<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 16, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------------
UNITRIN, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 6719 95-4255452
(State or other (Primary standard (I.R.S. employer
jurisdiction of industrial classification identification number)
incorporation or code number)
organization)
ONE EAST WACKER DRIVE
CHICAGO, ILLINOIS 60601
(312) 661-4600
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------
SCOTT RENWICK, ESQ.
UNITRIN, INC.
ONE EAST WACKER DRIVE
CHICAGO, ILLINOIS 60601
(312) 661-4600
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
JOHN S. CHAPMAN, ESQ. WILLIAM F. SEABAUGH, ESQ.
LORD, BISSELL & BROOK BRYAN CAVE LLP
115 SOUTH LASALLE STREET ONE METROPOLITAN SQUARE
CHICAGO, ILLINOIS 60603 211 N. BROADWAY, STE. 3600
ST. LOUIS, MISSOURI 63102
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement is declared effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box: [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
AMOUNT MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED(1) REGISTERED(2) PER UNIT PRICE(3) FEE
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<S> <C> <C> <C> <C>
Common Stock, $0.10 par value.... 3,760,170 N/A $211,982,778 $64,237
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</TABLE>
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(1) This Registration Statement relates to Common Stock of the Registrant
issuable to holders of common stock, par value $1.00 per share ("Reliable
Common Stock"), of The Reliable Life Insurance Company ("Reliable") in
connection with the Merger (defined below).
(2) The number of shares to be registered pursuant to this Registration
Statement is based on the maximum number of shares of Common Stock of the
Registrant issuable to shareholders of Reliable in the proposed merger
(the "Merger") of a subsidiary of the Registrant with and into Reliable,
at the exchange ratio of 2.235 and assuming that the maximum number of
shares of Reliable Common Stock to be acquired in the Merger for Common
Stock of the Registrant is 1,682,403.
(3) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 of the Securities Act of 1933, as amended, based on
the product of the estimated maximum number of shares of Reliable Common
Stock to be acquired in the Merger (1,682,403) multiplied by the average
of the bid and asked prices of Reliable Common Stock on July 10, 1997
($126) as reported on the SmallCap Tier of the Nasdaq Stock Market.
----------------
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.
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<PAGE>
THE RELIABLE LIFE INSURANCE COMPANY
231 WEST LOCKWOOD AVENUE
WEBSTER GROVES, MISSOURI 63119
, 1997
Dear Shareholder:
You are cordially invited to attend a special meeting of shareholders of The
Reliable Life Insurance Company ("Reliable"), which will be held at the
offices of Reliable, 231 West Lockwood Avenue, Webster Groves, Missouri 63119
at 10:00 a.m., local time on , 1997 (together with all adjournments
and postponements thereof, the "Special Meeting").
The purpose of the Special Meeting is to vote on two proposals. The first
proposal is to approve an Agreement and Plan of Reorganization (the "Merger
Agreement") pursuant to which a subsidiary of Unitrin, Inc. ("Unitrin") will
be merged with and into Reliable (the "Merger"). In the Merger, all holders of
Reliable Class A common stock (including shares of Reliable Class B common
stock converted into Reliable Class A common stock as described below) will
have the right, at their election, to receive 2.235 shares of Unitrin common
stock or $119 per share in cash for each of their shares of Reliable Class A
common stock, subject to the allocation procedures described in the attached
Proxy Statement/Prospectus.
The second proposal is to approve the conversion of the outstanding shares
of Reliable Class B common stock into shares of Reliable Class A common stock
(the "Conversion"). In the Conversion, each ten shares of Reliable Class B
common stock will be converted into one share of Reliable Class A common
stock. The Conversion will be effective immediately prior to the Merger.
APPROVAL OF THE CONVERSION IS A CONDITION TO THE CONSUMMATION OF THE MERGER.
THE CONVERSION WILL OCCUR ONLY IF THE MERGER IS CONSUMMATED.
THE BOARD OF DIRECTORS OF RELIABLE HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT AND THE SUBMISSION OF THE CONVERSION TO THE HOLDERS OF CLASS B
COMMON STOCK AND RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL TO APPROVE THE
MERGER AGREEMENT AND FOR THE PROPOSAL TO APPROVE THE CONVERSION.
Approval of the Merger will require the affirmative vote of two-thirds of
all outstanding shares of Reliable Class A common stock and Reliable Class B
common stock voting together. Approval of the Conversion will require the
affirmative vote of a majority of the outstanding shares of Reliable Class B
common stock. An abstention or failure to vote will have the same effect as a
vote "against" the Merger and, if applicable, the Conversion. Therefore, it is
important that your shares be represented at the Special Meeting, whether or
not you currently plan to attend the Special Meeting in person. Only holders
of Reliable Class B common stock are asked to vote on the Conversion, and any
votes cast by holders of Reliable Class A common stock on the Conversion will
be disregarded.
The accompanying Proxy Statement/Prospectus describes the Merger Agreement
which you are being asked to consider and vote upon at the Special Meeting.
The accompanying Proxy Statement/Prospectus also constitutes a prospectus for
the Unitrin common stock to be issued in connection with the transactions
contemplated by the proposed Merger Agreement. We urge you to carefully review
and consider the accompanying Notice of Special Meeting of Shareholders and
Proxy Statement/Prospectus which contain information about Reliable and
Unitrin and describe the proposed Merger and certain related matters.
Please complete, date, sign and promptly return your proxy card in the
enclosed envelope. Returning your proxy card now will not prevent you from
voting in person at the Special Meeting, but will assure that your vote is
counted if you are unable to attend.
Should you have questions about the voting procedure described in the
accompanying Proxy Statement/Prospectus, please feel free to contact Reliable
at 231 West Lockwood Avenue, Webster Groves, Missouri 63119, Attn.: Gregory P.
LaVigne (telephone (314) 968-6742).
Very truly yours,
Douglas B. Chomeau
Chairman of the Board and
Chief Executive Officer
<PAGE>
THE RELIABLE LIFE INSURANCE COMPANY
231 WEST LOCKWOOD AVENUE
WEBSTER GROVES, MISSOURI 63119
----------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD , 1997
----------------
NOTICE IS HEREBY GIVEN that a special meeting of shareholders of The
Reliable Life Insurance Company ("Reliable") will be held at the offices of
Reliable, 231 West Lockwood Avenue, Webster Groves, Missouri 63119 at 10:00
a.m. local time, on , 1997 (together with all adjournments and
postponements thereof, the "Special Meeting"), for the following purposes:
(1) To consider and vote upon a proposal to approve the Agreement and
Plan of Reorganization, dated as of June 20, 1997 (the "Merger Agreement"),
by and among Reliable, Unitrin, Inc. ("Unitrin") and Unitrin Acquisition
Corporation, a wholly-owned subsidiary of Unitrin, providing for the merger
of Unitrin Acquisition Corporation with and into Reliable, as more
completely described in the enclosed Proxy Statement/Prospectus; and
(2) To consider and vote upon a proposal to approve the conversion of all
of the outstanding shares of Reliable's Class B common stock into shares of
Reliable's Class A common stock (the "Conversion") whereby each ten shares
of Class B common stock will be converted into one share of Class A common
stock, with such Conversion to be effective immediately prior to, and
subject to the consummation of, the Merger.
Pursuant to the By-Laws of Reliable, no other business may be transacted at
the Special Meeting.
The Board of Directors has selected , 1997 as the record date for the
Special Meeting. Only those shareholders of record at the close of business on
that date will be entitled to notice of and to vote at the Special Meeting or
any postponements or adjournments thereof.
By Order of the Board of Directors
Douglas B. Chomeau,
Chairman of the Board
and Chief Executive Officer
Webster Groves, Missouri
, 1997
IT IS VERY IMPORTANT THAT EVERY SHAREHOLDER VOTE. WE URGE YOU TO SIGN AND
RETURN THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE, WHETHER OR NOT YOU
PLAN TO ATTEND THE SPECIAL MEETING IN PERSON. IF YOU DO ATTEND THE SPECIAL
MEETING, YOU MAY WITHDRAW YOUR PROXY AND VOTE IN PERSON AT THAT TIME. YOU MAY
REVOKE YOUR PROXY AT ANY TIME PRIOR TO ITS EXERCISE.
<PAGE>
PROXY STATEMENT
THE RELIABLE LIFE INSURANCE COMPANY
SPECIAL MEETING TO BE HELD ON , 1997
---------------
PROSPECTUS
UNITRIN, INC.
COMMON STOCK
(PAR VALUE $.10 PER SHARE)
---------------
This Proxy Statement/Prospectus is being furnished to the holders of Class A
common stock, par value $1.00 per share ("Reliable A Stock"), and Class B
common stock, par value $1.00 per share ("Reliable B Stock", which together
with Reliable A Stock is sometimes hereinafter referred to as "Reliable Common
Stock"), of The Reliable Life Insurance Company, a Missouri life insurance
company ("Reliable"), in connection with the solicitation of proxies by the
Board of Directors of Reliable for use at a special meeting of Reliable's
shareholders to be held at the offices of Reliable, 231 West Lockwood Avenue,
Webster Groves, Missouri 63119 at 10:00 a.m. local time on , 1997
(together with all adjournments and postponements thereof, the "Special
Meeting").
At the Special Meeting, the shareholders of record of Reliable Common Stock
as of the close of business on , 1997 will consider and vote upon a
proposal to approve that certain Agreement and Plan of Reorganization, dated
June 20, 1997 (the "Merger Agreement"), by and among Unitrin, Inc., a Delaware
corporation ("Unitrin"), Unitrin Acquisition Corporation, a Missouri
corporation and wholly-owned subsidiary of Unitrin ("Acquisition Subsidiary"),
and Reliable, pursuant to which Acquisition Subsidiary will merge with and
into Reliable (the "Merger"). In addition, the holders of Reliable B Stock
will consider and vote upon a proposal to convert all of the outstanding
shares of Reliable B Stock into shares of Reliable A Stock (the "Conversion")
whereby each ten shares of Reliable B Stock shall be converted into one share
of Reliable A Stock, with such Conversion to be effective immediately prior to
the Merger. Pursuant to Section 7 of the Amendment and Restatement of the
Amended and Restated By-Laws of Reliable (the "Reliable By-Laws"), no other
business may be transacted at the Special Meeting. APPROVAL OF THE CONVERSION
IS A CONDITION TO THE CONSUMMATION OF THE MERGER. THE CONVERSION WILL OCCUR
ONLY IF THE MERGER IS CONSUMMATED. See "THE SPECIAL MEETING."
Upon consummation of the Conversion and the Merger, each outstanding share
of Reliable A Stock (except for shares held by Reliable shareholders properly
exercising dissenters' rights) will be converted into the right to receive
either (i) 2.235 shares of common stock of Unitrin, par value $.10 per share
("Unitrin Stock"), or (ii) $119.00 in cash. Holders of Reliable A Stock will
be given the opportunity to elect the form of consideration they prefer,
subject to the allocation procedures described herein. Pursuant to the Merger
Agreement, at least 81% (the "Minimum Stock Amount") of the aggregate number
of issued and outstanding shares of Reliable A Stock as of the Effective Time
(as hereinafter defined) will be converted into whole shares of Unitrin Stock.
In the event that holders of Reliable A Stock elect, in the aggregate, to
convert less than the Minimum Stock Amount into whole shares of Unitrin Stock,
certain holders of Reliable A Stock will be selected by lot (or such other
method as is deemed reasonable by the parties) to receive shares of Unitrin
Stock instead of cash, so that the number of shares of Reliable A Stock
converted into whole shares of Unitrin Stock will be at least the Minimum
Stock Amount.
(continued on next page)
---------------
THE SHARES OF UNITRIN STOCK ISSUABLE 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 OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/ PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
---------------
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS , 1997.
<PAGE>
(continued from previous page)
BECAUSE THE EXCHANGE RATIO IS FIXED AND NOT BASED UPON THE PRICE OF UNITRIN
STOCK AT THE EFFECTIVE TIME, THE VALUE OF THE UNITRIN STOCK TO BE RECEIVED FOR
A SHARE OF RELIABLE A STOCK IN THE MERGER COULD BE GREATER OR LESS THAN THE
CASH CONSIDERATION OF $119.00. IF THE PRICE OF UNITRIN STOCK AT THE EFFECTIVE
TIME IS GREATER THAN $53.25 PER SHARE, THE VALUE OF THE UNITRIN STOCK TO BE
RECEIVED FOR A SHARE OF RELIABLE A STOCK WILL BE GREATER THAN $119.00.
CONVERSELY, IF THE PRICE OF UNITRIN STOCK AT THE EFFECTIVE TIME IS LESS THAN
$53.25 PER SHARE, THE VALUE OF THE UNITRIN STOCK TO BE RECEIVED FOR A SHARE OF
RELIABLE A STOCK WILL BE LESS THAN $119.00. See "THE MERGER--Consideration
Payable Upon Consummation of the Merger."
The Merger Agreement is included as Appendix A to this Proxy
Statement/Prospectus. Subject to regulatory approvals, the shareholder
approvals being sought at the Special Meeting, and satisfaction or waiver of
certain other conditions set forth in the Merger Agreement, the Merger
currently is expected to be consummated on or about September , 1997.
This Proxy Statement/Prospectus also constitutes a prospectus of Unitrin
with respect to the shares of Unitrin Stock to be issued upon consummation of
the Merger pursuant to the Merger Agreement. This Proxy Statement/Prospectus
does not cover any resales of such securities, and no person is authorized to
make use of this Proxy Statement/Prospectus in connection with any such
resale.
The outstanding shares of Unitrin Stock are quoted on the National Market
Tier of the Nasdaq Stock Market. The last reported sale price of Unitrin Stock
on , 1997 was $ per share.
This Proxy Statement/Prospectus, the attached Notice to Shareholders and the
accompanying proxy card are first being mailed to shareholders of Reliable on
or about , 1997.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in "RELIABLE MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," as well as
possible or assumed future results of operations of Unitrin and Reliable set
forth herein, including any forecasts, projections and synergies referred to
herein, and certain statements incorporated by reference from documents filed
with the Securities and Exchange Commission (the "SEC") by Unitrin, and other
statements contained or incorporated by reference herein regarding matters
that are not historical facts, are or may constitute forward-looking
statements (as such term is defined in the Private Securities Litigation
Reform Act of 1995). Because such statements are subject to risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements.
AVAILABLE INFORMATION
Unitrin 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 can be inspected and
copied at the public reference facilities maintained by the SEC at Judiciary
Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549; 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and 7 World Trade
Center, Suite 1300, New York, New York 10048. Copies of such material can be
obtained from the Public Reference Section of the SEC at 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. The SEC maintains a website
at http://www.sec.gov that also contains certain reports, proxy statements and
other information regarding companies (such as Unitrin) that file information
electronically with the SEC. Unitrin Stock is quoted on the National Market
Tier of the Nasdaq Stock Market under the Symbol "UNIT," and such reports,
proxy statements and other information concerning Unitrin should be available
for inspection and copying at the offices of Nasdaq Operations, 1735 K Street,
N.W., Washington, D.C.
This Proxy Statement/Prospectus constitutes a part of a registration
statement on Form S-4 (together with all amendments and exhibits, the
"Registration Statement") filed by Unitrin with the SEC under the Securities
Act of 1933, as amended (the "Securities Act") with respect to the shares of
Unitrin Stock to be issued in the
2
<PAGE>
Merger. This Proxy Statement/Prospectus does not contain all of the
information included in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the SEC. Any statement
contained herein concerning the provisions of any document filed as an exhibit
to the Registration Statement or otherwise filed with the SEC does not purport
to be complete and, in each such instance, is subject to and qualified in its
entirety by reference to the copy of such document. Reference is made to such
Registration Statement and to the exhibits relating thereto for further
information with respect to Unitrin and the securities offered hereby. Copies
of all or any part of the Registration Statement, including exhibits thereto,
may be obtained, upon payment of the prescribed fees, or inspected at the
offices of the SEC and Nasdaq Operations as set forth above.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF SUCH DOCUMENTS
RELATING TO UNITRIN, OTHER THAN CERTAIN EXHIBITS TO SUCH DOCUMENTS, ARE
AVAILABLE, WITHOUT CHARGE UPON WRITTEN OR ORAL REQUEST, FROM SCOTT RENWICK,
ESQ., SECRETARY, UNITRIN, INC., ONE EAST WACKER DRIVE, CHICAGO, ILLINOIS
60601, TELEPHONE (312) 661-4600. IN ORDER TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS, ANY REQUEST SHOULD BE MADE BY , 1997.
The following documents filed with the SEC by Unitrin are hereby
incorporated by reference in this Proxy Statement/Prospectus and made a part
hereof:
(1) Annual Report on Form 10-K for the fiscal year ended December 31,
1996;
(2) Quarterly Report on Form 10-Q for the quarter ended March 31, 1997;
and
(3) the description of Unitrin Stock set forth in the Registration
Statement on Form 10 dated February 15, 1990 and the Registration Statement
on Form 8-A dated August 3, 1994.
All documents filed by Unitrin pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Exchange Act after the date of this Proxy Statement/Prospectus and
prior to the Special Meeting shall be deemed incorporated by reference in this
Proxy Statement/Prospectus and a part hereof from the date of filing of such
documents. Any statement contained in a document incorporated or deemed
incorporated herein by reference will be deemed to be modified or superseded
for purposes of this Proxy Statement/Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is, or
is deemed to be, incorporated herein by reference, modifies or supersedes such
statement. Any such statement so modified or superseded will not be deemed,
except as so modified or superseded, to constitute a part of this Proxy
Statement/Prospectus.
All information contained in this Proxy Statement/Prospectus with respect to
Unitrin and its subsidiaries has been supplied by Unitrin, and all information
with respect to Reliable and its subsidiaries has been supplied by Reliable.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN AS CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR
SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS DOCUMENT NOR ANY
DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE
AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF UNITRIN OR
RELIABLE SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF. THIS PROXY STATEMENT/PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OF ANY SECURITY OTHER THAN THE UNITRIN STOCK TO WHICH
IT RELATES OR AN OFFER OR SOLICITATION TO ANY PERSON IN ANY JURISDICTION WHERE
SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL.
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS................. 2
AVAILABLE INFORMATION..................................................... 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................... 3
SUMMARY................................................................... 6
Parties To The Merger................................................... 6
Special Meeting Of Shareholders......................................... 6
Vote Required; Record Date.............................................. 6
Reasons for the Merger; Recommendation of Reliable's Board of Directors. 7
Opinion Of Financial Advisor............................................ 7
Conversion of Reliable B Stock.......................................... 7
Effect of the Merger.................................................... 7
Consideration Payable Upon Consummation of the Merger; Election;
Allocation............................................................. 8
Effective Time; Closing Date............................................ 8
Conditions; Regulatory Approvals........................................ 9
Conduct of Reliable's Business Pending the Merger....................... 9
Termination of the Merger Agreement; Termination Fee.................... 9
Interests of Certain Persons in the Merger.............................. 9
Certain Federal Income Tax Consequences................................. 9
Accounting Treatment.................................................... 10
Dissenters' Rights...................................................... 10
Certain Differences in Shareholders' Rights............................. 10
Markets and Market Prices............................................... 10
Selected Consolidated Financial Data.................................... 12
Unitrin............................................................... 12
Reliable.............................................................. 13
Comparative Per Share Data (Unaudited).................................. 14
INTRODUCTION.............................................................. 15
General................................................................. 15
Parties to the Merger................................................... 15
Unitrin............................................................... 15
Reliable.............................................................. 15
THE SPECIAL MEETING....................................................... 16
Record Date............................................................. 16
Proxies................................................................. 16
Quorum.................................................................. 16
Vote Required........................................................... 16
THE MERGER................................................................ 18
Background of the Merger................................................ 18
Reliable's Reasons for the Merger; Recommendation of the Reliable Board
of Directors........................................................... 19
Unitrin's Reasons for the Merger........................................ 21
Opinion of Financial Advisor............................................ 21
Effect of the Merger.................................................... 25
Conversion of Reliable B Stock.......................................... 26
Consideration Payable upon Consummation of the Merger................... 26
Conversion of Reliable A Stock........................................ 26
No Fractional Shares.................................................. 27
Election Procedures................................................... 27
Allocation Procedures................................................. 27
Effective Time; Closing Date............................................ 28
Surrender of Reliable Stock Certificates; Delivery of Merger
Consideration.......................................................... 29
</TABLE>
4
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Voting and Dividends.................................................... 29
Representations and Warranties.......................................... 30
Conduct of Reliable's Business Pending the Merger....................... 30
Certain Additional Covenants............................................ 31
Nonsolicitation......................................................... 31
Indemnification of Officers and Directors; D & O Coverage............... 31
Conditions to Consummation of the Merger................................ 32
Conditions to Each Party's Obligations................................ 32
Reliable Conditions................................................... 32
Unitrin Conditions.................................................... 32
Regulatory Approvals.................................................... 33
Amendment and Termination; Termination Fee.............................. 33
Amendment and Waiver.................................................. 33
Termination........................................................... 33
Termination Fee....................................................... 34
Interests of Certain Persons in the Merger.............................. 34
Unitrin--Reliable Transactions.......................................... 34
Fees to Reliable Financial Advisor...................................... 35
Certain Federal Income Tax Consequences................................. 35
Accounting Treatment.................................................... 36
Expenses................................................................ 36
Organization After the Merger........................................... 36
Resale of Unitrin Stock; Affiliates' Agreements......................... 37
Dissenters' Rights...................................................... 37
BUSINESS OF UNITRIN....................................................... 38
BUSINESS OF RELIABLE...................................................... 39
BENEFICIAL OWNERSHIP OF RELIABLE COMMON STOCK............................. 43
RELIABLE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................................... 45
COMPARISON OF RIGHTS OF SHAREHOLDERS...................................... 49
LEGAL MATTERS............................................................. 55
EXPERTS................................................................... 55
OTHER MATTERS............................................................. 55
INDEX TO FINANCIAL STATEMENTS OF THE RELIABLE LIFE INSURANCE COMPANY AND
SUBSIDIARIES............................................................. F-1
Report of Independent Accountants....................................... F-2
Consolidated Balance Sheets at March 31, 1997 (unaudited) and December
31, 1996 and 1995...................................................... F-3
Consolidated Statements of Income for the Three Months Ended March 31,
1997 and 1996 (unaudited) and for the Years Ended December 31, 1996,
1995 and 1994.......................................................... F-4
Consolidated Statements of Cash Flows for the Three Months Ended March
31, 1997 and 1996 (unaudited) and for the Years Ended December 31,
1996, 1995 and 1994.................................................... F-5
Consolidated Statements of Stockholders' Equity for the Three Months
Ended March 31, 1997 (unaudited) and for the Years Ended December 31,
1996, 1995 and 1994.................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
APPENDICES
Appendix A--Agreement and Plan of Reorganization
Appendix B--Article XIV of the Amended and Restated Articles of
Incorporation of Reliable
Appendix C--Opinion of Societe Generale Securities Corporation
</TABLE>
5
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS NOT INTENDED TO BE A COMPLETE DESCRIPTION OF
ALL MATERIAL FACTS REGARDING UNITRIN, RELIABLE AND THE MATTERS TO BE CONSIDERED
AT THE SPECIAL MEETING, AND IS QUALIFIED IN ALL RESPECTS BY THE INFORMATION
APPEARING ELSEWHERE OR INCORPORATED BY REFERENCE IN THIS PROXY
STATEMENT/PROSPECTUS, THE APPENDICES HERETO AND THE DOCUMENTS REFERRED TO
HEREIN. SHAREHOLDERS ARE URGED TO READ THIS PROXY STATEMENT/PROSPECTUS AND THE
APPENDICES HERETO IN THEIR ENTIRETY. CAPITALIZED TERMS USED BUT NOT DEFINED IN
THIS SUMMARY HAVE THE MEANINGS ASCRIBED TO SUCH TERMS ELSEWHERE IN THIS PROXY
STATEMENT/PROSPECTUS.
PARTIES TO THE MERGER
Unitrin is a diversified financial services holding company incorporated
under the laws of Delaware. Through its subsidiaries, Unitrin provides life and
health insurance, property and casualty insurance, and consumer finance
services. The principal subsidiaries of Unitrin are United Insurance Company of
America, Trinity Universal Insurance Company and Fireside Thrift Co. Unitrin
and its subsidiaries have approximately 7,400 full-time employees. The address
of Unitrin's principal executive offices is One East Wacker Drive, Chicago,
Illinois 60601, and its telephone number at that address is (312) 661-4600.
Unitrin Acquisition Corporation, a Missouri corporation ("Acquisition
Subsidiary"), is a newly incorporated wholly-owned subsidiary of Unitrin,
formed solely for the purpose of enabling Unitrin to acquire all of the
Reliable Common Stock in the Merger.
Reliable is a life insurance company incorporated under the laws of Missouri.
Reliable and its subsidiaries are engaged primarily in the home service life
insurance business. Reliable and its subsidiaries have approximately 1,400
employees. The address of Reliable's principal executive offices is 231 West
Lockwood Avenue, Webster Groves, Missouri 63119, and its telephone number at
that address is (314) 968-4900.
See "INTRODUCTION--Parties to the Merger," "BUSINESS OF UNITRIN," "BUSINESS
OF RELIABLE" and "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
SPECIAL MEETING OF SHAREHOLDERS
A special meeting of the shareholders of Reliable will be held at the offices
of Reliable, 231 West Lockwood Avenue, Webster Groves, Missouri 63119 at 10:00
a.m., local time on , 1997 (together with all adjournments and
postponements thereof, the "Special Meeting"). The purpose of the Special
Meeting is to consider and vote upon a proposal (the "Merger Proposal") to
approve the Merger Agreement. In addition, the holders of Reliable B Stock will
consider and vote upon a proposal (the "Conversion Proposal") to approve the
conversion of all of the outstanding shares of Reliable B Stock into shares of
Reliable A Stock. See "THE SPECIAL MEETING."
VOTE REQUIRED; RECORD DATE
Only Reliable shareholders of record at the close of business on
, 1997 (the "Record Date") will be entitled to vote at the
Special Meeting. See "THE SPECIAL MEETING--Record Date." The affirmative vote
of the holders of two-thirds of the outstanding shares of Reliable Common Stock
as of the Record Date is required to approve the Merger Proposal. The
affirmative vote of the holders of a majority of the outstanding shares of
Reliable B Stock as of the Record Date is required to approve the Conversion
Proposal. APPROVAL OF THE CONVERSION PROPOSAL IS A CONDITION TO THE
CONSUMMATION OF THE MERGER. THE CONVERSION
6
<PAGE>
WILL OCCUR ONLY IF THE MERGER IS CONSUMMATED. See "THE SPECIAL MEETING--Vote
Required." As of the Record Date, there were shares of Reliable A
Stock outstanding and shares of Reliable B Stock outstanding.
As of the Record Date, Reliable's directors, executive officers and their
respective affiliates beneficially owned an aggregate of shares of
Reliable A Stock and shares of Reliable B Stock, or approximately %
of the outstanding shares of Reliable Common Stock (for voting purposes) as of
the Record Date. As of the Record Date, Unitrin did not beneficially own any
shares of Reliable Common Stock.
REASONS FOR THE MERGER; RECOMMENDATION OF RELIABLE'S BOARD OF DIRECTORS
RELIABLE. The Reliable Board of Directors has unanimously concluded that the
Merger is in the best interests of Reliable and its shareholders and
unanimously recommends that shareholders vote for the Merger Proposal. See "THE
MERGER--Reliable's Reasons For the Merger; Recommendation of Reliable's Board
of Directors." For information on the interests of certain Reliable directors
and officers in the Merger, see "THE MERGER--Interests of Certain Persons in
the Merger."
UNITRIN. The Unitrin Board of Directors has approved the Merger Agreement and
determined that the Merger and the issuance of the Unitrin Stock pursuant
thereto are in the best interests of Unitrin's shareholders. The approval of
the Merger Proposal by the shareholders of Unitrin is not required. See "THE
MERGER--Unitrin's Reasons for the Merger."
OPINION OF FINANCIAL ADVISOR
Societe Generale Securities Corporation ("Societe Generale") has delivered a
written opinion to the Reliable Board of Directors dated June 18, 1997 to the
effect that as of such date and based upon and subject to the various
assumptions and considerations described therein, the consideration to be
received by holders of Reliable A Stock pursuant to the Merger is fair from a
financial point of view. For additional information, see "THE MERGER--Opinion
of Financial Advisor." The full text of the opinion of Societe Generale is
attached as Appendix C to this Proxy Statement/Prospectus. Shareholders are
urged to read such opinion in its entirety.
CONVERSION OF RELIABLE B STOCK
Subject to approval by a majority of the holders of Reliable B Stock,
immediately prior to the Effective Time (as herein defined) each ten issued and
outstanding shares of Reliable B Stock shall be converted into one share of
Reliable A Stock in accordance with the provisions of the Amended and Restated
Articles of Incorporation of Reliable (the "Reliable Articles") and applicable
law. UPON CONVERSION OF THE RELIABLE B STOCK TO RELIABLE A STOCK, CERTIFICATES
REPRESENTING OUTSTANDING SHARES OF RELIABLE B STOCK SHALL THEREAFTER BE DEEMED
TO REPRESENT THE NUMBER OF SHARES OF RELIABLE A STOCK INTO WHICH SUCH SHARES OF
RELIABLE B STOCK HAVE BEEN CONVERTED. ACCORDINGLY, ALL REFERENCES TO RELIABLE A
STOCK IN THIS PROXY STATEMENT/PROSPECTUS WITH RESPECT TO THE CONSIDERATION TO
BE RECEIVED IN THE MERGER AND THE ELECTION AND ALLOCATION PROCEDURES INCLUDE
THE SHARES OF RELIABLE A STOCK ISSUABLE UPON CONVERSION OF THE RELIABLE B STOCK
IMMEDIATELY PRIOR TO THE MERGER. APPROVAL OF THE CONVERSION PROPOSAL IS A
CONDITION TO THE CONSUMMATION OF THE MERGER. THE CONVERSION WILL OCCUR ONLY IF
THE MERGER IS CONSUMMATED. See "THE MERGER--Conversion of Reliable B Stock,"
"--Consideration Payable upon Consummation of the Merger--Election Procedures"
and "--Allocation Procedures."
EFFECT OF THE MERGER
Pursuant to the Merger Agreement, at the Effective Time, Acquisition
Subsidiary will merge with and into Reliable, with Reliable being the surviving
corporation. See "THE MERGER--Effect of the Merger." For
7
<PAGE>
information on how holders of Reliable A Stock (including former holders of
Reliable B Stock whose shares of Reliable B Stock have been converted into
shares of Reliable A Stock pursuant to the Conversion) will be able to exchange
such certificates for new certificates representing shares of Unitrin Stock
(and cash in lieu of fractional shares), and/or cash to be issued to them, see
"THE MERGER--Surrender of Reliable Stock Certificates; Delivery of Merger
Consideration."
CONSIDERATION PAYABLE UPON CONSUMMATION OF THE MERGER; ELECTION; ALLOCATION
An "Election Form" will be mailed to each record holder of Reliable Common
Stock pursuant to which each holder may elect, subject to the allocation
provisions described elsewhere in this Proxy Statement/Prospectus, to receive
for each share of Reliable A Stock owned by such holder either (i) 2.235 shares
of Unitrin Stock or (ii) $119.00 in cash. A holder of shares of Reliable B
Stock will be entitled to make elections with respect to the number of shares
of Reliable A Stock into which such shares of Reliable B Stock are to be
converted in the Conversion. Any shareholder of Reliable who fails to properly
complete and return the Election Form shall be deemed to have made a stock
election with respect to all shares of Reliable A Stock (other than shares
which have been voted against approval of the Merger Agreement and with respect
to which dissenters' rights have been perfected in accordance with Article XIV
of the Reliable Articles ("Dissenting Shares")) owned by such holder.
A cash election does not guarantee that a shareholder will receive cash for
any or all of the shares for which a cash election has been made. Under the
allocation procedures described elsewhere in this Proxy Statement/Prospectus,
at least 81% of the shares of Reliable A Stock issued and outstanding
immediately prior to the Effective Time (after giving effect to the Conversion)
will be converted into the right to receive whole shares of Unitrin Stock. The
allocation procedures were designed to permit the Merger to qualify as a tax-
free reorganization. See "THE MERGER--Certain Federal Income Tax Consequences."
BECAUSE THE EXCHANGE RATIO IS FIXED AND THE PRICE OF UNITRIN STOCK MAY
FLUCTUATE, THE UNITRIN STOCK ISSUED IN EXCHANGE FOR EACH SHARE OF RELIABLE A
STOCK MAY HAVE AN INITIAL MARKET VALUE THAT IS GREATER OR LESS THAN $119.00.
BECAUSE OF THE ALLOCATION PROVISIONS OF THE MERGER AGREEMENT, THERE IS NO
ASSURANCE THAT A HOLDER OF RELIABLE COMMON STOCK WILL RECEIVE THE PROPORTION OF
UNITRIN STOCK AND CASH INDICATED ON SUCH HOLDER'S FORM OF ELECTION.
IF ELECTIONS TO RECEIVE UNITRIN STOCK ARE MADE FOR FEWER THAN 81% OF THE
SHARES OF RELIABLE A STOCK OUTSTANDING IMMEDIATELY PRIOR TO THE EFFECTIVE TIME,
THEN SHARES OF RELIABLE A STOCK FOR WHICH ELECTIONS TO RECEIVE CASH HAVE
BEEN MADE WILL BE SELECTED BY LOT OR OTHER METHOD DEEMED REASONABLE BY THE
PARTIES FOR CONVERSION INTO UNITRIN STOCK DESPITE DELIVERY OF AN OTHERWISE
EFFECTIVE CASH ELECTION. THEREFORE, HOLDERS WHO ELECT CASH MAY NOT RECEIVE
THEIR REQUESTED FORM OF CONSIDERATION. SEE "THE MERGER--CONSIDERATION PAYABLE
UPON CONSUMMATION OF THE MERGER--ELECTION PROCEDURES" AND "--ALLOCATION
PROCEDURES."
EFFECTIVE TIME; CLOSING DATE
The Merger shall become effective upon the issuance of a Certificate of
Merger by the Secretary of State of Missouri after properly executed Articles
of Merger have been filed with the Secretary of State of Missouri, which filing
shall be made upon the closing of the transactions contemplated by the Merger
Agreement. As used in this Proxy Statement/Prospectus, the term "Effective
Time" means the date and time at which such Certificate of Merger is so issued.
The closing of the transactions contemplated by the Merger Agreement shall
occur as promptly as practicable after the fulfillment or waiver of all the
terms and conditions contained in the Merger Agreement.
8
<PAGE>
If the Merger is approved by the shareholders of Reliable, subject to certain
conditions described herein, the Effective Time is currently expected to occur
on or about September , 1997 (the "Closing Date").
CONDITIONS; REGULATORY APPROVALS
Consummation of the Merger is subject to the satisfaction of various
conditions, including: (i) the accuracy of the representations and warranties
and performance of the covenants of the respective parties to the Merger
Agreement; (ii) receipt of the shareholder approvals solicited hereby; (iii)
receipt of requisite regulatory approvals of the transactions contemplated by
the Merger Agreement; (iv) that the number of Dissenting Shares shall not
exceed 150,000; (v) receipt of certain opinions of counsel regarding, among
other matters, certain tax aspects of the Merger; and (vi) satisfaction of
other closing conditions. See "THE MERGER--Conditions to Consummation of the
Merger."
CONDUCT OF RELIABLE'S BUSINESS PENDING THE MERGER
The Merger Agreement contains certain restrictions on the conduct of
Reliable's business prior to the Effective Time. See "THE MERGER--Conduct of
Reliable's Business Pending the Merger."
TERMINATION OF THE MERGER AGREEMENT; TERMINATION FEE
The Merger Agreement may be terminated at any time prior to the Effective
Time, either before or after its approval by the shareholders of Reliable, (i)
by the mutual agreement of Reliable and Unitrin, or (ii) by one or both parties
under various other circumstances, including the failure of the Merger to be
effective by October 31, 1997 unless such failure is due to a breach of the
Merger Agreement by the party seeking to terminate. See "THE MERGER--Amendment
and Termination."
If Unitrin and Reliable fail to consummate the Merger and Reliable enters
into a binding commitment relating to any sale, merger, consolidation or
similar transaction with any third party prior to January 1, 1998, then
Reliable shall be required, under certain circumstances, to pay to Unitrin in
cash the sum of $10 million upon consummation of such other transaction. See
"THE MERGER--Amendment and Termination--Termination Fee."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Reliable Board of Directors with
respect to the Merger Proposal, the shareholders of Reliable should be aware
that certain members of Reliable's management and the Reliable Board of
Directors may be deemed to have certain interests in the Merger that are in
addition to their interests as shareholders of Reliable generally. See "THE
MERGER--Interests of Certain Persons in the Merger."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
It is intended that the Merger will be treated as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the
"Code") and in general, for federal income tax purposes, (i) Reliable
shareholders who receive solely shares of Unitrin Stock in the Merger will
recognize no gain or loss, except with respect to cash received in lieu of
fractional share interests; (ii) Reliable shareholders who receive both shares
of Unitrin Stock and cash will recognize gain, but not loss, to the extent of
the amount of cash received in the exchange; and (iii) Reliable shareholders
who receive solely cash in exchange for their Reliable A Stock will be treated
as receiving the cash in redemption of their stock. See "THE MERGER--Certain
Federal Income Tax Consequences."
9
<PAGE>
ACCOUNTING TREATMENT
The Merger will be accounted for by Unitrin under the purchase method of
accounting. See "THE MERGER--Accounting Treatment."
DISSENTERS' RIGHTS
Holders of shares of outstanding Reliable Common Stock who vote against the
Merger and make a written demand upon Reliable for the purchase of Dissenting
Shares and otherwise perfect their rights in accordance with the provisions of
Article XIV of the Reliable Articles will be entitled to receive payment for
the fair value of their shares as of the day prior to the date on which the
vote is taken approving the Merger. It is a condition to the consummation of
the Merger that holders of not more than 150,000 of the issued and outstanding
shares of Reliable A Stock at the Effective Time shall have delivered written
notice of intent to demand payment of the fair value of such shares pursuant to
Article XIV of the Reliable Articles. See "THE MERGER--Conditions to
Consummation of the Merger--Conditions to Each Party's Obligations" and "--
Dissenters' Rights" and Appendix B.
CERTAIN DIFFERENCES IN SHAREHOLDERS' RIGHTS
Reliable shareholders' rights are currently governed by Missouri law, the
Reliable Articles and the Reliable Bylaws. Upon consummation of the Merger,
holders of Reliable A Stock receiving Unitrin Stock will become shareholders of
Unitrin and their rights as such will be governed by Delaware law, the Unitrin
Certificate of Incorporation and the Unitrin Amended and Restated Bylaws. See
"COMPARISON OF RIGHTS OF SHAREHOLDERS."
MARKETS AND MARKET PRICES
Unitrin Stock is quoted on the National Market Tier of the Nasdaq Stock
Market under the symbol "UNIT," and Reliable A Stock is quoted on the SmallCap
Tier of the Nasdaq Stock Market under the symbol "RLIFA." The following table
sets forth the high and low closing price per share of Unitrin Stock, as
reported on the National Market Tier of the Nasdaq Stock Market, and the high
and low bid price per share of Reliable A Stock, as reported on the SmallCap
Tier of the Nasdaq Stock Market, for the periods indicated below.
<TABLE>
<CAPTION>
BID PRICE PER
PRICE PER SHARE SHARE
------------------ ----------------
UNITRIN STOCK RELIABLE A STOCK
------------------ ----------------
HIGH LOW HIGH LOW
--------- -------- -------- -------
<S> <C> <C> <C> <C>
1995
First Quarter...................... $50 1/2 $43 $ 54 1/2 $54
Second Quarter..................... 50 46 1/4 56 54 1/2
Third Quarter...................... 49 1/4 44 1/2 56 56
Fourth Quarter..................... 49 45 57 56
1996
First Quarter...................... 50 13/16 45 5/8 57 55 1/2
Second Quarter..................... 48 7/8 46 63 1/2 63
Third Quarter...................... 50 44 1/4 67 63 1/2
Fourth Quarter..................... 56 1/4 50 1/16 65 1/2 65 1/2
1997
First Quarter...................... 55 1/4 49 3/4 72 72
Second Quarter..................... 62 5/16 48 5/8 116 72
Third Quarter (through ,
1997).............................
</TABLE>
10
<PAGE>
The preceding market quotations for Reliable A Stock reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions. The shares of Reliable B Stock are subject to
restrictions on their transfer, and there is no public trading market or
reported prices for shares of Reliable B Stock.
As of May 30, 1997, there were approximately 490 record holders of Reliable A
Stock and 95 record holders of Reliable B Stock.
On June 18, 1997, the Reliable Board of Directors declared a dividend payable
on September 2, 1997 to holders of Reliable A Stock and Reliable B Stock of
record as of August 1, 1997 in the amounts of $.35 and $.03181 per share,
respectively. The closing price per share of Unitrin Stock, as reported on the
National Market Tier of the Nasdaq Stock Market, and the closing bid per share
of Reliable A Stock, as reported on the SmallCap Tier of the Nasdaq Stock
Market, as of May 6, 1997, the last trading day before the date on which
Unitrin and Reliable announced the proposed Merger, and as of ,
1997, the last practicable trading day before the printing of this Proxy
Statement/Prospectus, and equivalent per share prices for Reliable A Stock
based on the Unitrin Stock prices, were as follows:
<TABLE>
<CAPTION>
PRO FORMA
UNITRIN RELIABLE STOCK PRICE
STOCK PRICE STOCK PRICE EQUIVALENT (1)
----------- ----------- --------------
<S> <C> <C> <C>
May 6, 1997........................ $53 3/4 $72 $120 1/8
, 1997.................. $ $ $
</TABLE>
- --------
(1) Represents the equivalent of one share of Reliable A Stock calculated by
multiplying the closing price of Unitrin Stock by the fixed exchange ratio
of 2.235.
Following the Merger, Reliable A Stock will no longer be quoted on the
SmallCap Tier of the Nasdaq Stock Market. The shares of Unitrin Stock issued in
connection with the Merger will be quoted on the National Market Tier of the
Nasdaq Stock Market.
HOLDERS OF RELIABLE COMMON STOCK ARE URGED TO OBTAIN CURRENT MARKET
QUOTATIONS FOR UNITRIN STOCK. NO ASSURANCE CAN BE GIVEN AS TO THE MARKET PRICE
OF UNITRIN STOCK AT THE EFFECTIVE TIME OF THE MERGER OR THEREAFTER.
11
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
UNITRIN. The following sets forth selected consolidated historical financial
and other data for Unitrin and its consolidated subsidiaries for the periods
indicated. Such data should be read in conjunction with, and is qualified in
its entirety by, the more detailed information and the consolidated financial
statements and notes thereto in the documents described under "INCORPORATION OF
CERTAIN DOCUMENTS BY REFERENCE."
UNITRIN, INC. AND SUBSIDIARIES
(IN MILLIONS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
------------- -----------------------------------
1997 1996 1996 1995 1994 1993 1992
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
FOR THE PERIOD
Premiums and
Consumer Finance
Revenues.......... $ 339 $ 335 $1,341 $1,205 $1,140 $1,138 $1,101
Net Investment
Income............ 42 45 179 187 207 216 221
Net Gains on Sales
of Investments.... 1 1 3 55 18 9 41
------ ------ ------ ------ ------ ------ ------
Total Revenues.. $ 382 $ 381 $1,523 $1,447 $1,365 $1,363 $1,363
Net Income:
From Operations... $ 20 $ 13 $ 80 $ 70 $ 103 $ 106 $ 94
From Investees.... 13 11 51 45 34 (16) 42
From Sales of
Investments...... 1 1 2 36 11 5 27
------ ------ ------ ------ ------ ------ ------
From Continuing
Operations
Before
Accounting
Change........... 34 25 133 151 148 95 163
From Unitrin's
Accounting
Change........... -- -- -- -- -- -- (40)
------ ------ ------ ------ ------ ------ ------
Total Net
Income......... $ 34 $ 25 $ 133 $ 151 $ 148 $ 95 $ 123
====== ====== ====== ====== ====== ====== ======
Net Income Per
Share:
From Operations... $ 0.54 $ 0.35 $ 2.11 $ 1.72 $ 2.05 $ 2.04 $ 1.81
From Investees.... 0.34 0.29 1.34 1.12 0.67 (0.31) 0.82
From Sales of
Investments...... 0.02 0.02 0.06 0.89 0.24 0.10 0.52
------ ------ ------ ------ ------ ------ ------
From Continuing
Operations
Before
Accounting
Change........... 0.90 0.66 3.51 3.73 2.96 1.83 3.15
From Unitrin's
Accounting
Change........... -- -- -- -- -- -- (0.77)
------ ------ ------ ------ ------ ------ ------
Total Net Income
Per Share...... $ 0.90 $ 0.66 $ 3.51 $ 3.73 $ 2.96 $ 1.83 $ 2.38
====== ====== ====== ====== ====== ====== ======
Repurchases of
Unitrin Common
Stock............. $ 21 $ 15 $ 61 $ 416 $ 245 $ -- $ --
Dividends Paid to
Common
Shareholders...... $ 22 $ 21 $ 83 $ 81 $ 76 $ 67 $ 57
Dividends Paid to
Common
Shareholders (Per
Share)............ $ 0.60 $ 0.55 $ 2.20 $ 2.00 $ 1.50 $ 1.30 $ 1.10
AT PERIOD END
Investments........ $3,408 $3,397 $3,291 $3,410 $3,321 $3,707 $3,467
Total Assets....... 5,007 4,803 4,871 4,819 4,570 4,895 4,621
Insurance Reserves. 2,069 2,018 2,054 2,007 1,828 1,802 1,740
Shareholders'
Equity............ 1,473 1,483 1,480 1,525 1,765 2,099 1,954
Shares of Unitrin
Common Stock
Outstanding (In
Millions of
Shares)........... 37.3 38.2 37.3 38.5 47.1 51.8 51.8
Book Value Per
Share............. $39.46 $38.81 $39.64 $39.61 $37.51 $40.49 $37.70
</TABLE>
12
<PAGE>
RELIABLE. The following sets forth selected consolidated historical financial
and other data for Reliable and its consolidated subsidiaries for the period
indicated. Such data should be read in conjunction with, and is qualified in
its entirety by, the more detailed information set forth in "RELIABLE
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and the Reliable consolidated financial statements and notes
thereto set forth elsewhere in this Proxy Statement/Prospectus.
THE RELIABLE LIFE INSURANCE COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
------------------------- ------------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net premiums earned..... $ 26,381,166 $ 23,731,842 $ 94,004,740 $ 97,315,292 $ 92,041,371 $ 85,383,827 $ 79,993,326
Net investment income... 8,656,540 8,013,496 32,347,995 31,422,434 30,726,335 30,816,772 32,633,108
Net realized investment
gains (losses)......... 509,684 121,880 608,291 1,800,387 (2,210,324) (172,280) 3,651,842
Service fees and other
income................. 2,528,572 2,079,021 10,566,603 9,223,423 10,037,755 11,867,911 9,390,104
------------ ------------ ------------ ------------ ------------ ------------ ------------
38,075,962 33,946,239 137,527,629 139,761,536 130,595,137 127,896,230 125,668,378
------------ ------------ ------------ ------------ ------------ ------------ ------------
Benefits and claims..... 15,479,673 14,654,520 56,258,358 60,327,334 57,816,542 52,471,480 46,728,232
Commissions............. 2,853,241 2,519,953 11,265,708 10,637,683 10,293,093 9,729,401 9,585,787
Other operating
expenses............... 11,320,138 10,830,219 37,793,060 36,941,280 33,727,959 34,136,639 36,966,185
Amortization............ 2,701,045 4,115,553 13,698,872 12,660,934 12,033,959 10,246,923 10,207,866
------------ ------------ ------------ ------------ ------------ ------------ ------------
32,354,097 32,120,245 119,015,998 120,567,231 113,871,553 106,584,443 103,488,070
------------ ------------ ------------ ------------ ------------ ------------ ------------
Income before provision
for income taxes...... 5,721,865 1,825,994 18,511,631 19,194,305 16,723,584 21,311,787 22,180,308
Provision for income
taxes.................. 1,703,877 303,577 5,262,832 5,586,778 4,277,483 6,551,821 6,791,383
------------ ------------ ------------ ------------ ------------ ------------ ------------
Income before effect of
change in accounting
principle............. 4,017,988 1,522,417 13,248,799 13,607,527 12,446,101 14,759,966 15,388,925
Cumulative effect of
change in accounting
for income taxes....... -- -- -- -- -- 665,956 --
------------ ------------ ------------ ------------ ------------ ------------ ------------
Net income............. $ 4,017,988 $ 1,522,417 $ 13,248,799 $ 13,607,527 $ 12,446,101 $ 15,425,922 $ 15,388,925
============ ============ ============ ============ ============ ============ ============
Earnings per share (a).. $ 2.36 $ 0.81 $ 7.32 $ 7.23 $ 6.54 $ 7.96 $ 7.91
============ ============ ============ ============ ============ ============ ============
Total assets............ $629,648,174 $587,472,261 $600,901,008 $591,272,538 $538,990,435 $530,817,174 $515,477,364
============ ============ ============ ============ ============ ============ ============
Future benefits and
other insurance
liabilities............ $421,245,635 $381,464,737 $388,210,020 $380,834,423 $375,204,224 $361,329,787 $356,191,329
============ ============ ============ ============ ============ ============ ============
Note payable............ $ 10,000,000 $ -- $ -- $ -- $ -- $ -- $ --
============ ============ ============ ============ ============ ============ ============
Dividends declared per
Class A share.......... $ 0.35 $ 0.35 $ 1.47 $ 1.44 $ 1.34 $ 1.69 $ 1.73
============ ============ ============ ============ ============ ============ ============
Dividends declared per
Class B share.......... $ 0.0318 $ 0.0318 $ 0.1336 $ 0.1309 $ 0.1215 $ 0.1530 $ 0.1570
============ ============ ============ ============ ============ ============ ============
Book value per share (a)
....................... $ 91.04 $ 84.18 $ 90.56 $ 86.96 $ 68.67 $ 68.67 $ 62.06
============ ============ ============ ============ ============ ============ ============
</TABLE>
- --------
(a) Class B common stock may be converted to Class A common stock at a 10:1
ratio at the option of the shareholder. Earnings per share and book value
per share are presented under the "if-converted" method. The weighted
average shares outstanding used to calculate earnings per share for the
years ended December 31, 1996 through 1992 are 1,810,131, 1,881,135,
1,904,058, 1,937,305, and 1,944,815, respectively. The weighted average
shares for the three months ended March 31, 1997 and 1996 are 1,705,052 and
1,872,111, respectively.
13
<PAGE>
COMPARATIVE PER SHARE DATA (UNAUDITED)
The following table sets forth for the periods indicated selected historical
per share data of Unitrin and Reliable and the corresponding pro forma and pro
forma equivalent per share amounts, giving effect to the proposed Merger. The
data presented are based upon the consolidated financial statements and related
notes of each of Unitrin and Reliable appearing elsewhere herein. The data
presented as pro forma per share of Unitrin Stock and pro forma per share of
Reliable Common Stock assume that the Conversion has been completed and that
100% of the shares of Reliable A Stock have been exchanged in the Merger for
Unitrin Stock. This information should be read in conjunction with such
historical financial statements and related notes thereto. These data are not
necessarily indicative of the results of the future operations of the
consolidated organization or the actual results that would have occurred if the
Merger had been consummated prior to the periods indicated.
<TABLE>
<CAPTION>
RELIABLE
PRO FORMA
UNITRIN RELIABLE UNITRIN/RELIABLE EQUIVALENT
HISTORICAL HISTORICAL PRO FORMA (1)
------------- -------------------- ----------------- -------------
THREE THREE THREE THREE
MONTHS YEAR MONTHS YEAR MONTHS YEAR MONTHS YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
3/31 12/31 3/31 12/31 3/31 12/31 3/31 12/31
1997 1996 1997 1996 1997 1996 1997 1996
------ ------ -------- -------- -------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fully diluted book value
per share at end of
period................. $39.46 $39.64 $91.0400(2) $90.5600(2) $40.66 $40.83 $90.88 $91.25
Cash dividends declared
per Unitrin share...... 0.60 2.20 -- -- 0.60 2.20 1.34 4.92
Cash dividends declared
per Reliable A share .. -- -- 0.3500 1.4700 -- -- -- --
Cash dividends declared
per Reliable B share... -- -- 0.0318 0.1336 -- -- -- --
Earnings before
extraordinary item per
share.................. 0.90 $ 3.51 2.3600(2) 7.3200(2) 0.92 3.51 2.06 7.84
</TABLE>
- --------
(1) The Reliable pro forma equivalent represents the Unitrin/Reliable pro forma
combined book value, dividends and earnings per common share multiplied by
an exchange ratio of 2.235 shares of Unitrin Stock for each share of
Reliable A Stock so that the Reliable pro forma equivalent amounts
represent the respective values of one share of Reliable A Stock.
(2) The Reliable historical book value and earnings per share are presented
under the "if-converted" method.
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INTRODUCTION
GENERAL
This Proxy Statement/Prospectus is being furnished to the holders of
Reliable Common Stock in connection with the solicitation of proxies by the
Board of Directors of Reliable for use at the Special Meeting of Reliable
shareholders to be held at the offices of Reliable, 231 West Lockwood Avenue,
Webster Groves, Missouri 63119 at 10:00 a.m., local time, on ,
1997, and at any adjournments or postponements thereof.
At the Special Meeting, the shareholders of record of Reliable Common Stock
as of the close of business on , 1997, will consider and vote
upon a proposal (the "Merger Proposal") to approve the Merger Agreement
pursuant to which a wholly-owned subsidiary of Unitrin will be merged with and
into Reliable (the "Merger"). In addition, the holders of Reliable B Stock
will consider and vote upon a proposal to convert all of the outstanding
shares of Reliable B Stock into shares of Reliable A Stock (the "Conversion")
whereby each ten shares of Reliable B Stock shall be converted into one share
of Reliable A Stock, with such Conversion to be effective immediately prior to
the Merger. Pursuant to Section 7 of the Amendment and Restatement of the
Amended and Restated By-laws of Reliable (the "Reliable By-Laws"), no other
business may be transacted at the Special Meeting. Upon consummation of the
Conversion and the Merger, each outstanding share of Reliable A Stock (other
than Dissenting Shares and shares of Reliable Common Stock that may be owned
by Reliable, by Unitrin, or by any of their respective wholly-owned
subsidiaries prior to the Effective Time ("Cancelled Shares")) will be
converted into the right to receive, at the election of the holder thereof,
and subject to the allocation procedures described herein, either 2.235 shares
of Unitrin Stock or $119.00 in cash. See "THE SPECIAL MEETING" and "THE
MERGER--Consideration Payable Upon Consummation of the Merger." The Unitrin
Board of Directors has approved the issuance of the shares of Unitrin Stock to
be issued upon consummation of the Merger. Approval of the shareholders of
Unitrin is not required for the issuance of the shares of Unitrin Stock or the
consummation of the Merger.
This Proxy Statement/Prospectus also constitutes a prospectus of Unitrin in
respect of the shares of Unitrin Stock to be issued in connection with the
Merger.
PARTIES TO THE MERGER
UNITRIN
Unitrin is a diversified financial services holding company incorporated
under the laws of Delaware. Through its subsidiaries, Unitrin conducts its
operations in three segments: Life and Health Insurance, Property and Casualty
Insurance and Consumer Finance. See "BUSINESS OF UNITRIN" and "INCORPORATION
OF CERTAIN DOCUMENTS BY REFERENCE" elsewhere herein.
ACQUISITION SUBSIDIARY
Unitrin Acquisition Corporation, a Missouri corporation ("Acquisition
Subsidiary"), is a newly incorporated and wholly-owned subsidiary of Unitrin,
formed solely for the purpose of enabling Unitrin to acquire all of the
Reliable A Stock in the Merger.
RELIABLE
Reliable is a life insurance company incorporated under the laws of
Missouri. Reliable and its subsidiaries are engaged primarily in the home
service life insurance business. See "BUSINESS OF RELIABLE" elsewhere herein.
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THE SPECIAL MEETING
RECORD DATE
The Reliable Board of Directors has fixed the close of business on
, 1997, as the Record Date for the determination of shareholders
entitled to notice of, and to vote at, the Special Meeting. Accordingly, only
holders of record of shares of Reliable Common Stock on the Record Date will
be entitled to vote at the Special Meeting. As of the Record Date, there were
shares of Reliable A Stock outstanding held by approximately
shareholders of record, and shares of Reliable B Stock
outstanding held by approximately shareholders of record.
PROXIES
When a proxy card is returned, properly signed and dated, the shares
represented thereby will be voted in accordance with the instructions on the
proxy card. If a shareholder does not either attend and vote at the Special
Meeting or return the signed proxy card, such holder's shares will not be
voted, which will have the effect of a vote "AGAINST" the approval of the
Merger Proposal and, if applicable, the Conversion Proposal (except for
purposes of dissenters' rights, as explained under "Dissenters' Rights").
Shareholders are urged to mark the boxes on the proxy card to indicate how
their shares are to be voted. If a shareholder returns a signed proxy card but
does not indicate how the shares represented by the proxy card are to be
voted, such shares will be voted "FOR" approval of the Merger Proposal and, if
applicable, "FOR" the approval of the Conversion Proposal. Only holders of
Reliable B Stock are asked to vote on the Conversion, and any votes cast by
holders of Reliable A Stock on the Conversion will be disregarded. A
shareholder who has given a proxy may revoke it at any time prior to its
exercise at the Special Meeting by delivering an instrument of revocation to
the Secretary of Reliable, by duly executing and submitting a proxy card
bearing a later date, or by appearing at the Special Meeting and voting in
person. However, the mere presence at the Special Meeting of the shareholder
who has given a proxy will not revoke such proxy. In addition, brokers who
hold shares of Reliable Common Stock as nominees will not have discretionary
authority to vote such shares in connection with the Merger Proposal or, if
applicable, the Conversion Proposal, in the absence of instructions from the
beneficial owners. Accordingly, if a shareholder's shares are held by a broker
or nominee and the shareholder does not follow the voting instructions
provided by such broker or nominee with this Proxy Statement/Prospectus, such
shares will not be voted and will have the effect of a vote "AGAINST" the
approval of the Merger Proposal and, if applicable, the Conversion Proposal.
Expenses related to solicitation of proxies for the Special Meeting will be
borne by Reliable. Proxies will be solicited by mail and may also be solicited
by telephone or other means of communication. Certain directors, officers and
employees of Reliable may solicit proxies (for no additional compensation) by
personal interview, telephone, facsimile or similar means of communication.
Banks, trust companies, brokerage firms and other custodians, nominees and
fiduciaries will be reimbursed for their reasonable expenses in forwarding
these proxy materials to their principals.
RELIABLE SHAREHOLDERS SHOULD NOT SEND STOCK CERTIFICATES WITH THEIR PROXY
CARDS.
QUORUM
The presence, either in person or by properly executed proxies, of the
holders of a majority of the outstanding shares of Reliable Common Stock is
necessary to constitute a quorum at the Special Meeting.
VOTE REQUIRED
Reliable shareholders are entitled to one vote at the Special Meeting for
each share of Reliable Common Stock held of record by them on the Record Date.
Approval of the Conversion Proposal requires the affirmative vote of the
holders of a majority of the outstanding shares of Reliable B Stock. Approval
of the Merger Proposal requires the affirmative vote of the holders of two-
thirds of the Reliable Common Stock. APPROVAL OF THE
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CONVERSION PROPOSAL IS A CONDITION TO THE CONSUMMATION OF THE MERGER. THE
CONVERSION WILL OCCUR ONLY IF THE MERGER IS CONSUMMATED. Abstentions and
broker non-votes will have the same effect as a vote "AGAINST" the applicable
proposal, except for purposes of entitlement to dissenters' rights. See "THE
MERGER--Dissenters' Rights."
As of the Record Date, directors, executive officers and affiliates of such
directors and executive officers of Reliable beneficially owned an aggregate
of shares or approximately % of outstanding Reliable A Stock, and
shares or approximately % of outstanding Reliable B Stock, and
% of all shares of Reliable Common Stock entitled to vote at the Special
Meeting. As of the Record Date, Unitrin did not beneficially own any shares of
Reliable Common Stock.
A majority of the shares of Reliable Common Stock present at the Special
Meeting, in person or by proxy, whether or not constituting a quorum, may vote
to adjourn the Special Meeting from time to time for successive periods of not
more than ninety days, without notice other than announcement at the meeting,
until a quorum shall be present or represented. If a quorum is present or
represented at an adjournment of the Special Meeting, only the business which
could have been transacted at the Special Meeting as originally scheduled may
be transacted.
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THE MERGER
The following information, insofar as it relates to matters contained in the
Merger Agreement and the exhibits thereto, is qualified in its entirety by
reference to the Merger Agreement, which is incorporated herein by reference
and attached hereto as Appendix A. Reliable shareholders are urged to
carefully read the Merger Agreement in its entirety.
BACKGROUND OF THE MERGER
In August, 1996, representatives of Unitrin's principal life insurance
subsidiary, United Insurance Company of America ("United"), initiated
discussions with Reliable concerning a possible sale to Reliable of United's
home service life insurance business in Missouri and Arkansas, where Reliable
has a strong presence. These discussions culminated in the parties entering
into a reinsurance transaction on January 27, 1997, effective January 1, 1997,
in which Reliable agreed, among other things, to reinsure all of United's in
force home service life insurance policies in those states. See "THE MERGER--
Unitrin-Reliable Transactions."
Subsequent to the successful consummation of the reinsurance transaction,
Unitrin's Chief Executive Officer, Richard C. Vie, concluded that there might
be significant economies of scale to be derived from combining United's home
service business in Texas with Reliable's larger life insurance operations
there. However, because United's Texas operations account for a sizable
portion of United's total home service life insurance premium revenue
(approximately 10%), Mr. Vie further concluded that it would not be in
United's best interest to sell a block of business of that size but that it
might instead be worth pursuing whether Reliable would be interested in a
business combination with Unitrin.
Mr. Vie first presented this possibility to Reliable in a telephone call on
March 24, 1997 to David D. Chomeau, Reliable's Vice Chairman and Director of
Corporate Development. Several days later, after consulting with certain major
shareholders of Reliable and receiving a favorable reaction, Mr. Chomeau
called Mr. Vie and indicated that representatives of Reliable would be willing
to meet with Unitrin's management to explore the possibility of a business
combination.
On March 31, 1997, Reliable and Unitrin entered into a Confidentiality
Agreement for the purpose of permitting the exchange of certain information
between the parties.
On April 2, 1997, a meeting was held in Chicago to discuss in general terms
various aspects of a possible transaction, including price, Unitrin's
intentions relative to Reliable's employees and home office operations, and
potential synergies from combining the respective companies' home service life
insurance field operations in Texas. In attendance at the meeting were Mr. Vie
and David F. Bengston, a Unitrin Vice President, Douglas B. Chomeau, Chairman
and Chief Executive Officer of Reliable, and Lewis B. Shepley, Executive Vice
President and Chief Financial Officer of Reliable. At the conclusion of the
meeting, the parties agreed to continue discussions.
During the last two weeks of April, Mr. Vie and Mr. Douglas B. Chomeau had
several extensive telephone conversations regarding the possibility of an
acquisition of Reliable by Unitrin, with the principal focus of such
discussions being price. After a number of proposals and counterproposals, on
May 1, 1997 Mr. Vie and Mr. Chomeau tentatively agreed that an acquisition of
Reliable could be structured as a tax-free reorganization whereby each share
of Reliable A Stock (including Reliable B Stock on a converted basis) would be
converted into the right to receive, at the election of the holder, either
2.235 shares of Unitrin Stock or $119 cash. Unitrin instructed its legal
counsel to draft a letter of intent, which was transmitted to Reliable and its
legal counsel early the following week and discussed by the parties.
On May 7, 1997, Mr. Vie briefed members of the Unitrin Board of Directors by
telephone on the proposed transaction and was authorized informally by the
directors to proceed. On May 7, 1997, Douglas B. Chomeau convened a meeting of
Reliable's Board of Directors to advise the Board of the possibility of an
acquisition of
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Reliable by Unitrin, including the proposed terms and conditions of such
acquisition. Members of Reliable's management made a presentation to the
Reliable Board of Directors covering the position of certain major
shareholders relating to the Merger and certain key elements relating to the
structure of the proposed transaction, including Unitrin's stated intention to
leave the operations of Reliable substantially intact. At that time, the
Reliable Board authorized the executive officers of Reliable to enter into a
letter of intent for the acquisition, within certain specified parameters and
in substantially the form of letter of intent presented to the Board at that
time. The Reliable Board further authorized the executive officers to
negotiate definitive agreements for the acquisition.
On May 7, 1997, Reliable and Unitrin executed and publicly announced a
letter of intent for Unitrin to acquire Reliable in a merger transaction in
essentially the form and on the financial terms of the proposed Merger
described in this Proxy Statement/Prospectus. Thereafter, Unitrin and Reliable
instructed their respective counsel to begin preparation of appropriate
documentation for the Merger.
On May 14, 1997, at a regularly scheduled meeting of the Unitrin Board of
Directors, Mr. Vie updated the Board on developments in the transaction and
presented a tentative timetable for its completion.
On May 19, 1997, Reliable retained Societe Generale as its financial advisor
in order to evaluate the fairness of the Merger consideration to the holders
of Reliable A Stock from a financial point of view.
From May 7, 1997 through June 18, 1997, Reliable and Unitrin and their
respective advisors proceeded to work on, and held a series of meetings and
discussions regarding, the Merger Agreement, regulatory approvals that would
be necessary to conclude the Merger, and other matters relating to the
consummation of the Merger, as well as the financial, legal and accounting
"due diligence" investigations of the respective companies.
On June 18, 1997, the Reliable Board of Directors held a meeting at its
Webster Groves, Missouri headquarters and considered the proposed Merger
Agreement and the transactions contemplated thereby. All of the members of the
Reliable Board were present at such meeting. Mr. Vie, who was present for the
first portion of the meeting at the invitation of the Board, described to the
directors Unitrin's philosophy regarding the conduct of an acquired company's
continuing operations and Unitrin's current intention to maintain the home
office of Reliable in Webster Groves. After Mr. Vie left the meeting, members
of Reliable's management and representatives of Societe Generale and Bryan
Cave llp made presentations to the Board of Directors and discussed with
members of the Board their views and analyses of various aspects of the
proposed Merger and the effects thereof. Representatives of Societe Generale
delivered, and orally reaffirmed, Societe Generale's written opinion that the
proposed transaction was fair, from a financial point of view, to the holders
of Reliable A Stock. Following discussion, the Reliable Board of Directors
concluded that the Merger was in the best interests of Reliable and its
shareholders and, by a unanimous vote of all directors, approved the Merger
Agreement and the transactions contemplated thereby and the submission of the
Conversion Proposal to a vote of the holders of Reliable B Stock, and further
authorized the executive officers of Reliable to enter into the Merger
Agreement substantially in the form presented at the meeting.
On June 20, 1997, the Board of Directors of Unitrin met to review the terms
of the proposed Merger Agreement, including the proposed Merger consideration
and the issuance of Unitrin Stock. At such meeting, the Unitrin Board, by
unanimous vote of the directors present, approved the Merger Agreement and
authorized the issuance of Unitrin Stock in connection therewith.
On June 20, 1997, Reliable, Unitrin and Acquisition Subsidiary executed and
delivered the Merger Agreement and issued a joint press release announcing the
signing.
RELIABLE'S REASONS FOR THE MERGER; RECOMMENDATION OF THE RELIABLE BOARD OF
DIRECTORS
The Board of Directors of Reliable has unanimously determined that the
Merger Agreement and the transactions contemplated thereby are in the best
interests of Reliable's shareholders. In reaching its conclusion
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to approve the Merger and the Conversion, the Board of Directors of Reliable
considered the following principal factors:
Business History; Future Prospects. For over ten years, Reliable has
demonstrated sustained profitability. However, Reliable's focus in the home
service industry has made it difficult for Reliable to follow the trend in the
insurance industry toward providing a broader product line. In management's
opinion, smaller insurers, such as Reliable, are faced with a more difficult
challenge of satisfying customers' total insurance requirements.
Although the Directors of Reliable believe that Reliable's profitable
performance can be sustained, they do not believe that this level of
performance will be sufficient to allow Reliable to grow competitively without
a significant diversification of its business or enlargement of its operating
territory.
Anticipated Relationship with Unitrin; Reliable Home Office. Unitrin has
indicated that it presently intends to keep Reliable intact as an operating
unit with its home office in Webster Groves, Missouri. In addition, it is
presently contemplated that Reliable will add United's Texas home service
business to its operations. As described under "THE MERGER--Unitrin-Reliable
Transactions," earlier in 1997 Reliable reinsured United's home service
business in Missouri and Arkansas and certain other locations.
Reliable's management did not actively seek Unitrin's offer for Reliable.
Based upon the long-standing position of certain major shareholders of
Reliable, the Board believes that no proposal which contemplates the
elimination of the Reliable name and heritage, including its home office in
Webster Groves, and the dismissal and/or relocation of a substantial number of
its employees there, would be approved by the requisite number of
shareholders. The Board further believes that Unitrin's offer may represent a
unique opportunity for a combination of Reliable with an acquiror that will
respect the integrity of Reliable and its business.
Dividend Paying History of Unitrin. Unitrin has consistently paid a dividend
in excess of the dividend that Reliable shareholders have received. The Board
believes that such disparity will continue for the foreseeable future. The
Merger will therefore, in the opinion of the Board, enable the Reliable
shareholders to realize a more favorable dividend payment without increasing
their current investment.
Shareholder Liquidity. Although Reliable A Stock is traded on the SmallCap
Tier of the Nasdaq Stock Market, trading has been limited. The effect of this
inactivity has been a significant lack of shareholder liquidity. The Merger
offers Reliable shareholders the opportunity to receive Unitrin Stock which is
actively traded on the National Market Tier of the Nasdaq Stock Market.
Merger Consideration; Substantial Premium Over Historic Trading Price of
Reliable; Transaction Structure. The Board of Directors of Reliable believes
that the process by which the Merger consideration was calculated, and
therefore the amount of the Merger consideration, is fair. This belief is
based on the Directors' assessment of the future prospects of both Reliable
and Unitrin (i.e., sales and earnings potential, working capital requirements,
capital expenditures and liquidity needs) and on the Societe Generale Opinion,
discussed herein under "THE MERGER--Opinion of Financial Advisor." The Merger
consideration represents a substantial premium over the historic market price
of Reliable A Stock. In addition, the structure of the transaction proposed by
Unitrin, which is reflected in the Merger Agreement, affords the Reliable
shareholders the opportunity to receive Unitrin Stock on a tax-free basis or
alternatively, subject to the limitations discussed elsewhere herein, to
receive cash for their shares of Reliable A Stock at the aforementioned
premium.
In reaching their decision, the directors were aware of the fact that the
Merger consideration is subject to fluctuation (commensurate with fluctuations
in the market price of Unitrin Stock), as a result of the fixed exchange ratio
for Reliable shareholders electing to receive Unitrin Stock. The Board's
conclusion that the consideration to be received by the Reliable shareholders
is fair from a financial point of view is based on the Board's assessment of
the long-term prospects of Unitrin.
In the opinion of Reliable's Board of Directors, each of the above factors
supports a determination that the transactions contemplated with Unitrin are
in the best interest of Reliable's shareholders. Given the extensive
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nature of the factors discussed above, the Reliable Board did not attempt to
assign any individual weight to each factor. In total, however, the Board of
Directors believes that the Merger presents the best opportunity for Reliable
to succeed in the future and for Reliable's shareholders to achieve the fair
value of their investment.
THE BOARD OF DIRECTORS OF RELIABLE HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY AS BEING FAIR AND IN THE
BEST INTERESTS OF RELIABLE AND ITS SHAREHOLDERS AND HAS UNANIMOUSLY APPROVED
ITS SUBMISSION TO THE HOLDERS OF RELIABLE A STOCK AND RELIABLE B STOCK. THE
BOARD OF DIRECTORS HAS ALSO UNANIMOUSLY APPROVED THE SUBMISSION OF THE
CONVERSION OF THE RELIABLE B STOCK TO THE HOLDERS OF RELIABLE B STOCK. THE
RELIABLE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT HOLDERS OF RELIABLE
COMMON STOCK APPROVE THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREBY. APPROVAL OF THE CONVERSION BY THE HOLDERS OF RELIABLE B STOCK IS A
CONDITION TO THE CONSUMMATION OF THE MERGER. THE CONVERSION WILL OCCUR ONLY IF
THE MERGER IS CONSUMMATED.
In reviewing the terms of the Merger Agreement, the holders of Reliable
Common Stock should bear in mind that while Unitrin and Reliable have used
their best efforts to estimate the value of the Merger consideration based on
the facts currently known to them, there can be no assurance as to the value
of the Merger consideration received and ultimately retained by the holders of
Reliable Common Stock who elect to receive Unitrin Stock.
UNITRIN'S REASONS FOR THE MERGER
The Unitrin Board of Directors has approved the Merger Agreement and
determined that the Merger and the issuance of the Unitrin Stock pursuant
thereto are in the best interests of Unitrin's shareholders. The approval of
the Merger Proposal by the shareholders of Unitrin is not required.
Unitrin has concluded that Reliable is an attractive acquisition candidate
because of the potential to realize efficiencies through the combination of
the home service field agent operations of Reliable and United. Senior
management of Unitrin has considered the ongoing trend toward consolidation in
the life insurance industry and the potential for cost and operating synergies
arising from such consolidation. Management has also considered the relatively
low growth in premium revenues experienced by the home service life insurance
industry generally in recent years and the resulting need for ongoing
improvements in efficiencies in order to enhance profitability. The home
service life insurance business is inherently labor intensive, given the need
to have agents call on customers in their homes at least monthly to collect
premiums and to respond to customer needs. Unitrin believes that the combined
field operations will result in a stronger competitor in Reliable's
traditional geographic markets than either Reliable or United would be
separately.
OPINION OF FINANCIAL ADVISOR
On June 18, 1997, Societe Generale rendered to the Reliable Board of
Directors an oral opinion (confirmed by delivery of a written opinion dated
June 18, 1997) to the effect that, as of such date and based upon and subject
to the various assumptions and considerations set forth in such opinion, the
consideration to be received by the holders of Reliable A Stock in the Merger
was fair to such shareholders from a financial point of view.
The full text of Societe Generale's written opinion to the Reliable Board
dated June 18, 1997, which sets forth the assumptions made, matters considered
and limitations on the review undertaken, is attached as Appendix C to this
Proxy Statement/Prospectus (the "Societe Generale Opinion") and is
incorporated herein by reference. Shareholders of Reliable are urged to read
this opinion carefully in its entirety. The Societe Generale Opinion was
intended for the use and benefit of the Reliable Board of Directors and is
directed only to the fairness of the consideration payable upon consummation
of the Merger from a financial point of view to the
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Reliable shareholders. The Societe Generale Opinion does not address any other
aspect of the proposed Merger or any related transaction and does not
constitute a recommendation to any shareholder as to how such shareholder
should vote at the Special Meeting or as to whether any shareholder should
elect to receive cash or shares of Unitrin Stock. The summary of the Societe
Generale Opinion set forth in this Proxy Statement/Prospectus is qualified in
its entirety by reference to the full text of such opinion.
In connection with its opinion, Societe Generale: (i) reviewed certain
publicly available business and financial information relating to Reliable and
Unitrin; (ii) reviewed certain financial and other information of Reliable and
Unitrin prepared by their respective managements, including historical pro
forma financial statements, analyses and forecasts of certain costs savings
and related expenses and synergies expected to result from the Merger (the
"Expected Savings and Synergies") and forecasts of Reliable prepared according
to Statutory Accounting Principles; (iii) conducted discussions with members
of senior management of Reliable and Unitrin concerning their respective
businesses and prospects, before and after giving effect to the Merger, and
the Expected Savings and Synergies; (iv) reviewed the historical market prices
and trading activity for the Reliable A Stock and Unitrin Stock and compared
them with those of certain publicly traded companies which Societe Generale
deemed to be relevant; (v) compared the historical and projected results of
operations of Reliable and Unitrin with those of certain companies which
Societe Generale deemed to be relevant; (vi) compared the proposed financial
terms of the Merger with the financial terms of certain other mergers and
acquisitions which Societe Generale deemed to be relevant; (vii) reviewed a
draft of the Merger Agreement dated June 13, 1997 and the Letter of Intent
dated May 7, 1997; (viii) reviewed the Subordinated Promissory Note and Loan
Agreement between Reliable and Southwest Bank of St. Louis both dated March
31, 1997 and (ix) reviewed such other financial studies and analyses and
performed such other investigations and took into account such other matters
as Societe Generale deemed appropriate.
For purposes of rendering its opinion, Societe Generale assumed, in all
respects material to its analysis, that the representations and warranties of
each party contained in the Merger Agreement and all related documents and
instruments (collectively, the "Documents") are true and correct, that each
party will perform all of the covenants and agreements required to be
performed by it under such Documents and that all conditions to the
consummation of the Merger will be satisfied without waiver thereof. Societe
Generale has also assumed that all material governmental, regulatory or other
consents and approvals will be obtained and that in the course of obtaining
any necessary governmental, regulatory or other consents and approvals, or any
amendments, modifications or waivers to any documents to which either of
Reliable or Unitrin is a party, no restrictions will be imposed or amendments,
modification or waivers made that would have any material adverse effect on
the contemplated benefits to Reliable and Unitrin of the Merger. The Societe
Generale Opinion and its analysis described herein assume the conversion of
Reliable B Stock to Reliable A Stock immediately prior to the Merger.
In preparing its opinion, Societe Generale, with the consent of the Reliable
Board of Directors, assumed and relied upon the accuracy and completeness of
all the financial and other information provided to, discussed with, or
otherwise made available to it, or publicly available, did not independently
verify such information or undertake an independent evaluation or appraisal of
any of the assets or liabilities of Reliable or Unitrin and was not furnished
with any such evaluation or appraisal. In addition, Societe Generale did not
conduct any physical inspection of the properties or facilities of Reliable or
Unitrin. With respect to the financial forecasts, and the Expected Savings and
Synergies, furnished to or discussed with Societe Generale by Reliable or
Unitrin, Societe Generale has assumed that they have been reasonably prepared
and reflect the best currently available estimates and judgments of Reliable's
and Unitrin's management as to the expected future financial performance of
Reliable or Unitrin, or the surviving entity after giving effect to the
Merger, as the case may be. Societe Generale further assumed that the Merger
will be accounted for as a purchase under generally accepted accounting
principles ("GAAP") and that it will qualify as a tax-free reorganization for
U.S. federal income tax purposes. The Societe Generale Opinion is necessarily
based on market, economic and other conditions as they existed on the date
thereof.
Societe Generale did not and is not expressing any opinion as to what the
value of the Unitrin Stock actually will be when issued to Reliable
shareholders pursuant to the Merger or the prices at which such Unitrin Stock
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will trade subsequent to the Merger. With respect to Unitrin's investments in
certain publicly traded companies (the "Investees"), Societe Generale relied
on Unitrin's publicly available financial statements regarding the market
value of the Investees' securities held by Unitrin and Societe Generale did
not undertake any investigation of the Investees. Societe Generale was not
requested to, and did not, solicit third party indications of interest in
acquiring all or any part of Reliable. The Societe Generale Opinion does not
in any manner address Reliable's underlying business decision to effect the
Merger.
The following is a summary of certain of the financial analyses used by
Societe Generale in connection with the delivery of the Societe Generale
Opinion to the Reliable Board.
Dividend Discount Analysis. Societe Generale performed a dividend discount
analysis with respect to Reliable, assuming an annual growth rate in dividends
per share of 4% and an annual growth rate in net operating income of 3.0% to
5.0% for Reliable from 1996 to 2001. Societe Generale also calculated
Reliable's terminal values as of December 31, 2001 based on the latest twelve
months ("LTM") net income per share multiples ranging from 14.0x to 16.0x. The
sum of (a) the projected dividends for the years 1997 to 2001 and (b) the
calculated terminal values, each discounted to a present value using discount
rates ranging from 11% to 13%, implied a value per share of Reliable A Stock
ranging from approximately $81.00 to $107.00.
Selected Transactions Analysis. Societe Generale analyzed certain
information relating to selected transactions in the home service industry
since 1990 (the "Selected Home Service Transactions"). Societe Generale noted
that the purchase price to latest available operating earnings multiples (i)
when operating earnings are net operating income measured in accordance with
GAAP, ranged from 8.7x to 17.9x with a median of 14.6x, compared to a
transaction multiple in the Merger of 15.0x, and (ii) when operating earnings
are net income measured in accordance with statutory accounting principles,
ranged from 11.2x to 30.9x with a median of 16.6x, compared with a transaction
multiple in the Merger of 19.4x. Societe Generale also noted that the purchase
price to book value multiples (i) when book value is measured in accordance
with GAAP, ranged from 1.0x to 2.8x with a median of 1.2x, compared with a
transaction multiple of 1.4x, and (ii) when book value is defined as capital
and surplus plus asset valuation reserve ("AVR") in accordance with statutory
accounting principles, ranged from 1.9x to 4.7x with a median of 2.6x,
compared with a transaction multiple of 3.5x. In addition, Societe Generale
noted that the purchase price less capital and surplus plus AVR, divided by
premiums written, ranged from 0.7x to 2.7x with a median of 1.1x, compared to
a transaction multiple of 1.7x.
Selected Public Company Trading Analysis. Societe Generale compared certain
trading and financial statement data for Reliable with certain corresponding
information for selected life insurance companies whose securities are
publicly traded. Such companies included ALLIED Life Financial Corporation,
American Heritage Life Investment Corporation, AmerUS Life Holding Inc.,
Kansas City Life Insurance Company and Liberty Corporation (the "Selected
Small Capitalization Companies") and American General Corporation, American
National Insurance Company, Jefferson Pilot Corporation, Protective Life
Corporation, Reliastar Financial Corporation, and Torchmark Corporation (the
"Selected Large Capitalization Companies"). As of June 16, 1997, the median
equity market capitalizations of the Selected Small Capitalization Companies
and the Selected Large Capitalization Companies were $480 million and $3,850
million, respectively. The multiples and ratios for the selected life
insurance companies and Reliable were based on the most recent publicly
available information. The earnings per share growth estimate for a projected
5-year period for Reliable was based on discussions with Reliable management.
Societe Generale considered, among other multiples and ratios, share price-
to-GAAP operating earnings per share for the LTM ended March 31, 1997 ("LTM
P/E Ratio"), earnings per share growth for a historical 5-year period (the
"Historical 5-Year EPS Growth Rate"), earnings per share growth for a
projected 5-year period (the "Projected 5-Year EPS Growth Rate"), the price-
to-adjusted GAAP book value ratio (the "Price-to-Adjusted Book Value Ratio")
for common equity before adjustment for net unrealized investment gains
pursuant to FAS 115, and the return on average equity for 1996 ("1996 ROE")
based on 1996 EPS as a percentage of average book value per share. Societe
Generale's analyses indicated that (a) the LTM P/E Ratio ranged from 11.4x to
23.9x, with a median of 14.7x for the Selected Small Capitalization Companies
and from 10.9x to 16.9, with a
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median of 16.0x for the Selected Large Capitalization Companies, compared with
a transaction multiple in the Merger of 15.0x; (b) the Historical 5-Year EPS
Growth Rate ranged from (2.0%) to 16.2% with a median of 9.0% for the Selected
Small Capitalization Companies, and from 2.2% to 21.7% with a median of 10.4%
for the Selected Large Capitalization Companies, compared with (1.1%) for
Reliable; (c) the Projected 5-Year EPS Growth Rate ranged from 9.0% to 11.5%
with a median of 10.0% for the Selected Small Capitalization Companies, and
from 10.2% to 12.9% with a median of 10.8% for the Selected Large
Capitalization Companies, compared with 4.0% for Reliable; (d) the Price-to-
Adjusted Book Value Ratio ranged from 1.0x to 1.9x, with a median of 1.3x for
the Selected Small Capitalization Companies, and from 1.0x to 3.0x, with a
median of 2.3x for the Selected Large Capitalization Companies, compared with
a transaction multiple in the Merger of 1.4x for Reliable; and (e) 1996 ROE
ranged from 6.3% to 11.9%, with a median of 8.3% for the Selected Small
Capitalization Companies, and from 7.4% to 19.6% with a median of 12.5% for
the Selected Large Capitalization Companies, compared with 8.0% for Reliable.
Pro Forma Dividend and Merger Analyses. Societe Generale analyzed the pro
forma dividends received per share of Reliable A Stock. Based on Reliable's
projected dividend per share of Reliable A Stock for 1997, each Reliable
shareholder would receive approximately $1.53 per share. Each shareholder
making an election for stock would receive $5.36 per share of Reliable A Stock
in 1997 pro forma for the Merger based on an estimate of Unitrin's 1997
dividend per share, representing an increase of $3.83 per share of Reliable A
Stock. The estimates of the 1997 dividends per share for Reliable and Unitrin
are estimated based on annualized first quarter 1997 dividends paid (and, in
the case of Reliable dividends, on Reliable projections) and Societe Generale
does not express an opinion as to the likelihood of such dividends being
realized.
In addition, Societe Generale computed a pro forma merger analysis based on
certain assumptions regarding purchase accounting adjustments, including the
potential recognition of an asset related to the prefunding of Reliable's
pension liabilities in excess of the estimated future liability thereof, cost
savings and other matters. This analysis indicated that pre-tax cost savings
and/or synergies of approximately $1.5 million would be required in order for
the Merger to be non-dilutive to Unitrin.
Historical Stock Trading Analysis. Societe Generale reviewed the historical
trading prices and volumes for both Reliable A Stock and Unitrin Stock for the
last five years. Societe Generale also compared the trading prices of Reliable
A Stock and Unitrin Stock with the S&P 500 Index and indices of selected
comparable companies. Societe Generale also calculated that the transaction
price represented a premium of 77% to the closing price of Reliable A Stock
one month prior to the announcement of the transaction.
Unitrin Stock Price Analysis. Since a portion of the consideration payable
will be in the form of Unitrin Stock, Societe Generale reviewed certain
financial, market and non-financial data, and performed certain analyses
relating to Unitrin. Societe Generale compared certain trading and financial
statement data for Unitrin with certain corresponding information for selected
multi-line insurance companies whose securities are publicly traded. Such
companies included Allmerica Financial Corporation, Cigna Corporation, CNA
Financial Corporation, Hartford Financial Services Group, SAFECO Corporation
and USF&G Corporation (the "Selected Multi-line Insurance Companies").
Societe Generale considered, among other multiples and ratios, LTM P/E
Ratio, estimated EPS for 1997 (as estimated by research analysts and compiled
by Institutional Brokers' Estimate System) ("1997 P/E Ratio"), Price-to-
Adjusted Book Value, and 1996 ROE. Societe Generale's analyses indicated that
(a) the LTM P/E Ratio ranged from 7.8x to 13.1x, with a median of 12.6x for
the Selected Multi-line Insurance Companies, compared with 15.5x for Unitrin;
(b) the 1997 P/E Ratio ranged from 11.6x to 15.0x with a median of 13.4x for
the Selected Multi-line Insurance Companies, compared with 15.5x for Unitrin;
(c) the Price-to-Adjusted Book Value Ratio ranged from 0.9x to 2.4x, with a
median of 1.7x for the Selected Multi-line Insurance Companies, compared with
1.5x for Unitrin; and (d) the 1996 ROE ranged from (0.4%) to 13.9%, with a
median of 8.9% for the Selected Multi-line Insurance Companies, compared with
8.7% for Unitrin.
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The preparation of a fairness opinion is a complex analytic process and is
not necessarily susceptible to a partial analysis or summary description.
Societe Generale made qualitative judgments as to the significance and
relevance of each analysis and factor considered as a whole and believes that
selecting portions of its analyses and factors, without considering all
analyses and factors, could create a misleading or incomplete view of the
processes underlying such analyses and its opinion. In arriving at its
fairness opinion, Societe Generale did not attribute any particular weight to
any analysis or factor considered by it. No company or transaction used in the
above analyses as a comparison is directly comparable to Reliable, Unitrin or
the contemplated transaction. In performing its analyses, Societe Generale
made numerous assumptions with respect to forecasts of future results,
industry performance, market and financial considerations and other matters.
Analyses based upon such forecasts are not necessarily indicative of actual
future results, which may be significantly more or less favorable than those
suggested by such analyses. In addition, analyses relating to the value of
businesses or securities do not purport to be appraisals or to reflect the
prices at which businesses or securities actually may be sold. Because such
analyses are inherently subject to uncertainty, being based upon numerous
factors or events beyond the control of the parties or their advisors, none of
Reliable, Unitrin, Societe Generale or any other person assumes responsibility
if future results are materially different from those which are forecast.
Societe Generale's presentation to the Reliable Board was only one of many
factors taken into consideration by the Reliable Board in making its
determination to approve the Merger and related transactions. Although Societe
Generale evaluated the fairness of the consideration, from a financial point
of view, to be received by holders of Reliable A Stock in the Merger, Societe
Generale was not asked to and did not recommend the specific consideration
payable in the Merger, which was determined through negotiation between
Reliable and Unitrin.
Societe Generale is an internationally recognized investment banking firm
and is regularly engaged in the valuation of businesses and securities in
connection with mergers and acquisitions, leveraged buyouts, competitive
biddings, private placements, public financings and valuations for corporate,
estate and other purposes. Reliable's Board of Directors selected Societe
Generale because of its substantial experience in transactions similar to the
Merger and its familiarity with Reliable, its business and the life insurance
and property and casualty insurance industries. Societe Generale has provided
certain investment banking services for Unitrin from time to time, and has
received customary fees for such services. In the ordinary course of business
Societe Generale may actively trade the debt and equity securities of Reliable
and/or Unitrin for its own account or the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
Societe Generale may provide investment banking services to Reliable, Unitrin
or their respective subsidiaries in the future.
Pursuant to the terms of Societe Generale's engagement as financial advisor
to Reliable, Reliable paid Societe Generale a fee of $250,000 for delivering
its opinion. Reliable has also agreed to reimburse Societe Generale for its
reasonable out-of-pocket expenses and to indemnify Societe Generale and
related persons against certain liabilities, including liabilities under the
federal securities laws, in each case incurred in connection with its
engagement.
EFFECT OF THE MERGER
At the Effective Time, Acquisition Subsidiary will merge with and into
Reliable, with Reliable continuing as the surviving corporation. At the
Effective Time, the Reliable Articles in effect at the time of the Merger
shall be the Articles of Incorporation of the surviving corporation, and the
By-Laws of Acquisition Subsidiary in effect at the time of the Merger shall be
the By-Laws of the surviving corporation. In addition, the officers of
Reliable immediately prior to the Effective Time shall be the officers of the
surviving corporation at the Effective Time. The directors of the surviving
corporation at the Effective Time shall be individuals designated by Unitrin
to serve, in each case, until their successors shall have been elected and
shall qualify.
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CONVERSION OF RELIABLE B STOCK
Subject to approval by a majority of the holders of Reliable B Stock,
immediately prior to the Effective Time each ten issued and outstanding shares
of Reliable B Stock shall be converted into one share of Reliable A Stock in
accordance with the provisions of the Reliable Articles and applicable law. No
fractional shares of Reliable A Stock will be issued upon the Conversion. In
lieu of any fractional share of Reliable A Stock that a holder of Reliable B
Stock would otherwise be entitled to receive as a result of the Conversion,
such holder shall be entitled to receive from Reliable, upon surrender of
stock certificates for exchange pursuant to the Merger Agreement, an amount in
cash determined by multiplying the fraction of a share of Reliable A Stock to
which such holder would otherwise have been entitled by $119.00. No interest
will be paid with respect to such cash payment. No fractional shares are
anticipated to result from the Conversion.
Pursuant to the Reliable Articles, upon consummation of a transaction such
as the Merger, the shares of Reliable B Stock would automatically be converted
into shares of Reliable A Stock. The Reliable Articles require the approval of
a majority of the holders of Reliable B Stock to effect the Conversion
immediately prior to the Merger. The Conversion is being effected immediately
prior to the Merger in order to facilitate the election and allocation
procedures described elsewhere herein.
UPON CONVERSION OF THE RELIABLE B STOCK TO RELIABLE A STOCK, CERTIFICATES
REPRESENTING OUTSTANDING SHARES OF RELIABLE B STOCK SHALL THEREAFTER BE DEEMED
TO REPRESENT THE NUMBER OF SHARES OF RELIABLE A STOCK INTO WHICH SUCH SHARES
OF RELIABLE B STOCK HAVE BEEN CONVERTED. ACCORDINGLY, ALL REFERENCES TO
RELIABLE A STOCK IN THIS PROXY STATEMENT/PROSPECTUS WITH RESPECT TO THE
CONSIDERATION TO BE RECEIVED IN THE MERGER AND THE ELECTION AND ALLOCATION
PROCEDURES INCLUDE WHOLE SHARES OF RELIABLE A STOCK ISSUABLE UPON CONVERSION
OF THE RELIABLE B STOCK IMMEDIATELY PRIOR TO THE MERGER. APPROVAL OF THE
CONVERSION PROPOSAL IS A CONDITION TO THE CONSUMMATION OF THE MERGER. THE
CONVERSION WILL OCCUR ONLY IF THE MERGER IS CONSUMMATED.
CONSIDERATION PAYABLE UPON CONSUMMATION OF THE MERGER
Conversion of Reliable A Stock. At the Effective Time, by virtue of the
Merger, each share of Reliable A Stock (other than Dissenting Shares and
Cancelled Shares) will be converted into the right to receive, subject to the
election and allocation procedures described below, either (i) 2.235 shares of
Unitrin Stock (the "Per Share Stock Amount") or (ii) $119.00 in cash without
interest (the "Per Share Cash Amount," which, together with the Per Share
Stock Amount, is hereinafter referred to as the "Merger Consideration").
In the aggregate, between 81% and 100% of the shares of Reliable A Stock
issued and outstanding immediately prior to the Effective Time will be
converted into the right to receive Unitrin Stock. Holders of Reliable A Stock
will have the opportunity to indicate their preference for the proportion of
cash and Unitrin Stock to be exchanged for their shares of Reliable A Stock in
the Merger, and may indicate a preference for receiving all cash or all
Unitrin Stock.
The Merger Agreement provides that if during the period between June 20,
1997 and the Effective Time any change in the outstanding shares of capital
stock of Unitrin shall occur by reason of any reclassification,
recapitalization, stock split or combination, exchange or readjustment of
shares, or any dividend (whether in cash, stock or other property) to
shareholders of Unitrin as to which the record date is before the Effective
Time (other than Unitrin's regular quarterly dividends in an amount consistent
with prior practice), the Per Share Stock Amount shall be appropriately
adjusted. As of the date of this Proxy Statement/Prospectus, no such change in
Unitrin Stock had occurred.
At the Effective Time, Cancelled Shares will be cancelled and retired and
shall be deemed to be authorized but unissued shares of Reliable, and no
exchange or payment shall be made with respect to such Cancelled Shares.
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No Fractional Shares. No fractional shares of Unitrin Stock will be issued
in the Merger. All fractional shares of Unitrin Stock that a holder of shares
of Reliable A Stock would otherwise be entitled to receive as a result of the
Merger will be aggregated. If a fractional share results from such
aggregation, such holder will be entitled to receive from Unitrin, in lieu
thereof, upon surrender of stock certificates for exchange in the manner
described below, an amount in cash determined by multiplying $119.00 (subject
to appropriate adjustment if necessary) by the fraction of a share of Unitrin
Stock to which such holder would otherwise have been entitled. No interest
will be paid with respect to such cash payment.
Election Procedures. Reliable will mail a form (the "Election Form") to each
of its shareholders of record as of the Record Date for the Special Meeting
pursuant to which each record holder of Reliable Common Stock may elect
(hereinafter called an "Election"), subject to the allocation provisions
described below, to receive for each share of Reliable A Stock owned by such
holder (i) the Per Share Cash Amount (a "Cash Election") or (ii) the Per Share
Stock Amount (a "Stock Election"). A holder of shares of Reliable B Stock will
be entitled to make Elections for the number of shares of Reliable A Stock
into which such shares of Reliable B Stock are to be converted in the
Conversion. A shareholder's Election shall have been properly made only if
First Chicago Trust Company of New York, as exchange agent (the "Exchange
Agent"), shall have received, by 5:00 p.m., Central Time, on the date of the
Special Meeting (the "Election Date"), an Election Form properly completed and
signed. Any shareholder of Reliable who fails to properly make the required
election shall be deemed to have made a Stock Election with respect to all
shares of Reliable A Stock (other than Dissenting Shares) owned by such holder
(after giving effect to the Conversion). Dissenting Shares will not be
converted into the Merger Consideration and will be treated as provided in
"Dissenters' Rights" below.
Any shareholder may at any time prior to the Election Date change his or her
Election by written notice received by the Exchange Agent on or prior to the
Election Date accompanied by a properly completed, later dated Election Form.
Any shareholder may at any time prior to the Election Date revoke his or her
Election by written notice received by the Exchange Agent on or prior to the
Election Date. Any Election relating to shares which become Dissenting Shares
shall be deemed automatically revoked as of the Election Date. Any Election
that has been revoked and not otherwise replaced by a later dated Election
Form prior to the Election Date (other than an Election relating to shares
which become Dissenting Shares) shall be deemed to be a Stock Election. Any
such revoked Election, together with all other Elections that are deemed to be
Stock Elections as provided above, are hereinafter referred to as "Default
Stock Elections."
Unitrin will have the reasonable discretion, which it may delegate in whole
or in part to the Exchange Agent, (i) to determine whether any Election Form
has been properly completed, signed and submitted or revoked and (ii) to
disregard immaterial defects in any Election Form. The decision of Unitrin (or
the Exchange Agent) in such matters shall be conclusive and binding. Neither
Unitrin nor the Exchange Agent will be under any obligation to notify any
person of any defect in an Election Form submitted to the Exchange Agent. The
Exchange Agent shall also make all computations under the allocation
procedures described below to determine any allocation of the Merger
Consideration under this Agreement and all such computations shall be final.
Allocation Procedures. If the number of shares of Reliable A Stock covered
by Stock Elections and Default Stock Elections is equal to or greater than 81%
of the number of shares of Reliable A Stock outstanding immediately prior to
the Merger (after giving effect to the Conversion), then all such shares
covered by Stock Elections and Default Stock Elections will be converted into
the right to receive shares of Unitrin Stock, and all such shares covered by
Cash Elections will be converted into the right to receive cash.
If the number of shares of Reliable A Stock covered by Stock Elections and
Default Stock Elections is less than 81% of the number of shares of Reliable A
Stock outstanding immediately prior to the Effective Time (after giving effect
to the Conversion), then all such shares covered by Stock Elections and
Default Stock Elections will be converted into the right to receive shares of
Unitrin Stock, and the shares covered by Cash Elections will be allocated by
the Exchange Agent for conversion into the right to receive either cash or
Unitrin Stock in the following manner: the Exchange Agent will select by lot
(or by such other method as is deemed reasonable by Unitrin and Reliable) from
among such shares a sufficient number of shares to be converted into the right
to
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receive Unitrin Stock so that the number of shares so selected, together with
the shares already covered by Stock Elections and Default Stock Elections, are
sufficient to cause the total number of shares to be converted into the right
to receive Unitrin Stock to be equal to or greater than 81% of the number of
shares of Reliable A Stock outstanding immediately prior to the Effective Time
(after giving effect to the Conversion); any such shares not so selected by
the Exchange Agent shall be converted into the right to receive cash.
After giving effect to the foregoing allocations, if the payment of cash in
lieu of fractional shares of Unitrin Stock would result in fewer than 81% of
the number of shares of Reliable A Stock outstanding immediately prior to the
Effective Time being converted into whole shares of Unitrin Stock, then the
Exchange Agent shall select by lot (or such other method as is deemed
reasonable by Unitrin and Reliable) additional shares covered by Cash
Elections for conversion into the right to receive Unitrin Stock in order to
ensure that not less than 81% of the number of shares of Reliable A Stock
outstanding immediately prior to the Effective Time is converted into whole
shares of Unitrin Stock. The allocation procedures were designed to permit the
Merger to qualify as a tax-free reorganization. See "--Certain Federal Income
Tax Consequences."
RELIABLE SHAREHOLDERS SHOULD NOT FORWARD RELIABLE COMMON STOCK CERTIFICATES
TO THE EXCHANGE AGENT UNTIL THEY HAVE RECEIVED LETTERS OF TRANSMITTAL.
RELIABLE SHAREHOLDERS SHOULD NOT RETURN STOCK CERTIFICATES WITH THE ENCLOSED
PROXY.
BECAUSE THE EXCHANGE RATIO IS FIXED AND THE PRICE OF UNITRIN STOCK MAY
FLUCTUATE, THE UNITRIN STOCK ISSUED IN EXCHANGE FOR EACH SHARE OF RELIABLE A
STOCK MAY HAVE AN INITIAL MARKET VALUE THAT IS GREATER OR LESS THAN $119.00.
RELIABLE SHAREHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR
UNITRIN STOCK IN CONNECTION WITH VOTING THEIR SHARES AND MAKING ELECTIONS
DURING THE ELECTION PERIOD TO RECEIVE THE STOCK CONSIDERATION OR THE CASH
CONSIDERATION.
BECAUSE OF THE ALLOCATION PROVISIONS OF THE MERGER AGREEMENT, THERE IS NO
ASSURANCE THAT A HOLDER OF RELIABLE A STOCK WILL RECEIVE THE PROPORTION OF
UNITRIN STOCK AND CASH INDICATED ON SUCH HOLDER'S FORM OF ELECTION. IF
ELECTIONS TO RECEIVE UNITRIN STOCK ARE MADE FOR FEWER THAN 81% OF THE SHARES
OF RELIABLE A STOCK OUTSTANDING IMMEDIATELY PRIOR TO THE EFFECTIVE TIME, THEN
SHARES OF RELIABLE A STOCK FOR WHICH AN ELECTION TO RECEIVE CASH HAS BEEN MADE
WILL BE SELECTED BY LOT FOR CONVERSION INTO UNITRIN STOCK DESPITE DELIVERY OF
AN OTHERWISE EFFECTIVE CASH ELECTION. THEREFORE, HOLDERS WHO ELECT CASH MAY
NOT RECEIVE THEIR REQUESTED FORM OF CONSIDERATION. SEE "ELECTION PROCEDURES"
AND "ALLOCATION PROCEDURES."
EFFECTIVE TIME; CLOSING DATE
The Merger will become effective upon the issuance of a Certificate of
Merger by the Secretary of State of Missouri after properly executed Articles
of Merger have been filed with the Secretary of State of Missouri, which
filing will be made upon the closing of the transactions contemplated by the
Merger Agreement. As used in this Proxy Statement/Prospectus, the term
"Effective Time" means the date and time at which such Certificate of Merger
is so issued. The closing of the transactions contemplated by the Merger
Agreement shall occur as promptly as practicable after the fulfillment or
waiver of all the terms and conditions contained in Articles VII, VIII, IX and
X of the Merger Agreement.
If the Merger is approved by the shareholders of Reliable, subject to
certain conditions described herein, the Effective Time is currently expected
to occur on or about September , 1997 (the "Closing Date").
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SURRENDER OF RELIABLE STOCK CERTIFICATES; DELIVERY OF MERGER CONSIDERATION
As promptly as practicable following the Effective Time, Unitrin will cause
the Exchange Agent to mail transmittal materials to the former holders of
Reliable A Stock (including former holders of Reliable B Stock whose shares of
Reliable B Stock have been converted into shares of Reliable A Stock in the
Conversion) for use in surrendering their certificate or certificates in
exchange for the Merger Consideration. Each holder of a certificate formerly
representing Reliable Common Stock who surrenders or has surrendered such
certificate (or customary affidavits and indemnification regarding the loss or
destruction of such certificate), together with duly executed transmittal
materials, to the Exchange Agent shall, upon acceptance thereof, be entitled
to a certificate representing the Unitrin Stock or cash into which the shares
shall have been converted pursuant to the Merger. Each certificate which
represented shares of Reliable Common Stock immediately prior to the Effective
Time (other than Dissenting Shares and Cancelled Shares) shall be deemed
cancelled at the Effective Time and shall represent only the right to receive
the Merger Consideration for each share of Reliable A Stock represented by
such certificate. In no event shall the holder of any such surrendered
certificates be entitled to receive interest on the Per Share Cash Amount to
be received in the Merger.
Each holder of shares of Reliable A Stock also will receive, upon surrender
of the certificate or certificates representing such shares, cash in lieu of
any fractional shares of Unitrin Stock to which such holder would otherwise be
entitled. Unitrin shall not deliver the consideration to which any former
holder of Reliable Common Stock is entitled as a result of the Merger until
such holder surrenders the certificate or certificates (or customary
affidavits and indemnification regarding the loss or destruction of such
certificate) representing such shares for exchange as herein provided.
After the Effective Time, there will be no transfers on Reliable's stock
transfer books of shares of Reliable Common Stock. If certificates
representing shares of Reliable Common Stock are presented for transfer after
the Effective Time, together with documents sufficient to evidence and effect
such transfer, they will be cancelled and exchanged for shares of Unitrin
Stock and/or cash, if any, deliverable in respect thereof.
Voting and Dividends. No holder of any unsurrendered certificates
representing shares of Reliable Common Stock shall have the right either to
vote or to receive dividends or other distributions with respect to the
Unitrin Stock receivable in exchange for such certificates until such
certificates are surrendered as provided above. See "Surrender of Reliable
Stock Certificates; Delivery of Merger Consideration." Following such
surrender, such holder shall have the right to vote the Unitrin Stock at any
Unitrin shareholder meeting the record date of which is after the date of such
surrender. Upon such surrender, there shall be paid, without interest, to the
person in whose name the certificates representing the shares of Unitrin Stock
into which such shares of Reliable A Stock were converted are registered, all
dividends and other distributions payable in respect of such shares of Unitrin
Stock on a date subsequent to, and in respect of a record date after, the
Effective Time and prior to such surrender. Such holder shall be also entitled
to receive, on the payment date therefor, any dividend or distribution the
record date for which occurs prior to such surrender and the payment date for
which occurs following such surrender.
Promptly following 180 days after the Effective Time, the Exchange Agent
will deliver to Unitrin all cash and other documents in its possession
relating to the Merger, and the Exchange Agent's duties shall terminate.
Thereafter, each holder of a certificate formerly representing Reliable Common
Stock who has not previously surrendered such certificate may surrender such
certificate to Unitrin and receive in exchange the Merger Consideration.
Neither Unitrin, Reliable, the Exchange Agent nor any other person will be
liable to any former holder of Reliable Common Stock for any shares of Unitrin
Stock (or dividends or distributions with respect thereto) or cash delivered
to a public official pursuant to applicable unclaimed property, abandoned
property, escheat or similar laws.
Any shares as to which dissenters' rights have been perfected will be
purchased in accordance with the procedures described under "--Dissenters'
Rights" and in Appendix B to this Proxy Statement/ Prospectus.
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Certificates surrendered by persons who are deemed "affiliates" of Reliable
for purposes of Rule 145 under the Securities Act will not be exchanged for
certificates representing Unitrin Stock until Unitrin has received an
affiliate's agreement. See "CERTAIN RELATED AGREEMENTS--Resale of Unitrin
Stock; Affiliates' Agreements."
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties made by
Unitrin and Reliable to each other relating to their respective assets,
liabilities, obligations, business operations and other matters. The
representations and warranties of Reliable include, without limitation, those
relating to (i) the structure, organization, standing and similar corporate
matters of Reliable and its subsidiaries; (ii) the capital structure of
Reliable; (iii) Reliable's authorization to enter into the Merger and related
transactions and the execution, delivery, performance and enforceability of
the Merger Agreement; (iv) Reliable's financial statements; (v) the material
accuracy of information supplied by Reliable in connection with the
Registration Statement and this Proxy Statement/Prospectus; (vi) compliance
with applicable law; (vii) the absence of material pending or threatened
litigation against Reliable and its subsidiaries, except as disclosed; (viii)
the filing of tax returns and payment of taxes; (ix) certain material
contracts; (x) retirement and other employee benefit plans and matters
relating to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"); (xi) the adequacy of Reliable's reserves; (xii) the maintenance of
adequate insurance; (xiii) the absence of actions or conditions which would
give rise to liabilities under environmental laws; (xiv) the enforceability of
certain intellectual property rights; and (xv) changes in Reliable's business
since December 31, 1996.
The representations and warranties of Unitrin include, without limitation,
those relating to (i) the structure, organization, standing and similar
corporate matters of Unitrin and its subsidiaries; (ii) the capital structure
of Unitrin; (iii) Unitrin's authorization to enter into the Merger and related
transactions and the execution, delivery, performance and enforceability of
the Merger Agreement; (iv) the filing by Unitrin of certain reports with the
SEC; (v) the material accuracy of information supplied by Unitrin in
connection with the Registration Statement and this Proxy
Statement/Prospectus; (vi) compliance with applicable law; (vii) the absence
of material pending or threatened litigation against Unitrin and its
subsidiaries, except as disclosed; and (viii) changes in Unitrin's business
since March 31, 1997.
The representations and warranties are required to be true and correct in
all material respects on the date of the Merger Agreement and (with certain
exceptions) upon the Closing Date. The representations and warranties will not
survive the closing.
CONDUCT OF RELIABLE'S BUSINESS PENDING THE MERGER
The Merger Agreement provides that, during the period from the date of the
Merger Agreement to the Effective Time, Reliable and each of its subsidiaries
shall conduct its respective business in the ordinary course consistent with
past practice and, without the prior written consent of Unitrin, Reliable
shall not, among other things, (i) adopt or propose any change in the Reliable
Articles or By-Laws; (ii) make any change in its authorized capital stock or
declare, set aside or pay any dividend or other distribution with respect to
any shares of its capital stock except quarterly dividends; (iii) merge or
consolidate with any other person or acquire a material amount of assets of
any other person; (iv) except pursuant to certain identified contracts or
commitments or in the ordinary course of business, sell, lease, license or
otherwise surrender, relinquish or dispose of any material assets; (v) settle
any material audit, make or change any material tax election or file amended
tax returns; (vi) except in the ordinary course of business, incur any
material indebtedness or amend or otherwise increase, accelerate the payment
or vesting of the amounts payable or to become payable under or fail to make
any required contribution to, or withdraw any amounts from, any employee
benefit plan maintained by Reliable or any of its subsidiaries; (vii) except
in the ordinary course of business, grant any increase in the compensation of
any director, officer, employee, consultant or agent of Reliable or any of its
subsidiaries, or enter into any indemnity agreements with any such person;
(viii) except in the ordinary course of business, enter into, terminate or
amend any material contract or agreement of Reliable or any of its
subsidiaries, including without limitation
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any employee benefit plan; (ix) change any method of accounting or accounting
practice by Reliable or any of its subsidiaries; (x) conduct transactions in
Company Investments (as such term is defined in the Merger Agreement) except
in compliance with Reliable's investment policies and all applicable insurance
laws and regulations, provided that neither Reliable nor any of its
subsidiaries may acquire any securities or other investments other than
investments in U.S. Treasury bonds with maturities of five years or less
except pursuant to certain identified contracts or commitments; or (xi) agree
or commit to do any of the foregoing.
Reliable has also agreed to notify Unitrin promptly of (i) any notice or
other communication received by Reliable or any of its subsidiaries after June
20, 1997 and prior to the Effective Time relating to a default or event which
with notice or lapse of time or both would become a default under the Reliable
Articles or By-laws or any indenture, or material instrument or agreement, to
which Reliable or any of its subsidiaries is a party, by which it or any of
its properties is bound or to which it or any of its properties is subject,
(ii) any notice or other communication from any third party alleging that the
consent of such third party is or may be required in connection with the
Merger, (iii) any matter which, if it had occurred prior to June 20, 1997,
would have been required to be disclosed in the Reliable Disclosure Schedule
referred to in the Merger Agreement.
CERTAIN ADDITIONAL COVENANTS
Unitrin and Reliable have entered into various additional covenants and
agreements, including agreements to cooperate with the other; to prepare and
file all necessary applications and filings; to use their best efforts to
accomplish all actions necessary to comply with applicable legal requirements
related to the Merger and to obtain requisite regulatory approvals; and to
consult with the other party before issuing any press release or other public
statement with respect to the transactions contemplated by the Merger
Agreement and to make no such statement without the prior approval of the
other party.
NONSOLICITATION
Under the terms of the Merger Agreement, Reliable has agreed not to, nor
will it permit any of its subsidiaries or any of its or their officers,
directors or employees or agents to, directly or indirectly, solicit,
encourage or take any other action to facilitate any inquiry or proposal, or
provide any information to or participate in any negotiations with any other
person (other than Unitrin and its affiliates) ("Third Parties") relating to
any (i) merger or consolidation or other business combination of Reliable or
any of its subsidiaries, (ii) sale of a significant amount of assets of
Reliable or any of its subsidiaries outside the ordinary course of business,
(iii) purchase or sale of shares of capital stock of Reliable or any of its
subsidiaries or (iv) similar action or transaction involving Reliable or any
of its subsidiaries other than the transactions contemplated by the Merger
Agreement (each an "Extraordinary Transaction"), or agree to or consummate any
Extraordinary Transaction; provided, however, that Reliable may provide
information at the request of, or enter into negotiations with, a third party
or agree to or consummate any Extraordinary Transaction if the Board of
Directors of Reliable determines, in good faith, at a meeting of the Board of
Directors, that the exercise of its fiduciary duties to Reliable's
shareholders under applicable law, as advised in writing by Bryan Cave LLP (or
other firm with a national reputation in transactions of this nature),
requires it to take any such action, and, provided further, that Reliable may
not, in any event, provide to such third party any information which it has
not provided to Unitrin. Reliable has agreed to immediately inform Unitrin in
writing of any inquiry, proposal or request for information (including the
terms thereof and the person making such inquiry) which it may receive in
respect of such a transaction and provide Unitrin with a copy of any such
written inquiries, proposals and offers, including without limitation any
Acquisition Proposal.
INDEMNIFICATION OF OFFICERS AND DIRECTORS; D & O COVERAGE
Under the terms of the Merger Agreement, Unitrin has agreed, for six years
after the Effective Time, (i) to cause Reliable to indemnify and hold harmless
each person who is or has been at any time prior to June 20, 1997, or who
becomes prior to the Effective Time, an officer or director of Reliable in
respect of acts or omissions occurring prior to the Effective Time (the
"Indemnified Parties") (including but not limited to the
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transactions contemplated by this Agreement) to the extent provided under the
Reliable Articles and Reliable By-Laws and indemnity agreements between
Reliable and any of its officers or directors ("Indemnity Agreements") in
effect on June 20, 1997, provided that such indemnification shall be subject
to any limitation imposed from time to time under applicable law, and (ii) to
provide, or cause Reliable to provide, if available, officers' and directors'
liability insurance in respect of acts or omissions occurring prior to the
Effective Time, including but not limited to the transactions contemplated by
the Merger Agreement, covering each such person currently covered by
Reliable's officers' and directors' liability insurance policy, or who becomes
covered by such policy prior to the Effective Time, on terms with respect to
coverage and amount comparable to those of such policy in effect on the date
hereof, provided that such coverage may be obtained by Unitrin at a cost that
does not exceed the current cost of Reliable's insurance.
CONDITIONS TO CONSUMMATION OF THE MERGER
Conditions to Each Party's Obligations. The respective obligations of
Unitrin and Reliable to effect the Merger are subject to the satisfaction or
waiver prior to the Effective Time of certain conditions, including, without
limitation, the following: (i) all required regulatory approvals shall have
been received; (ii) no litigation or proceeding shall be pending seeking to
restrain, prohibit or enjoin the Merger; (iii) the Merger Agreement shall have
been approved at the Special Meeting by at least two-thirds of the issued and
outstanding shares of Reliable Common Stock entitled to vote thereon; (iv) the
Conversion shall have been approved by a majority of the outstanding shares of
Reliable B Stock; (v) no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no action, suit, proceeding
or investigation for that purpose shall have been initiated or threatened by
any governmental authority; (vi) holders of not more than 150,000 of the
issued and outstanding shares of Reliable Common Stock at the Effective Time
shall have delivered written notice of intent to demand payment of the fair
value of their shares pursuant to Article XIV of the Reliable Articles; and
(vii) the Effective Time shall be no later than 5:00 P.M. Central Time on
October 31, 1997. For a discussion of the regulatory approvals required for
consummation of the Merger, see "THE MERGER--Regulatory Approvals."
Reliable Conditions. The obligation of Reliable to effect the Merger is
subject to the satisfaction or waiver prior to the Effective Time of certain
additional conditions, including the following: (i) the representations and
warranties of Unitrin contained in the Merger Agreement shall be true and
correct in all material respects as of the date of the Merger Agreement and
(with certain exceptions) as of the Closing Date; Unitrin shall have performed
in all material respects all obligations and agreements and complied with all
covenants and conditions of the Merger Agreement to be performed and complied
with by Unitrin at or before the Closing Date and no facts, events or
circumstances shall have occurred which in the reasonable judgment of Reliable
could have a material adverse effect on the business, financial condition, or
results of operations of Unitrin and its subsidiaries taken as a whole; (ii)
Reliable shall have received an opinion from Bryan Cave LLP to the effect that
the Merger when consummated in accordance with the terms of the Merger
Agreement will constitute a tax-free reorganization within the meaning of
Section 368(a) of the Code; (iii) Reliable shall have received an opinion from
Scott Renwick, Esq., counsel to Unitrin, as to certain legal matters; and (iv)
the Societe Generale Opinion shall not have been rescinded or amended in any
material respect; (v) the shares of Unitrin Stock issuable in exchange for the
shares of Reliable A Stock covered by Stock Elections shall have been included
on the National Market Tier of the Nasdaq Stock Market; and (vi) Unitrin shall
not have effected or entered into an agreement providing for a change of
control (as defined in the Merger Agreement) of Unitrin.
Unitrin Conditions. The obligation of Unitrin to effect the Merger is
subject to the satisfaction or waiver prior to the Effective Time of certain
additional conditions, including the following: (i) the representations and
warranties of Reliable contained in the Merger Agreement shall be true and
correct in all material respects as of the date of the Merger Agreement and
(with certain limited exceptions) as of the Closing Date; Reliable shall have
performed in all material respects all obligations and agreements and complied
with all covenants and conditions of the Merger Agreement to be performed and
complied with by Reliable at or before the Closing Date and no facts, events
or circumstances shall have occurred which in the reasonable judgment of
Unitrin could have a material adverse effect on the business, financial
condition, or results of operations of Reliable and its
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subsidiaries taken as a whole; (ii) each person identified by Reliable as an
"affiliate" for purposes of Rule 145 under the Securities Act shall have
delivered an affiliates' agreement in the form agreed to by the parties in
connection with the Merger Agreement; (iii) Unitrin shall have received
resignations of all of the directors of Reliable and its subsidiaries
designated by Unitrin prior to the Closing Date; (iv) Unitrin shall have
received the opinion of Bryan Cave LLP, counsel to Reliable, as to certain
legal matters; (v) Unitrin shall have received evidence reasonably
satisfactory to Unitrin demonstrating that certain private placement
investments owned by Reliable have an aggregate value in excess of 95% of the
carrying value of such investments as reflected in Reliable's statutory
financial statements for the quarter ended March 31, 1997 (subject to certain
adjustments); and (vi) Reliable shall have delivered to Unitrin evidence
reasonably satisfactory to Unitrin that Reliable and its insurance
subsidiaries' existing licenses and governmental authorizations necessary for
them to conduct business remain in full force and effect and are not subject
to any restriction.
REGULATORY APPROVALS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR
Act") and the rules promulgated thereunder by the Federal Trade Commission
(the "FTC"), certain acquisition transactions may not be consummated unless
notice has been given and certain information has been furnished to the
Antitrust Division of the United States Department of Justice (the "Antitrust
Division") and the FTC and certain waiting period requirements have been
satisfied. The Merger is subject to these requirements.
Reliable and Unitrin each filed with the Antitrust Division and the FTC a
Notification and Report Form with respect to the Merger on June 24, 1997.
Under the HSR Act, the Merger may not be consummated until the expiration of a
waiting period of at least 30 days following the receipt of each filing,
unless the waiting period is earlier terminated by the FTC and the Antitrust
Division or unless the waiting period is extended by a request for additional
information. On July 7, 1997, the FTC notified the parties that the waiting
period was early terminated as of that date.
Under Missouri and Texas insurance laws and related regulations, the
acquisition of control of a domestic insurer must receive prior approval by
the state's insurance department. Missouri and Texas law provide that a
transaction will be approved if the insurance department finds that the
transaction would, among other things, not violate the law or be contrary to
the interests of the insureds of any participating domestic insurance
corporation. Applications for approval of the Merger and all related
transactions were submitted to the Missouri and Texas Insurance Departments on
June 27 and July 3, 1997, respectively. Filings of pre-acquisition
notifications have been made in certain states where insurance holding company
system acts contain anti-competition provisions pertaining to the lines of
business in which Reliable or any of its insurance subsidiaries and any of
Unitrin's insurance subsidiaries compete. In addition, various state insurance
licensing laws require relicensing of Reliable after consummation of the
Merger.
AMENDMENT AND TERMINATION; TERMINATION FEE
Amendment and Waiver. Except as otherwise required by law, the Merger
Agreement may be modified or amended by action of the Boards of Directors of
Reliable and Unitrin, without action by their respective shareholders,
pursuant to a writing signed by the parties to the Merger Agreement.
Termination. The Merger Agreement may be terminated at any time prior to the
closing (i) by mutual written consent of the Boards of Directors of Unitrin
and Reliable, (ii) by action of the Board of Directors of Unitrin or the Board
of Directors of Reliable, if a material breach of any provision of the Merger
Agreement has been committed by the non-terminating party, and such breach has
not been waived, (iii) by action of the Board of Directors of Unitrin, in the
event a condition to Unitrin's obligation to close has not been satisfied as
of the time such condition is required hereunder to be satisfied, or
satisfaction of such condition is or becomes impossible (other than through
the failure of Unitrin to comply with its obligations under the Merger
Agreement), (iv) by action of the Board of Directors of Reliable, in the event
a condition to Reliable's obligation to close has not been satisfied as of the
time such condition is required hereunder to be satisfied, or satisfaction of
such
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condition is or becomes impossible (other than through the failure of Reliable
to comply with its obligations under the Merger Agreement), or (v) by action
of the Board of Directors of Unitrin or Reliable in the event a mutual
condition to close has not been satisfied as of the time such condition is
required hereunder to be satisfied, or satisfaction of such condition is or
becomes impossible (other than through the failure of the terminating party to
comply with its obligations under the Merger Agreement).
Termination Fee. If Unitrin and Reliable fail to consummate the Merger and
Reliable enters into a binding commitment or agreement regarding an
Extraordinary Transaction (as defined in the Merger Agreement) with any Third
Party (as defined) on or prior to January 1, 1998, then Reliable will promptly
pay to Unitrin in cash the sum of $10 million contemporaneously with (and
subject to) consummation of such Extraordinary Transaction; provided, however,
that such amount shall not be payable by Reliable (i) if Reliable was entitled
not to consummate the Merger with Unitrin due to a failure of one or more of
Reliable's or the mutual conditions (each with certain exceptions) to be
satisfied, or (ii) if Unitrin fails to consummate the Merger based upon a
failure of one of Unitrin's conditions to close, unless in the case of either
(i) or (ii) above, the failure of such condition to be satisfied is caused by
any action or failure to act on the part of Reliable. Notwithstanding the
foregoing, such fee shall not be payable if Reliable was entitled not to
consummate the Merger due to the failure of Bryan Cave LLP to issue its tax
opinion with respect to the Merger if such failure resulted from a change in
applicable tax laws or regulations after June 20, 1997 or the failure of
Unitrin to deliver its tax certificate referred to in the Merger Agreement.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
As of the Record Date the directors and executive officers of Reliable
beneficially owned outstanding shares of Reliable A Stock and
outstanding shares of Reliable B Stock. Under the Conversion
Proposal, all such shares of Reliable B Stock will be converted into shares of
Reliable A Stock immediately prior to the Merger in the same manner as will
shares of Reliable B Stock held by all other holders of Reliable B Stock. In
the Merger, all such shares of Reliable A Stock, including the shares of
Reliable A Stock issued upon conversion of such shares of Reliable B Stock,
will be converted into the right to receive cash or Unitrin Stock or both at
the Effective Time in the same manner as will the shares of Reliable A Stock
held by all other Reliable shareholders.
The Merger Agreement provides for a continuation of certain rights to
indemnification existing in favor of the current and former directors and
officers of Reliable following the Merger for a period of six years following
the Effective Time, and further provides that directors' and officers'
liability insurance coverage will be provided to current directors and
officers of Reliable covering acts and omissions prior to the Effective Time.
See "--Indemnification of Officers and Directors; D & O Coverage." See also
"--Organization After the Merger" for a discussion of the anticipated
operations of United's Texas home service business and Reliable's home office
following the Merger.
UNITRIN-RELIABLE TRANSACTIONS
Effective January 1, 1997, United entered into a 100% coinsurance agreement
whereby Reliable reinsured all home service life, accident and health
insurance business of United in the states of Arkansas and Missouri and small
amounts in adjoining areas of some neighboring states. Reinsured liabilities
totaled $28 million at January 1, 1997. United received a ceding commission of
approximately $14 million and Reliable offered employment to approximately 150
persons in the affected states who had been employees of United servicing the
reinsured business.
United is negotiating to purchase from Reliable certain real property
located in Houston, Texas for a purchase price of approximately $8.4 million.
The consummation of this proposed transaction will not be contingent upon the
consummation of the Merger.
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FEES TO RELIABLE FINANCIAL ADVISOR
Societe Generale will receive certain fees and expenses in connection with
financial advisory services provided to Reliable. See "--Opinion of Financial
Advisor."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discusses only certain federal income tax consequences of the
Merger to United States persons who hold shares of Reliable Common Stock as
capital assets. It does not discuss all the tax consequences that might be
relevant to Reliable shareholders entitled to special treatment under the
federal income tax law.
The consummation of the Merger is conditioned upon receipt of an opinion
from Bryan Cave LLP to the effect that, if the Merger is consummated in
accordance with the terms of the Merger Agreement and as described in this
Joint Proxy Statement/Prospectus, under current law, for federal income tax
purposes, the Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code. The delivery of this opinion is dependent upon
Unitrin acquiring at least 81% of the Reliable A Stock (after giving effect to
the Conversion) in exchange for whole shares of Unitrin Stock and the receipt
and accuracy of customary representations to be made to Bryan Cave LLP with
respect to certain factual matters required to qualify the Merger as a
reorganization under the Code, including that:
(i) Unitrin has no present plan or arrangement with any Reliable
shareholder to reacquire any shares of Unitrin Stock issuable pursuant to
the Merger and to the best knowledge of the management of Reliable, the
shareholders of Reliable have no plan or intention to sell, exchange, or
otherwise dispose of a number of shares of Unitrin Stock received in the
Merger that would reduce Reliable shareholders' ownership of Unitrin Stock
to a number of shares having a fair market value, as of the date of the
Merger, of less than 50 percent of the fair market value of all of the
formerly outstanding Reliable Common Stock as of the same date; (ii) there
is no present plan or intention by Reliable to issue additional shares of
Reliable Common Stock or by Unitrin to cause Reliable to issue such shares
that would result in Unitrin losing control of Reliable within the meaning
of Section 368(c) of the Code; (iii) Unitrin has no present plan or
intention (a) to liquidate Reliable, (b) to merge Reliable into another
corporation, or (c) to cause Reliable to sell or otherwise dispose of its
assets, except for dispositions made in the ordinary course of business
(provided, however, Unitrin may cause Reliable to dispose of all or
portions of its private placement portfolio, the proceeds of which would be
reinvested by Reliable in investment assets) ; and (iv) Unitrin has no
present plan or intention to cause Reliable not to engage in the life
insurance business.
The opinion will be based on the Code, regulations and rulings in effect as
of the date of such opinion, current administrative rulings and practice and
judicial precedent, all of which are subject to change. Any such change, which
may or may not be retroactive, could alter the tax consequences discussed
herein. Such opinion will neither bind the Internal Revenue Service (the
"Service") nor preclude the Service from adopting a contrary position. The
parties will not request and the Merger is not conditioned upon a ruling from
the Service with respect to any of the federal income tax consequences of the
Merger.
Based on the opinion of Bryan Cave LLP that the Merger qualifies as a
reorganization under the Code, the following material federal income tax
consequences are expected to result:
(i) Reliable shareholders who receive solely shares of Unitrin Stock in
the Merger will recognize no gain or loss, except with respect to cash
received in lieu of fractional share interests, if any, as discussed below.
(ii) Reliable shareholders who receive both shares of Unitrin Stock and
cash pursuant to the Cash Election will recognize gain, but not loss, to
the extent of the amount of cash received in the exchange.
(iii) Such gain will be subject to the provisions of Section 302 of the
Code, relating to whether the cash so distributed will be treated as the
distribution of a dividend or as capital gain. In most instances, the gain
with respect to the cash received should be treated as a capital gain. If
the exchange, however, has the
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effect of the distribution of a dividend (determined with the application
of the constructive ownership provisions of Section 318 of the Code), then
the amount of gain recognized that is not in excess of the Reliable
shareholder's ratable share of undistributed earnings and profits will be
treated as a dividend.
(iv) The tax basis of the shares of Unitrin Stock received by a Reliable
shareholder (including any deemed fractional share interests as
contemplated by clause (vi) below) will be equal to the tax basis of the
shares of Reliable Common Stock exchanged therefor decreased by the amount
of cash received pursuant to the Cash Election and increased by the amount
of gain recognized on the transaction and by the amount, if any, treated as
a dividend.
(v) For purposes of determining whether a gain or loss on a disposition
of shares of Unitrin Stock is long-term or short-term, the holding period
of the shares of Unitrin Stock received pursuant to the Merger by the
Reliable shareholders will include the holding period of the Reliable
Common Stock exchanged therefor.
(vi) Cash received by Reliable shareholders in lieu of fractional share
interests of Unitrin Stock will be treated as if the fractional shares were
actually issued by Unitrin as part of the exchange and then redeemed by
Unitrin for cash. These cash payments will be treated as having been
received in exchange for the redeemed fractional share interests under
Section 302(a) of the Code.
(vii) If a Reliable shareholder makes a Cash Election or dissents from
the Merger and receives solely cash in exchange for the Reliable Common
Stock, such cash will be treated as having been received as a distribution
in redemption, subject to the provisions of Section 302 of the Code. Where,
as a result of such distribution, a Reliable shareholder owns no Unitrin
Stock (either directly or by reason of the application of Section 318) the
redemption will be a complete termination of interest within the meaning of
Section 302(b)(3) and such cash will be treated as a distribution in full
payment in exchange of the shareholder's stock as provided pursuant to
Section 302(a). Such Reliable shareholders will recognize gain or loss
under Section 1001 equal to the difference between the amount of cash
received and the adjusted basis of the Reliable Common Stock surrendered.
BECAUSE OF THE COMPLEXITY OF THE TAX LAWS, AND BECAUSE THE TAX CONSEQUENCES
OF ANY PARTICULAR RELIABLE SHAREHOLDER MAY BE AFFECTED BY MATTERS NOT
DISCUSSED HEREIN, IT IS RECOMMENDED THAT EACH RELIABLE SHAREHOLDER CONSULT HIS
OR HER PERSONAL TAX ADVISOR CONCERNING THE APPLICABILITY OF FEDERAL, STATE AND
LOCAL INCOME TAX CONSEQUENCES OF THE MERGER TO HIS OR HER PARTICULAR
SITUATION.
ACCOUNTING TREATMENT
The Merger will be accounted for by Unitrin under the purchase method of
accounting in accordance with Accounting Principles Board Opinion No. 16,
"Business Combinations," as amended. Under this method of accounting, the
purchase price will be allocated to assets acquired and liabilities assumed
based on their estimated fair values at the Effective Time. Income of Unitrin
will not include income (or loss) of Reliable prior to the closing.
EXPENSES
The Merger Agreement provides that except for the termination fee described
herein, each party will pay its own expenses in connection with the Merger
Agreement.
ORGANIZATION AFTER THE MERGER
Following the Merger, Unitrin anticipates that United's Texas home service
business will be integrated into Reliable's operations and that Reliable's
home office operation will continue to be conducted in Webster Groves,
Missouri.
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RESALE OF UNITRIN STOCK; AFFILIATES' AGREEMENTS
The shares of Unitrin Stock issued pursuant to the Merger Agreement upon
consummation of the Merger will be freely transferable under the Securities
Act except for shares issued to any shareholder who may be deemed to be an
"affiliate" of Reliable for purposes of Rule 145 under the Securities Act as
of the date of the Special Meeting. Affiliates may not sell their shares of
Unitrin Stock acquired in connection with the Merger except pursuant to an
effective registration statement under the Securities Act covering such shares
or in compliance with Rule 145 under the Securities Act or another applicable
exemption from the registration requirements of the Securities Act. Persons
who may be deemed to be affiliates of Reliable generally include individuals
or entities that control, are controlled by or are under common control with
Reliable and include certain officers and directors of Reliable as well as
principal shareholders of Reliable.
The Merger Agreement requires Reliable to use all reasonable efforts to
cause certain persons who Reliable believes to be "affiliates" of Reliable
within the meaning of Rule 145 to enter into and deliver to Unitrin, prior to
the Closing Date, affiliate's agreements providing that such persons will not
sell, assign, transfer or otherwise dispose of their shares of Unitrin Stock
which they may acquire in connection with the Merger or any securities which
may be paid as a dividend or otherwise distributed with respect thereto or
issued or delivered in exchange or substitution therefor (collectively,
"Restricted Securities"), or any option, right or other interest with respect
to any Restricted Securities, unless such sale, transfer or disposition is
effected (i) pursuant to an exemption from the registration requirements of
the Securities Act, (ii) pursuant to an effective registration statement
under, and in compliance with, the Securities Act, or (iii) in compliance with
Rule 145(d) (as evidenced by a broker's letter stating that the requirements
of Rule 145 have been met). Stop transfer instructions will be given to
Unitrin's transfer agent in accordance with the restrictions on transfer set
forth in each affiliates' agreement. The Merger Agreement provides that
certificates for Reliable Common Stock held by a person who is an affiliate of
Reliable for purposes of Rule 145 will not be exchanged for certificates
representing Unitrin Stock until Unitrin has received an affiliate's agreement
from such person.
Each affiliate will be able to sell under Rule 145 in a broker's transaction
within any period of three months a number of shares which does not exceed the
greater of one percent of the outstanding shares of Unitrin Stock or the
average weekly trading volume during the preceding four weeks. If the Merger
were consummated as of the date of this Proxy Statement/Prospectus, there
would have been shares of Unitrin Stock outstanding, and one percent of
that amount is shares.
The affiliates' agreements will terminate, and the related transfer
restrictions will be lifted forthwith, subject in all events to the
requirements of Rule 145 under the Securities Act, if (i) the Restricted
Securities shall have been registered under the Securities Act for sale,
transfer or other disposition by such affiliate, (ii) such person is not at
the time an affiliate of Unitrin and has held the Restricted Securities for at
least one year (or such other period as may be prescribed by the Securities
Act or the rules and regulations thereunder) and Unitrin has filed with the
SEC all of the reports it is required to file under the Exchange Act during
the preceding twelve months, (iii) such person is not and has not been for at
least three months an affiliate of Unitrin and has held the Restricted
Securities for at least two years, or (iv) Unitrin shall have received a
letter from the staff of the SEC, or an opinion of Unitrin's general counsel
or other counsel acceptable to Unitrin, to the effect that the securities
transfer restrictions are not required.
DISSENTERS' RIGHTS
Holders of Reliable Common Stock are entitled to dissenters' appraisal
rights under Article XIV of the Reliable Articles. The following is a summary
of certain of the provisions of Article XIV of the Reliable Articles and is
qualified in its entirety by reference to the full text of Article XIV, a copy
of which is appended hereto as Appendix B.
Any shareholder entitled to vote on the adoption of the Merger Agreement
whose shares are not voted in favor of such adoption will be entitled, upon
complying with provisions of Article XIV of the Reliable Articles, to be paid
the fair value of such shares held of record by the shareholder. Such value is
determined as of the day
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before the vote is taken by the shareholders of Reliable authorizing the
Merger. In order to be entitled to such payment, the shareholder must file with
Reliable written objection thereto at or prior to the meeting at which the
Merger is submitted to a vote, must not vote in favor of the Merger, and,
within 20 days after the vote was taken, must make written demand for the
payment to him of the fair value. Any shareholder failing to make demand within
the 20-day period will be conclusively presumed to have consented to the Merger
and will be bound by the terms thereof. A proxy marked "AGAINST" and returned
prior to the meeting will not constitute the written objection required by the
Reliable Articles.
The shareholder must specify in such demand the number and class of shares
owned by him. If, within 30 days after the date on which such vote was taken,
the value of such shares is agreed upon between the dissenting shareholder and
Reliable, Reliable must make payment of the agreed value within 90 days after
the date on which the vote was taken authorizing the Merger, upon surrender by
the dissenting shareholder of his certificate or certificates representing his
shares. Upon payment of the agreed value, the dissenting shareholder will cease
to have any interest in such shares or in Reliable. If within such period of 30
days the shareholder and Reliable do not so agree, then the dissenting
shareholder may, within 60 days after the expiration of the 30 day period, file
a petition in any court of competent jurisdiction within St. Louis County,
Missouri, asking for a finding and determination of the fair value of such
shares, and shall be entitled to judgment against Reliable for the amount of
such fair value as of the day prior to the date on which such vote was taken
together with interest thereon to the date of such judgment. Unless the
dissenting shareholder files such petition within the time set forth above,
such shareholder and such persons claiming under him will be conclusively
presumed to have approved and ratified the Merger and will be bound by the
terms thereof.
The right of a dissenting shareholder to be paid the fair value of his or her
shares shall cease if and when Reliable abandons the Merger or the shareholders
fail to approve the Merger. Reliable does not plan to send any further notice
as to the date on which the vote of shareholders is taken.
BUSINESS OF UNITRIN
Unitrin is a diversified financial services holding company incorporated
under the laws of Delaware. Through its subsidiaries, Unitrin provides life and
health insurance, property and casualty insurance, and consumer finance
services.
Life and Health Insurance. Unitrin conducts its life and health insurance
business through United and its subsidiaries, including Union National Life
Insurance Company and The Pyramid Life Insurance Company (collectively, the
"Life and Health Group"). The leading product of the Life and Health Group is
traditional life insurance. This product accounted for 28%, 32% and 32% of
Unitrin's consolidated insurance premiums for the years ended December 31,
1996, 1995 and 1994, respectively. Permanent policies are offered primarily on
a non-participating, guaranteed-cost basis.
United, together with Union National Life Insurance Company, is one of the
largest home service insurance operations in the United States. In the "home
service" market, agents who are full-time employees of the insurer call on
customers in their homes to sell insurance products, provide services related
to policies in force and collect premiums, typically monthly. The Life and
Health Group's home service operations generated 81% of the Group's premiums in
1996. The major market for home service business generally consists of middle
and lower income families. Approximately 3,700 of the Life and Health Group's
5,000 employees are full-time sales representatives and sales management
personnel engaged in the home service business. The Life and Health Group also
distributes property and casualty insurance products to its home service
customers. United also distributes other life and health insurance products to
other markets through its Group Division, its Worksite Products Division and
The Pyramid Life Insurance Company.
Based on data compiled by A.M. Best Company ("A.M. Best"), at the end of
1996, Unitrin's Life and Health Group ranked among the 100 largest life and
health insurance company groups in the United States, measured by admitted
assets (87th), net premiums written (82nd) and capital and surplus (41st).
Property and Casualty Insurance. Trinity Universal Insurance Company
("Trinity"), together with its subsidiaries and affiliates (collectively, the
"Property and Casualty Group") comprise a network of regional
38
<PAGE>
insurers operating in the southern, midwestern and western United States. The
Property and Casualty Group provides insurance coverage to over 775,000
policyholders in thirty-two states. Taking the January 1, 1997 acquisition of
Union Automobile Indemnity Company into account, the five states providing the
largest amount of premium revenues are: Texas (27%), California (13%),
Wisconsin (9%), Illinois (8%), and Louisiana (6%).
The Property and Casualty Group provides automobile, homeowners, commercial
multi-peril, motorcycle, boat and watercraft, fire, casualty, workers
compensation and other types of property and casualty insurance to individuals
and businesses. Automobile insurance accounted for 37%, 33% and 32% of
Unitrin's consolidated insurance premiums for the years ended December 31,
1996, 1995 and 1994, respectively. Preferred and standard risk insurance
products are marketed exclusively by over 2,600 independent agents. These
personal and commercial products are designed and priced for those individuals
and businesses that have demonstrated favorable risk characteristics and loss
history. Typical customers include "main street" businesses and middle income
families. Products are marketed primarily in suburban and rural communities.
Specialty products include nonstandard automobile, motorcycle, and specialty
watercraft insurance. Nonstandard automobile insurance is provided for
individuals and companies that have had difficulty obtaining standard or
preferred risk insurance, usually because of their driving record. Nonstandard
automobile insurance products are marketed through over 4,600 agents in
California and twenty other states.
Based on the most recent data published by A.M. Best, at the end of 1996
Unitrin's Property and Casualty Group ranked among the 100 largest property
and casualty insurance company organizations in the United States, measured by
admitted assets (61st), net premiums written (59th) and policyholders' surplus
(47th).
Consumer Finance. Unitrin is engaged in the consumer finance business
through its subsidiary Fireside Thrift Co. ("Fireside Thrift"), which has 38
branches in California and Arizona. Fireside Thrift is organized under
California law as an industrial loan company and is a member of the Federal
Deposit Insurance Corporation (the "FDIC"). Industrial loan companies are
sometimes also referred to as thrift and loan companies, and are distinct from
both savings and loan associations and banks. Fireside Thrift's principal
business is the financing of used automobiles through the purchase of
conditional sales contracts from automobile dealers. Fireside Thrift also
makes personal loans, mostly secured by automobiles. The borrowers under these
contracts and loans typically have marginal credit histories. Fireside
Thrift's financing activities are funded primarily by thrift investment
certificates (i.e., interest-bearing instruments that may be redeemed by the
owner or repurchased by Fireside Thrift under certain circumstances) ranging
from thirty-one days to five years in maturity and money market accounts.
Regulation. As discussed in the documents incorporated herein by reference,
Unitrin is subject to the insurance holding company laws of several states.
Unitrin's insurance subsidiaries are subject to regulation in the states in
which they do business. In addition, Unitrin's insurance subsidiaries are
required under the guaranty fund laws of most states in which they transact
business to pay assessments up to prescribed limits to fund policyholder
losses or liabilities of insolvent insurance companies. Fireside Thrift is
regulated by the California Department of Financial Institutions and is
subject to the provisions of the California Industrial Loan Law, which limits
dividends and imposes other requirements and restrictions on the business of
Fireside Thrift. Fireside Thrift is also subject to regulations imposed by the
FDIC and the Federal Reserve Board.
Additional information about Unitrin is included in documents incorporated
by reference into this Proxy Statement/Prospectus. See "INCORPORATION OF
CERTAIN DOCUMENTS BY REFERENCE."
39
<PAGE>
BUSINESS OF RELIABLE
GENERAL
Reliable was incorporated on December 28, 1911, as an assessment plan life
and accident and health insurance company under Missouri law, with the name
"Reliable Life and Accident Insurance Company." It was reincorporated under
Missouri law on August 16, 1916, as a stock-stipulated premium life and
accident and health insurance company. The charter was amended on January 2,
1923, to make Reliable a legal reserve ("old line") stock life and accident
and health insurance company, which it remains today. Reliable's name was
changed on December 26, 1936, to "The Reliable Life Insurance Company."
In December, 1993, Reliable organized Clayton Reinsurance, Ltd. ("Clayton Re
Mo") as its wholly-owned subsidiary under the insurance laws of the State of
Missouri. Clayton Re Mo, in turn, owns Clayton Reinsurance Ltd. ("Clayton Re
Bermuda") which was formed as an insurance company in December, 1978, under
the laws of Bermuda. In June, 1994, Reliable organized The Reliable Life
Insurance Company of Texas as its wholly-owned subsidiary under the insurance
laws of the State of Texas ("Reliable Texas").
BUSINESS
Reliable is engaged primarily in the business of selling life and accident
and health insurance through full-time employee-agents. It conducts its
operations on a district office plan and sells its products primarily through
the "home service" or "debit" system of marketing. Reliable had 1,428
employees as of June 1, 1997, of which 1,145 were field personnel.
Reliable offers a portfolio of life and accident and health plans including
whole life, term life, limited pay whole life, interest sensitive whole life,
career life and accidental death and limited disability income insurance. All
contracts are written on a non-participating basis with no maximum policy
limit other than a maximum of $50,000 accidental death benefit on any one
life.
Reliable reinsures portions of the larger life insurance risks it has
underwritten in order to limit its exposure to loss on any single insured or
groups of insureds. The maximum amount retained on any one life is $100,000.
Reliable cedes excess risks to high quality reinsurers using yearly renewable
term reinsurance. This type of reinsurance is primarily intended to increase
capacity and provide financial stability, and should not materially affect
profit or loss. For Reliable's non-core business, which is group accident and
health and group life, the type of reinsurance used is coinsurance. The
percentage of risk retained for such non-core business by Reliable is nominal.
In some cases 100% of the risk is ceded; and in that type of reinsurance
arrangement, the only financial impact is the fee that Reliable realizes for
providing the underlying insurance contract.
Reliable is currently licensed to sell insurance in the District of
Columbia, Puerto Rico, and all states except Louisiana and New York. However,
Reliable operates primarily in Missouri, Texas and Arkansas. Reliable Texas is
licensed in Texas only. It was formed for the sole purpose of assumption
reinsuring the Texas home service life and accident and health insurance
policies of Shannon Life Insurance Company, Fort Worth, Texas effective
September 1, 1994. Reliable Texas, in turn, reinsures such business into
Reliable on a 100% co-insurance basis.
In Texas, Reliable's employee-agents market fire and allied lines products
for Capitol County Mutual Fire Insurance Company ("Capitol County"). In
Missouri and Arkansas, Reliable's employee-agents market fire and allied lines
products for Old Reliable Casualty Company, a wholly-owned subsidiary of
Capitol County. Capitol County is a mutual company which is owned by its
policyholders. Reliable provides sales, data processing and administrative
support to Capitol County and its insurance subsidiary. These services are
designed to provide Capitol County and its subsidiary the benefit of greater
expertise in a broader range of services with greater economies of scale than
would otherwise be possible. Common data processing equipment and professional
claims, investment, actuarial, auditing, marketing and underwriting services
are among the services provided by Reliable to Capitol County and its
subsidiary. See Note 9 of Notes to Consolidated Financial Statements.
40
<PAGE>
Clayton Re Mo is licensed in Missouri only and participates with other
insurers in providing catastrophe reinsurance coverage for Capitol County and
its insurance subsidiary. Clayton Re Bermuda is licensed in Bermuda only and
has outstanding a single legal liability indemnity policy that indemnifies the
policyholder against reinsurance claims that are in run-off.
The following tables set forth certain data with respect to Reliable over
the last three years:
<TABLE>
<CAPTION>
INCREASE IN
SERVICE LIABILITIES TOTAL
NET FEES AND FOR FUTURE OTHER
YEAR ENDED PREMIUM INVESTMENT OTHER POLICY POLICY OPERATING
DECEMBER 31, INCOME INCOME INCOME CLAIMS BENEFITS EXPENSES
------------ --------- ------------- ----------- ----------- ----------- ---------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
1996.................... $ 94,005 $ 32,348 $ 10,567 $ 46,218 $10,041 $62,758
1995.................... 97,315 31,422 9,223 51,159 9,169 60,240
1994.................... 92,041 30,726 10,038 48,588 9,229 56,055
<CAPTION>
INSURANCE
AS OF TOTAL STOCKHOLDERS' ISSUED INSURANCE
DECEMBER 31, ASSETS EQUITY DURING YEAR IN FORCE
------------ --------- ------------- ----------- -----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
1996.................... $600,901 $160,044 $690,025 $3,548,040
1995.................... 591,273 162,808 758,010 3,501,855
1994.................... 538,990 129,654 670,432 3,361,100
</TABLE>
Reliable establishes and maintains liabilities for future policy benefits on
life insurance and accident and health policies and annuities. Liabilities for
future policy benefits for such products are calculated at amounts which, with
additions from premiums or annuity considerations to be received on
outstanding policies or annuity contracts, and with interest on such amounts
compounded annually at certain assumed rates, are deemed to be sufficient to
meet the policy obligations at death or maturity or to meet the annuity
obligations pursuant to the contract, both in accordance with mortality tables
used when the policy or contract was issued. See Note 1G of Notes to
Consolidated Financial Statements.
Management believes that liabilities for future policy benefits for
outstanding life insurance policies and annuity contracts as of December 31,
1996 exceed minimum amounts required to cover the ultimate cost of present
benefits incurred and the present value of expected future benefits.
Liabilities for future policy benefits are necessarily based on estimates and,
therefore, it is possible that actual experience may vary from these
estimates.
In addition to its insurance underwriting business, Reliable is engaged in
the investment and reinvestment of its funds, from which an important part of
its income is derived. Reliable traditionally has invested the major portion
of its funds in bonds, primarily mortgage backed securities and private
placements, preferred stocks and mortgages on commercial and industrial
properties. Minor equity investments are held in convertible securities. In
the last three years, most of Reliable's long-term investments have been in
bonds backed by mortgages guaranteed by Government National Mortgage
Association and in investment-grade corporate bonds and preferred stocks.
41
<PAGE>
The following is a summary of investments and investment income for the
periods indicated:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
--------------------- --------------------- ---------------------
PERCENT PERCENT PERCENT
OF OF OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
------------ ------- ------------ ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities........ $399,865,289 84.1% $394,308,637 83.5% $349,327,281 82.3%
Equity securities....... 3,965,156 0.8 4,231,761 0.9 2,662,769 0.6
Mortgage loans on real
estate................. 22,078,007 4.6 26,748,204 5.7 31,065,451 7.3
Real estate & other..... 8,016,389 1.7 8,077,216 1.7 7,798,355 1.8
Policy loans & premium
notes.................. 28,806,034 6.1 26,669,900 5.6 25,112,710 5.9
Short-term investments.. 12,732,926 2.7 12,312,878 2.6 8,296,992 2.0
------------ ----- ------------ ----- ------------ -----
Total investments... $475,463,801 100.0% $472,348,596 100.0% $424,263,558 100.0%
============ ===== ============ ===== ============ =====
Total investment income. $ 34,983,396 $ 34,068,228 $ 33,543,837
Total investment
expenses............... 2,635,401 2,645,794 2,817,482
------------ ------------ ------------
Net investment income... $ 32,347,995 $ 31,422,434 $ 30,726,355
============ ============ ============
Average net yield....... 6.83% 7.01% 7.25%
============ ============ ============
</TABLE>
For additional information concerning investments and investment income, see
Notes 2 and 3 of Notes to Consolidated Financial Statements.
THE LIFE INSURANCE INDUSTRY
The life insurance industry is highly competitive and consists of a large
number of companies of the stock, mutual and other types. Reliable is in
competition with numerous life insurers, some of which are substantially
larger, offer a number of types of policies and have considerably greater
financial resources. The principal methods of meeting this competition are
appropriate pricing and personal service to the policyholder.
Reliable is subject to extensive regulation and supervision by the states in
which it is organized and the states in which it transacts business. Such
regulation, supervision and administration relate, among other things, to the
standards of solvency which must be met and maintained; the licensing of
insurers and their agents; the nature of and limitations on investments;
deposits of securities for the benefit of policyholders; approval of policy
forms; periodic examinations of the affairs of insurance companies; annual and
other reports required to be filed on the financial condition of insurers or
for other purposes; and requirements regarding legal reserves and other
matters. Rates are determined by individual companies based on standard
mortality tables and the various investment income and expense factors of
individual companies. The purpose of such regulation and supervision is
primarily to provide safeguards for policyholders and the public rather than
to protect the interests of stockholders. The insurance laws of the various
states establish regulatory agencies with broad administrative powers,
including the power to grant or revoke licenses to transact business and to
regulate trade practices, investments, premium rates, deposits of securities,
the form and content of financial statements and policies, accounting
practices and the maintenance of specified reserves and capital for the
protection of policyholders.
Reliable is required to file detailed annual reports with the appropriate
insurance regulatory agency in each of the states in which it does business.
Its business and accounts are subject to examination by such agencies at any
time. Reliable and all of its insurance subsidiaries are subject to
examination by state insurance departments on a periodic basis as applicable
law requires. Reliable and Clayton Re Mo were last examined by the Missouri
Department of Insurance as of December 31, 1994. Reliable Texas was last
examined by the Texas Department of Insurance as of September 30, 1995.
Under insolvency or guaranty laws in most states in which Reliable, Clayton
Re Mo and Reliable Texas operate, insurers doing business in those states can
be assessed up to prescribed limits for policyholder losses by insolvent
insurance companies. Under these laws, the extent of any further assessments
against them is not
42
<PAGE>
determinable. However, most laws do provide that an assessment may be excused
or deferred if it would threaten a solvent insurer's financial strength.
PROPERTIES
All real properties used by Reliable are owned or leased by it. Reliable owns
its home office, which has approximately 83,000 square feet and is located in
Webster Groves, Missouri, and five district sales offices in various states
with a total of approximately 15,000 square feet. Reliable also owns various
investment properties in Missouri and Texas: an office building in Ft. Worth,
Texas, which has approximately 16,000 square feet; two office buildings in
Spring, Texas, which have approximately 21,000 square feet; an office complex
of seven buildings and various parking areas in Houston, Texas, which has
approximately 161,000 square feet; and two office buildings located near
Reliable's home office in Webster Groves, Missouri, which have approximately
17,500 square feet. Reliable occupies a portion of some of the investment
properties for district sales offices, but the majority is leased to outside
tenants. Reliable currently leases 46 district sales offices in various states
with a total of approximately 93,400 square feet.
LEGAL PROCEEDINGS
Reliable is party to a number of lawsuits arising in the normal course of
business. Reliable believes that the resolution of these lawsuits will not have
a material adverse effect on its financial condition.
BENEFICIAL OWNERSHIP OF RELIABLE COMMON STOCK
The following table shows with respect to each person who is known to be the
beneficial owner of more than 5% of Reliable Common Stock: (i) the total number
of shares of Reliable Common Stock beneficially owned as of the Record Date;
and (ii) the percent of Reliable Common Stock so owned as of that date:
<TABLE>
<CAPTION>
RELIABLE % OF
NAME AND RELIABLE RELIABLE COMMON VOTING
ADDRESS A STOCK % B STOCK % STOCK POWER
-------- -------- ---- -------- ----- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Spencer T. Gould................ 4,783 * 709,840 12.44% 714,623 10.48%
10345 N. Orchard Road
P.O. Box 270
Ephraim, WI 54211
Mildred L. Mattes & Mercantile 56,071 5.04% 635,350 11.14% 691,421 10.15%
N/A Trust......................
c/o Mercantile Bank NA
Drawer 387 Main Post Office
St. Louis, MO 63166
Elizabeth T. Gould Trust........ 52,654 4.73% 526,540 9.23% 579,194 8.50%
231 W. Lockwood Avenue
Webster Groves, MO 63119
Barbara S. Gould................ 13,950 1.25% 450,000 7.89% 463,950 6.81%
10345 N. Orchard Road
P.O. Box 270
Ephraim, WI 54211
Bernal T. Chomeau (1)........... 35,894 3.28% 343,540 6.02% 379,434 5.57%
321 Parkwood
Kirkwood, MO 63122
</TABLE>
- --------
*Less than one percent.
(1) Includes shares held by Mr. Chomeau directly and shares placed in a
charitable remainder trust.
43
<PAGE>
The following table shows with respect to each of Reliable's directors and
executive officers and all the directors and executive officers as a group,
eleven in number: (i) the total number of shares of Reliable Common Stock
beneficially owned as of the Record Date; and (ii) the percent of Reliable
Common Stock so owned as of that date:
<TABLE>
<CAPTION>
DIRECTORS AND RELIABLE % OF
EXECUTIVE RELIABLE RELIABLE COMMON VOTING
OFFICERS A STOCK % B STOCK % STOCK POWER
------------- -------- ---- --------- ---- --------- ------
<S> <C> <C> <C> <C> <C> <C>
D.D. Chomeau................ 6,050 * 162,500(1) 2.9% 168,550 2.5%
D.B. Chomeau................ 26,310 2.4% 253,600 4.4% 279,910 4.1%
S.G. Chomeau (2)............ 27,660 2.5% 257,100 4.5% 284,760 4.2%
S.F. Desloge (3)............ 0 * 0 * 0 *
J.M. Hecker (4)............. 751 * 0 * 751 *
S.C. Myers (3)(5)........... 44,312 4.0% 170,000 3.0% 214,312 3.1%
H.G. Pillow................. 0 * 0 * 0 *
L.B. Shepley (6)............ 3,784 * 27,720 * 31,504 *
A.G. Spaulding (3).......... 315 * 0 * 315 *
T.A. Skelton (7)............ 29,569 2.7% 197,500 3.5% 227,069 3.3%
All directors and executive
officers as a group
(10 persons)............... 138,751 12.5% 1,068,420 18.7% 1,207,171 17.7%
</TABLE>
- --------
*Less than one percent.
(1) Includes 162,500 shares of Reliable B Stock owned by Mr. Chomeau's wife in
a revocable trust.
(2) Includes 520 shares of Reliable A Stock held as custodian for minor
children.
(3) Messrs. Desloge, Myers and Spaulding are directors but not executive
officers.
(4) Includes 415 shares of Reliable A Stock held in an Individual Retirement
Account.
(5) Includes 22,813 shares of Reliable A Stock and 170,000 shares of Reliable
B Stock owned by Mr. Myers' wife and 8,186 shares of Reliable A Stock held
by Mr. Myers' wife as custodian for their two minor children.
(6) Includes 1,012 shares of Reliable A Stock held in an Individual Retirement
Account.
(7) Mr. Skelton is an executive officer but not a director. Shares include
27,275 shares of Reliable A Stock and 197,500 shares of Reliable B Stock
owned by his wife and 2,144 shares of Reliable A Stock held as custodian
for minor children.
44
<PAGE>
RELIABLE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion presents an analysis of the results of operations
and financial condition of Reliable for the years ended December 31, 1996,
1995 and 1994 and the three months ended March 31, 1997 and 1996. This
analysis should be read in conjunction with the consolidated financial
statements of Reliable and the notes thereto.
Reliable is engaged primarily in the business of selling life and accident
and health insurance through the home service or debit system of marketing
("core business"). Reliable also participates in several reinsurance pools
and/or fronting arrangements produced by non-affiliated managing general
agents ("non-core business"). The non-core business consists primarily of
group accident and credit life and accident and health insurance. In addition,
through its wholly owned subsidiary, Clayton Re Mo, Reliable provides
catastrophe reinsurance for Capitol County.
The majority of Reliable's core business is concentrated in the states of
Texas, Missouri and Arkansas.
RESULTS OF OPERATIONS
1996 Compared to 1995
Income before provision for income taxes was $18.5 million and $19.2 million
for the years ended December 31, 1996 and 1995, respectively. Income before
provision for income taxes decreased primarily due to a $1.2 million decrease
in net realized investment gains and the $1.1 million write-off of the present
value of future profits ("PVFP") on certain cancer policies partially offset
by a decrease in catastrophe losses (net of reinstatement premiums) of $1.3
million.
Net earned premiums were $94.0 million in 1996 and $97.3 million in 1995.
Core business premiums increased by $1.6 million due to higher volume.
Premiums for non-core business decreased $4.0 million primarily due to the
run-off of certain group accident business, a decrease in the premium
production related to certain fronting arrangements and the run-off of certain
credit business. Catastrophe reinsurance premiums decreased $0.9 million from
$1.2 million in 1995 to $0.3 million in 1996.
Net investment income was $32.3 million in 1996 and $31.4 million in 1995.
The increase in investment income was primarily due to an increase in invested
assets which is a result of positive cash flow from operations. The average
yield on investments, net of expenses, was 6.83% and 7.01% for 1996 and 1995,
respectively.
Service fees and other income increased by $1.3 million. Reliable provides
certain administrative, accounting and investment management services to
Capitol County. Service fee income for these services was related to the cost
of providing those services to Capitol County ("allocated expenses") and the
profitability of Capitol County ("service fee profit"). For the years ended
December 31, 1996 and 1995, service fee income, was $9.7 million and $9.1
million, respectively. The increase of $0.6 million was primarily due to a
$0.3 million increase in allocated expenses and a $0.3 million increase in
service fee profits.
Total benefits and claims were $56.2 million in 1996 compared to $60.3
million in 1995. The $4.1 million decrease includes a $2.4 million decrease in
benefits related to Reliable's non-core business and a decrease in
catastrophic losses of $1.9 million. Benefits and claims related to non-core
business decreased primarily due to Reliable's run-off of certain group
accident business. The decrease in catastrophic losses is related to a
catastrophe loss incurred by Clayton Re Mo during 1995. Clayton Re Mo, which
issues catastrophic coverage to Capitol County, paid losses of $2.9 million on
a single storm in Fort Worth, Texas during 1995. Related loss reserves
released were $1.1 million.
45
<PAGE>
Commissions related to Reliable's core business were $11.4 million and $11.5
million for the years ended December 31, 1996 and 1995, respectively.
Commissions related to Reliable's non-core business increased $0.7 million
during 1996 primarily due to production increases related to certain group
accident business and a decrease in ceded commissions related to certain
fronting arrangements.
Amortization of PVFP was $3.6 million in 1996 and $2.6 million in 1995.
Amortization of PVFP in 1996 included the write-off of $1.1 million of PVFP
related to certain cancer policies.
Net periodic pension cost for the years ended December 31, 1996 and 1995 was
$1.1 million and $0.5 million, respectively. The increase of $0.6 million in
net periodic pension cost was primarily due to a decrease in the assumed
discount rate from 8.0% for 1995 to 7.0% for 1996.
1995 Compared to 1994
Income before provision for income taxes was $19.2 million and $16.7 million
for the years ended December 31, 1995 and 1994, respectively. Income before
income taxes increased primarily due to a $4.0 million increase in net
realized investment gains partially offset by catastrophe losses (net of
reinstatement premiums) of $1.3 million in 1995.
Net earned premiums were $97.3 million in 1995 and $92.0 million in 1994.
Core business premiums increased by $3.9 million primarily due to higher
volume. Premiums earned on non-core business increased $0.9 million.
Catastrophe reinsurance premiums increased $0.5 million.
Net investment income was $31.4 million and $30.7 million for the years
ended December 31, 1995 and 1994, respectively. The increase in investment
income was primarily due to an increase in invested assets and Reliable's
movement of investment funds from tax exempt securities to higher yielding
taxable securities.
Service fees and other income decreased by $0.8 million. Service fee income
related to Capitol County was $9.1 million and $10.0 million for 1995 and
1994, respectively. The decrease was primarily due to a $1.6 million decrease
in service fee profit from Capitol County offset by a $0.8 million increase in
service fee expenses allocated to Capitol County. Service fee profit decreased
primarily due to the effect of the Fort Worth, Texas storm in 1995.
Total benefits and claims were $60.3 million and $57.8 million for the years
ended December 31, 1995 and 1994, respectively. Benefits and claims increased
by $2.5 million primarily due to the net $1.9 million increase in catastrophe
losses.
Other operating expenses increased $3.3 million in 1995 compared to 1994.
Other operating expenses increased primarily due to a $1.1 million increase in
conference and conventions expenses and a $0.9 million increase in
compensation and other employee benefit expenses.
Quarter ended March 31, 1997 Compared to Quarter ended March 31, 1996
Income before provision for income taxes was $5.7 million and $1.8 million
for the first quarters of 1997 and 1996, respectively. Effective January 1,
1997, Reliable entered into a 100% coinsurance agreement with United. See "THE
MERGER--Unitrin-Reliable Transactions." Income before provision for income
taxes includes $1.2 million of income (excluding any allocation of fixed
overhead costs) related to this block of home service business. In addition,
the quarter ended March 31, 1996 includes the $1.1 million write-off of the
PVFP on certain cancer policies.
Net earned premiums were $26.3 million and $23.7 million for the quarters
ended March 31, 1997 and 1996, respectively. Compared to the first quarter of
1996, core business premiums increased by $3.6 million during the first
quarter of 1997 primarily due to the United coinsurance agreement. Premiums
earned on non-core business decreased $0.9 million primarily due to lower
volume and the run-off of certain group accident business.
46
<PAGE>
Net investment income was $8.7 million and $8.0 million for the quarters
ended March 31, 1997 and 1996, respectively. Investment income increased
primarily due to an increase in invested assets. Invested assets increased
primarily due to positive cash flow from operations including the United
coinsurance agreement.
Service fees and other income increased by $0.4 million primarily due to an
increase in service fee profit.
Total benefits and claims increased by $0.8 million during the first quarter
of 1997 compared to the same period in 1996. Benefits for Reliable's core
business increased $1.8 million primarily due to the United coinsurance
agreement. Benefits and claims in Reliable's non-core business decreased $0.9
million primarily due to favorable experience and the run-off of certain group
accident business.
Amortization of deferred policy acquisition costs decreased $0.5 million
during the first quarter of 1997 primarily due to the run-off of certain group
accident business.
Amortization of present value of future profits decreased $1.0 million
primarily due to the $1.1 million write-off of PVFP related to certain cancer
policies during the first quarter of 1996.
Other operating expenses increased by $0.6 million in the first quarter of
1997 compared to the same period in 1996 primarily due to the additional
operating expenses associated with the United business and an increase in
experience rating refunds related to Reliable's non-core business. Operating
expenses related to the United business reflect additional costs associated
with temporarily operating district offices in locations already serviced by
Reliable.
LIQUIDITY AND CAPITAL RESOURCES
The nature of Reliable's business requires it to generate sufficient cash
flow to meet both short-term and long-term cash obligations. Short-term cash
needs consisting primarily of policyholder benefits, policy acquisition
expenses and other operating expenses have consistently been met by cash flow
from operations. Cash flow from operations for the first three months of 1997
and the years ended December 31, 1996, 1995 and 1994 was $4.3 million, $19.8
million, $15.5 million and $21.0 million, respectively. Cash provided from
operations for the three months ended March 31, 1997 includes $13.3 million of
cash transferred to Reliable as part of the coinsurance of the United
business. A substantial amount of Reliable's portfolio is invested in U.S.
Treasuries which provide liquidity. At December 31, 1996 and 1995, U.S.
Treasury securities and obligations of U.S. Government corporations and
agencies totaled $46.5 million and $64.9 million, respectively, and
represented 14.6% and 20.3%, respectively, of the bond portfolio. In addition,
the majority of Reliable's investment securities are readily marketable. Cash
provided from the sale or maturity of investments for the first three months
of 1997 and the years ended December 31, 1996, 1995 and 1994 was $16.1
million, $100.6 million, $107.5 million and $94.6 million, respectively. In
addition, Reliable maintains a $15.0 million line of credit with Mercantile
Bank of St. Louis, N.A. There were no draws on the line of credit during 1996,
1995 or 1994.
With respect to its long-term obligations to policyholders and shareholders,
Reliable has invested its net positive cash flows from operations in a
diversified investment portfolio consisting primarily of investment-grade
bonds and preferred stocks. At December 31, 1996 and 1995, approximately 98%
and 99% of the bond portfolio had NAIC ratings of 1 (Highest Quality) or 2
(High Quality). In addition, Reliable's sinking fund preferred stock portfolio
is rated investment grade and provides a high after-tax yield.
Reliable's investment portfolio also includes significant investments in
mortgaged-backed ("MBS") securities and private placement securities. At
December 31, 1996 and 1995, MBS securities represented 30.7% and 27.7% of
total investments, respectively, and private placement securities represented
21.1% and 20.4%, respectively. Over 85% of the MBS securities are GNMA backed,
and none of the MBS securities are rated less than AAA. Reliable's management
believes that exposure to interest rate and prepayment risks is minimized by
investing in less volatile types of MBS securities such as sequential and
Planned Amortization Class collateralized mortgage obligations. Reliable's
private placement portfolio has historically provided Reliable with yields
higher than publicly traded securities of like kind. At December 31, 1996, the
private placement portfolio
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had a book yield of approximately 8.4% and an average life of 6.5 years. At
December 31, 1996, approximately 94% of the private placements securities had
a NAIC rating of 1 or 2, and all holdings were current as to principal and
interest.
On March 31, 1997, Reliable issued a $10.0 million, thirty-year surplus note
to an unaffiliated lender. The interest rate on the note varies over the term
of the note, and all interest and principal payments are subject to the
approval of the Missouri Department of Insurance. Reliable believes that the
issuance of the note will provide sufficient statutory surplus to maintain its
current A.M. Best rating A ("Excellent").
Reliable's uses of its net cash flow after operating activities include the
purchase of investments, payment of dividends to shareholders and the purchase
of treasury stock.
Statutory regulations restrict annual shareholder dividends, without
regulatory approval, to the greater of 10% of surplus as regards policyholders
as of December 31 of the previous year or statutory gain from operations for
the previous year. Under these regulations, the amount of cash dividends that
Reliable would be permitted to pay in 1997, without such approval, is $11.6
million. Shareholder dividends paid for the years ended December 31, 1996,
1995 and 1994 were $2.5 million, $2.5 million and $3.1 million, respectively.
Reliable has in the past purchased its own common stock either through
tender offers or private negotiations. On January 23, 1997, Reliable purchased
from several shareholders 42,085 shares of Reliable A Stock and 428,500 shares
of Reliable B Stock for $6.4 million. During 1996, Reliable announced a tender
offer to purchase up to 80,000 shares of its Reliable A Stock. The offer
resulted in the purchase of approximately 68,000 shares of Reliable A Stock
for an aggregate cost of $4.4 million. In addition, during 1996, Reliable
purchased an additional 37,000 shares of Reliable A Stock at an aggregate cost
of $2.5 million. During 1994, Reliable announced a tender offer to purchase up
to 200,000 shares of its Reliable A Stock. The offer resulted in the purchase
of approximately 47,000 shares of Reliable A Stock for an aggregate cost of
$2.8 million.
The NAIC has adopted Risk-Based Capital ("RBC") requirements for life
insurance companies in order to evaluate the adequacy of statutory capital and
surplus. Regulatory compliance is determined by the ratio of regulatory total
adjusted capital, as defined by the NAIC, to the authorized control level RBC,
as defined by the NAIC. Reliable's total adjusted capital at December 31, 1996
significantly exceeded the minimum RBC requirements.
Reliable has no material commitments for capital expenditures.
EFFECTS OF INFLATION
The effects of inflation on Reliable depends on its severity and duration.
Inflation tends to increase policy size and therefore premiums, but also
increases the costs associated with the acquisition and maintenance of
insurance in force. Inflation should produce an increase in investment income
(although the speed at which this would occur would be reduced by the long-
term nature of most of Reliable's investments) while Reliable's largest
obligation, policy reserves, represents monetary liabilities which are fixed
in nature and carry low rates of interest.
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COMPARISON OF RIGHTS OF SHAREHOLDERS
As a result of the Merger, the shareholders of Reliable, whose rights are
currently governed by Missouri law and the Reliable Articles, will become
shareholders of Unitrin, whose rights are governed by Delaware law and the
Certificate of Incorporation of Unitrin (the "Unitrin Certificate"). Missouri
corporations are formed pursuant to, and their corporate affairs are generally
governed by, the Missouri General Business Corporation Law (the "MGBCL").
However, Reliable is formed pursuant to and its corporate affairs are governed
by Chapters 374-382 of the Revised Statutes of Missouri (the "Missouri
Insurance Code"). In addition, Section 351.690.2 of the MGBCL specifically
states that the MGBCL is not applicable to insurance companies, except for
certain specified provisions. Notwithstanding the foregoing, Reliable
understands that, in the absence of applicable provisions in the Missouri
Insurance Code, the Missouri Department of Insurance considers the provisions
of the MGBCL generally applicable to Missouri insurance companies such as
Reliable. The following summary assumes that, absent a contrary provision in
the Missouri Insurance Code, the MGBCL would generally govern the rights of the
Reliable shareholders.
The following discussion is intended only to highlight certain material
differences between the rights of corporate shareholders under Missouri law and
Delaware law generally and specifically with respect to shareholders of
Reliable and Unitrin under the Reliable Articles and the Unitrin Certificate.
The discussion does not constitute a complete comparison of the differences
between the rights of such holders or the provisions of the Missouri Insurance
Code, the MGBCL, the Delaware General Corporation Law (the "DGCL"), the
Reliable Articles or the Unitrin Certificate, and is qualified in its entirety
by reference to the Missouri Insurance Code, the MGBCL, the DGCL, the Reliable
Articles and the Unitrin Certificate.
ELECTION OF DIRECTORS
Pursuant to Missouri law, directors of Missouri corporations, unless their
terms are staggered, are elected at each annual shareholder meeting. The
articles of incorporation or the by-laws of a corporation may authorize the
election of directors by one or more classes or series of shares, and under
Missouri law, shareholders have cumulative voting rights in the election of
directors unless the articles of incorporation or by-laws provide otherwise.
Reliable shareholders have cumulative voting rights in the election of
directors. Moreover, a corporation must have at least three directors, unless
the articles of incorporation expressly provide that one or more directors
shall constitute the Board of Directors. The Reliable Articles provide that
there shall be three classes of directors who will each serve for three years.
Further, the Reliable By-Laws restrict the times during which and prescribes
the procedures under which shareholders may nominate directors to be voted on
at a meeting of shareholders. The Board of Directors of Reliable consists of
nine members divided into three equal classes, with three directors elected at
each annual meeting of shareholders. The Reliable By-Laws provide that a
shareholders' notice in connection with the nomination of directors is timely
if received by Reliable not less than 15 or more than 50 days before the date
of either an annual meeting or special meeting for the election of directors.
Under the DGCL, directors, unless their terms are staggered, are elected at
each annual shareholder meeting. The certificate of incorporation may authorize
the election of certain directors by one or more classes or series of shares,
and the certificate of incorporation, an initial by-law or a by-law adopted by
a vote of the shareholders may provide for staggered terms for the directors.
The certificate of incorporation or by-laws also may allow the shareholders or
the Board of Directors to fix or change the number of directors, but a
corporation must have at least one director. Under Delaware law, shareholders
do not have cumulative voting rights unless the certificate of incorporation so
provides. The Unitrin Certificate does not provide for cumulative voting. The
Amended and Restated By-Laws of Unitrin (the "Unitrin By-Laws") provide that
the number of directors which shall constitute the whole Unitrin Board of
Directors shall be not less than three nor more than seven and that the number
of directors may be determined by resolution of the Board of Directors or by
the shareholders at the annual meeting. The Unitrin Board of Directors
presently consists of a single class of seven members. The Unitrin By-Laws also
require advance notice of a shareholder's intention to nominate Board members
at an annual meeting of shareholders, which notice must generally be given not
less than sixty nor more than ninety days prior to the first anniversary of the
preceding year's annual meeting.
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REMOVAL OF DIRECTORS; FILLING VACANCIES ON THE BOARD OF DIRECTORS
Missouri law provides that, unless the articles of incorporation or the by-
laws provide otherwise, one or more directors or the entire Board of Directors
may be removed, with or without cause, by a vote of the holders of a majority
of shares then entitled to vote at an election of directors. Where a
corporation has cumulative voting in the election of directors, and if less
than the entire Board is to be removed, no one director may be removed if the
votes cast against his or her removal would be sufficient to elect him or her
if then cumulatively voted at an election of the entire Board of Directors, or,
if there are classes of directors, at an election of the class of directors of
which he is a part. Further, Missouri law provides that vacancies on the Board
of Directors may be filled by the Board of Directors, unless the articles of
incorporation or by-laws provide otherwise. The Reliable By-Laws provide that
vacancies on the Board of Directors shall be filled by the remaining directors.
Pursuant to the Reliable Articles, any director, or the entire Board of
Directors, may be removed from office at any time prior to the expiration of
his, her or their term(s) of office, with or without cause, only by the
affirmative vote of the holders of record of outstanding shares representing at
least 80% of all of the then outstanding shares of capital stock of Reliable
then entitled to vote generally in the election of directors, voting together
as a single class at a special meeting of shareholders called expressly for
that purpose; provided that if less than the entire Board of Directors is to be
removed, no director may be removed if the votes cast against his or her
removal would be sufficient to elect him or her if then cumulatively voted at
an election of the class of directors of which he or she is a part. Removal
under the Reliable Articles can also occur by a vote of a majority of the
entire Board of Directors if qualifications as set out in the Reliable By-Laws
are not met or if such director is in breach of any agreement between such
director and Reliable relating to such director's service as a director or
employee of Reliable.
The Unitrin Certificate and the Unitrin By-Laws provide that the Chairman of
the Board may only be removed by a resolution adopted by a majority of the
directors then in office. Neither the Unitrin Certificate nor the Unitrin By-
Laws otherwise addresses the removal of directors. However, under the DGCL, any
director or the entire Board of Directors generally may be removed, with or
without cause, by the holders of a majority of the shares entitled to vote at
an election of directors. The Unitrin Certificate and the Unitrin By-Laws
provide that, subject to the rights of holders of any class or series of
preferred stock, unless the Board of Directors otherwise determines, vacancies
and newly created directorships resulting from any increase in the authorized
number of directors may be filled only by a majority of the directors then in
office, even though less than a quorum, and the directors so chosen shall hold
office until the next annual election and until their successors are duly
elected and shall qualify.
ACTION BY WRITTEN CONSENT
Under the MGBCL, any action may be taken without a meeting if consents in
writing, setting forth the action so taken, are signed by all the shareholders
entitled to vote with respect to the subject matter thereof. Such consents have
the same force and effect as a unanimous vote of the shareholders at a meeting
duly held.
The DGCL provides that, unless limited by the certificate of incorporation,
any action that could be taken by shareholders at a meeting may be taken
without a meeting if a consent or consents in writing, setting forth the action
so taken, is or are signed by the holders of record of outstanding stock having
not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote thereon
were present and voted. The Unitrin Certificate provides that action can be
taken by shareholders only at a meeting of shareholders and may not be effected
by consent in writing of such shareholders.
AMENDMENTS TO CHARTER
The Missouri Insurance Code provides that any insurance company may amend its
charter if: (1) the Board of Directors or other governing body adopts a
resolution setting forth the proposed amendment and directs that it be
submitted to a vote at a meeting of the shareholders, or the proposed amendment
need not be adopted by the Board of Directors and may be directly submitted to
the shareholders; (2) written and printed notice setting forth the proposed
amendment or a summary of changes to be effected is given to each shareholder
entitled to vote
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thereon; and (3) the proposed amendment is adopted by the affirmative vote of a
majority of all shares entitled to vote at the meeting either in person or by
proxy or by a specified vote if contained in the articles or other provision of
law which shall not be less than a majority.
The Reliable Articles provide that Reliable has the right to amend any
provision contained therein with the affirmative vote of the holders of at
least 80% of all of the then outstanding shares of capital stock of Reliable
entitled to vote generally in the election of directors, voting together as a
single class. In addition, the affirmative vote of a majority of the then
outstanding shares of any class of stock of Reliable, voting separately as a
class, is required to make any significant amendment affecting such class of
capital stock.
Under the DGCL, unless a higher vote is required in the certificate of
incorporation, an amendment to the certificate of incorporation of a
corporation may be approved by a majority of the outstanding shares entitled to
vote upon the proposed amendment. The Unitrin Certificate does not modify the
provision contained in the DGCL, except for amendments to Article SIX and
Article SEVEN of the Unitrin Certificate, which require the affirmative vote of
the holders of at least 75% of the voting power of all outstanding voting stock
of Unitrin, voting together as a single class.
AMENDMENTS TO BY-LAWS
Under the MGBCL, the power to make, amend or repeal by-laws of the
corporation is vested in the shareholders unless and to the extent vested in
the Board of Directors by the articles of incorporation; provided, however,
that the original by-laws of the corporation may be adopted by the directors.
The Reliable Articles provide for amendments by the Board of Directors by the
vote of a majority of the entire Board of Directors or by the shareholders by
the affirmative vote of not less than 80% of all the then outstanding shares of
capital stock of Reliable then entitled to vote generally in the election of
Directors, voting together as a single class.
Delaware law provides that a corporation's by-laws may be amended by the
corporation's shareholders, or, if so provided in the certificate of
incorporation, by the corporation's directors. The Unitrin Certificate provides
that the Board of Directors may adopt, amend or repeal the Unitrin By-Laws by a
vote a majority of the directors then in office, and that the Unitrin
shareholders may also adopt, amend or repeal the Unitrin By-Laws by the
affirmative vote of the holders of at least a majority of the voting power of
all outstanding voting stock of Unitrin, voting together as a single class.
SPECIAL MEETINGS OF SHAREHOLDERS
Missouri law provides that special meetings of the shareholders may be called
by the Board of Directors or by such other person or persons as may be provided
in the articles of incorporation or the by-laws. Pursuant to the Reliable By-
Laws, special meetings of the shareholders may be called only by (a) the Board
of Directors pursuant to a resolution adopted by the affirmative vote of a
majority of the entire Board, (b) the Chairman of the Board, the President, or
the Secretary, or (c) by the holders of record of outstanding shares
representing at least 25% of all of the shares of capital stock of Reliable
entitled to vote generally in the election of directors, acting together as a
single class.
Under Delaware law, special meetings of the shareholders of a corporation may
be called by the corporation's Board of Directors or by such other persons as
may be authorized in the corporation's certificate of incorporation or by-laws.
The Unitrin Certificate and the Unitrin By-Laws provide that a special meeting
of the shareholders may be called only by the Chairman of the Board or by a
majority of the Board of Directors then in office.
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VOTE ON EXTRAORDINARY CORPORATE TRANSACTIONS; BUSINESS COMBINATIONS
Under Chapter 382 of the Missouri Insurance Code, no person other than the
issuer shall attempt to acquire any voting security of a Missouri insurance
company if, after the consummation thereof, that person would, directly or
indirectly, be in control of the insurer, and no person shall enter into an
agreement to merge with or otherwise to acquire control of a domestic insurer
without prior approval by the Missouri Director of Insurance pursuant to
written notification and the hearing process set forth in the Missouri
Insurance Code.
Pursuant to the Reliable Articles, Reliable may be merged, consolidated or
liquidated, or all or substantially all of its assets may be sold, only upon
submission of the plan of merger, plan of consolidation, plan of liquidation,
or plan of sale to vote at a meeting of shareholders, which may be either an
annual or special meeting. Written or printed notice of the meeting to consider
such plan, together with a summary of the plan, shall be given to each
shareholder entitled to vote thereon. The proposed plan shall be approved upon
receiving the affirmative vote of the holders of at least two-thirds of the
outstanding shares of capital stock of Reliable entitled to vote at such
meeting. In addition, the affirmative vote of a majority of the then
outstanding shares of Reliable A Stock, voted separately as a class, shall be
necessary to approve any such plan pursuant to which shares of Reliable A Stock
or Reliable B Stock are converted into or exchanged for any securities or any
other consideration unless each share of Reliable A Stock will receive
consideration of a type identical to the type to be received by each share of
Reliable B Stock and each share of Reliable A Stock will receive consideration
in an amount not less than ten times the amount to be received by each share of
Reliable B Stock.
The DGCL provides that unless otherwise specified in the corporation's
certificate of incorporation or unless the provisions of Section 203 of the
DGCL relating to "business combinations" are applicable, a sale of all or
substantially all of the corporation's assets, a merger or consolidation or a
dissolution of the corporation requires an affirmative vote of the Board of
Directors (except in certain limited circumstances) plus, with certain
exceptions, the affirmative vote of a majority of the outstanding stock
entitled to vote thereon.
Article SEVEN of the Unitrin Certificate provides that Unitrin shall not
enter into any "Business Combination" with an "Interested Shareholder" unless
(1) the Business Combination has been approved by a majority of the "Continuing
Directors," or (2) the Business Combination has been approved by the
affirmative vote of 75% of the voting power of the outstanding voting stock of
Unitrin, voting together as a single class, and the consideration to be
received by the holders of each class or series of capital stock of Unitrin on
consummation of the Business Combination equals the highest price paid by the
Interested Shareholder for any shares of such class or series during the
preceding 24 months and is either in cash or in the form of consideration
previously used by the Interested Shareholder to acquire the largest number of
shares of such class or series previously acquired by such Interested
Shareholder. For purposes of Article SEVEN of the Unitrin Certificate,
"Business Combination" means certain mergers, consolidations, asset sales and
liquidations involving an Interested Shareholder, as more fully enumerated
therein. The term "Interested Shareholder," as more fully defined in the
Unitrin Certificate, includes any person who or which is the beneficial owner
of 15% or more of the voting power of the outstanding voting stock of Unitrin.
A "Continuing Director" is (i) a member of Unitrin's original Board of
Directors, (ii) a person who is unaffiliated with an Interested Shareholder and
who was a member of the Board of Directors prior to such person or entity
becoming an Interested Shareholder, or (iii) a successor of a Continuing
Director who is recommended to succeed a Continuing Director by a majority of
Continuing Directors then on the Board.
SECTION 203 OF THE DELAWARE LAW
Section 203 of the Delaware General Corporation Law ("Section 203") prohibits
certain "Business Combination" transactions (as defined in Section 203) between
a publicly held Delaware corporation and any "interested stockholder" (as
defined in Section 203) for a period of three years after the date the
interested stockholder becomes an interested stockholder unless (a) prior to
the interested stockholder becoming an interested stockholder, either the
proposed Business Combination or the proposed acquisition of stock which would
make such interested stockholder an interested stockholder was approved by the
corporation's Board of
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Directors, (b) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned (i) by persons who are
directors and also officers and (ii) by employee stock plans in which employee
participants do not have the right to determine confidentially whether shares
held subject to the plan will be tendered in a tender or exchange offer, or (c)
the interested stockholder obtained the approval of the corporation's Board of
Directors and the approval of the holders of at least two thirds of the
outstanding shares of the corporation's voting stock other than any shares of
voting stock held by the interested stockholder.
RIGHTS PLAN
Each share of Unitrin Stock, including those to be issued to holders of
Reliable A Stock in connection with the Merger, is accompanied by one preferred
share purchase right (a "Right"). Unless and until they are triggered, the
Rights are redeemable by the Board of Directors, are not represented by
separate certificates and are transferable only with the shares of Unitrin
Stock to which they attach. The description and terms of the Rights are set
forth in a Rights Agreement (the "Plan") between Unitrin and First Chicago
Trust Company of New York, as rights agent, dated as of August 3, 1994.
Under the Plan's "flip-in" feature, if any person or group beneficially
acquires 15% or more of Unitrin's voting power without the approval of the
Board of Directors, all other shareholders except that non-approved acquiror
will be entitled to purchase Unitrin Stock having twice the market value of the
exercise price of the Rights, which the Board of Directors has set at $125
(subject to certain adjustment provisions). In addition, under the Plan's
"flip-over" feature, after a non-approved person or group becomes a 15%-or-
greater beneficial owner, if Unitrin is involved in a business combination
with, or sells 50% or more of its assets or earning power to, that beneficial
owner (or any other person if the transaction does not treat all shareholders
alike), all other Unitrin shareholders will be entitled to purchase voting
stock of the other person having twice the market value of the exercise price.
The Plan will expire on August 3, 2004, and the Rights may be redeemed by the
Board of Directors for $0.01 per Right at any time prior to a triggering flip-
in or flip-over event.
DIVIDENDS
Dividends or distributions made by Missouri domiciled insurers may be subject
to approval of the Missouri Insurance Department, may be paid only from surplus
profits (i.e., earned surplus), which does not include capital or contributed
surplus accounts. In addition, Missouri law requires a life insurer to maintain
its statutory surplus at no less than $600,000. Under Section 382.210 of the
Missouri Insurance Code, no extraordinary dividend (which includes a dividend
which, when aggregated with all other dividends paid during the preceding
twelve months, exceeds the greater of ten percent of surplus as regards
policyholders at the end of the prior year or the net gain from the operations
of the life insurance company for the prior year) may be paid without thirty
days' notice to and the receipt of approval from the Director of Insurance.
Under the Reliable Articles, in the event the Board of Directors declares
dividends or other distributions on Reliable Common Stock payable in cash or
other property of Reliable at any time shares of Reliable B Stock are
outstanding, the amount of any dividend payable on each share of Reliable A
Stock shall in all cases be equal to 110% of the aggregate dividend payable on
ten shares of Reliable B Stock. If a dividend or distribution payable in shares
of Reliable A Stock (including but not limited to any distribution payable as a
consequence of a split in the Reliable A Stock) shall be made on the shares of
Reliable A Stock, a dividend or distribution payable in shares of Reliable B
Stock shall be made simultaneously on the shares of Reliable B Stock and the
number of shares of Reliable B Stock payable on each share of Reliable B Stock
pursuant to such dividend or distribution shall be equal to the number of
shares of Reliable A Stock payable on each share of Reliable A Stock pursuant
to such dividend or distribution. If a dividend or distribution payable in
shares of Reliable B Stock (including but not limited to any distribution
payable as a consequence of a split in the Reliable B Stock) shall be made on
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the shares of Reliable B Stock, a dividend or distribution payable in shares of
Reliable A Stock and the number of shares of Reliable A Stock pursuant to such
dividend or distribution shall be equal to the number of shares of Reliable B
Stock payable on each share of Reliable B Stock pursuant to such dividend or
distribution.
Subject to any restrictions contained in a corporation's certificate of
incorporation, the DGCL generally provides that a corporation may declare and
pay dividends out of surplus (defined as the excess, if any, of net assets over
capital) or, when no surplus exists, out of the net profits for the fiscal year
in which the dividend is declared and/or the preceding fiscal year. Dividends
may not be paid out net profits if the capital of the corporation is less than
the amount of capital represented by the issued and outstanding stock of all
classes having a preference upon the distribution of assets. The Unitrin
Certificate provides that, subject to the rights of any outstanding preferred
stock, the Board of Directors may pay any dividends on the common stock out of
any funds legally available therefor.
INDEMNIFICATION AND LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS
The MGBCL permits indemnification of officers, directors and employees in
certain instances as long as the person acts in good faith and in a manner
reasonably believed to be in or not opposed to the best interests of the
corporation, and with respect to any criminal action, the person has no
reasonable cause to believe his conduct was unlawful. The Missouri law
indemnification provision is not exclusive of any other rights which may be
granted in the articles of incorporation, by-laws, a vote of shareholders or
disinterested directors, agreement or otherwise. Directors of a corporation who
shall knowingly declare and pay any dividend except as permitted by and in
accordance with the corporation statute and the articles of incorporation shall
be jointly and severally liable for all of the debts of the corporation then
existing, and for all that shall be thereafter contracted as long as they shall
respectively continue in office; provided, that the amount for which they shall
be liable shall not exceed the amount of such dividend. The Reliable Articles
provide for indemnification of directors and officers to the fullest extent
permitted by the MGBCL.
To the extent an indemnified director is successful in a defense of an
action, he or she shall be indemnified against expenses actually and reasonably
incurred in connection with the defense. The determination of the right to
indemnification shall be made by the Board of Directors by a majority vote of a
quorum consisting of directors who were not parties to the action, and if not
obtainable, by an independent legal counsel, or by the shareholders. Payment of
the expenses may be paid by Reliable in advance of the final disposition of the
action. The indemnification provided by the above clauses is not exclusive.
Reliable has purchased insurance for past or present directors and officers or
for directors and officers who served at the request of the corporation. The
Board of Directors may also indemnify employees. In addition, Reliable has
separate indemnification agreements in place with each of its current directors
and various officers.
Section 145 of the DGCL provides that a corporation may indemnify any of its
officers or directors party to any action, suit or proceeding by reason of the
fact that such person was a director, officer, or employee of the corporation
by, among other things, a majority vote of a quorum consisting of directors who
were not parties to such action, suit, or proceeding provided that such officer
or director acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the corporation. The Unitrin
Certificate provides that Unitrin shall indemnify and hold harmless any person
made a party or threatened to be made party to or is involuntarily involved in
any action, suit or proceeding by reason of the fact that he or she is or was a
director or officer of Unitrin or is or was serving at the request of Unitrin
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, to the fullest extent authorized by
the DGCL. Section 102 of the DGCL allows a corporation to limit or eliminate
the personal liability of directors of the corporation and its shareholders for
monetary damages for breach of fiduciary duty as a director. However, this
provision excludes any limitation on liability (a) for any breach of the
director's duty of loyalty to the corporation or its shareholders, (b) for act
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (c) for intentional or negligent payment of unlawful
dividends, stock purchase or redemption, or (d) for any transaction from which
the director derived an improper personal benefit. The Unitrin Certificate
provides for the limitation of directors' liability as permitted by this
statute.
54
<PAGE>
DUTIES OF DIRECTORS
The MGBCL expressly provides that directors of insurance companies may
consider various constituencies (including constituencies whose interests may
diverge from the interests of shareholders) in connection with proposals
relating to the acquisition of control of the corporation and in other
contexts. In addition, the Reliable Articles specifically permit the Board of
Directors to consider various constituencies (including policyholders,
employees, suppliers, customers and others having similar relationships with
them, and the communities in which they conduct their businesses) in
connection with transactions such as the Merger.
The DGCL does not contain a specific provision elaborating the duties of a
Board of Directors with respect to the best interests of the corporation.
Delaware courts have permitted directors to consider various constituencies
provided that there be some rationally related benefit to the shareholders.
The Unitrin Certificate specifically permits the Board of Directors to
consider various constituencies including employees, suppliers and customers
of Unitrin and its subsidiaries and the communities in which offices or
facilities of Unitrin are located (whose interests may diverge from the
interests of shareholders) in connection with taking any corporate action.
LEGAL MATTERS
The validity of the Unitrin Stock to be issued in the Merger and certain
other legal matters will be passed upon for Unitrin by Scott Renwick, Esq.,
Counsel of Unitrin. As of [ ]1997, Mr. Renwick beneficially owned an
aggregate of [ ] shares of Unitrin Stock. Certain legal and tax
matters with respect to the Merger will be passed upon for Reliable by Bryan
Cave llp, St. Louis, Missouri.
EXPERTS
The consolidated financial statements and financial statement schedules of
The Reliable Life Insurance Company and its subsidiaries as of December 31,
1996 and 1995 and for each of the three years in the period ended December 31,
1996, which are included in this Proxy Statement/Prospectus, have been
included herein in reliance on the reports of Coopers & Lybrand L.L.P.,
independent accountants, given upon the authority of that firm as experts in
accounting and auditing. Representatives of Coopers & Lybrand L.L.P. are
expected to be present at the Special Meeting and are expected to be available
to respond to appropriate questions.
The consolidated financial statements and financial statement schedules of
Unitrin and subsidiaries appearing in Unitrin's Annual Report (Form 10-K) for
the year ended December 31, 1996 have been audited by KPMG Peat Marwick LLP,
independent auditors, as set forth in their reports thereon included therein
and incorporated herein by reference. Such consolidated financial statements
and financial statement schedules are incorporated herein by reference in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.
OTHER MATTERS
The Board of Directors of Reliable does not know of any matter to be
presented at the Special Meeting other than as set forth above. Pursuant to
the Reliable By-Laws, no other business may be transacted at the Special
Meeting.
55
<PAGE>
INDEX TO FINANCIAL STATEMENTS OF THE RELIABLE LIFE INSURANCE COMPANY AND
SUBSIDIARIES
<TABLE>
<S> <C>
Report of Independent Accountants.......................................... F-2
Consolidated Balance Sheets at March 31, 1997 (unaudited) and December 31,
1996 and 1995............................................................. F-3
Consolidated Statements of Income for the Three Months Ended March 31, 1997
and 1996 (unaudited) and for the Years Ended December 31, 1996, 1995 and
1994...................................................................... F-4
Consolidated Statements of Cash Flows for the Three Months Ended March 31,
1997 and 1996 (unaudited) and for the Years Ended December 31, 1996, 1995
and 1994.................................................................. F-5
Consolidated Statements of Stockholders' Equity for the Three Months Ended
March 31, 1997 (unaudited) and for the Years Ended December 31, 1996, 1995
and 1994.................................................................. F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
The Reliable Life Insurance Company:
We have audited the accompanying consolidated balance sheets of The Reliable
Life Insurance Company and Subsidiaries as of December 31, 1996 and 1995 and
the related consolidated statements of income, cash flows and stockholders'
equity for each of the three years in the period ended December 31, 1996.
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, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of The Reliable
Life Insurance Company and Subsidiaries as of December 31, 1996 and 1995, and
the consolidated results of their operations and cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1994 the
Company changed its method of accounting for investments in accordance with
SFAS 115, Accounting for Certain Investments in Debt and Equity Securities.
/s/ Coopers & Lybrand l.l.p.
St. Louis, Missouri
February 20, 1997, except for
Note 14 for which the
date is June 20, 1997
F-2
<PAGE>
THE RELIABLE LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 (UNAUDITED) AND DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
DECEMBER 31
MARCH 31, --------------------------
ASSETS 1997 1996 1995
------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Investments:
Fixed maturities--Available-for-
sale, at estimated fair value
(amortized cost of $400,250,228,
$391,401,536 and $375,126,193 at
March 31, 1997, December 31, 1996
and December 31, 1995,
respectively)...................... $402,666,281 $399,865,289 $394,308,637
Equity securities--Available-for-
sale, at estimated fair value (cost
of $2,297,677, $3,081,861 and
$3,900,097 at March 31, 1997,
December 31, 1996 and December 31,
1995, respectively)................ 3,162,406 3,965,156 4,231,761
Mortgage loans on real estate....... 23,145,372 22,078,007 26,748,204
Real estate......................... 3,368,967 3,399,280 3,494,680
Real estate--acquired in
satisfaction of debt............... 4,580,545 4,617,109 4,582,536
Policy loans and premium notes...... 32,305,662 28,806,034 26,669,900
Short-term investments.............. 17,509,566 12,732,926 12,312,878
------------ ------------ ------------
Total investments................. 486,738,799 475,463,801 472,348,596
Other assets:
Cash................................ 5,548,329 5,092,302 --
Accrued investment income........... 5,958,825 5,316,412 5,229,220
Accounts and premiums receivable.... 9,632,899 7,814,331 6,060,444
Deferred policy acquisition costs... 72,256,209 70,437,414 65,164,177
Present value of future profits..... 39,415,800 26,380,950 29,979,298
Property and equipment, net......... 2,724,792 2,634,073 2,705,615
Prepaid pension cost................ 1,521,194 1,884,192 3,046,022
Due from reinsurers................. 1,917,755 2,249,093 4,541,884
Prepaid reinsurance premiums........ 66,308 126,932 257,271
Other assets........................ 3,867,264 3,501,508 1,940,011
------------ ------------ ------------
Total assets...................... $629,648,174 $600,901,008 $591,272,538
============ ============ ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
Insurance liabilities:
Future policy benefits.............. $410,163,542 $376,287,381 $365,404,827
Unpaid policy claims................ 8,117,360 8,208,872 9,875,713
Unearned premiums................... 1,997,293 2,924,547 4,743,442
Other policy liabilities............ 967,440 789,220 810,441
------------ ------------ ------------
421,245,635 388,210,020 380,834,423
Other liabilities:
Cash overdraft...................... -- -- 67,251
Note payable........................ 10,000,000 -- --
Accrued expenses and other
liabilities........................ 16,820,183 22,414,511 14,770,032
Stockholder dividends declared and
unpaid............................. 569,979 717,972 724,284
Amounts withheld by company as
agent.............................. 4,395,643 4,076,748 3,631,336
Current federal income taxes........ 2,733,479 2,706,718 2,229,614
Deferred federal income taxes....... 20,712,815 22,731,022 26,207,377
------------ ------------ ------------
Total liabilities................. 476,477,734 440,856,991 428,464,317
------------ ------------ ------------
Stockholders' equity:
Preferred stock, $1.00 par value:
Authorized:
Voting--3,000,000 shares; none
issued............................ -- -- --
Nonvoting--3,000,000 shares; none
issued............................ -- -- --
Class A common stock, $1.00 par
value:
Authorized: 6,000,000 shares........
1997: 2,216,840 issued and
1,091,131 outstanding;............. 2,216,840 -- --
1996: 2,173,378 issued and
1,132,604 outstanding;............. -- 2,173,378 --
1995: 2,135,218 issued and
1,199,217 outstanding.............. -- -- 2,135,218
Class B common stock, $1.00 par
value:
Authorized, issued and outstanding:
5,912,720, 6,347,340 and 6,728,940
shares at 1997, 1996 and 1995,
respectively....................... 5,912,720 6,347,340 6,728,940
Treasury stock: 1,125,709,
1,040,774 and 936,001 shares of
Class A common stock, at cost, at
1997, 1996 and 1995, respectively.. (40,408,359) (33,995,766) (27,119,585)
Additional paid-in capital.......... 8,719,112 8,327,954 7,984,514
Retained earnings................... 174,597,561 171,115,542 160,394,966
Net unrealized investment gains (net
of income taxes of $1,148,325,
$3,271,479 and $6,829,940 at 1997,
1996 and 1995, respectively)....... 2,132,566 6,075,569 12,684,168
------------ ------------ ------------
Total stockholders' equity........ 153,170,440 160,044,017 162,808,221
------------ ------------ ------------
Total liabilities and
stockholders' equity............ $629,648,174 $600,901,008 $591,272,538
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
THE RELIABLE LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEARS ENDED DECEMBER 31,
----------------------- --------------------------------------
1997 1996 1996 1995 1994
----------- ----------- ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net premiums earned..... $26,381,166 $23,731,842 $ 94,004,740 $ 97,315,292 $ 92,041,371
Investment income....... 8,656,540 8,013,496 32,347,995 31,422,434 30,726,335
Net realized investment
gains (losses)......... 509,684 121,880 608,291 1,800,387 (2,210,324)
Service fees and other
income................. 2,528,572 2,079,021 10,566,603 9,223,423 10,037,755
----------- ----------- ------------ ------------ ------------
38,075,962 33,946,239 137,527,629 139,761,536 130,595,137
----------- ----------- ------------ ------------ ------------
Benefits and claims:
Policy claims......... 12,909,784 11,953,450 46,217,632 51,158,737 48,587,930
Increase in future
policy benefits...... 2,569,889 2,701,070 10,040,726 9,168,597 9,228,612
----------- ----------- ------------ ------------ ------------
15,479,673 14,654,520 56,258,358 60,327,334 57,816,542
Commissions............. 2,853,241 2,519,953 11,265,708 10,637,683 10,293,093
Taxes, licenses and
fees................... 1,249,310 1,477,020 4,376,009 4,284,147 4,221,315
Amortization of deferred
policy acquisition
costs.................. 1,952,651 2,439,416 10,100,524 10,037,532 9,541,536
Amortization of present
value of future
profits................ 748,394 1,676,137 3,598,348 2,623,402 2,492,423
Net periodic pension
cost................... 362,998 290,457 1,161,830 543,262 681,306
Other operating costs
and expenses........... 9,707,830 9,062,742 32,255,221 32,113,871 28,825,338
----------- ----------- ------------ ------------ ------------
32,354,097 32,120,245 119,015,998 120,567,231 113,871,553
----------- ----------- ------------ ------------ ------------
Income before
provision for
income taxes....... 5,721,865 1,825,994 18,511,631 19,194,305 16,723,584
----------- ----------- ------------ ------------ ------------
Provision for income
taxes:
Current............... 1,598,931 839,740 5,180,710 3,162,920 5,564,109
Deferred.............. 104,946 (536,163) 82,122 2,423,858 (1,286,626)
----------- ----------- ------------ ------------ ------------
1,703,877 303,577 5,262,832 5,586,778 4,277,483
----------- ----------- ------------ ------------ ------------
Net income.......... $ 4,017,988 $ 1,522,417 $ 13,248,799 $ 13,607,527 $ 12,446,101
=========== =========== ============ ============ ============
Earnings per share,
based on weighted
average number of
shares of common stock
outstanding............ $ 2.36 $ 0.81 $ 7.32 $ 7.23 $ 6.54
=========== =========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
THE RELIABLE LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------------ ----------------------------------------
1997 1996 1996 1995 1994
----------- ----------- ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income............. $ 4,017,988 $ 1,522,417 $ 13,248,799 $ 13,607,527 $ 12,446,101
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Amortization and
depreciation.......... 2,765,724 4,186,092 14,042,046 13,230,892 12,226,540
Policy acquisition
costs deferred........ (17,555,160) (3,940,112) (15,373,761) (17,040,413) (17,302,370)
Provision for deferred
income taxes.......... 104,946 (536,163) 82,122 2,423,858 (1,286,626)
Net realized
investment (gains)
losses................ (509,684) (121,880) (608,291) (1,800,387) 2,210,324
Changes in:
Accounts and premiums
receivable, unearned
premiums and other
policy liabilities... (2,506,978) (1,316,122) (3,463,664) (2,148,190) (1,388,347)
Accrued investment
income............... (642,413) 84,615 (87,192) 567,208 (289,411)
Future policy
benefits, unpaid
policy claims and
due from reinsurers.. 33,874,823 2,926,818 10,666,240 6,708,541 10,065,464
Accrued expenses and
other liabilities.... 788,669 2,385,063 1,765,348 (50,129) 3,548,832
Other, net............ 293,466 906,594 (499,424) 31,021 812,906
----------- ----------- ------------ ------------ ------------
Net cash provided by
operating
activities.......... 20,631,381 6,097,322 19,772,223 15,529,928 21,043,413
----------- ----------- ------------ ------------ ------------
Investing activities:
Investments in:
Fixed maturities:
Available-for-sale.... (23,460,827) (38,014,913) (103,967,610) (94,133,706) (90,824,906)
Held-to-maturity...... -- -- -- (14,373,487) (11,734,967)
----------- ----------- ------------ ------------ ------------
Total fixed
maturities.......... (23,460,827) (38,014,913) (103,967,610) (108,507,193) (102,559,873)
Equity securities...... (25,627) (1,573) (3,095,570) (1,290,272) --
Mortgage loans......... (1,450,000) -- (2,360,000) (2,360,000) (10,266,300)
Real estate............ (34,889) (130,286) (325,679) (675,720) (358,539)
Short-term
investments, net of
maturities............ (10,764,100) (2,803,582) 5,567,412 (4,015,886) 808,447
Policy loans and
premium notes......... (3,499,629) (354,600) (2,136,134) (1,557,190) (1,403,221)
Investment repayments
and sales:
Fixed maturities:
Available-for-sale--
Sales................ 11,499,115 26,067,829 59,138,899 75,780,555 43,167,082
Available-for-sale--
Maturities........... 3,261,646 7,192,129 29,699,056 17,374,360 40,284,890
Held-to-maturity--
Maturities........... -- -- -- 7,549,454 3,846,376
----------- ----------- ------------ ------------ ------------
Total fixed
maturities.......... 14,760,761 33,259,958 88,837,955 100,704,369 87,298,348
----------- ----------- ------------ ------------ ------------
Equity securities...... 924,887 -- 4,066,898 -- --
Mortgage loans......... 394,003 630,364 7,647,666 6,750,060 6,453,999
Real estate............ -- -- -- -- 835,684
Net purchases of
property and equipment. (164,542) (40,178) (279,156) (472,880) (570,233)
Acquisitions of
insurance in force..... -- -- -- -- 2,615,080
----------- ----------- ------------ ------------ ------------
Net cash used in
investing
activities.......... (23,319,963) (7,454,810) (6,044,218) (11,424,712) (17,146,608)
----------- ----------- ------------ ------------ ------------
Financing activities:
Note payable proceeds.. $10,000,000 $ -- $ -- $ -- $ --
Receipts credited to
policyholder account
balance............... 771,132 754,203 3,050,226 3,070,301 3,277,336
Return of policyholder
account balances...... (529,968) (542,288) (2,207,962) (2,282,268) (2,395,520)
Stockholder dividends
paid.................. (683,962) (724,284) (2,534,535) (2,521,200) (3,113,191)
Acquisition of treasury
stock................. (6,412,593) -- (6,876,181) (909,534) (2,921,325)
Change in cash
overdraft............. -- 1,869,857 (67,251) (1,462,515) 1,255,895
----------- ----------- ------------ ------------ ------------
Net cash used in
financing
activities.......... 3,144,609 1,357,488 (8,635,703) (4,105,216) (3,896,805)
----------- ----------- ------------ ------------ ------------
Net change in cash.. 456,027 -- 5,092,302 -- --
Cash, beginning of year. 5,092,302 -- -- -- --
----------- ----------- ------------ ------------ ------------
Cash, end of year....... $ 5,548,329 $ -- $ 5,092,302 $ -- $ --
=========== =========== ============ ============ ============
Interest paid........... $ 34,734 $ 31,706 $ 372,517 $ 172,255 $ 94,371
=========== =========== ============ ============ ============
Income taxes paid, net.. $ 11,500 $ -- $ 5,668,050 $ 8,962,477 $ 5,406,210
=========== =========== ============ ============ ============
</TABLE>
The Company has defined cash as cash on hand and on deposit.
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
THE RELIABLE LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
NET
UNREALIZED
ADDITIONAL INVESTMENT
COMMON TREASURY PAID-IN RETAINED GAINS
STOCK STOCK CAPITAL EARNINGS (LOSSES) TOTAL
---------- ------------ ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Stockholders' equity,
December 31, 1993...... $8,993,209 $(23,288,726) $7,855,463 $139,397,346 $ 39,941 $132,997,233
Adjustment to beginning
balance for change in
accounting principle,
net of income taxes of
$3,417,518............. -- -- -- -- 6,346,819 6,346,819
Net income.............. -- -- -- 12,446,101 -- 12,446,101
Stock conversions....... (128,223) -- 128,223 -- -- --
Treasury stock acquired. -- (2,921,325) -- -- -- (2,921,325)
Dividends (per share):
($1.3365--Class A)..... -- -- -- (1,629,180) -- (1,629,180)
($.1215--Class B)...... -- -- -- (814,354) -- (814,354)
Change in net unrealized
investment losses, net
of income taxes of
$(9,042,246)........... -- -- -- -- (16,771,244) (16,771,244)
---------- ------------ ---------- ------------ ------------ ------------
Stockholders' equity,
December 31, 1994...... 8,864,986 (26,210,051) 7,983,686 149,399,913 (10,384,484) 129,654,050
Net income.............. -- -- -- 13,607,527 -- 13,607,527
Stock conversions....... (828) -- 828 -- -- --
Treasury stock acquired. -- (909,534) -- -- -- (909,534)
Dividends (per share):
($1.4395--Class A)..... -- -- -- (1,731,958) -- (1,731,958)
($.1309--Class B)...... -- -- -- (880,516) -- (880,516)
Change in net unrealized
investment gains, net
of income taxes of
$12,433,166............ -- -- -- -- 23,068,652 23,068,652
---------- ------------ ---------- ------------ ------------ ------------
Stockholders' equity,
December 31, 1995...... 8,864,158 (27,119,585) 7,984,514 160,394,966 12,684,168 162,808,221
---------- ------------ ---------- ------------ ------------ ------------
Net income.............. -- -- -- 13,248,799 -- 13,248,799
Stock conversions....... (343,440) -- 343,440 -- -- --
Treasury stock acquired. -- (6,876,181) -- -- -- (6,876,181)
Dividends (per share):
($1.47--Class A)....... -- -- -- (1,680,088) -- (1,680,088)
($.1336--Class B)...... -- -- -- (848,135) -- (848,135)
Change in net unrealized
investment losses, net
of income taxes of
$(3,558,461)........... -- -- -- -- (6,608,599) (6,608,599)
---------- ------------ ---------- ------------ ------------ ------------
Stockholders' equity,
December 31, 1996...... 8,520,718 (33,995,766) 8,327,954 171,115,542 6,075,569 160,044,017
Net income.............. -- -- -- 4,017,988 -- 4,017,988
Stock conversions....... (391,158) -- 391,158 -- -- --
Treasury stock acquired. -- (6,412,593) -- -- -- (6,412,593)
Dividends (per share):
($.35--Class A)........ -- -- -- (364,452) -- (364,452)
($.03181--Class B)..... -- -- -- (171,517) -- (171,517)
Change in net unrealized
investment losses, net
of income taxes of
$(2,123,153)........... -- -- -- -- (3,943,003) (3,943,003)
---------- ------------ ---------- ------------ ------------ ------------
Stockholders' equity,
March 31, 1997......... $8,129,560 $(40,408,359) $8,719,112 $174,597,561 $ 2,132,566 $153,170,440
========== ============ ========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
THE RELIABLE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Reliable Life Insurance Company ("Reliable") is a home service insurance
company with the vast majority of its business concentrated in Texas, Missouri
and Arkansas.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and include the following significant
accounting policies which vary in certain respects from practices prescribed
or permitted by the Department of Insurance of the State of Missouri (see Note
11). Generally accepted accounting principles require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates
of the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
A. Principles of Consolidation: The consolidated financial statements
include the accounts of Reliable and all of its wholly-owned subsidiaries
(collectively, the "Company"). Intercompany transactions have been eliminated
in consolidation.
B. Investments: On January 1, 1994, the Company adopted Statement of
Financial Accounting Standards No. 115 ("SFAS 115"). The adoption of SFAS 115
resulted in an increase in stockholders' equity of approximately $6,347,000,
net of income taxes of $3,418,000.
Under SFAS 115, fixed maturities and equity securities classified as
available for sale are carried at market value (with the unrealized gains and
losses, net of tax, reflected as a separate component of stockholders'
equity). At December 31, 1996 and 1995, the Company did not have a fixed
maturity or equity security trading portfolio.
At December 31, 1995, the Company reclassified all of its fixed maturities
classified as held-to-maturity to available-for-sale. This reclassification
was a one-time transfer of securities from held-to-maturity in accordance with
the provisions provided by the FASB special report entitled A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities. The amortized cost of fixed maturities held-to-maturity
transferred to fixed maturities available-for-sale was $86,126,899 and the
related unrealized gain, net of tax (reflected as a separate component of
stockholders' equity), was $4,899,885.
Mortgage loans on real estate are carried at the aggregate unpaid balance,
net of unearned discount of $123,834 in 1996 and $178,304 in 1995. Real estate
is stated at cost, less accumulated depreciation of $3,748,809 in 1996 and
$3,346,983 in 1995. Depreciation on investment real estate for the years ended
December 31, 1996, 1995 and 1994 was $401,826, $391,786 and $367,578,
respectively. All other investments are carried at cost or equity, which
generally approximates market.
Fixed maturities, mortgage loans and real estate reflect provisions for
losses considered to be other than temporary on investments where there is
evidence of the issuers' inability to meet the obligation in full at maturity,
where there is insufficient underlying collateral on delinquent loans or where
projected revenues are considered to be insufficient.
Realized investment gains and losses, including any provisions for losses
arising from impairments in the value of investments, are included in the
determination of net income. The cost of securities sold is based upon
specific identification.
C. Fair Values of Financial Instruments: Fair value disclosures have been
made for the Company's invested assets in Note 2 of the "Notes to Consolidated
Financial Statements."
F-7
<PAGE>
THE RELIABLE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The fair values for fixed maturities and equity securities are based on
quoted market prices, where available. For fixed maturities not actively
traded, fair values are based upon estimated values obtained from independent
pricing services. The fair values for mortgage loans are developed based on
internal estimates of discounted future cash flows.
Other financial instruments, exclusive of those which are related to policy
contracts, are generally short-term in nature. It is assumed that cost
approximates fair value.
D. Deferred Policy Acquisition Costs: Commissions and other expenses
relating to policy issue and underwriting, which vary with and are primarily
related to the production of new business, are deferred. For noninterest
sensitive products, deferred policy acquisition costs are amortized over the
premium-paying period of the related policies in proportion to the ratio of
the annual earned premium to the total anticipated premium using the same
assumptions as used for computing liabilities for future policy benefits. On
interest sensitive products, deferred policy acquisition costs are amortized
in relation to anticipated gross profits.
E. Present Value of Future Profits: The present value of future profits
("PVFP") represents the present value of anticipated profits to be realized
from future premiums on insurance in force at the respective dates of
acquisition and is amortized over the years that such premiums are collected.
Generally, the same assumptions applied in estimating liabilities for future
policy benefits were used and discounted to provide an appropriate rate of
return.
F. Property and Equipment: Depreciation on property and equipment has been
provided principally using straight-line and accelerated methods on the basis
of estimated useful lives. When assets are retired or otherwise disposed of,
the costs and related accumulated depreciation are removed from the accounts
and the resulting gain or loss is reflected in income. Expenditures for
repairs and maintenance are charged to income as incurred.
G. Liabilities for Future Policy Benefits and Unpaid Policy Claims: For non-
interest sensitive products, liabilities for future policy benefits have been
estimated using the net level premium method utilizing assumptions as to
investment yields, withdrawals and mortality, including provisions for the
risk of adverse deviations from the estimates, which were appropriate at the
time the policies were issued or acquired. The more material assumptions are
as follows:
<TABLE>
<CAPTION>
YEAR OF ISSUE OR ACQUISITION INTEREST RATES
---------------------------- ---------------------------------------
<S> <C>
To 1969........................... 4 1/2%
1969 to 1980...................... 6% graded to 4 1/2%
1981 to 1991...................... 7 1/2% or 8% graded to 6% over 20 years
1992 to 1996...................... 7% or 8% graded to 6% over 20 years
</TABLE>
Mortality rate assumptions are based on various published tables which
approximate the Company's experience.
Withdrawal rate assumptions are based on the Company's experience.
For interest sensitive products, liabilities for future policy benefits are
set equal to the policyholder balances, which represent payments received plus
interest earned and reduced by withdrawals, mortality and expense charges
based on contract provisions.
Liabilities for unpaid policy claims (including estimates of costs for
claims related to insured events that have occurred but have not been
reported) are accrued when the insured events occur.
F-8
<PAGE>
THE RELIABLE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
H. Federal Income Taxes: The Company adopted Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). SFAS
109 requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax assets
and liabilities are determined based upon the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. No
deferred taxes are provided on policyholders' surplus as defined by the
Internal Revenue Code.
I. Premiums and Expense Recognition: Premiums on policies other than limited
payment and interest sensitive contracts are recognized as revenues when due
under the terms of the contracts. Benefits and expenses for life policies are
matched with earned premiums to result in the recognition of profits over the
life of the contracts. This matching is accomplished through the provision of
liabilities for future policy benefits and the deferral and amortization of
policy acquisition costs. Revenues on limited payment contracts and mortality
and expense charges on interest sensitive contracts are recognized over the
period during which benefits are provided under the contract.
J. Reinsurance Arrangements: The Company is involved in various reinsurance
transactions and participates in various reinsurance pools and fronting
arrangements.
The Company reports reinsurance transactions in accordance with Financial
Accounting Standard No. 113, Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts ("SFAS 113"). SFAS 113 requires
separate reporting of assets and liabilities related to reinsurance contracts.
K. Common Stock and Earnings Per Share: Class B common stock may be
converted to Class A common stock at a 10:1 ratio at the option of the
stockholder. During 1996, 1995 and 1994, 381,600, 920 and 142,470 shares,
respectively, of Class B common stock were converted to 38,160, 92 and 14,247
shares, respectively, of Class A common stock. The Company acquired 104,773,
15,944 and 48,782 shares, respectively, of treasury stock during 1996, 1995
and 1994. Earnings per share are presented under the "if-converted" method.
The weighted average shares outstanding used to calculate earnings per share
for the years ended December 31, 1996, 1995 and 1994 are 1,810,131, 1,881,135
and 1,904,058, respectively.
L. Interim Consolidated Financial Statements (Unaudited): The unaudited
consolidated balance sheet as of March 31, 1997, the unaudited consolidated
statements of income and cash flows for the three months ended March 31, 1997
and 1996, and the unaudited consolidated statement of stockholders' equity for
the three months ended March 31, 1997, in the opinion of management, have been
prepared on the same basis as the audited consolidated financial statements
and include all significant adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the results of the interim
periods. The data disclosed in these notes to the financial statements for
these periods are also unaudited. Operating results for the three months ended
March 31, 1997 are not necessarily indicative of the results that may be
expected for the entire year ending December 31, 1997.
F-9
<PAGE>
THE RELIABLE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. INVESTMENTS:
The amortized cost and estimated fair value of investments all classified as
available-for-sale at December 31, 1996 and 1995, were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
1996 COST GAINS LOSSES FAIR VALUE
---- ------------ ----------- ---------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S.
Government corporations and
agencies..................... $ 44,663,984 $ 1,924,250 $ 38,479 $ 46,549,755
Obligations of states,
territories and possessions.. 31,583,199 751,754 35,803 32,299,150
Corporate securities.......... 91,004,849 4,524,077 698,979 94,829,947
Mortgage-backed securities.... 143,434,286 3,190,616 862,219 145,762,683
Other debt securities......... 80,715,218 1,268,992 1,560,456 80,423,754
------------ ----------- ---------- ------------
Total fixed maturities...... 391,401,536 11,659,689 3,195,936 399,865,289
Equity securities............. 3,081,861 903,422 20,127 3,965,156
------------ ----------- ---------- ------------
$394,483,397 $12,563,111 $3,216,063 $403,830,445
============ =========== ========== ============
<CAPTION>
1995
----
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S.
Government corporations and
agencies..................... $ 61,088,140 $ 3,821,065 $ 2,784 $ 64,906,421
Obligations of states,
territories and possessions.. 36,019,751 1,095,143 -- 37,114,894
Corporate securities.......... 78,818,821 7,648,642 418,692 86,048,771
Mortgage-backed securities.... 125,125,381 6,080,049 259,331 130,946,099
Other debt securities......... 74,074,100 2,124,727 906,375 75,292,452
------------ ----------- ---------- ------------
Total fixed maturities...... 375,126,193 20,769,626 1,587,182 394,308,637
Equity securities............. 3,900,097 338,940 7,276 4,231,761
------------ ----------- ---------- ------------
$379,026,290 $21,108,566 $1,594,458 $398,540,398
============ =========== ========== ============
</TABLE>
The amortized cost and estimated fair value of available-for-sale securities
at December 31, 1996, by contractual maturity, are show below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
AVAILABLE-FOR-SALE SECURITIES COST FAIR VALUE
----------------------------- ------------ ------------
<S> <C> <C>
Due in one year or less........................ $ 6,011,953 $ 6,011,719
Due after one year through five years.......... 41,152,689 42,206,845
Due after five years through ten years......... 78,007,000 81,635,144
Due after ten years............................ 185,514,676 189,587,827
Redeemable preferred stock..................... 80,715,218 80,423,754
------------ ------------
Total fixed maturities....................... $391,401,536 $399,865,289
============ ============
</TABLE>
F-10
<PAGE>
THE RELIABLE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net realized gains (losses) reflected in the results of operations for the
years ended December 31, 1996, 1995 and 1994, were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ---------- -----------
<S> <C> <C> <C>
Fixed maturities....................... $422,048 $1,804,705 $(2,222,066)
Equity securities...................... 153,092 -- --
Real estate............................ 15,320 (5,074) 25,086
Mortgage loans and other............... 17,831 756 (13,344)
-------- ---------- -----------
$608,291 $1,800,387 $(2,210,324)
======== ========== ===========
</TABLE>
Proceeds from sales of available-for-sale securities totaled $59,138,899,
$75,780,555 and $43,167,082 for 1996, 1995 and 1994, respectively. Gross
realized gains and losses on such sales were $878,045 and $131,586 during
1996, respectively, $2,791,418 and $1,225,956 during 1995, respectively, and
$399,121 and $2,219,710 during 1994, respectively. The additional net realized
gains and losses on fixed maturities in 1996 and 1995 consist primarily of
gains recognized on involuntary bond conversions. During 1994 the additional
net realized losses on fixed maturities consisted primarily of valuation
adjustments.
The estimated fair value of mortgage loans on real estate at December 31,
1996 and 1995 is approximately $22,600,000 and $28,000,000.
At December 31, 1996 and 1995, bonds and first mortgage loans on real estate
with an aggregate estimated fair value of $10,598,950 and $14,689,593,
respectively, were on deposit with various regulatory authorities.
At December 31, 1996 and 1995, approximately 41% and 36%, respectively, of
the outstanding mortgage loans were located in the State of Texas.
3. INVESTMENT INCOME:
Investment income and related expenses for the years ended December 31,
1996, 1995 and 1994, were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Investment income:
Fixed maturities.................... $28,231,501 $26,856,169 $26,897,323
Equity securities................... 48,904 288,980 234,324
Mortgage loans on real estate....... 2,396,485 2,778,611 2,725,520
Policy loans and premium notes...... 1,583,687 1,465,236 1,364,896
Short-term investments.............. 403,226 405,226 404,970
Real estate and other............... 2,319,593 2,274,006 1,916,784
----------- ----------- -----------
Total investment income........... 34,983,396 34,068,228 33,543,817
Total investment expenses........... 2,635,401 2,645,794 2,817,482
----------- ----------- -----------
Total net investment income....... $32,347,995 $31,422,434 $30,726,335
=========== =========== ===========
</TABLE>
F-11
<PAGE>
THE RELIABLE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. DEFERRED POLICY ACQUISITION COSTS AND PRESENT VALUE OF FUTURE PROFITS:
Changes in deferred policy acquisition costs are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Balance, January 1................ $65,164,177 $58,161,296 $50,400,462
Additions--Commissions and
expenses....................... 15,373,761 17,040,413 17,302,370
Amortization.................... (10,100,524) (10,037,532) (9,541,536)
----------- ----------- -----------
Balance, December 31.............. $70,437,414 $65,164,177 $58,161,296
=========== =========== ===========
</TABLE>
Changes in present value of future profits are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Balance, January 1................ $29,979,298 $32,602,700 $34,577,091
Additions--Acquisitions of
insurance in force............. -- -- 518,032
Amortization, net of interest of
$3,591,450, $3,908,360 and
$4,199,898, respectively....... (2,500,525) (2,623,402) (2,492,423)
Write-off due to impairment..... (1,097,823) -- --
----------- ----------- -----------
Balance, December 31.............. $26,380,950 $29,979,298 $32,602,700
=========== =========== ===========
</TABLE>
The interest accrual rate ranges from 6.5% to 15.0%. During each of the next
five years the present value of future profits at the beginning of the year is
expected to decrease at a rate of approximately 10.0%.
F-12
<PAGE>
THE RELIABLE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. REINSURANCE:
In the normal course of business, the Company cedes insurance in order to
limit its exposure to loss on any single insured or groups of insureds. The
Company also participates in reinsurance and fronting arrangements in order to
take advantage of business opportunities which are consistent with the
Company's objectives and to utilize its available resources. To the extent
that any reinsuring companies are unable to meet obligations under reinsurance
agreements, the Company would be liable for the reinsured risk. The Company
evaluates the financial condition of its reinsurers and utilizes various
security arrangements to minimize its exposure to significant loss from
reinsurer insolvenices.
The effect of reinsurance on premiums written and earned in 1996, 1995 and
1994 is as follows:
<TABLE>
<CAPTION>
SHORT DURATION LONG DURATION
------------------------ -------------
WRITTEN AND
1996 WRITTEN EARNED EARNED
---- ----------- ----------- -------------
<S> <C> <C> <C>
Direct............................ $ 6,229,706 $ 7,098,786 $85,903,806
Assumed........................... 1,383,866 2,310,451 --
Ceded............................. (1,063,915) (1,194,254) (114,049)
----------- ----------- -----------
Net Premiums.................... $ 6,549,657 $ 8,214,983 $85,789,757
=========== =========== ===========
<CAPTION>
1995
----
<S> <C> <C> <C>
Direct............................ $ 7,903,338 $ 9,538,934 $84,354,714
Assumed........................... 4,795,607 6,609,014 --
Ceded............................. (2,564,265) (3,063,717) (123,653)
----------- ----------- -----------
Net Premiums.................... $10,134,680 $13,084,231 $84,231,061
=========== =========== ===========
<CAPTION>
1994
----
<S> <C> <C> <C>
Direct............................ $10,201,192 $10,955,319 $80,331,448
Assumed........................... 7,519,051 7,256,927 345,515
Ceded............................. (5,843,242) (6,687,178) (160,660)
----------- ----------- -----------
Net Premiums.................... $11,877,001 $11,525,068 $80,516,303
=========== =========== ===========
</TABLE>
Reinsurance recoveries on benefits and claims incurred amounted to
approximately $(64,180), $2,088,000 and $2,800,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
6. PROPERTY AND EQUIPMENT:
Property and equipment as of December 31, 1996 and 1995 consisted of the
following:
<TABLE>
<CAPTION>
EXPECTED USEFUL
LIFE (YEARS) 1996 1995
--------------- ---------- ----------
<S> <C> <C> <C>
Land................................ N/A $ 621,075 $ 621,075
Buildings and improvements.......... 7 to 39 3,886,620 3,848,972
Business machines and equipment..... 5 to 7 2,469,782 2,254,993
Furniture and fixtures.............. 7 258,615 251,501
Transportation equipment............ 5 77,289 77,289
---------- ----------
7,313,381 7,053,830
Less accumulated depreciation....... 4,679,308 4,348,215
---------- ----------
$2,634,073 $2,705,615
========== ==========
</TABLE>
F-13
<PAGE>
THE RELIABLE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Related depreciation expense for the years ended December 31, 1996, 1995 and
1994 was $350,698, $359,643 and $385,905, respectively.
7. RETIREMENT BENEFITS:
The Company sponsors a defined benefit retirement plan for eligible
employees. The benefits are based on years of service and the employee's final
average compensation. The Company's funding policy is to contribute annually
no less than the minimum amount required by government funding standards, but
not more than that which can be deducted for federal income tax purposes. The
Company has not made contributions to the plan during 1996, 1995 and 1994.
Plan assets consist principally of listed stocks and bonds, corporate
obligations, real estate and mortgages.
The discount rate is evaluated at the beginning of each pension period. The
rate in effect during the year is used to calculate the net periodic pension
cost. The rate established for the upcoming year is used to calculate the
future pension obligations. The weighted average discount rate used to
calculate the net periodic pension cost, the rate of increase in future
compensation levels and the expected long-term rate of return on plan assets
for plan years 1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Discount rate.............................................. 7.0% 8.0% 7.0%
Compensation increase...................................... 5.5% 5.5% 5.5%
Investment return rate..................................... 7.0% 7.0% 7.0%
</TABLE>
The calculation of the actuarial present value of benefit obligations was
based on a discount rate of 7.25% at December 31, 1996 and 7.00% at December
31, 1995. The increase in discount rate resulted in a decrease in the vested
benefit obligation at December 31, 1996 of approximately $1,561,000, a
decrease in the accumulated benefit obligation of approximately $1,584,000 and
a decrease in the projected benefit obligation of approximately $2,440,000.
Net periodic pension cost for 1996, 1995 and 1994 included the following
components:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ------------ -----------
<S> <C> <C> <C>
Service cost--Benefits earned
during the period............... $ 3,229,324 $ 2,680,899 $ 2,882,808
Interest cost on projected
benefit obligation.............. 4,448,451 4,027,447 3,725,920
Actual return on plan assets..... (8,968,987) (14,865,175) 1,545,854
Deferred gain (loss) on assets... 3,675,091 9,921,246 (6,252,861)
Amortization of:
Unrecognized net asset existing
at initial application of SFAS
87............................ (1,626,472) (1,626,472) (1,626,472)
Unrecognized prior service
cost.......................... 404,423 405,317 406,057
----------- ------------ -----------
Net periodic pension cost.... $ 1,161,830 $ 543,262 $ 681,306
=========== ============ ===========
</TABLE>
F-14
<PAGE>
THE RELIABLE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The plan's funded status and amounts recognized in the Company's
consolidated balance sheets at December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Actuarial present value of benefit
obligations:
Vested..................................... $(50,489,642) $(49,020,596)
Nonvested.................................. (320,560) (318,323)
------------ ------------
Accumulated benefit obligation........... $(50,810,202) $(49,338,919)
============ ============
Projected benefit obligation for service to
date (PBO).................................. $(65,749,475) $(64,727,842)
Plan assets at fair value.................... 89,724,870 83,165,228
------------ ------------
Plan assets in excess of PBO............. 23,975,395 18,437,386
Unrecognized net asset existing at initial
application of SFAS 87...................... (11,385,296) (13,011,768)
Unrecognized net gains....................... (14,697,166) (6,786,597)
Unrecognized prior service cost.............. 3,991,259 4,407,001
------------ ------------
Prepaid pension cost..................... $ 1,884,192 $ 3,046,022
============ ============
</TABLE>
Unrecognized gains and losses are being amortized over the expected future
service period of employees expected to receive benefits. Prior service cost
is being amortized on a straight-line basis over eighteen years.
The plan provides a $5,000 death benefit in addition to the vested benefits.
Accumulated plan benefits of certain retirees and vested terminated
participants amounting to $1,733,363 and $1,821,791 at December 31, 1996 and
1995, respectively, are covered by nonparticipating annuity contracts issued
by the Company.
The Company sponsors a profit-sharing plan for all eligible employees. The
plan provides for weekly employer contributions based upon percentages of
employee contributions. Employer contributions of $917,099, $917,427 and
$980,848 were charged to expense for the years ended December 31, 1996, 1995
and 1994, respectively.
The Company provides postretirement health benefits and life insurance to
employees and their dependents. The health care plan is contributory with
retiree contributions adjusted from time to time. Health care benefits are
provided from retirement until age 65. Deductibles and coinsurance provisions
are assumed to escalate reflective of increases in the costs of the plan. The
total cost of the life insurance plan is borne by the Company. The amount of
insurance in force at retirement is reduced by 20% each year after retirement
down to zero after 5 years.
The following sets forth the plan's status reconciled with the amounts
recognized in the Company's balance sheets for the years ended December 31,
1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Accumulated postretirement benefits
obligation:
Retirees................................... $(1,119,000) $(1,208,000)
Fully eligible active employees............ (669,000) (522,000)
Active employees not yet fully eligible.... (3,518,000) (3,368,000)
Unrecognized net gain from past experience. (1,156,000) (930,000)
Prior service cost not yet recognized...... 354,000 377,000
----------- -----------
Total accrued obligation................. $(6,108,000) $(5,651,000)
=========== ===========
</TABLE>
F-15
<PAGE>
THE RELIABLE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net periodic postretirement benefits cost for 1996, 1995 and 1994 included
the following components:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- ----------
<S> <C> <C> <C>
Service cost............................... $480,000 $389,000 $ 577,000
Interest cost.............................. 357,000 347,000 462,000
Net amortization and deferral.............. (16,000) (33,000) 117,000
-------- -------- ----------
Total postretirement benefit cost...... $821,000 $703,000 $1,156,000
======== ======== ==========
</TABLE>
The annual assumed rate of increase in the per capita cost of covered
benefits is 9% in 1996. The rate is assumed to decrease gradually to 4.5% by
the year 2006 and remain at that level thereafter. Increasing the assumed
health care cost trend rates by one percentage point in each year would
increase the accumulated postretirement benefits obligation as of December 31,
1996 by $552,000 and increase the aggregate service and interest cost
components of net periodic postretirement benefits cost for 1996 by $111,000.
The weighted average discount rate used in determining the accumulated
postretirement benefits obligation was 7.25% in 1996 and 7% in 1995.
8. FEDERAL INCOME TAXES:
Reliable and its subsidiaries file a consolidated federal income tax return.
Reliable's federal income tax returns have been examined by the Internal
Revenue Service (IRS) through 1990.
The following table accounts for the differences between the actual tax
provision and the amounts obtained by applying the statutory U.S. federal
income tax rate to income before income taxes:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------- ---------------------- ----------------------
INCOME EFFECTIVE INCOME EFFECTIVE INCOME EFFECTIVE
TAXES TAX RATE TAXES TAX RATE TAXES TAX RATE
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Income taxes calculated
at statutory tax rates. $ 6,479,071 35.0% $ 6,718,007 35.0% $ 5,853,254 35.0%
Effects of differences
in tax reporting:
Dividends received
deduction and tax
exempt interest...... (1,141,508) (6.2) (1,196,330) (6.2) (1,666,193) (10.0)
Special life insurance
deductions........... (35,854) (0.2) -- -- (9,891) --
Other................. 44,696 0.3 54,152 0.3 121,154 0.7
Revision of prior
years' tax estimates. (32,874) (0.2) 28,943 0.1 (17,311) (0.1)
Effect of graduated
tax rates and
environmental tax.... (50,699) (0.3) (17,994) (0.1) (3,530) --
----------- ---- ----------- ---- ----------- -----
Provision for income
taxes.............. $ 5,262,832 28.4% $ 5,586,778 29.1% $ 4,277,483 25.6%
=========== ==== =========== ==== =========== =====
</TABLE>
F-16
<PAGE>
THE RELIABLE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of the net deferred tax liability at December 31, 1996, were
as follows:
<TABLE>
<CAPTION>
DEFERRED
DEFERRED TAX
TAX ASSETS LIABILITIES
---------- -----------
<S> <C> <C>
Investments........................................ $ 2,651,874
Accounts and premiums receivable................... 305,741
Deferred policy acquisition costs.................. 17,831,991
Present value of future profits.................... 9,233,333
Prepaid pension cost............................... 659,467
Reinsurance recoverable............................ 215,836
Prepaid reinsurance premiums....................... 44,426
Future policy benefits............................. $4,534,265
Unpaid policy claims............................... 192,224
Unearned premiums and other policy liabilities..... 705,314
Accrued expenses and other liabilities............. 2,779,843
---------- -----------
Totals........................................... $8,211,646 $30,942,668
---------- -----------
Net deferred federal income taxes.............. $22,731,022
===========
</TABLE>
The components of the net deferred tax liability at December 31, 1995, were
as follows:
<TABLE>
<CAPTION>
DEFERRED
DEFERRED TAX
TAX ASSETS LIABILITIES
---------- -----------
<S> <C> <C>
Investments........................................ $ 5,406,462
Accounts and premiums receivable................... 357,650
Deferred policy acquisition costs.................. 16,499,275
Present value of future profits.................... 10,265,903
Prepaid pension cost............................... 1,066,108
Reinsurance recoverable............................ 416,263
Prepaid reinsurance premiums....................... 90,045
Future policy benefits............................. $3,974,565
Unpaid policy claims............................... 319,996
Unearned premiums and other policy liabilities..... 714,205
Accrued expenses and other liabilities............. 2,885,563
---------- -----------
Totals........................................... $7,894,329 $34,101,706
---------- -----------
Net deferred federal income taxes.............. $26,207,377
===========
</TABLE>
The Life Insurance Company Income Tax Act of 1959 provided for a
"Policyholders' Surplus Account" under which certain items of income included
in the account were not subject to current federal income taxes. No deferred
tax liability has been recognized on the Policyholders' Surplus Account
balance. Beginning in 1984 additions to this account were no longer allowable.
Any direct or indirect shareholder distribution in excess of the
"Shareholders' Surplus Account" or certain other events would trigger the
effect of the tax. The balance of the Policyholders' Surplus Account at
December 31, 1996 is approximately $32,500,000. The related unrecognized
deferred tax liability would be approximately $11,375,000. The Company does
not anticipate that any events will occur which would cause this amount to
become taxable.
F-17
<PAGE>
THE RELIABLE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. TRANSACTIONS WITH RELATED COMPANIES:
Substantially all of the home service agents of the Company sell insurance
policies for the Company and for Capitol County Mutual Fire Insurance Company
or its subsidiary (together herein called "Capitol"). In addition, certain
officers of Capitol also serve in similar capacities with Reliable or its
subsidiaries.
For the service of processing the policies and providing the related
accounting and claims services required, the Company furnishes Capitol
necessary personnel, data processing services, and investment portfolio
management and charges Capitol a fee. For the years ended December 31, 1996,
1995 and 1994, the fees aggregated $9,698,276, $9,096,366 and $9,991,848,
respectively.
Clayton Reinsurance, Ltd. (Clayton Re), a wholly-owned subsidiary of
Reliable, issues catastrophic coverage to Capitol. Catastrophic premiums paid
to Clayton Re were $289,755, $1,213,712 and $731,000 for 1996, 1995 and 1994,
respectively. During 1995, Clayton Re paid Capitol $2,925,000 for catastrophic
losses. Related loss reserves established by Clayton Re were approximately
$791,000 and $531,000 at December 31, 1996 and 1995, respectively.
10. COMMITMENT AND CONTINGENCIES:
At December 31, 1996, the Company was committed or contingently liable with
respect to the following:
A. The Company is party to a number of lawsuits arising in the normal
course of business. While the results of litigation cannot be predicted
with certainty, management, based upon advice of Company's counsel,
believes that the final outcome of such litigation will not have a material
adverse effect on the consolidated financial position, results of
operations or cash flows of the Company.
B. The Company leases district offices, equipment and software under
noncancelable operating leases which expire at various dates through 2001.
At December 31, 1996, the leases require the following minimum annual
rentals:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31
-----------
<S> <C>
1997.......................................................... $ 628,272
1998.......................................................... 457,183
1999.......................................................... 282,959
2000.......................................................... 172,315
2001.......................................................... 61,801
----------
Total remaining annual rentals.............................. $1,602,530
==========
</TABLE>
Total rental expense for all operating leases was $753,363, $777,925 and
$839,172 for the years ended December 31, 1996, 1995 and 1994,
respectively.
The Company has renewal options ranging from 1 to 5 years on several of
the district offices at essentially the same terms as the leases currently
in effect.
C. The Company participates in certain state guaranty associations which
provide certain protection to policyholders of insolvent insurers doing
business in those states. Due to insolvencies of certain insurers, the
Company may be assessed additional amounts by the state guaranty
associations. Management does not expect such assessments to have a
material effect on the consolidated financial position, results of
operations or cash flows of the Company.
F-18
<PAGE>
THE RELIABLE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. STATUTORY DISCLOSURES:
Reliable and its insurance subsidiaries are subject to regulation based, in
part, on accounting methods prescribed by regulatory authorities.
On an unconsolidated basis, Reliable's statutory assets were $509,011,561
and $488,586,323 at December 31, 1996 and 1995, respectively, and its
statutory capital and surplus was $60,754,174 and $56,572,284 at those dates,
respectively. On an unconsolidated basis, Reliable's statutory net income was
$10,822,293, $9,821,710 and $9,942,555 for the years ended December 31, 1996,
1995 and 1994, respectively.
On an unconsolidated basis, statutory net income (loss) of Reliable's
insurance subsidiaries for the years ended December 31, 1996, 1995 and 1994,
aggregated $480,707, ($671,227) and $545,838, respectively. Statutory capital
and surplus of Reliable's insurance subsidiaries at December 31, 1996 and 1995
was $9,374,666 and $8,811,757, respectively.
Statutory regulations restrict annual stockholder dividends, without
regulatory approval, to the higher of gain from operations or a stipulated
percentage of statutory net worth. Under these regulations, the amount of cash
dividends the Company would be permitted to pay in 1997, without such
approval, is approximately $11,622,000.
12. LINE OF CREDIT:
The Company has established a line of credit for $15,000,000 with Mercantile
Bank, N.A., St. Louis. There were no draws on the line of credit as of
December 31, 1996 or 1995.
13. ACQUISITIONS OF INSURANCE IN FORCE:
On March 14, 1994, the Company acquired a block of home service insurance in
force in an assumption reinsurance transaction. The acquisition is recorded in
the 1994 consolidated financial statements as follows:
<TABLE>
<S> <C>
Present value of future profits.............................. $ (518,032)
Policy loans................................................. (243,815)
Future policy benefits....................................... 3,376,488
Other, net................................................... 439
----------
Cash received.............................................. $2,615,080
==========
</TABLE>
14. SUBSEQUENT EVENTS:
On January 23, 1997, the Company purchased from several stockholders 42,085
shares of its Class A common stock and 428,500 shares of its Class B common
stock for $6.4 million.
On January 27, 1997, the Company agreed to reinsure a block of home service
life and accident and health business for approximately $15 million from
United Insurance Company of America, a subsidiary of Unitrin, Inc.
("Unitrin"), subject to certain regulatory requirements, which were met on
February 4, 1997. The reinsurance agreement is retroactive to January 1, 1997.
The business, which involves annual premium in force of $11 million, is
located in Arkansas and Missouri, with small amounts in adjoining areas of
some neighboring states. The Company has also hired the sales force which
serviced the business, and expects to add about 130 permanent employees.
As a result of the transactions described above, the Company issued on March
31, 1997 a $10 million, thirty-year surplus note to an unaffiliated local
lender. The note was approved by the Missouri Department of Insurance.
F-19
<PAGE>
THE RELIABLE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On June 20, 1997, the Company entered into a definitive agreement providing
for the acquisition of the Company by Unitrin. Shareholders of the Company's
Class A common stock will be entitled to convert each share to 2.235 shares of
Unitrin common stock or, at the shareholders election, $119 in cash, provided
that no less than 81% of the Company's Class A common stock will be converted
into Unitrin common stock. The agreement provides that all outstanding Class B
common shares will be converted into Class A shares prior to closing. The
transaction is intended to be a tax-free reorganization and is subject to
approvals by certain insurance and other regulatory authorities, the Company's
shareholders and other customary closing conditions.
F-20
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
AMONG
UNITRIN, INC.,
UNITRIN ACQUISITION CORPORATION
AND
THE RELIABLE LIFE INSURANCE COMPANY
AS OF JUNE 20, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
ARTICLE I
THE MERGER
<TABLE>
<C> <S> <C>
1.1 The Merger.......................................................... A-1
1.2 Effective Time...................................................... A-1
1.3 Effects of the Merger............................................... A-2
1.4 Articles of Incorporation........................................... A-2
1.5 By-Laws............................................................. A-2
1.6 Directors and Officers.............................................. A-2
1.7 Conversion of Company B Stock....................................... A-2
1.8 Conversion of Shares................................................ A-2
1.9 Election Procedures................................................. A-3
1.10 Allocation Procedures............................................... A-3
1.11 Designation of Exchange Agent....................................... A-4
1.12 Transmittal Materials; Surrender of Shares.......................... A-4
1.13 Termination of Exchange Agent's Duties.............................. A-5
1.14 Issuance, Voting and Dividends...................................... A-5
1.15 Dissenting Reliable Shares.......................................... A-5
1.16 Adjustments......................................................... A-6
1.17 Fractional Shares................................................... A-6
1.18 Closing of Company's Transfer Books................................. A-6
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
2.1 Organization, Standing and Qualification of Company................. A-6
2.2 Company Subsidiaries................................................ A-6
2.3 Capital Stock....................................................... A-7
2.4 Authorization....................................................... A-7
2.5 Articles of Incorporation and By-laws............................... A-7
2.6 Consents and Approvals.............................................. A-8
2.7 Defaults and Conflicts.............................................. A-8
2.8 GAAP Financial Statements........................................... A-8
2.9 Statutory Financial Statements...................................... A-8
2.10 Changes Since December 31, 1996..................................... A-9
2.11 Real Estate and Mortgages........................................... A-9
2.12 Title to Property................................................... A-9
2.13 Investment Securities............................................... A-10
2.14 Environmental Laws.................................................. A-10
2.15 Proprietary Rights.................................................. A-11
2.16 [Intention.......................................................... A-11
2.17 Agreements.......................................................... A-11
2.18 Litigation.......................................................... A-11
2.19 Compliance with Laws................................................ A-12
2.20 Taxes............................................................... A-12
2.21 Related Party Transactions.......................................... A-13
2.22 Employee Benefit Plans.............................................. A-13
2.23 Insurance Protection................................................ A-14
</TABLE>
i
<PAGE>
<TABLE>
<C> <S> <C>
2.24 Insurance Business.................................................. A-14
2.24.1 Policies and Rates........................................... A-14
2.24.2 Producers.................................................... A-14
2.24.3 Assessments.................................................. A-14
2.24.4 Regulatory Matters........................................... A-14
2.25 Regulatory Filings and Reports...................................... A-15
2.26 Agents.............................................................. A-15
2.27 Reserves and Reinsurance............................................ A-15
2.28 Information in Proxy Statement...................................... A-15
2.29 Information in Registration Statement............................... A-16
2.30 Other Filings....................................................... A-16
2.31 Third Party Discussions............................................. A-16
2.32 Disclosure.......................................................... A-16
2.33 Fairness Opinion.................................................... A-16
2.34 Finder and Investment Bankers....................................... A-16
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF UNITRIN
3.1 Organization of Unitrin and Acquisition Sub......................... A-16
3.2 Capital Stock....................................................... A-17
3.3 Authorization....................................................... A-17
3.4 Consents and Approvals.............................................. A-17
3.5 Defaults and Conflicts.............................................. A-17
3.6 SEC Reports; Financial Statements................................... A-17
3.7 Changes Since March 31, 1997........................................ A-18
3.8 Registration Statement.............................................. A-18
3.9 Information in Proxy Statement...................................... A-18
3.10 Litigation.......................................................... A-18
3.11 Compliance with Laws................................................ A-18
3.12 Disclosure.......................................................... A-19
3.13 Unitrin Rights Plan................................................. A-19
ARTICLE IV
RIGHT TO INVESTIGATE
ARTICLE V
COVENANTS OF THE COMPANY
5.1 Conduct of Business Pending the Merger.............................. A-19
5.2 Consents............................................................ A-20
5.3 Notice.............................................................. A-21
5.4 Shareholder Meeting................................................. A-21
5.5 Conversion of Company B Stock....................................... A-21
5.6 No Solicitation of Acquisition Proposals............................ A-21
5.7 Affiliates.......................................................... A-21
5.8 Phantom Stock Plan.................................................. A-22
</TABLE>
ii
<PAGE>
<TABLE>
<C> <S> <C>
5.9 Cooperation......................................................... A-22
5.10 Comfort Letters..................................................... A-22
5.11 Conditions Precedent................................................ A-22
ARTICLE VI
COVENANTS OF UNITRIN
6.1 Consents............................................................ A-22
6.2 Cooperation......................................................... A-22
6.3 Conditions Precedent................................................ A-22
6.4 Director and Officer Liability...................................... A-22
6.5 Registration Statement.............................................. A-23
6.6 Inclusion on Nasdaq................................................. A-23
6.7 Notice.............................................................. A-23
6.8 Comfort Letters..................................................... A-23
ARTICLE VII
CLOSING AND CLOSING DOCUMENTS
7.1 Closing............................................................. A-23
7.2 Company Closing Documents........................................... A-23
7.3 Unitrin Closing Documents........................................... A-24
ARTICLE VIII
CONDITIONS TO THE OBLIGATIONS OF UNITRIN
8.1 Validity of Representation and Warranties........................... A-24
8.2 Performance of Obligations.......................................... A-24
8.3 Consents............................................................ A-24
8.4 Material Adverse Change............................................. A-24
8.5 Company Closing Documents........................................... A-24
8.6 Approval of Company Shareholders.................................... A-24
8.7 Resignations........................................................ A-25
8.8 Affiliates.......................................................... A-25
8.9 Licenses............................................................ A-25
8.10 Private Placement Securities........................................ A-25
ARTICLE IX
CONDITIONS TO THE OBLIGATIONS OF THE COMPANY
9.1 Validity of Representations and Warranties.......................... A-25
9.2 Performance of Obligations.......................................... A-25
9.3 Tax Opinion......................................................... A-25
9.4 Consents............................................................ A-25
9.5 Unitrin Closing Documents........................................... A-25
9.6 Material Adverse Change............................................. A-26
</TABLE>
iii
<PAGE>
<TABLE>
<C> <S> <C>
9.7 Fairness Opinion.................................................... A-26
9.8 Inclusion on Nasdaq................................................. A-26
9.9 No Change of Control................................................ A-26
ARTICLE X
CONDITIONS APPLICABLE TO UNITRIN AND THE COMPANY
10.1 Hart-Scott-Rodino Act............................................... A-26
10.2 Governmental Approvals.............................................. A-26
10.3 Injunction.......................................................... A-26
10.4 Shareholder Approval................................................ A-26
10.5 Conversion of Company B Stock....................................... A-26
10.6 Registration Statement; Blue Sky.................................... A-26
10.7 Dissenting Reliable Shares.......................................... A-27
10.8 Effective Time...................................................... A-27
ARTICLE XI
TERMINATION AND TERMINATION FEE
11.1 Termination......................................................... A-27
11.2 Termination Fee..................................................... A-27
11.3 Survival of Rights.................................................. A-27
ARTICLE XII
SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS
ARTICLE XIII
MISCELLANEOUS
13.1 Payment of Expenses................................................. A-28
13.2 Entire Agreement.................................................... A-28
13.3 Modifications, Amendments and Waivers............................... A-28
13.4 Assignment; Governing Law........................................... A-28
13.5 Schedules........................................................... A-28
13.6 Press Releases...................................................... A-28
13.7 Notices............................................................. A-28
</TABLE>
iv
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION, dated as of June 20, 1997 (the
"Agreement"), by and among The Reliable Life Insurance Company, a Missouri
life insurance company (the "Company"), Unitrin Acquisition Corporation, a
Missouri corporation ("Acquisition Sub"), said two corporations referred to
herein as the "Constituent Corporations", and Unitrin, Inc., a Delaware
corporation ("Unitrin").
The authorized common stock of the Company consists of 6,000,000 shares of
Class A Common Stock, $1.00 par value ("Company A Stock"), of which 1,111,845
are outstanding as of the date hereof, and 15,000,000 shares of Class B Common
Stock, $1.00 par value ("Company B Stock"), of which 5,705,580 shares are
outstanding as of the date hereof (Company B Stock and Company A Stock are
hereinafter collectively referred to as "Company Common Stock");
The authorized common stock of Unitrin consists of 100,000,000 shares of
common stock, par value $.10 per share ("Unitrin Common Stock"), of which
37,335,245 shares were outstanding as of March 31, 1997;
The authorized capital stock of Acquisition Sub consists of 1,000 shares of
Common Stock, par value $1.00 per share, all of which shares are issued and
outstanding and are owned by Unitrin;
The respective Boards of Directors of the Company, Unitrin and Acquisition
Sub deem the merger provided for herein (the "Merger") desirable and in the
best interests of their respective shareholders;
It is the intent of the parties that the merger and reorganization provided
for herein shall be pursuant to the applicable laws of the State of Missouri
and shall qualify as a reorganization as defined in Sections 368(a)(1)(A) and
368(a)(2)(E) of the Internal Revenue Code of 1986, as amended (the "Code");
and
The respective Boards of Directors of the Company, Unitrin and Acquisition
Sub have duly adopted resolutions approving the Agreement, and the Board of
Directors of the Company has directed that the Agreement be submitted for
approval by the Company's shareholders.
In consideration of the premises and the respective representations,
warranties, covenants and agreements set forth herein, the parties hereto
agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. Subject to the receipt of all regulatory approvals listed on
the Company Consent Schedule and the Unitrin Consent Schedule (as each term is
defined below) and in accordance with the provisions of this Agreement, the
Amended and Restated Articles of Incorporation of the Company (the "Company
Articles") and Chapters 351 and 382 of the Revised Statutes of Missouri (the
"Missouri Laws"), at the Effective Time (as herein defined), Acquisition Sub
shall be merged with and into the Company and the separate existence of
Acquisition Sub shall thereupon cease, and the Company shall be the surviving
corporation in the Merger (the "Surviving Corporation").
1.2 Effective Time. The Merger shall become effective upon the issuance of a
Certificate of Merger by the Secretary of State of Missouri after properly
executed Articles of Merger have been filed with the Secretary of State of
Missouri, which filing shall be made upon the closing of the transactions
contemplated by this Agreement in accordance with Article VII hereof. As used
herein, the term "Effective Time" shall mean the date and time at which such
Certificate of Merger is so issued.
<PAGE>
1.3 Effects of the Merger. At the Effective Time the Surviving Corporation
shall possess all the rights, privileges, immunities and franchises, of a
public as well as of a private nature, of both of the Constituent
Corporations; and all property, real, personal and mixed, and all debts due on
whatever account; including subscriptions to shares, and all other choses in
action, and all and every other interest, of or belonging to or due to either
of the Constituent Corporations, shall be taken and deemed to be transferred
to and vested in the Surviving Corporation without further act or deed; and
the title to any real estate, or any interest therein, under the laws of
Missouri vested in either of the Constituent Corporations shall not revert or
be impaired in any way by reason of the Merger. After the Effective Time, the
Surviving Corporation shall be responsible and liable for all the liabilities
and obligations of each of the Constituent Corporations; and any claim
existing or action or proceeding pending by or against any of such
corporations may be prosecuted to judgment as if the Merger had not taken
place, or the Surviving Corporation may be substituted in its place. Neither
the rights of creditors nor any liens upon the property of either of the
Constituent Corporations shall be impaired by the Merger.
1.4 Articles of Incorporation. The Articles of Incorporation of the Company
in effect at the time of the Merger shall be the Articles of Incorporation of
the Surviving Corporation until amended in accordance with applicable law.
1.5 By-Laws. The By-Laws of Acquisition Sub in effect at the time of the
Merger shall be the By-Laws of the Surviving Corporation until amended in
accordance with applicable law.
1.6 Directors and Officers. The directors of the Surviving Corporation at
the Effective Time shall be individuals designated by Unitrin to serve, in
each case, until their successors shall have been elected and shall qualify.
The officers of the Company immediately prior to the Effective Time shall be
the officers of the Surviving Corporation at the Effective Time. If at the
Effective Time a vacancy shall exist on the Board of Directors or in any of
the offices of the Surviving Corporation, such vacancy may thereafter be
filled in the manner provided by the By-Laws of the Surviving Corporation.
1.7 Conversion of Company B Stock. Subject to approval by a majority of the
holders of Company B Stock, immediately prior to the Effective Time each
issued and outstanding share of Company B Stock shall be converted into one-
tenth ( 1/10) of a share of Company A Stock in accordance with the provisions
of the Company's Articles of Incorporation and applicable law (the shares of
Company A Stock, including those shares of Company A Stock issued upon
conversion of the Company B Stock, are referred to hereinafter collectively as
the "Shares" and individually as a "Share"). No fractional shares of Company A
Stock shall be issued upon such conversion. In lieu of any fractional share of
Company A Stock that a holder of Company B Stock would otherwise be entitled
to receive as a result of such conversion, such holder shall be entitled to
receive from the Company, upon surrender of stock certificates for exchange
pursuant to the Merger as provided in this Article I, an amount in cash
determined by multiplying the fraction of a share of Company A Stock to which
such holder would otherwise have been entitled by $119.00. No interest shall
be paid with respect to such cash payment. Upon conversion of the Company B
Stock to Company A Stock, certificates representing outstanding shares of
Company B Stock shall thereafter be deemed to represent the number of shares
of Company A Stock into which such shares of Company B Stock have been
converted.
1.8 Conversion of Shares. At the Effective Time, by virtue of the Merger and
without any action on the part of any of the parties hereto or any shareholder
of the Constituent Corporations:
(i) each Share held by the Company as treasury stock or owned by Unitrin
or any subsidiary of Unitrin immediately prior to the Effective Time shall
be canceled, retired, and shall be deemed to be authorized but unissued
shares of the Company, and no payment shall be made with respect thereto;
(ii) all shares of common stock of Acquisition Sub issued and outstanding
at the Effective Time shall be converted into and exchanged for 4,000,000
shares of Class A common stock of the Surviving Corporation which shall
constitute all the outstanding shares of capital stock of the Surviving
Corporation; and
A-2
<PAGE>
(iii) each Share which is issued and outstanding immediately prior to the
Effective Time, except as otherwise provided in Section 1.8(i) above and
other than Dissenting Reliable Shares (as defined below), shall be
converted into the right to receive, subject to the election and allocation
procedures set forth in Sections 1.9 and 1.10 below, either (i) $119.00 in
cash without interest (the "Per Share Cash Amount"), or (ii) 2.235 shares
of Unitrin Common Stock (the "Per Share Stock Amount", which, together with
the Per Share Cash Amount, is hereinafter referred to as the "Merger
Consideration"), together with the associated preferred share purchase
rights issued under the Rights Agreement between Unitrin and First Chicago
Trust Company of New York, as Rights Agent, dated as of August 3, 1994 (the
"Unitrin Rights Agreement").
1.9 Election Procedures. Unitrin and the Company shall prepare a form (the
"Election Form") pursuant to which each record holder of Shares may elect in
accordance with the provisions of this Section 1.9 (hereinafter called an
"Election"), and subject to the allocation provisions of Section 1.10, to
receive for each Share owned by such holder (i) the Per Share Cash Amount (a
"Cash Election") or (ii) the Per Share Stock Amount (a "Stock Election"). A
holder of shares of Company B Stock shall be entitled to make Elections, with
respect to the number of shares of Company B Stock owned by such holder, for
the number of Shares equal to the number of shares of Company A Stock into
which such shares of Company B Stock are to be converted as provided in
Section 1.7 above. The Company shall mail the Election Form to each of its
shareholders of record as of the record date for the Company Shareholder
Meeting (as defined in Section 2.4 herein). A shareholder's Election shall
have been properly made only if the Exchange Agent (as defined in Section 1.11
below) shall have received, by 5:00 p.m., Central Time, on the date of the
Company Shareholders' Meeting (the "Election Date"), an Election Form properly
completed and signed. Any shareholder of the Company who fails to properly
make the required election shall be deemed to have made a Stock Election with
respect to all Shares (other than Dissenting Reliable Shares) owned by such
holder. Dissenting Reliable Shares shall not be converted into the Merger
Consideration and shall be treated as provided in Section 1.15 below.
Any shareholder may at any time prior to the Election Date change his
Election by written notice received by the Exchange Agent at or prior to the
Election Date accompanied by a properly completed, later dated Election Form.
Any shareholder may at any time prior to the Election Date revoke his Election
by written notice received by the Exchange Agent at or prior to the Election
Date. Any Election relating to Shares which become Dissenting Reliable Shares
shall be deemed automatically revoked as of the Election Date. Any Election
that has been revoked and not otherwise replaced by a later dated Election
Form prior to the Election Date (other than an Election relating to Shares
which become Reliable Dissenting Shares) shall be deemed to be a Stock
Election. Any such revoked Election, together with all other Elections that
are deemed to be Stock Elections as provided in the penultimate sentence in
the immediately preceding paragraph, are hereinafter referred to as "Default
Stock Elections."
Unitrin will have the reasonable discretion, which it may delegate in whole
or in part to the Exchange Agent, (i) to determine whether any Election Form
has been properly completed, signed and submitted or revoked and (ii) to
disregard immaterial defects in any Election Form. The decision of Unitrin (or
the Exchange Agent) in such matters shall be conclusive and binding. Neither
Unitrin nor the Exchange Agent will be under any obligation to notify any
person of any defect in an Election Form submitted to the Exchange Agent. The
Exchange Agent shall also make all computations under the allocation
procedures described below to determine any allocation of the Merger
Consideration under this Agreement and all such computations shall be
conclusive and binding on the Company and its shareholders.
1.10 Allocation Procedures. If the number of Shares covered by Stock
Elections and Default Stock Elections is equal to or greater than 81% of the
number of Shares outstanding immediately prior to the Merger (after giving
effect to the conversion of the Company B Stock as provided in Section 1.7
above and before payment in cash for any fractional shares in connection
therewith), then all Shares covered by Stock Elections and Default Stock
Elections shall be converted into the right to receive shares of Unitrin
Common Stock, and all Shares covered by Cash Elections shall be converted into
the right to receive cash.
A-3
<PAGE>
If the number of Shares covered by Stock Elections and Default Stock
Elections is less than 81% of the number of Shares outstanding immediately
prior to the Effective Time (after giving effect to the conversion of the
Company B Stock as provided in Section 1.7 above and before payment in cash
for any fractional shares in connection therewith), then all Shares covered by
Stock Elections and Default Stock Elections shall be converted into the right
to receive shares of Unitrin Common Stock, and the Shares covered by Cash
Elections shall be allocated by the Exchange Agent for conversion into the
right to receive either cash or Unitrin Common Stock in the following manner:
the Exchange Agent shall select by lot (or by such other method as is deemed
reasonable by Unitrin and the Company) from among such Shares a sufficient
number of Shares to be converted into the right to receive Unitrin Common
Stock so that the number of Shares so selected, together with the Shares
already covered by Stock Elections and Default Stock Elections, are sufficient
to cause the total number of Shares to be converted into the right to receive
Unitrin Common Stock to be equal to or greater than 81% of the number of
Shares outstanding immediately prior to the Effective Time (after giving
effect to the conversion of the Company B Stock as provided in Section 1.7
above and before payment in cash for any fractional shares in connection
therewith); any such Shares not so selected by the Exchange Agent shall be
converted into the right to receive cash.
After giving effect to the foregoing allocations, if the payment of cash in
lieu of fractional shares of Unitrin Common Stock pursuant to Section 1.17
would result in fewer than 81% of the number of Shares outstanding immediately
prior to the Effective Time being converted into whole shares of Unitrin
Common Stock, then the Exchange Agent shall select by lot (or such other
method as is deemed reasonable by Unitrin and the Company) additional Shares
covered by Cash Elections for conversion into the right to receive Unitrin
Common Stock in order to ensure that not less than 81% of the number of Shares
outstanding immediately prior to the Effective Time is converted into whole
shares of Unitrin Common Stock.
1.11 Designation of Exchange Agent. Not more than three business days
following the Effective Time, Unitrin shall make available to First Chicago
Trust Company of New York as exchange agent (the "Exchange Agent") (i) the
number of shares of Unitrin Common Stock issuable in respect of Shares that
have been converted into the right to receive the Per Share Stock Amount and
(ii) an amount in cash equal to the sum of (A) the amount of cash payable in
respect of Shares that have been converted into the right to receive the Per
Share Cash Amount and (B) the amount of cash payable in respect of fractional
Shares as provided in Sections 1.7 and 1.17 hereof. The Exchange Agent shall
not be entitled to vote or exercise any rights of ownership with respect to
Unitrin Common 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 for the account of the persons
entitled thereto.
1.12 Transmittal Materials; Surrender of Shares. As promptly as practicable
following the Effective Time, Unitrin shall cause the Exchange Agent to mail
appropriate and customary transmittal materials (which shall specify that
delivery shall be effected, and risk of loss and title to the certificates
theretofore representing Shares shall pass, only upon proper delivery of such
certificates to the Exchange Agent) to the former holders of Shares for use in
surrendering their certificate or certificates in exchange for the Merger
Consideration. Each holder of a certificate formerly representing Shares who
surrenders or has surrendered such certificate (or customary affidavits and
indemnification regarding the loss or destruction of such certificate),
together with duly executed transmittal materials, to the Exchange Agent
shall, upon acceptance thereof, be entitled to a certificate representing the
Unitrin Common Stock or cash into which the Shares shall have been converted
pursuant hereto. Each certificate which represented Shares immediately prior
to the Effective Time (other than Dissenting Reliable Shares) shall be deemed
canceled at the Effective Time and shall represent only the right to receive
the Merger Consideration for each Share represented by such certificate. In no
event shall the holder of any such surrendered certificates be entitled to
receive interest on the Per Share Cash Amount to be received in the Merger.
To the extent provided by Section 1.17 of this Agreement, each holder of
Shares also shall receive, upon surrender of the certificate or certificates
representing such Shares, cash in lieu of any fractional shares of Unitrin
Common Stock to which such holder would otherwise be entitled. Unitrin shall
not be obligated to deliver the consideration to which any former holder of
Shares is entitled as a result of the Merger until such holder surrenders the
certificate or certificates representing such Shares for exchange as provided
in this Section
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1.12. In addition, certificates surrendered for exchange by any person
identified on the letter delivered by the Company to Unitrin pursuant to
Section 5.7 hereof shall not be exchanged for certificates representing whole
shares of Unitrin Common Stock until Unitrin has received a written agreement
from such person as provided in Section 5.7.
1.13 Termination of Exchange Agent's Duties. Promptly following the date
which is one hundred and eighty days after the Effective Time, the Exchange
Agent shall deliver to Unitrin all cash and other documents in its possession
relating to the transactions described in this Agreement, and the Exchange
Agent's duties shall terminate. Thereafter, each holder of a certificate
formerly representing Shares who has not previously surrendered such
certificate may surrender such certificate to Unitrin and (subject to
applicable abandoned property, escheat and similar laws and Sections 1.09 and
1.10 hereof) receive in exchange therefor the Merger Consideration.
Notwithstanding anything in this Agreement to the contrary, neither Unitrin,
Acquisition Sub, the Surviving Corporation nor the Exchange Agent shall be
liable to a holder of Shares, for Unitrin Common Stock, dividends or
distributions thereon, the Cash Amount Per Share, or cash in lieu of
fractional Shares, delivered to a public official pursuant to applicable
escheat laws.
1.14 Issuance, Voting and Dividends. The shares of Unitrin Common Stock
constituting the Merger Consideration shall be deemed to have been issued at
the Effective Time. No holder of any unsurrendered certificates representing
Shares shall have the right to vote the Unitrin Common Stock receivable in
exchange for such certificates until such certificates are surrendered as
provided in Sections 1.12 and 1.13. Following such surrender, such holder
shall have the right to vote the Unitrin Common Stock at any meeting the
record date of which is after the date of such surrender. No dividends or
other distributions with respect to the Unitrin Common Stock constituting part
of the Merger Consideration shall be paid to the holder of any unsurrendered
certificates representing Shares until such certificates are surrendered as
provided in Sections 1.12 and 1.13. Upon such surrender, there shall be paid,
without interest, to the person in whose name the certificates representing
the shares of Unitrin Common Stock into which such Shares were converted are
registered, all dividends and other distributions payable in respect of such
shares of Unitrin Common Stock on a date subsequent to, and in respect of a
record date after, the Effective Time and prior to such surrender. Such holder
shall be also entitled to receive, on the payment date therefor, any dividend
or distribution the record date for which occurs prior to such surrender and
the payment date for which occurs following such surrender. In no event shall
any holder be entitled to receive interest on the Cash Amount Per Share to be
received in the Merger.
1.15 Dissenting Reliable Shares. Each outstanding share of Company Common
Stock for which written notice of intent to demand payment therefor is
delivered in accordance with Article XIV of the Company Articles and is not
voted in favor of the Merger shall not be converted into or represent a right
to receive the Merger Consideration hereunder unless and until the holder
thereof shall have failed to perfect or shall have withdrawn or otherwise lost
his right to demand payment under Article XIV of the Company Articles, at
which time his shares shall be converted into the right to receive the Merger
Consideration in the same manner and subject to the same conditions as
provided for other outstanding Shares in this Article I. All such Shares for
which such a written notice of intent to demand payment is so delivered and
which are not voted in favor of the Merger, and for which a demand for payment
is perfected in accordance with Article XIV of the Company Articles and not
withdrawn or waived, are herein called "Dissenting Reliable Shares." The
Company shall give Unitrin and Acquisition Sub prompt notice upon receipt by
the Company of any such written notice of intent to demand payment for Shares.
The Company agrees that prior to the Effective Time it will not, except with
the prior written consent of Unitrin, voluntarily make any payment with
respect to, or settle or offer to settle, any such demand for payment. Each
holder of Shares who demands payment in accordance with Article XIV of the
Company Articles shall retain all other rights as a shareholder of the Company
until the Effective Time whereupon such shares shall be canceled and represent
only the right to receive the payment provided for under Article XIV of the
Company Articles. Each holder of Dissenting Reliable Shares who becomes
entitled, pursuant to Article XIV of the Company Articles, to receive payment
for the fair value of his shares shall receive payment therefor from the
Company as the Surviving Corporation (but only after the amount thereof shall
have been agreed upon or finally determined pursuant to such provisions).
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1.16 Adjustments. If at any time during the period between the date of this
Agreement and the Effective Time, any change in the outstanding shares of
capital stock of Unitrin shall occur by reason of any reclassification,
recapitalization, stock split or combination, exchange or readjustment of
shares, or any dividend (whether in cash, stock or other property) to
shareholders of Unitrin as to which the record date is before the Effective
Time (other than (i) Unitrin's regular quarterly dividends in an amount
consistent with prior practice, and (ii) the Unitrin Fourth Quarter Dividend
as described in Section 5.1(ii), regardless of amount), the Per Share Stock
Amount shall be appropriately adjusted.
1.17 Fractional Shares. No fractional shares of Unitrin Common Stock shall
be issued in the Merger. All fractional shares of Unitrin Common Stock that a
holder of Shares would otherwise be entitled to receive as a result of the
Merger shall be aggregated and if a fractional share results from such
aggregation, such holder shall be entitled to receive from Unitrin, in lieu
thereof, upon surrender of stock certificates for exchange pursuant to this
Article I, an amount in cash determined by multiplying $119.00 (subject to
appropriate adjustment by reason of an occurrence as cited in Section 1.16) by
the fraction of a share of Unitrin Common Stock to which such holder would
otherwise have been entitled. No interest shall be paid with respect to such
cash payment.
1.18 Closing of Company's Transfer Books. At the Effective Time, the stock
transfer records of the Company shall be closed and no transfer of Shares
shall thereafter be made or recognized.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Unitrin and Acquisition Sub as
follows:
2.1 Organization, Standing and Qualification of Company. The Company is an
insurance company duly organized, validly existing and in good standing under
the laws of the State of Missouri and has the corporate power to own or lease
its properties and to carry on its business as now being conducted. The
Company is duly qualified as a foreign corporation to do business, and is in
good standing, in each jurisdiction where the character of its properties
owned or held under lease or the nature of its activities makes such
qualification necessary, except where the failure to be so qualified would not
individually or in the aggregate have a material adverse effect on the
business, prospects, assets, liabilities, results of operations or financial
condition of the Company and the Company Subsidiaries (as hereinafter
defined), taken as a whole, or adversely affect the ability of the Company to
consummate the transactions contemplated by this Agreement in any material
respect (a "Company Material Adverse Effect"). The Company has all requisite
power and authority to carry on an insurance business pursuant to and to the
extent of the certificates of authority issued under the laws of the states
listed in Section 2.1 of a schedule delivered by the Company to Unitrin
concurrently with the execution of this Agreement (the "Company Disclosure
Schedule"). The Company Disclosure Schedule specifies the line or lines of
insurance which is permitted to be written with respect to each certificate of
authority listed. No certificate of authority identified on such Schedule has
been revoked, restricted, suspended, limited or modified nor is any
certificate of authority the subject of, nor to the knowledge of the Company
is there a basis for, a proceeding for revocation, restriction, suspension,
limitation or modification, nor is the Company operating under any formal or
informal agreement or understanding with the licensing authority of any state
which restricts its authority to do business or requires the Company to take,
or refrain from taking, any action. Except as set forth on such Schedule, the
Company has not issued any surplus notes or similar instruments.
2.2 Company Subsidiaries. Section 2.2 of the Company Disclosure Schedule
sets forth a list of all of the Company's subsidiaries (hereinafter separately
called a "Company Subsidiary" and collectively called the "Company
Subsidiaries"). Such Schedule sets forth the authorized capital stock, the
number of shares duly issued and outstanding, the number so owned by the
Company and the jurisdiction of incorporation of each Company Subsidiary. The
shares of capital stock of the Company Subsidiaries owned directly or
indirectly by the Company are validly issued, fully paid and non-assessable,
and are owned free and clear of any liens, claims,
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charges or encumbrances except as set forth on the Company Disclosure
Schedule. Except as set forth on such Schedule, neither the Company nor any of
the Company Subsidiaries has any investment in any subsidiary or any
investment in any partnership, joint venture, limited liability company or
similar entity, all of which investments are owned free and clear of any
liens, claims, charges or encumbrances except as set forth thereon. Each of
the Company Subsidiaries is a corporation duly organized, validly existing and
in good standing under the laws of the jurisdiction of its incorporation and
has the corporate power to own or lease its properties and carry on its
business as now being conducted. Each of the Company Subsidiaries is duly
qualified or otherwise authorized to transact business as a foreign
corporation and is in good standing in every jurisdiction in which such
qualification or authorization is required by law to carry on its business as
now being conducted, except where the failure to qualify or to be authorized
would not have a Company Material Adverse Effect. Each of the Company
Subsidiaries which is an insurance company as specified on the Company
Disclosure Schedule (hereinafter separately called an "Insurance Subsidiary"
and collectively called the "Insurance Subsidiaries"), has all requisite power
and authority to carry on an insurance business pursuant to and to the extent
of the certificates of authority issued under the laws of the states listed in
such Schedule. The Company Disclosure Schedule specifies the line or lines of
insurance which is permitted to be written with respect to each certificate of
authority listed. No certificate of authority identified on such Schedule has
been revoked, restricted, suspended, limited or modified nor is any
certificate of authority the subject of, nor to the knowledge of the Company
is there a basis for, a proceeding for revocation, restriction, suspension,
limitation or modification, nor is any Insurance Subsidiary operating under
any formal or informal agreement or understanding with the licensing authority
of any state which restricts its authority to do business or requires such
Insurance Subsidiary to take, or refrain from taking, any action. Except as
set forth on such Schedule, none of the Insurance Subsidiaries has issued any
surplus notes or similar instruments.
2.3 Capital Stock. The authorized capital stock of the Company consists of
3,000,000 shares of Voting Preferred Stock, $1.00 par value, none of which
have been issued, 3,000,000 shares of Nonvoting Preferred Stock, $1.00 par
value, none of which have been issued, 6,000,000 shares of Company A Stock, of
which 1,111,845 shares are issued and outstanding as of the date hereof, and
15,000,000 shares of Company B Stock, of which 5,705,580 shares are issued and
outstanding as of the date hereof. All of the issued and outstanding shares of
Company Common Stock have been validly issued and are fully paid and non-
assessable and free of preemptive rights. Except for shares specified above
and as reflected in Section 2.3 of the Company Disclosure Schedule, the
Company is not a party to any contract, understanding, restriction or
agreement, including any voting trust or other agreement or understanding with
respect to the voting of any of the capital stock of the Company or any
Company Subsidiary, or any convertible, exchangeable or exercisable security,
option, warrant, call, or commitment on the part of the Company or any Company
Subsidiary of any character relating to issued or unissued shares of the
capital stock of the Company or any Company Subsidiary.
2.4 Authorization. The Board of Directors of the Company has adopted
resolutions approving the Agreement and the transactions contemplated hereby,
including without limitation the conversion of the Company B Stock to Company
A Stock to be effective immediately preceding the Merger, and has authorized
the execution and delivery of the Agreement and has directed by resolution
that the Agreement be submitted to a vote of the shareholders of the Company
taken at a meeting called for the purpose of considering and acting upon this
Agreement (the "Company Shareholder Meeting"). The Company has full power and
authority to enter into this Agreement and, upon appropriate consent of its
shareholders in accordance with law, subject to obtaining all required
regulatory approvals, to consummate the transactions contemplated hereby. This
Agreement has been duly executed and delivered by the Company and constitutes
the valid and legally binding obligation of the Company, enforceable against
it in accordance with its terms, subject to bankruptcy, receivership,
insolvency, reorganization, moratorium or similar laws affecting or relating
to creditors rights generally and subject to general principles of equity.
Other than the approval by a majority of the holders of Company B Stock, in
accordance with the Company's Articles of Incorporation and applicable law, no
other action or authorization is required to effect such conversion of Company
B Stock to Company A Stock.
2.5 Articles of Incorporation and By-laws. The Company has delivered to
Unitrin true and complete copies of its and each of the Company Subsidiaries'
Articles of Incorporation and By-Laws as in effect as of the date
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hereof. Neither the Company nor any Company Subsidiary is or immediately prior
to the Effective Time will be in default under its Articles of Incorporation
or By-Laws.
2.6 Consents and Approvals. Except for the consents and approvals listed on
the schedule attached hereto (the "Company Consent Schedule"), no filing with,
and no permit, authorization, consent or approval of, any public body or
authority is necessary for the consummation by the Company of the transactions
contemplated by this Agreement.
2.7 Defaults and Conflicts. Subject to the receipt of all consents and
approvals contemplated by this Agreement, neither the execution and delivery
of this Agreement, the consummation of the transactions contemplated hereby or
the fulfillment of and compliance with the terms and provisions hereof, will
(i) violate any judicial, administrative or arbitral order, writ, award,
judgment, injunction or decree involving the Company or any of the Company
Subsidiaries, (ii) conflict with the terms, conditions or provisions of the
Articles of Incorporation or By-Laws of the Company or any Company Subsidiary,
(iii) conflict with, result in a breach of, constitute a default under or
accelerate or permit the acceleration of the performance required by, any
indenture or any agreement or other instrument to which the Company or any
Company Subsidiary is a party or by which the Company or any Company
Subsidiary is bound, including without limitation any agreement listed in
Section 2.17 of the Company Disclosure Schedule, (iv) result in the creation
of any lien, charge or encumbrance upon any of the assets of the Company or
any Company Subsidiary under any such agreement or instrument, or (v)
terminate or give any party thereto the right to terminate any such indenture,
agreement or instrument, other than, with respect to (iii), (iv) and (v)
above, any such conflict, lien or termination that would not result in a
Company Material Adverse Effect. Except as set forth in Section 2.7 of the
Company Disclosure Schedule, no consent of any third party to any indenture,
agreement or other instrument to which the Company or any Company Subsidiary
is a party is required in connection with the Merger, except for such consent
or consents that, if not obtained, would not result in a Company Material
Adverse Effect.
2.8 GAAP Financial Statements. The Company has delivered to Unitrin (i)
audited consolidated balance sheets of the Company and the Company
Subsidiaries as of December 31, 1992, 1993, 1994, 1995 and 1996, and the
related audited consolidated statements of income, cash flows and
stockholders' equity and the notes thereto for the years ended on each of
those dates, and (ii) an unaudited consolidated balance sheet of the Company
and the Company Subsidiaries as of March 31, 1997 and the related statements
of income, cash flows and stockholders' equity and any notes thereto for the
period then ended (hereinafter referred to as the "Company March 31, 1997
Financial Statements"). All such financial statements, together with the notes
thereto, present fairly, in all material respects, the consolidated financial
position of the Company and the Company Subsidiaries as of the dates thereof,
and its consolidated results of operations and cash flows for the periods then
ended, in conformity with generally accepted accounting principles ("GAAP")
applied on a basis consistent with prior periods (except as may be indicated
therein or in the notes thereto, and, in the case of any unaudited interim
financial statements, subject to (i) normal year-end adjustments and (ii)
standard limitations on the application of GAAP), provided that financial
statements for Clayton Reinsurance Ltd. (Bermuda) are prepared in accordance
with Canadian generally accepted accounting principles.
Except as and to the extent reflected in the Company March 31, 1997
Financial Statements or in Section 2.8 of the Company Disclosure Schedule,
neither the Company nor any Company Subsidiary had as of March 31, 1997 any
liability or obligation (absolute, contingent or otherwise) except for
liabilities arising in the ordinary course, none of which, individually or in
the aggregate, would have a Company Material Adverse Effect. Except as and to
the extent set forth in Section 2.8 of the Company Disclosure Schedule,
neither the Company nor any Company Subsidiary has incurred any liability or
obligation (absolute, contingent or otherwise) since March 31, 1997 other than
liabilities incurred in the ordinary course of business, none of which,
individually or in the aggregate, would have a Company Material Adverse
Effect.
2.9 Statutory Financial Statements. The Company has furnished to Unitrin
copies of the statutory financial statements and the annual audited financial
reports (collectively, the "Statutory Financial Statements") for the Company
and each of the Insurance Subsidiaries (provided that such financial reports
for The Reliable Life
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Insurance Company of Texas and Clayton Reinsurance Ltd. (Missouri) are not
audited) for the years ended December 31, 1992, 1993, 1994, 1995 and 1996 and
the quarter ended March 31, 1997 as filed with the Missouri Director of
Insurance and the applicable insurance department or comparable regulatory
authority of each of such Insurance Subsidiaries' jurisdiction of organization
(each such department or authority, as applicable, is hereinafter referred to
as the "Insurance Department"), provided that the Statutory Financial
Statements of Clayton Reinsurance Ltd. (Bermuda) are not filed with the
Missouri Director of Insurance and have not been audited as of the date hereof
with respect to 1996 and the quarter ended March 31, 1997. The Statutory
Financial Statements, including, without limitation, the provisions made
therein for investments and the valuation thereof, reserves, policy and
contract claims, together with the notes, exhibits and schedules thereto,
fairly present the statement of admitted assets, liabilities and capital and
surplus of the Company and each of the Insurance Subsidiaries as of the dates
thereof and the related statutory basis statements of income, changes in
capital and surplus, and cash flows for the periods indicated in conformity
with the statutory accounting practices prescribed or permitted by the
applicable Insurance Department or by the National Association of Insurance
Commissioners ("SAP"), applied on a basis consistent with prior periods,
except as set forth therein. Section 2.9 of the Company Disclosure Schedule
describes each such permitted statutory accounting practice and the effect
such practice has on the surplus of the Company and each of the Insurance
Subsidiaries. Each such Statutory Financial Statement was in compliance with
applicable law and correct in every material respect when filed and there were
no material omissions therefrom. Except for liabilities and obligations
disclosed or provided for in the Statutory Financial Statements, neither the
Company nor any of the Insurance Subsidiaries had, as of the respective dates
of each such Statutory Financial Statements, any liabilities or obligations
(whether absolute or contingent and whether due or to become due) except for
liabilities arising in the ordinary course which are not required to be
reflected in statutory financial statements prepared in accordance with SAP,
none of which, individually or in the aggregate, would have a Company Material
Adverse Effect. All books of account of the Company and such Insurance
Subsidiary fully and fairly disclose all the transactions, properties, assets,
investments, liabilities and obligations of the Company and such Insurance
Subsidiary and all such books of account are in the possession of the Company
or such Insurance Subsidiary and are complete in all material respects.
2.10 Changes Since December 31, 1996. Since December 31, 1996 there has been
no event or condition which has had (or is reasonably likely to result in) a
Company Material Adverse Effect, and except as set forth in Section 2.10 of
the Company Disclosure Schedule, the Company and the Company Subsidiaries have
conducted their businesses in the ordinary course consistent with past
practices and have not taken any action which, if taken after the date hereof,
would violate Section 5.1 hereof.
2.11 Real Estate and Mortgages. Section 2.11 of the Company Disclosure
Schedule sets forth a list and summary description of (i) all real property
currently owned or sold or disposed of within the past three (3) years by the
Company or any Company Subsidiary and all buildings and other structures
located on such real property, (ii) all leases, subleases or other agreements
under which the Company or any Company Subsidiary is or was within the past
three (3) years the lessor or lessee of any real property (such list being
current as of June 1, 1997 with respect to properties where the Company is the
lessor, and such list being current as of June 10, 1997 with respect to
properties where the Company is the lessee), (iii) all unexpired options held
by the Company or any Company Subsidiary or contractual obligations on its
part to purchase or acquire any interest in real property, (iv) all unexpired
options granted by the Company or any Company Subsidiary or contractual
obligations on its part to sell or dispose of any interest in real property,
(v) all mortgages (other than mortgages which are Company Investments, as
defined in Section 2.13) held by the Company or any Company Subsidiary,
identifying all such mortgages, if any, for which deficiency notices have been
issued or that are otherwise not current. Except as set forth in Section 2.11
of the Company Disclosure Schedule, as of the date hereof such leases,
subleases and other agreements are in full force and effect and neither the
Company nor any Company Subsidiary has received any notice of any default
thereunder. Each of the options set forth in Section 2.11 of the Company
Disclosure Schedule is in full force and effect.
2.12 Title to Property. Except as set forth in Section 2.12 of the Company
Disclosure Schedule, the Company and each Company Subsidiary has good and
marketable title to all assets and properties shown as
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owned by it on the Company March 31, 1997 Financial Statements or acquired
since that date (except properties disposed of in the ordinary course of
business subsequent to said date), in each case free of all mortgages, liens,
charges and encumbrances of any nature whatsoever, other than (i) liens for
Taxes (as defined below) not yet due and payable and (ii) such minor liens,
charges and encumbrances as, in the aggregate, do not and would not if
asserted have a Company Material Adverse Effect ("Permitted Company Liens").
2.13 Investment Securities.
(i) The Company has provided to Unitrin a list of all securities,
mortgages and other investments owned by the Company, the Insurance
Subsidiaries and The Reliable Life Insurance Company and Associates
Retirement Plan (the "Plan") (all such investments collectively are
hereinafter referred to as the "Company Investments"), together with the
cost basis book or amortized value, as the case may be, as of March 31,
1997. Section 2.13 of the Company Disclosure Schedule sets forth a list of
all acquisitions and dispositions of the Company Investments by the
Company, the Insurance Subsidiaries and the Plan from March 31, 1997 to May
31, 1997. All acquisitions and dispositions of Company Investments by the
Company, the Insurance Subsidiaries and the Plan from May 31, 1997 to the
date hereof have complied with the investment policies of the Company, such
Insurance Subsidiaries and the Plan and all applicable insurance laws and
regulations.
(ii) Section 2.13 of the Company Disclosure Schedule separately
identifies all of the Company Investments that are securities or interests
therein acquired in private placement transactions by the Company, each
Insurance Subsidiary and the Plan and are owned by the Company, each
Insurance Subsidiary and the Plan as of the date hereof (such Schedule may
omit principal payments or prepayments made in respect of such Company
Investments after March 31, 1997).
(iii) Except as set forth in Section 2.13 of the Company Disclosure
Schedule, the Company, the Insurance Subsidiaries and the Plan have good
and marketable title to the Company Investments other than with respect to
those Company Investments which have been disposed of in the ordinary
course of business or as contemplated by this Agreement or redeemed in
accordance with their terms since such date and other than Permitted
Company Liens or with respect to statutory deposits which are subject to
certain restrictions on transfer.
(iv) Section 2.13 of the Company Disclosure Schedule identifies the
Company Investments which to the best knowledge of the Company, are in
default in the payment of principal or interest as of May 31, 1997.
(v) Except as set forth in Section 2.13 of the Company Disclosure
Schedule, there are no liens, claims or encumbrances on any of the Company
Investments, other than Permitted Company Liens, and none of the Company
Investments consist of securities loaned to third parties.
2.14 Environmental Laws. Except as set forth in Section 2.14 of the Company
Disclosure Schedule, the Company and each Company Subsidiary has conducted and
is conducting its business in compliance in all material respects with all
applicable federal, state, and local laws, regulations and requirements
currently in force relating to the protection of the environment
("Environmental Laws"). Except as set forth in Section 2.14 of the Company
Disclosure Schedule, there is no pending, or to the knowledge of the Company
or any Company Subsidiary, threatened, civil or criminal litigation, written
notice of violation, or administrative proceeding relating to such
Environmental Laws involving the Company or any Company Subsidiary or any
previously or presently owned property or asset of the Company or any Company
Subsidiary, including without limitation any insurance policy assumed,
reinsured or issued by the Company or any Insurance Subsidiary that asserts
coverage for any alleged violation of Environmental Laws. There are no
conditions existing with respect to the release, emission, discharge or
presence of hazardous substances in connection with the business of the
Company or any Company Subsidiary which conditions could, individually or in
the aggregate, have a Company Material Adverse Effect. The Company and each
Company Subsidiary has received all approvals, consents, licenses, and permits
with respect to environmental matters necessary to carry on its business as
currently conducted, the failure of which to obtain could, individually or in
the aggregate, have a Company Material Adverse Effect.
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2.15 Proprietary Rights. Section 2.15 of the Company Disclosure Schedule
sets forth all the trademarks, trade names, service marks (and all
registrations and applications with respect thereto), computer software,
programs and similar systems (other than "off-the-shelf" software programs)
(collectively the "Proprietary Rights") owned or used by the Company or any
Company Subsidiary. Except as otherwise set forth in such Schedule, each of
the Company and the Company Subsidiaries owns or is duly authorized to use all
of its Proprietary Rights, including "off-the-shelf" software programs. The
Proprietary Rights owned by the Company or a Company Subsidiary do not violate
or infringe upon the proprietary rights of any third party, and there is no
claim, action, proceeding or investigation pending or, to the best of the
Company's knowledge, threatened against the Company or any of the Company
Subsidiaries with respect to any of the Proprietary Rights.
2.16 [Intentionally left blank].
2.17 Agreements. Except as set forth in Section 2.17 of the Company
Disclosure Schedule, neither the Company nor any Company Subsidiary is a party
to nor is the Company or any Company Subsidiary bound by any oral or written
(i) contract for the employment of any officer or employee which pursuant to
its terms is not terminable without liability on 30 days' (or less) notice or
which provides for any further payments following such termination, or
contract with a former officer or employee pursuant to which payments are
required to be made at any time following the date hereof, or contract with
any labor union or association representing any employee, (ii) stock
ownership, profit-sharing, bonus, deferred compensation, phantom stock, stock
option, severance pay, pension, retirement or similar plan or agreement, (iii)
mortgage, indenture, note or installment obligation the unpaid balance of
which exceeds $50,000, or other instrument for or relating to any borrowing of
money by the Company or any of the Company Subsidiaries, the unpaid balance of
which exceeds $50,000, (iv) guaranty of any obligation for borrowings or
otherwise which in the aggregate exceed $50,000, (v) agreement or arrangement
for the sale or lease of any material amount of its assets or part of its
business other than in the ordinary course of business or for the grant of
preferential rights to purchase or lease any material amount of its assets or
part of its business, (vi) agreement or arrangement obligating it to register
any of its outstanding shares or other securities with the Securities and
Exchange Commission (the "SEC"), (vii) agreement or arrangement with any
officer or director of the Company, any Company Subsidiary, or any other
affiliate of the Company, (viii) reinsurance or retrocession treaty or
agreement (including terminated treaties or agreements containing residual or
unexpired liabilities), (ix) agreement or contract with any insurance agent or
producer other than pursuant to the forms of agreement included in such
Schedule, (x) agreement or arrangement with any investment advisor, (xi)
agreement or arrangement pursuant to which the Company or any Company
Subsidiary has agreed to acquire or dispose of any Company Investments or
(xii) contract, agreement or other instrument which is material to the
business, prospects, assets, liabilities, results of operations or financial
condition of the Company and the Company Subsidiaries taken as a whole. All
contracts, plans, mortgages, indentures, guaranties and other agreements set
forth in Section 2.17 of the Company Disclosure Schedule are in full force and
effect as of the date hereof, neither the Company nor any Company Subsidiary
or to the knowledge of the Company or any Company Subsidiary any other party
thereto is in default as to any provision thereof, except for defaults which
individually or in the aggregate would not have a Company Material Adverse
Effect, and no party thereto may terminate any of such agreements by reason of
the transactions contemplated by this Agreement.
2.18 Litigation. Section 2.18 of the Company Disclosure Schedule sets forth
a description of (i) each lawsuit in which punitive, exemplary or other extra-
contractual damages are sought against Company or any Company Subsidiary, (ii)
each lawsuit not involving insurance policies issued by the Company or any
Insurance Subsidiary in which the Company or any Company Subsidiary is a
party, (iii) each lawsuit involving a life or health insurance policy issued
by the Company or any Insurance Subsidiary, and (iv) each lawsuit involving a
property or casualty insurance policy issued or reinsured by the Company or
any Insurance Subsidiary where the reserve established by the Company or such
Insurance Subsidiary exceeds $50,000. Except as set forth in Section 2.18 of
the Company Disclosure Schedule, and except for insurance claims litigation
arising in the ordinary course of business for which reserves have been
established in accordance with Section 2.27 hereof, there is no action, suit,
arbitration, mediation, investigation or proceeding pending against, or to the
knowledge of the Company or any Company Subsidiary threatened against or
affecting the Company or any Company Subsidiary or its
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properties or businesses, at law or in equity, or before any governmental or
administrative body or agency or before any arbitrator which, alone or in the
aggregate, could have a Company Material Adverse Effect or which challenges
the validity of this Agreement or any action taken or to be taken by the
Company pursuant to this Agreement in connection with the Merger. Except as
may be set forth on such Schedule, there are no unresolved disputes under any
contract to which the Company or any Company Subsidiary is a party or by which
the Company or any Company Subsidiary is bound involving in the aggregate an
amount in excess of $50,000. Neither the Company nor any Company Subsidiary is
in default with respect to any order, writ, award, judgment, injunction or
decree of any court, governmental or administrative body or agency, or
arbitrator applicable to it.
2.19 Compliance with Laws. The Company and each of the Company Subsidiaries
has complied with all laws, regulations, orders, ordinances, judgments or
decrees of all governmental authorities (federal, state, local, foreign or
otherwise) applicable to its businesses, except where the failure to have so
complied would not, individually or in the aggregate, have a Company Material
Adverse Effect. Except as set forth in Section 2.19 of the Company Disclosure
Schedule, neither the Company nor any Company Subsidiary has received any
notification of any asserted failure by it to comply with any of such laws.
2.20 Taxes.
2.20.1 Except as set forth in Section 2.20.1 of the Company Disclosure
Schedule: (i) all Tax Returns (as defined below) required to be filed with
the appropriate taxing authorities have been filed by or on behalf of the
Company or any Company Subsidiary and all Taxes (as defined below) shown to
be due on such Tax Returns have been paid or provided for in full; (ii)
there are no liens for Taxes upon the assets of the Company or any Company
Subsidiaries except statutory liens for Taxes not yet due; (iii) there are
no outstanding deficiencies in respect of Taxes asserted or threatened or
assessments of Taxes made or threatened, nor any administrative or judicial
proceedings pending or threatened concerning Taxes, with respect to the
Company or any Company Subsidiary and any deficiencies, assessments or
proceedings shown in the Company Disclosure Schedule are being contested in
good faith through appropriate proceedings; (iv) the Company has
established on the financial statements described in Section 2.8 of this
Agreement reserves and accruals adequate for the payment of all Taxes
accruing with respect to or payable by Company and each Company Subsidiary
for all periods reflected therein; (v) there are no outstanding agreements
or waivers extending the statutory period of limitations applicable to any
Tax Returns required to be filed with respect to the Company or any Company
Subsidiary; and (vi) neither the Company nor any Company Subsidiary has
requested any extension of time within which to file any Tax Return, which
Tax Return has not been filed.
2.20.2 The appropriate income Tax Returns of the Company and each Company
Subsidiary have been examined by (i) the Internal Revenue Service or the
statute of limitations has expired for all periods up to and including
December 31, 1988 and (ii) the taxing authorities of all of the states set
forth in Section 2.2 of the Company Disclosure Schedule or the statute of
limitations has expired for all periods up to and including December 31,
1988, respectively, and there are no outstanding or unresolved proposed
adjustments.
2.20.3 The consummation of the transactions contemplated by this
Agreement will not give rise to any payment by the Company or any Company
Subsidiary which payment will not be deductible (in whole or in part) by
reason of Section 280G of the Code, as amended, and the regulations
promulgated thereunder.
2.20.4 Except as set forth in Section 2.20.4 of the Company Disclosure
Schedule, no power of attorney has been granted by the Company or any
Company Subsidiary with respect to any matter relating to Taxes which is
currently in force.
For purposes of this Agreement, the term "Taxes" shall mean all taxes,
charges, fees, levies or other assessments, including without limitation, all
net income, gross income, premium or privilege, gross receipts, sales, use, ad
valorem, transfer, franchise, profits, license, withholding, payroll,
employment, excise, estimated, severance, stamp, occupation, property or other
taxes, customs duties, fees or assessments, together with any interest and any
penalties, additions to tax or additional amounts imposed by any governmental
authority
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(domestic or foreign) upon the Company or any Company Subsidiary and the term
"Tax Returns" shall mean all returns, declarations, reports, estimates, and
statements, regarding Taxes, required to be filed under United States federal,
state, local or any foreign laws.
2.21 Related Party Transactions. Except as set forth in Section 2.21 of the
Company Disclosure Schedule and other than transactions exclusively between or
among the Company and/or any of the Company Subsidiaries, neither the Company
nor any Company Subsidiary has made any loan to any director, officer or other
affiliate of the Company or a Company Subsidiary which remains outstanding nor
has the Company or any Company Subsidiary entered into any agreement, other
than an agreement referred to in Section 2.17 hereof, for the purchase or sale
of any property or services from or to any director, officer or other
affiliate of the Company or a Company Subsidiary.
2.22 Employee Benefit Plans.
2.22.1 Section 2.22.1 of the Company Disclosure Schedule sets forth a
true and complete list of each employee benefit plan, as defined in Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") and each other plan, arrangement and agreement providing employee
benefits (collectively the "Plans"), that covers current or former
employees of the Company or any Company Subsidiary or affiliate and is
presently maintained by the Company or any Company Subsidiary or any
affiliate thereof or by any trade or business, whether or not incorporated
(an "ERISA Affiliate"), which together with the Company would be deemed a
"single employer" within the meaning of Section 4001 of ERISA. None of the
Plans is a "multi-employer plan," as defined in Section 3(37) of ERISA. The
Company has delivered or made available to Unitrin copies of all such
Plans; any related trust agreements, group annuity contracts, insurance
policies or other funding agreements or arrangements relating thereto; the
most recent determination letter, if any, from the Internal Revenue Service
with respect to each of the Plans which is subject to ERISA ("ERISA
Plans"); actuarial valuations, if applicable, for the most recent plan year
for which such valuations are available; the current summary plan
descriptions; and the annual return/report on Form 5500 and summary annual
reports for each of the Plans for each of the last three years.
2.22.2 Each of the ERISA Plans is in substantial compliance with all
applicable provisions of law, including the Code and ERISA. Except as set
forth in Section 2.22.2 of the Company Disclosure Schedule, neither the
Company nor any ERISA Affiliate currently maintains or sponsors a defined
benefit pension plan as defined in Section 414(j) of the Code and neither
the Company nor any ERISA Affiliate has ever maintained or sponsored any
such plan that could give rise to a liability against the Company or any
Company Subsidiary.
2.22.3 The written terms of each of the Plans, and any related trust
agreement, group annuity contract, insurance policy or other funding
arrangement are in substantial compliance with all applicable laws
including ERISA, the Code, and the Age Discrimination in Employment Act, as
applicable, and each of such Plans has been administered in substantial
compliance with such requirements.
2.22.4 Except with respect to income taxes on benefits paid or provided,
no income, excise or other tax or penalty (federal or state) has been
waived or excused, has been paid or is owed by any person (including, but
not limited to, any Plan, any Plan fiduciary, the Company and ERISA
Affiliates) with respect to the operations of, or any transactions with
respect to, any Plan. No action has been taken, nor has there been any
failure to take any action, nor is any action or failure to take action
contemplated, that would subject any person or entity to any liability for
any tax or penalty in connection with any Plan. No reserve for any taxes or
penalties has been established with respect to any Plan, nor has any advice
been given to any person with respect to the need to establish such a
reserve.
2.22.5 There are no (i) actions, suits, arbitrations or claims (other
than routine claims for benefits), (ii) legal, administrative or other
proceedings or governmental investigations or audits, or (iii) complaints
to or by any governmental entity, which are pending, anticipated or
threatened, against the Plans or their assets.
2.22.6 The present value of the future cost to the Company and ERISA
Affiliates of post-retirement medical benefits that the Company or any
ERISA Affiliate is obligated to provide, calculated on the basis
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of actuarial assumptions the Company considers reasonable estimates of
future experience and which have been provided to Unitrin, does not exceed
the amount specified in Section 2.22.6 of the Company Disclosure Schedule.
2.22.7 Neither the Company nor any ERISA Affiliate, nor any of the ERISA
Plans, nor any trust created thereunder, nor any trustee or administrator
thereof has engaged in a transaction in connection with which the Company
or any ERISA Affiliate, any of the ERISA Plans, any such trust, or any
trustee or administrator thereof, or any party dealing with the ERISA Plans
or any such trust could be subject to either a civil penalty assessed
pursuant to Section 409 or 502(i) of ERISA or a tax imposed pursuant to
Section 4975 or 4976 of the Code, which civil penalty or tax would,
individually or in the aggregate, have a Company Material Adverse Effect.
Neither the Company nor any ERISA Affiliate is, or, as a result of any
actions, omissions, occurrences or state of facts existing prior to the
Effective Time, may become liable for any tax imposed under Section 4978 of
the Code, which tax would, individually or in the aggregate, have a Company
Material Adverse Effect.
2.23 Insurance Protection. All material tangible and real properties of the
Company and each Company Subsidiary are covered by valid and currently
effective insurance policies issued in favor of the Company or a Company
Subsidiary. Set forth in Section 2.23 of the Company Disclosure Schedule is a
list of all insurance policies covering the Company and the Company
Subsidiaries. The Company or a Company Subsidiary is included as an insured
party under all such policies or has full rights as a loss payee. No notice of
cancellation or termination has been received with respect to any such policy.
Such policies will not be terminable or cancelable by reason of this Agreement
and the consummation of the transactions contemplated hereby.
2.24 Insurance Business.
2.24.1 Policies and Rates. Except as set forth in Section 2.24.1 of the
Company Disclosure Schedule, all policies of insurance issued by the
Company or any of the Insurance Subsidiaries as now in force are, to the
extent required under applicable law, on forms approved by applicable
insurance regulatory authorities or which have been filed and not objected
to by such authorities within the period provided for objection. Any
premium rates required to be filed with or approved by insurance regulatory
authorities have been so filed or approved and premiums charged conform
thereto and to any related actuarial memoranda and documents required to be
filed with such authorities. Any such actuarial memoranda comply in all
material respects with applicable standard valuation and non-forfeiture
laws.
2.24.2. Producers. Each of the contracts between the Company or any of
the Insurance Subsidiaries and its agents, managers, brokers or producers
is in full force and effect. Neither the Company nor any of the Insurance
Subsidiaries is and to the knowledge of the Company none of the agents are
in default in any material respect thereunder, and no such party thereto
may terminate any such agreements by reason of the transactions
contemplated by this Agreement.
2.24.3 Assessments. The Company and each of the Insurance Subsidiaries
has paid in full or properly reserved for all guaranty fund and residual
market assessments required by any regulatory authority to be paid by the
Company or such Insurance Subsidiary.
2.24.4 Regulatory Matters. All life insurance policies issued by the
Company or any Insurance Subsidiary which is a life insurance company (a
"Life Company") satisfy the tax definition of life insurance policies in
Section 7702 or 101(f) of the Code. All annuity contracts issued by a Life
Subsidiary satisfy the provisions of Sections 817(h) and 72(s) of the Code,
as applicable, and amounts credited to such contracts are not subject to
current taxation under Section 72(a) of the Code. Except as set forth in
Section 72(a) of the Company Disclosure Schedule, none of the policies or
contracts offered or sold by a Life Company (i) has been registered under
any Federal or state (including blue sky and insurance) securities laws,
and such policies and contracts were not, when offered or sold, required to
be registered or qualified under such laws; and (ii) has been issued in
connection with any separate account established and maintained by a Life
Company.
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2.25 Regulatory Filings and Reports. The Company has made available for
inspection by Unitrin all registrations, filings or submissions made by the
Company and all Company Subsidiaries with any Insurance Department since 1992,
including without limitation all annual and quarterly statutory financial
statements filed with or submitted to any Insurance Department, and any state
insurance reports of examination issued by any such Insurance Department or
other state insurance governmental or regulatory body since December 31, 1992.
The Company and each Company Subsidiary has filed all reports, statements,
documents, registrations, filings or submissions required to be filed by it
with any governmental or regulatory body, except (i) those with respect to
which the imposition, levy or collection of all fines, penalties, assessments,
taxes, forfeitures, money judgments or sanctions of any type are barred by
statute of limitations, (ii) with respect to which the failure to so file
individually and in the aggregate would not cause a Company Material Adverse
Effect, (iii) except as may be required for the transactions contemplated by
this Agreement, and (iv) as otherwise agreed to in writing by the applicable
governmental or regulatory body. Except as set forth in Section 2.25 of the
Company Disclosure Schedule, (A) all such registrations, filings and
submissions were in material compliance with applicable law when filed, and
(B) no material deficiencies have been asserted by any such governmental or
regulatory body with respect to such registrations, filings and submissions
that have not been satisfied. Except as may be required for the transactions
contemplated by this Agreement, the Company and each of the Insurance
Subsidiaries has duly filed with appropriate insurance authorities, to the
extent that filing of the same is required by laws, rules or regulations, all
annual and quarterly statements and other statements, documents and reports
(including, without limitation, any filings required under applicable state
insurance holding company systems acts) required by the insurance and other
laws of its state of domicile and in each of the states in which it is
licensed to conduct an insurance business. All such statements and filings are
substantially correct as filed, and there are no material omissions therefrom,
except as set forth in Section 2.25 of the Company Disclosure Schedule.
Section 2.25 of the Company Disclosure Schedule sets forth all financial,
market conduct or other reports of examination issued by any department of
insurance or regulatory body with respect to the Company or any of its
Insurance Subsidiaries since December 31, 1992. Except as set forth in Section
2.25 of the Company Disclosure Schedule, the Company and its Insurance
Subsidiaries have resolved all issues raised in such reports to the
satisfaction of the issuer of such reports.
2.26 Agents. Set forth in Section 2.26 of the Company Disclosure Schedule is
a true and correct summary description of the compensation arrangements of the
Company and each Insurance Subsidiary with its agents and general agents.
2.27 Reserves and Reinsurance. Except as set forth in Section 2.27 of the
Company Disclosure Schedule, the insurance reserves and liabilities reflected
in the Company's and each of the Insurance Subsidiaries' Statutory Financial
Statements and established on the books of the Company or such Insurance
Subsidiary for all future insurance policy benefits, dividends, losses, claims
and expenses make a sufficient provision for all reasonably anticipated
matured and unmatured liabilities and obligations of the Company and such
Insurance Subsidiary, under all insurance policies and reinsurance and
coinsurance agreements or other similar contracts pursuant to which the
Company or such Insurance Subsidiary had or has any liability or obligation.
All such reserves are computed in accordance with applicable SAP loss
reserving practices, consistently applied, are fairly stated in accordance
with sound loss reserving and actuarial principles, are based on factors and
assumptions relevant to the provisions in the related insurance contracts, and
are in compliance with the requirements of the insurance laws of the
applicable jurisdiction. Except as set forth in Section 2.27 of the Company
Disclosure Schedule, neither the Company nor any of the Insurance Subsidiaries
is involved in any dispute with or inquiry initiated by its outside
accountants or any Insurance Department with respect to its actuarial or
reserving practices. The Company and each Insurance Subsidiary owns assets
which qualify as admitted assets under applicable state insurance laws in an
amount at least equal to all of its required insurance reserves. All
reinsurance recoverables reflected or otherwise included, either as assets or
contra-liabilities, in the Statutory Financial Statements are fairly stated in
accordance with applicable SAP.
2.28 Information in Proxy Statement. The proxy statement required to be
filed by the Company with the Missouri Department of Insurance in connection
with the transactions contemplated by this Agreement (the
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"Company Proxy Statement"), and any amendments or supplements thereto will,
when filed, comply in all material respects with the applicable requirements
of the Missouri Insurance Code. The Company Proxy Statement and amendments
thereof or supplements thereto will not, at the time of (i) the first mailing
thereof to the shareholders of the Company and (ii) the meeting of
shareholders to be held in connection with the Merger, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading. The
representations and warranties contained in this Section 2.28 will not apply
to statements in, or omissions from, the Company Proxy Statement based upon
information furnished to the Company by Unitrin specifically for use therein.
2.29 Information in Registration Statement. The information with respect to
the Company and the Merger that the Company furnishes to Unitrin in writing
expressly for inclusion in the Registration Statement (as defined in Section
3.8) will not contain at the time the Registration Statement becomes effective
or at the Effective Time 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 made therein not misleading.
2.30 Other Filings. The Company and each Company Subsidiary has made all
required filings with the SEC, the National Association of Securities Dealers,
Inc., the Nasdaq Stock Market, any state securities commission and all other
governmental or regulatory filings required to be made by the Company or any
Company Subsidiary.
2.31 Third Party Discussions. Other than pursuant to this Agreement, the
Company is not currently entertaining discussions with any third party
regarding a possible sale or merger of the Company or any Company Subsidiary
or a substantial portion of their assets or business.
2.32 Disclosure. No representation or warranty of the Company and no
statement or information relating to the Company or any Company Subsidiary or
their respective businesses or properties contained in (i) this Agreement,
(ii) the Company Disclosure Schedule, or (iii) in any certificate furnished to
Unitrin or Acquisition Sub pursuant to this Agreement contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements made herein or therein not misleading.
2.33 Fairness Opinion. The Company's Board of Directors has received from
Societe Generale Securities Corporation, a written opinion (the "Fairness
Opinion") to the effect that the consideration to be paid by Unitrin in the
Merger is fair to the shareholders of the Company from a financial point of
view.
2.34 Finder and Investment Bankers. Except as set forth in Section 2.34 of
the Company Disclosure Schedule, neither the Company nor any Company
Subsidiary has retained any broker, finder or other agent or incurred any
liability for any brokerage fees, commissions or finders' fees with respect to
the Merger.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF UNITRIN
Unitrin represents and warrants to the Company as follows:
3.1 Organization of Unitrin and Acquisition Sub. Unitrin is a corporation
duly organized, validly existing and in good standing under the laws of
Delaware. Acquisition Sub is a corporation duly organized, validly existing
and in good standing under the laws of the State of Missouri. Acquisition Sub
is a wholly-owned subsidiary of Unitrin. Unitrin is duly qualified as a
foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of its properties owned or held under lease
or the nature of its activities makes such qualification necessary, except
where the failure to be so qualified would not individually or in the
aggregate have a material adverse effect on the business, prospects, assets,
liabilities, results of operations or financial condition of Unitrin and its
subsidiaries, taken as a whole, or adversely affect the ability of Unitrin to
consummate the transactions contemplated by this Agreement in any material
respect (a "Unitrin Material
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Adverse Effect"). Unitrin's insurance subsidiaries (the "Unitrin
Subsidiaries") have all requisite power and authority to carry on an insurance
business pursuant to and to the extent of the certificates of authority issued
under the laws of all applicable states. No such certificate of authority has
been revoked, restricted, suspended, limited or modified nor is any
certificate of authority the subject of a proceeding for revocation,
restriction, suspension, limitation or modification, except where such
revocation, restriction, suspension, limitation or modification would not
result in a Unitrin Material Adverse Effect. Neither Unitrin nor any Unitrin
Subsidiary is operating under any formal or informal agreement or
understanding with the licensing authority of any state which restricts its
authority to do business or requires the Unitrin Subsidiaries to take, or
refrain from taking, any action, except where such restriction or requirement
would not result in a Unitrin Material Adverse Effect.
3.2 Capital Stock. The authorized capital stock of Unitrin consists of
20,000,000 shares of Preferred Stock, par value $.10 per share, none of which
is issued and outstanding, and 100,000,000 shares of Unitrin Common Stock, of
which 37,335,245 shares were issued and outstanding as of March 31, 1997. All
of the shares of Unitrin Common Stock issuable at the Effective Time in
exchange for Shares covered by Stock Elections or Default Stock Elections in
accordance with this Agreement, when so issued, will be duly authorized,
validly issued, fully paid and non-assessable and free of preemptive rights.
3.3 Authorization. The Board of Directors of each of Unitrin and Acquisition
Sub has adopted resolutions approving the transactions contemplated by this
Agreement and has authorized the execution and delivery of this Agreement by
Unitrin and Acquisition Sub, respectively. Unitrin and Acquisition Sub each
has full power and authority to enter into this Agreement and subject to
obtaining all required regulatory approvals, to consummate the transactions
contemplated hereby. This Agreement has been duly executed and delivered by
Unitrin and Acquisition Sub and constitutes the valid and legally binding
obligation of each of them, enforceable against them in accordance with its
terms, subject to bankruptcy, receivership, insolvency, reorganization,
moratorium or similar laws affecting or relating to creditors rights generally
and subject to general principles of equity.
3.4 Consents and Approvals. Except for consents and approvals listed in the
schedule attached hereto (the "Unitrin Consent Schedule"), no filing with, and
no permit, authorization, consent or approval of, any public body or authority
is necessary for the consummation by Unitrin or Acquisition Sub of the
transactions contemplated by this Agreement.
3.5 Defaults and Conflicts. Subject to the receipt of all consents and
approvals contemplated by this Agreement, neither the execution and delivery
of this Agreement, the consummation of the transactions contemplated hereby or
the fulfillment of and compliance with the terms and provisions hereof will
(i) violate any judicial, administrative or arbitral order, writ, award,
judgment, injunction or decree involving Unitrin, (ii) conflict with the
terms, conditions or provisions of the Certificate of Incorporation or By-Laws
of Unitrin, (iii) conflict with, result in a breach of, constitute a default
under or accelerate or permit the acceleration of the performance required by,
any indenture or any agreement or other instrument to which Unitrin is a party
or by which Unitrin is bound, (iv) result in the creation of any lien, charge
or encumbrance upon any of the assets of Unitrin under any such agreement or
instrument, or (v) terminate or give any party thereto the right to terminate
any such indenture, agreement or instrument, other than, with respect to
(iii), (iv) and (v) above, any such conflict, lien or termination that would
not result in a Unitrin Material Adverse Effect. Except as set forth in
Section 3.5 of the schedule delivered by Unitrin to the Company concurrently
with the execution of this Agreement (the "Unitrin Disclosure Schedule"), no
consent of any third party to any indenture, agreement or other instrument to
which Unitrin is a party is required in connection with the execution and
delivery of this Agreement, except for such consent or consents that, if not
obtained, would not result in a Unitrin Material Adverse Effect.
3.6 SEC Reports; Financial Statements. Unitrin has filed all reports
required to be filed with the SEC pursuant to the Securities Exchange Act of
1934, as amended, since December 31, 1993 (collectively, the "SEC Reports").
As of their respective dates, none of the SEC Reports, including, without
limitation, any financial statements or schedules included therein, contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the
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circumstances under which they were made, not misleading. The audited
consolidated financial statements of Unitrin and its subsidiaries included in
its Annual Report on Form 10-K for the years ended December 31, 1994, 1995 and
1996, and the unaudited consolidated interim financial statements included in
its Quarterly Report on Form 10-Q for its quarter ended March 31, 1997,
present fairly in all material respects in conformity with generally accepted
accounting principles (except as may be indicated therein or in the notes
thereto) the consolidated financial position of Unitrin and its subsidiaries
as of the dates thereof and its consolidated statements of operations,
shareholders' equity, and cash flows for the periods then ended (in the case
of any unaudited interim financial statements, subject to (i) normal year-end
adjustments and (ii) standard limitations on the application of generally
accepted accounting principles).
Except as and to the extent reflected in the interim consolidated statement
of financial position of Unitrin and its subsidiaries as of March 31, 1997,
and notes thereto included in its Quarterly Report on Form 10-Q for its
quarter ended March 31, 1997, neither Unitrin nor any of its subsidiaries had
as of March 31, 1997 any liability or obligation (absolute, contingent or
otherwise) other than liabilities incurred in the ordinary course of business,
none of which, individually or in the aggregate, would have a Unitrin Material
Adverse Effect. Except as and to the extent set forth in Section 3.6 of the
Unitrin Disclosure Schedule, neither Unitrin nor any of its subsidiaries has
incurred any liability or obligation (absolute, contingent or otherwise) since
March 31, 1997 other than liabilities incurred in the ordinary course of
business, none of which, individually or in the aggregate, would have a
Unitrin Material Adverse Effect.
3.7 Changes Since March 31, 1997. Since March 31, 1997, there has been no
event or condition which has had (or is reasonably likely to result in) a
Unitrin Material Adverse Effect, and except as set forth in Section 3.7 of the
Unitrin Disclosure Schedule, Unitrin and its subsidiaries have conducted their
businesses in the ordinary course consistent with past practices.
3.8 Registration Statement. The registration statement on Form S-4 to be
filed by Unitrin with the SEC with respect to the offering of Unitrin Common
Stock in connection with the transactions contemplated by this Agreement (the
"Registration Statement") and any amendments or supplements thereto will, when
filed, comply as to form in all material respects with the requirements of the
Securities Act of 1933, as amended (the "Securities Act"), and will not
contain, at the time the Registration Statement becomes effective or at the
Effective Time, 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 contained therein, not misleading; provided that the foregoing
representation shall not apply to statements or omissions in the Registration
Statement based upon information furnished to Unitrin or Acquisition Sub by
the Company specifically for use therein.
3.9 Information in Proxy Statement. None of the information supplied or to
be supplied by Unitrin or Acquisition Sub in writing expressly for inclusion
in the Company Proxy Statement to be mailed to the shareholders of the Company
in connection with the Merger or in any amendments thereof or supplements
thereto will, at the time of (i) the first mailing thereof and (ii) the
meeting of shareholders to be held in connection with the Merger, contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
3.10 Litigation. There is no action, suit, arbitration, mediation,
investigation or proceeding pending against, or to the knowledge of Unitrin
threatened against or affecting, Unitrin or any of the Unitrin Subsidiaries or
its properties or businesses, at law or in equity, or before any governmental
or administrative body or agency or before any arbitrator, which (i)
challenges the validity of this Agreement or any action taken or to be taken
by Unitrin or Acquisition Sub pursuant to this Agreement in connection with
the Merger, or (ii) except as set forth in Section 3.10 of the Unitrin
Disclosure Schedule, would result in a Unitrin Material Adverse Effect.
3.11 Compliance with Laws. Unitrin and each of its subsidiaries has complied
with all laws, regulations, orders, ordinances, judgments or decrees of all
governmental authorities (federal, state, local, foreign or otherwise)
applicable to its businesses, except where the failure to have so complied
would not, individually or in the aggregate, have a Unitrin Material Adverse
Effect.
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3.12 Disclosure. No representation or warranty of Unitrin and no statement
or information relating to Unitrin or any of the Unitrin Subsidiaries or their
respective businesses or properties contained in (i) this Agreement, (ii) the
Unitrin Disclosure Schedule, or (iii) in any certificate furnished to the
Company pursuant to this Agreement contains any untrue statement of a material
fact or omits to state a material fact necessary in order to make the
statements made herein or therein not misleading.
3.13 Unitrin Rights Plan. Neither the approval, execution or delivery of
this Agreement nor the consummation of the transactions contemplated hereby
will cause the rights outstanding under the Unitrin Rights Plan to become
exercisable provided that the Company's shareholders do not, either
individually or in the aggregate, own a sufficient number of shares of Unitrin
Common Stock which, when added to the number of shares Unitrin Common Stock
issuable to such shareholders in the Merger, would cause any such shareholders
or group thereof to become an Acquiring Person within the meaning of the
Unitrin Rights Plan.
ARTICLE IV
RIGHT TO INVESTIGATE
The Company shall afford to the officers and authorized representatives of
Unitrin reasonable access to the offices, properties, books and records of the
Company in order that Unitrin may have full opportunity to make such
investigations as it shall desire of the affairs of the Company and the
Company Subsidiaries, and the officers of the Company shall furnish Unitrin
with such additional financial, actuarial and operating data and other
information as to the assets, properties, liabilities and business of the
Company and the Company Subsidiaries as Unitrin shall from time to time
reasonably request. The Company and the Company Subsidiaries shall consent to
the review by the officers and authorized representatives of Unitrin of the
reports and working papers of the Company's independent auditors and actuarial
consultants and to discussions by the officers and authorized representatives
of Unitrin with parties with which Company and the Company Subsidiaries have
business relationships. All such information shall be held confidential in
accordance with the Confidentiality Agreement delivered by Unitrin to the
Company dated March 31, 1997.
ARTICLE V
COVENANTS OF THE COMPANY
5.1 Conduct of Business Pending the Merger. From the date hereof until the
Effective Time, unless Unitrin shall otherwise agree in writing, or except as
set forth in Section 5.1 of the Company Disclosure Schedule or as otherwise
contemplated by this Agreement, the Company and the Company Subsidiaries shall
conduct their respective businesses in the ordinary course consistent with
past practice and shall use all reasonable efforts to preserve intact their
licenses, permits and certificates of authority, business organizations and
relationships with third parties (including but not limited to their
respective relationships with policyholders and agents) and to keep available
the services of their officers and key employees. Except as set forth in
Section 5.1 of the Company Disclosure Schedule or as otherwise provided in
this Agreement, from the date hereof until the Effective Time, without the
prior written consent of Unitrin, the Company shall not, and shall not permit
any Company Subsidiary to:
(i) adopt or propose any change in its Articles of Incorporation or By-
Laws;
(ii) (A) make any change in its authorized capital stock, (B) issue any
stock options, or issue any warrants, or other rights calling for the
issue, transfer, sale or delivery of its capital stock or other securities,
(C) pay any stock dividend or split, combine or reclassify its outstanding
shares of capital stock, (D) other than the conversion of Company B Stock
into Company A Stock, issue, sell, exchange or deliver any shares of its
capital stock (or securities convertible into or exchangeable, with or
without additional consideration, for such capital stock), (E) purchase or
otherwise acquire for a consideration any outstanding shares of its capital
stock, or (F) declare, set aside or pay any dividend or other distribution
with respect to any shares of
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its capital stock except for regular quarterly dividends with respect to
Company A Stock in an amount not greater than $.35 per share and regular
quarterly dividends with respect to Company B Stock in an amount not
greater than $.03181 per share, provided that, in the event the record date
(the "Unitrin Record Date") for the regular quarterly dividend for the
fourth quarter of 1997 payable to holders of Unitrin Common Stock (the
"Unitrin Fourth Quarter Dividend") which has historically been declared on
or about November 1 of each year is established to be a date prior to the
Effective Time, then the Company shall be entitled to pay, in lieu of the
Company's own regular quarterly dividend for the fourth quarter of 1997
(the "Reliable Fourth Quarter Dividend"), a special dividend to the holders
of the Company Common Stock in an amount not to exceed the amount such
holders would have received in connection with the Unitrin Fourth Quarter
Dividend on the shares of Unitrin Common Stock such holders would have
received in the Merger had the Effective Time occurred prior to the Unitrin
Record Date and assuming such holders had made Stock Elections, and
provided further, that the Company shall not declare or pay the Reliable
Fourth Quarter Dividend to holders of Company Common Stock if the Effective
Time occurs prior to the Unitrin Record Date;
(iii) merge or consolidate with any other person or acquire a material
amount of assets of any other person;
(iv) except pursuant to existing contracts or commitments identified in
Section 2.17 of the Company Disclosure Schedule, or in the ordinary course
of business consistent with past practice, sell, lease, license or
otherwise surrender, relinquish or dispose of (A) any material facility
owned or leased by the Company or any Company Subsidiary or (B) any assets
or property which are material to the Company and the Company Subsidiaries,
taken as a whole;
(v) settle any material audit, make or change any material Tax election
or file amended tax returns;
(vi) except in the ordinary course of business consistent with past
practice or as otherwise permitted by this Agreement, (A) incur any
material indebtedness except in the ordinary course of business pursuant to
existing credit facilities or arrangements, (B) amend or otherwise
increase, accelerate the payment or vesting of the amounts payable or to
become payable under or fail to make any required contribution to, or
withdraw any amounts from, any employee benefit plan maintained by the
Company or any Company Subsidiary, or (C) materially increase any non-
salary benefits payable to any employee or former employee;
(vii) grant any increase in the compensation of any director, officer,
employee, consultant or agent of the Company or any Company Subsidiary,
except in the ordinary course of business consistent with past practice, or
enter into any Indemnity Agreements as defined in Section 6.4(i) with any
such person;
(viii) except, in any case, in the ordinary course of business consistent
with past practice, enter into, terminate or amend any (A) employment
agreement or other employment arrangement with any employee of the Company
or any Company Subsidiary, (B) any reinsurance or retrocession agreement or
treaty, or (C) any other contract or agreement of the Company or any
Company Subsidiary of the type described in Section 2.17 hereof, including
without limitation any employee benefit plan;
(ix) change any method of accounting or accounting practice by the
Company or any Company Subsidiary, except for any such change required by
GAAP or SAP;
(x) conduct transactions in Company Investments except in compliance with
the investment policies of the Company or such Company Subsidiary and all
applicable insurance laws and regulations, provided that neither the
Company nor any Company Subsidiary shall acquire any securities or other
investments other than investments in U.S. Treasury bonds with maturities
of five years or less except pursuant to existing contracts or commitments
identified in Section 2.17(xi) of the Company Disclosure Schedule; or
(xi) agree or commit to do any of the foregoing.
5.2 Consents. The Company shall, as soon as reasonably practicable, prepare
or cause to be prepared and made all necessary filings with all governmental
or regulatory bodies or other entities and shall use its best efforts to
obtain all consents, waivers, approvals, authorizations, rulings or orders
from all governmental or regulatory bodies or other entities listed on the
Company Consent Schedule and furnish true, correct and complete copies of each
to Unitrin. The Company agrees that prior to the Effective Time it will use
its best efforts to obtain all
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required consents of parties to any indenture, agreement or other instrument
referred to in Section 2.7 of the Company Disclosure Schedule.
5.3 Notice. The Company shall give prompt notice to Unitrin of (i) any
notice of, or other communication relating to, a default or event which with
notice or lapse of time or both would become a default, received by the
Company or any Company Subsidiary subsequent to the date of this Agreement and
prior to the Effective Time, under its Articles of Incorporation or By-laws or
any indenture, or material instrument or agreement, to which the Company or
any Company Subsidiary is a party, by which it or any of its properties is
bound or to which it or any of its properties is subject, (ii) any notice or
other communication from any third party alleging that the consent of such
third party is or may be required in connection with the transactions
contemplated hereby and (iii) any matter which, if it had occurred prior to
the date hereof, would have been required to be included in the Company
Disclosure Schedule.
5.4 Shareholder Meeting. The Company shall duly call the Company Shareholder
Meeting to be held at the earliest practicable date for the purpose of voting
on the Agreement and the conversion of the Company B Stock, and in connection
therewith, Company shall prepare and file with the Missouri Department of
Insurance, as soon as is reasonably practicable, the required proxy materials
with respect thereto and shall use its best efforts to obtain clearance by the
Missouri Department of Insurance of the mailing of such material to the
Company shareholders. Unless otherwise required in connection with the
exercise of its fiduciary duties to the Company's shareholders under
applicable law, the Board of Directors of the Company shall recommend the
approval of this Agreement and the conversion of the Company B Stock to
Company A Stock as contemplated hereby to the Company shareholders.
5.5 Conversion of Company B Stock. Subject to approval by a majority of the
holders of Company B Stock, the Company shall take all necessary actions to
cause the Company B Stock to be converted into Company A Stock in accordance
with the provisions of the Company's Articles of Incorporation and applicable
law, such conversion to be effective immediately prior to the Effective Time.
5.6 No Solicitation of Acquisition Proposals. The Company shall not, nor
shall it permit any of the Company Subsidiaries, or authorize or permit any of
their officers, directors or employees or any investment banker, financial
advisor, attorney, accountant or other representative or agent retained by the
Company or any Company Subsidiary, to, directly or indirectly, make, solicit,
initiate, encourage or take any other action to facilitate any inquiry or
proposal, or, subject to the provisos to this sentence, provide any
information to or participate in any negotiations with, any corporation,
partnership, agent, attorney, financial advisor, person, or other entity or
group (other than Unitrin and its affiliates) ("Third Parties") relating to
any (i) merger or consolidation or other business combination of the Company
or any of the Company Subsidiaries, (ii) sale of a significant amount of
assets of the Company or any of its Subsidiaries outside the ordinary course
of business, (iii) purchase or sale of shares of capital stock of the Company
or any of its Subsidiaries or (iv) any similar action or transaction involving
the Company or any of its Subsidiaries other than the transactions
contemplated by this Agreement ("Extraordinary Transaction"), or, subject to
the provisos to this sentence, agree to or consummate any Extraordinary
Transaction; provided, however, that the Company may provide information at
the request of, or enter into negotiations with a, third party or agree to or
consummate any Extraordinary Transaction if the Board of Directors of the
Company determines, in good faith, at a meeting of the Board of Directors,
that the exercise of its fiduciary duties to the Company's shareholders under
applicable law, as advised in writing by Bryan Cave LLP (or other firm with a
national reputation in transactions of this nature), requires it to take any
such action, and, provided further, that the Company may not, in any event,
provide to such third party any information which it has not provided to
Unitrin. The Company shall immediately inform Unitrin in writing of any
inquiry, proposal or request for information (including the terms thereof and
the person making such inquiry) which it may receive in respect of such a
transaction and provide Unitrin with a copy of any such written inquiries,
proposals and offers, including without limitation any Acquisition Proposal.
5.7 Affiliates. At least 30 days prior to the Closing, the Company shall
deliver to Unitrin a letter identifying all persons who are, at the time this
Agreement is submitted for approval to the shareholders of the Company,
"affiliates" of the Company for purposes of Rule 145 under the Securities Act.
The Company shall use all
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reasonable efforts to cause each person named in such letter to deliver to
Unitrin prior to the Closing a written "Affiliates" agreement, in the form
previously agreed to by the parties, providing that such person shall dispose
of the Unitrin Common Stock to be received by such person in the Merger only
in accordance with applicable law.
5.8 Phantom Stock Plan. The Company shall take all actions necessary to
terminate The Reliable Life Insurance Company Phantom Stock Bonus Plan at or
prior to the Effective Time so that the Company has no liability following the
Effective Time to any participant thereunder.
5.9 Cooperation. The Company shall, and shall cause each of the Company
Subsidiaries to, execute such documents and other papers, provide such
information, and take such further actions as may be reasonably requested by
Unitrin to carry out the provisions hereof and to consummate the transactions
contemplated hereby.
5.10 Comfort Letters. Upon the request of Unitrin, the Company shall use all
reasonable efforts to provide to Unitrin "comfort letters" from the
independent certified public accountants for the Company and the Company
Subsidiaries, dated the date on which the Registration Statement, or last
amendment thereto, shall become effective, and dated the date of the Closing,
addressed to the Board of Directors of each of Unitrin and the Company,
covering such matters as Unitrin shall reasonably request with respect to
facts concerning the financial condition of the Company and the Company
Subsidiaries and customary for such certified public accountants to deliver in
connection with a transaction similar to the Merger.
5.11 Conditions Precedent. The Company shall, and shall cause each of the
Company Subsidiaries to, use its best efforts to cause all of the conditions
precedent to the consummation of the Merger applicable to them to be met.
ARTICLE VI
COVENANTS OF UNITRIN
6.1 Consents. Unitrin shall, and shall cause Acquisition Sub to, as soon as
practicable, prepare and make all necessary filings with all governmental or
regulatory bodies or other entities and shall use its best efforts to obtain
all consents, waivers, approvals, authorizations, rulings or orders from all
governmental or regulatory bodies or other entities listed on the Unitrin
Consent Schedule and furnish true, correct and complete copies of each to the
Company.
6.2 Cooperation. Unitrin shall, and shall cause Acquisition Sub to, execute
such documents and other papers, provide such information, and take such
further actions as may be reasonably requested by the Company to carry out the
provisions hereof and to consummate the transactions contemplated hereby.
6.3 Conditions Precedent. Unitrin shall, and shall cause Acquisition Sub to,
use its best efforts to cause all of the conditions precedent to the
consummation of the Merger applicable to it to be met.
6.4 Director and Officer Liability.
(i) For six years after the Effective Time, Unitrin shall cause the
Company to indemnify and hold harmless each person who is or has been at
any time prior to the date hereof or who becomes prior to the Effective
Time, an officer or director of the Company, in respect of acts or
omissions occurring prior to the Effective Time (the "Indemnified Parties")
(including but not limited to the transactions contemplated by this
Agreement) to the extent provided under the Company Articles and the Bylaws
of the Company and indemnity agreements between the Company and any of its
officers or directors ("Indemnity Agreements") in effect on the date
hereof, provided that such indemnification shall be subject to any
limitation imposed from time to time under applicable law.
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(ii) For six years after the Effective time, Unitrin shall or shall cause
the Company to provide, if available, officers' and directors' liability
insurance in respect of acts or omissions occurring prior to the Effective
Time, including but not limited to the transactions contemplated by this
Agreement, covering each such person currently covered by the Company's
officers' and directors' liability insurance policy, or who becomes covered
by such policy prior to the Effective Time, on terms with respect to
coverage and amount comparable to those of such policy in effect on the
date hereof, provided that such coverage may be obtained by Unitrin at a
cost that does not exceed the current cost of the Company's insurance.
6.5 Registration Statement. Unitrin will file the Registration Statement with
the SEC and, if required, appropriate materials with applicable state
securities agencies as promptly as practicable and will use all reasonable
efforts to cause the Registration Statement to become effective under the
Securities Act and all such state filed materials to comply with applicable
state securities laws. The Company authorizes Unitrin to utilize in the
Registration Statement and in all such state filed materials the information
concerning the Company and its subsidiaries provided to Unitrin in connection
with, or contained in, the Registration Statement. Unitrin will advise the
Company promptly when the Registration Statement has become effective and of
any supplements or amendments thereto, and Unitrin will furnish the Company
with copies of all such documents. Except for the Company Proxy Statement and
related prospectus of Unitrin, Unitrin shall not distribute any written
material that would constitute a "prospectus" relating to the Merger other than
in compliance with the Securities Act or any applicable state securities law.
6.6 Inclusion on Nasdaq. Unitrin shall use its best efforts to cause the
shares of Unitrin Common Stock issuable in exchange for Shares to be included
on the National Market Tier of the Nasdaq Stock Market prior to the Effective
Time.
6.7 Notice. Unitrin shall give prompt notice to the Company of (i) any notice
or other communication from any third party alleging that the consent of such
third party is or may be required in connection with the transactions
contemplated hereby and (ii) any matter which, if it had occurred prior to the
date hereof, would have been required to be included in the Unitrin Disclosure
Schedule.
6.8 Comfort Letters. Upon the request of the Company, Unitrin shall use all
reasonable efforts to provide to the Company "comfort letters" from the
independent certified public accountants for Unitrin and its subsidiaries,
dated the date on which the Registration Statement, or last amendment thereto,
shall become effective, and dated the date of the Closing, addressed to the
Board of Directors of each of the Company and Unitrin, covering such matters as
the Company shall reasonably request with respect to facts concerning the
financial condition of Unitrin and its subsidiaries and customary for such
certified public accountants to deliver in connection with a transaction
similar to the Merger.
ARTICLE VII
CLOSING AND CLOSING DOCUMENTS
7.1 Closing. The closing (the "Closing") under this Agreement shall be held
at the offices of Lord, Bissell & Brook, 115 S. LaSalle Street, Chicago,
Illinois at 10:00 a.m., Central Time, as promptly as practicable after the
fulfillment or waiver of all the terms and conditions contained in Articles
VII, VIII, IX and X of this Agreement, or at such other place and time as shall
be mutually agreeable to the parties. The Articles of Merger shall be filed
upon the Closing with the Secretary of State of Missouri.
7.2 Company Closing Documents. At the Closing, the Company shall deliver, or
cause to be delivered, to Unitrin:
(i) a certificate of the Company, signed by its Chief Executive Officer,
which shall confirm that the conditions to Unitrin's obligations set forth
in Sections 8.1 and 8.2 have been satisfied;
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(ii) the opinion of Bryan Cave LLP, counsel for the Company, dated the
Effective Time, and in form and substance satisfactory to Unitrin, covering
the matters set forth in Exhibit 7.2 hereto;
(iii) a certificate of the Company's inspector of elections as to the
vote taken at the Company Shareholders' Meeting with respect to the Merger
and the conversion of Company B Stock into Company A Stock to be effective
immediately prior to the Merger;
(iv) written resignations, effective the Effective Time, of those
directors of the Company and the Company Subsidiaries specified on a
schedule to be delivered by Unitrin to the Company prior to the Closing
(the "Directors Schedule");
(v) Articles of Incorporation of the Company and each of the Company
Subsidiaries certified by the Secretary of State or Insurance Department of
their respective States of incorporation dated as of a date within five (5)
days prior to the Closing; and
(vi) certificates of Good Standing of the Company and each of the Company
Subsidiaries certified by the Secretary of State or Insurance Department of
their respective States of incorporation and qualification dated the date
of the Closing or as close thereto as practicable.
7.3 Unitrin Closing Documents. At the Closing, Unitrin and Acquisition Sub
shall deliver, or cause to be delivered, to the Company:
(i) a certificate of Unitrin, signed by its President or a Vice
President, which shall confirm that the conditions to the Company's
obligations set forth in Sections 9.1 and 9.2 have been satisfied; and
(ii) the opinion of Scott Renwick, Esq., counsel of Unitrin, dated the
Effective Time, and in form and substance satisfactory to the Company,
covering the matters set forth in Exhibit 7.3 hereto.
ARTICLE VIII
CONDITIONS TO THE OBLIGATIONS OF UNITRIN
The obligations of Unitrin under this Agreement to cause this Agreement to
become effective and have the transactions contemplated hereby be consummated
are, at its option, subject to the conditions that:
8.1 Validity of Representation and Warranties. The representations and
warranties of the Company herein contained that are qualified as to
materiality shall be true and correct, and the representations and warranties
of the Company herein contained that are not so qualified shall be true and
correct in all material respects, in each case as of the date of this
Agreement and as of the Effective Time as though made on and at the Effective
Time, except as contemplated or permitted by this Agreement.
8.2 Performance of Obligations. The Company shall have performed in all
material respects all obligations and agreements and complied with all
covenants and conditions contained in this Agreement to be performed and
complied with by it at or prior to the Effective Time.
8.3 Consents. All consents, waivers, approvals, authorizations or orders
listed on the Company Consent Schedule shall have been obtained by the Company
in form and substance reasonably acceptable to Unitrin and copies of the same
shall have been delivered to Unitrin.
8.4 Material Adverse Change. Since the date of this Agreement, no facts,
events or circumstances shall have occurred which, in the reasonable judgment
of Unitrin, could have a Company Material Adverse Effect.
8.5 Company Closing Documents. The Company shall have delivered or caused to
be delivered to Unitrin at the Closing all of the documents listed in Section
7.2 hereof.
8.6 Approval of Company Shareholders. This Agreement, and the conversion of
the Company B Stock to Company A Stock to be effective immediately prior to
the Merger, shall have been approved and adopted by the requisite votes of the
shareholders of the Company in accordance with the provisions of the Articles
of Incorporation of the Company and applicable law.
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8.7 Resignations. The directors of the Company and the Company Subsidiaries
as specified in the Directors Schedule shall have tendered their resignations
in writing, effective at the Effective Time.
8.8 Affiliates. Unitrin shall have received a signed "affiliates letter"
from each of the persons named in the letter delivered by the Company to
Unitrin pursuant to Section 5.7 hereof.
8.9 Licenses. The Company shall have delivered to Unitrin evidence
reasonably satisfactory to Unitrin that the Company's and the Company
Subsidiaries' existing licenses and governmental authorizations necessary for
them to conduct business remain in full force and effect and are not subject
to any restriction.
8.10 Private Placement Securities. Unitrin shall have received evidence
reasonably satisfactory to Unitrin demonstrating that:
(i) the Company Investments identified in Section 2.13(ii) of the Company
Disclosure Schedule as of March 31, 1997 (adjusted for subsequent
acquisitions, dispositions and principal payments) have an aggregate value
(assuming sale or other disposition of all such investments within twenty-
four months) in excess of 95% of the carrying value of such investments
(adjusted for subsequent acquisitions, dispositions and principal payments)
as reflected in the Statutory Financial Statements for the quarter ended
March 31, 1997; and
(ii) the Company has in its possession at its principal place of business
all documentation with respect to the acquisition of such investments which
would be customary to be delivered by the seller thereof to an unrelated
purchaser, including, without limitation, any original note purchase
agreements, indentures, guarantees, security agreements, legal opinions and
officer certificates.
ARTICLE IX
CONDITIONS TO THE OBLIGATIONS OF THE COMPANY
The obligations of the Company under this Agreement to cause this Agreement
to become effective and have the transactions contemplated hereby be
consummated are, at its option, subject to the conditions that:
9.1 Validity of Representations and Warranties. The representations and
warranties of Unitrin herein contained that are qualified as to materiality
shall be true and correct, and the representations and warranties of Unitrin
herein contained that are not so qualified shall be true and correct in all
material respects, in each case as of the date of this Agreement and as of the
Effective Time as though made on and at the Effective Time, except as
contemplated or permitted by this Agreement.
9.2 Performance of Obligations. Unitrin shall have performed in all material
respects all obligations and agreements and complied with all covenants and
conditions contained in this Agreement to be performed and complied with by
them at or prior to the Effective Time.
9.3 Tax Opinion. The Company shall have received from Bryan Cave LLP an
opinion to the effect that the Merger when consummated in accordance with the
terms hereof will constitute a tax-free reorganization within the meaning of
Section 368(a) of the Code. In rendering such opinion, Bryan Cave LLP may rely
upon representations contained in certificates of Unitrin and the Company in
the form previously agreed to by the parties.
9.4 Consents. All consents, waivers, approvals, authorizations or orders
listed on the Unitrin Consent Schedule shall have been obtained by Unitrin in
form and substance reasonably acceptable to the Company and copies of the same
shall have been delivered to the Company.
9.5 Unitrin Closing Documents. Unitrin shall have delivered or cause to be
delivered to the Company at the Closing all of the documents listed in Section
7.3 hereof.
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9.6 Material Adverse Change. Since the date of this Agreement, no facts,
events or circumstances shall have occurred which, in the reasonable judgment
of the Company, could have a Unitrin Material Adverse Effect.
9.7 Fairness Opinion. The Fairness Opinion shall not have been rescinded or
amended in any material respect.
9.8 Inclusion on Nasdaq. The shares of Unitrin Common Stock issuable in
exchange for the Stock Election Shares shall have been included on the
National Market Tier of the Nasdaq Stock Market.
9.9 No Change of Control. Unitrin shall not have effected or entered into an
agreement providing for a change of control of Unitrin. As used herein,
"change of control" shall mean: (a) the acquisition of the beneficial
ownership of more than 40% of outstanding shares of Unitrin Common Stock by a
single person or entity or a group of affiliated persons or entities, (b) the
merger, consolidation or combination of Unitrin with an unaffiliated
corporation in which the Directors of Unitrin immediately prior to such
merger, consolidation or combination constitute less than a majority of the
Board of Directors of the surviving, new or combined entity or (c) the sale of
all or substantially all of the assets of Unitrin.
ARTICLE X
CONDITIONS APPLICABLE TO UNITRIN AND THE COMPANY
The obligations of Unitrin and the Company under this Agreement to cause
this Agreement to become effective and have the transactions contemplated
hereby be consummated are subject to the following terms and conditions:
10.1 Hart-Scott-Rodino Act. Any waiting period applicable to the
consummation of the Merger under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended, shall have expired or been terminated, and no action
shall have been instituted by the Department of Justice or Federal Trade
Commission challenging or seeking to enjoin the consummation of this
transaction, which action shall have not been withdrawn or terminated.
10.2 Governmental Approvals. A written order approving the Merger and the
transactions contemplated thereby from the Missouri Director of Insurance and
the Texas Commissioner of Insurance and any approvals of the Merger and the
transactions contemplated thereby as may be required by other Insurance
Departments shall have been obtained at or prior to the Effective Time in form
and substance reasonably acceptable to Unitrin and Company.
10.3 Injunction. The consummation of the Merger shall not have been
restrained, enjoined or prohibited by any court or governmental authority of
competent jurisdiction. No material litigation or administrative proceeding
shall be pending as of the Effective Time seeking to restrain, enjoin or
prohibit the consummation of this Agreement or the Merger which, in the
reasonable good faith determination of any party, is likely to render it
impossible or unlawful to consummate such transactions; provided, however,
that the provisions of this Section 10.3 shall not apply to any party that has
directly or indirectly solicited or encouraged any such action.
10.4 Shareholder Approval. This Agreement shall have been approved and
adopted at a duly called meeting of the shareholders of the Company by at
least two-thirds of the issued and outstanding shares entitled to vote
thereon.
10.5 Conversion of Company B Stock. All of the issued and outstanding shares
of Company B Stock shall have been converted, effective immediately prior to
the Effective Time, into shares of Company A Stock in accordance with the
Company's Articles of Incorporation and applicable law.
10.6 Registration Statement; Blue Sky. The Registration Statement shall have
been declared effective and no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no action, suit, proceeding
or investigation for that purpose shall have been initiated or threatened by
any governmental authority. Unitrin shall have received all state securities
law authorizations necessary to consummate the transactions contemplated
hereby.
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10.7 Dissenting Reliable Shares. The holders of not more than 150,000 of the
issued and outstanding Shares at the Effective Time shall have delivered
written notice of intent to demand payment of the fair value of their Shares
pursuant to Article XIV of the Articles of the Company.
10.8 Effective Time. The Effective Time shall be no later than 5:00 P.M.
Central Time on October 31, 1997.
ARTICLE XI
TERMINATION AND TERMINATION FEE
11.1 Termination. This Agreement and the transactions contemplated hereby
may be terminated at any time prior to the Closing (i) by mutual written
consent of the Board of Directors of Unitrin and the Board of Directors of the
Company, (ii) by action of the Board of Directors of Unitrin or the Board of
Directors of the Company, if a material breach of any provision of this
Agreement has been committed by the non-terminating party, and such breach has
not been waived, (iii) by action of the Board of Directors of Unitrin, in the
event a condition set forth in Article VIII of this Agreement has not been
satisfied as of the time such condition is required hereunder to be satisfied,
or such condition is or becomes impossible (other than through the failure of
Unitrin to comply with its obligations under this Agreement), (iv) by action
of the Board of Directors of the Company, in the event a condition set forth
in Article IX of this Agreement has not been satisfied as of the time such
condition is required hereunder to be satisfied, or such condition is or
becomes impossible (other than through the failure of the Company to comply
with its obligations under this Agreement), or (v) by action of the Board of
Directors of Unitrin or the Board of Directors of the Company in the event a
condition set forth in Article X of this Agreement has not been satisfied as
of the time such condition is required hereunder to be satisfied, or such
condition is or becomes impossible (other than through the failure of the
terminating party to comply with its obligations under this Agreement).
11.2 Termination Fee. If Unitrin and the Company fail to consummate the
Merger and the Company enters into a binding commitment or agreement regarding
an Extraordinary Transaction with any Third Party (as such terms are defined
in Section 5.6 above), on or prior to January 1, 1998, then the Company shall
promptly pay to Unitrin in cash the sum of ten million dollars ($10,000,000)
contemporaneously with (and subject to) consummation of such Extraordinary
Transaction; provided, however, that such amount shall not be payable by the
Company (i) if the Company was entitled not to consummate the Merger with
Unitrin due to a failure of one or more of the conditions set forth in
Articles IX and X (other than the conditions contained in Sections 9.3, 9.7,
10.4, 10.5 or 10.7) to be satisfied, or (ii) if Unitrin fails to consummate
the Merger based upon a failure of a condition to closing set forth in Article
VIII to be satisfied, unless in the case of either (i) or (ii) above, the
failure of such condition to be satisfied is caused by any action or failure
to act on the part of the Company. Notwithstanding the foregoing, such fee
shall not be payable if the Company was entitled not to consummate the Merger
due to the failure of Bryan Cave LLP to issue its tax opinion specified in
Section 9.3 if such failure resulted from a change in applicable tax laws or
regulations after the date hereof or the failure of Unitrin to deliver its
certificate referred to in Section 9.3.
11.3 Survival of Rights. The payment described in Section 11.2 above shall
be in addition to, and not in limitation of, any right or remedy that any
party hereunder may have in the event of a breach by any party of this
Agreement.
ARTICLE XII
SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS
All of the representations, warranties and covenants of the parties
hereunder shall be deemed to be conditions of the Merger and shall not survive
the Closing, provided that the covenants of Unitrin set forth in Section 6.4
shall survive the Closing.
A-27
<PAGE>
ARTICLE XIII
MISCELLANEOUS
13.1 Payment of Expenses. Except as provided in Article XI, whether or not
the Merger shall be consummated, each party hereto shall pay its own expenses
incident to preparing for, entering and carrying out this Agreement and to the
consummation of the Merger.
13.2 Entire Agreement. This Agreement (together with the Schedules and
Exhibits hereto and the documents referred to herein) contains, and is
intended as, a complete statement of all of the terms of the arrangements
between the parties with respect to the matters provided for herein, and
supersedes any previous agreements and understandings between the parties with
respect to those matters, including, without limitation, the agreement in
principle between Unitrin and Company dated May 7, 1997. There are no third
party beneficiaries to this Agreement, provided that the Indemnified Parties
and their heirs, executors and personal representatives shall be third party
beneficiaries of the covenants of Unitrin set forth in Section 6.4.
13.3 Modifications, Amendments and Waivers. At any time prior to the
Effective Time, the parties hereto may, by written agreement, (i) extend the
time for the performance of any of the obligations or other acts of the
parties hereto, (ii) waive any inaccuracies in the representations and
warranties contained in this Agreement or in any document delivered pursuant
hereto, (iii) waive compliance with any of the covenants or agreements
contained in this Agreement, or (iv) make any other modification of this
Agreement approved by the respective Boards of Directors of the parties
hereto. This Agreement shall not be altered or otherwise amended except
pursuant to an instrument in writing executed and delivered on behalf of each
of the parties hereto. For the convenience of the parties hereto, this
Agreement may be executed in any number of counterparts, and each such
counterpart shall be deemed to be an original instrument, and all such
counterparts shall together constitute the same agreement.
13.4 Assignment; Governing Law. Neither this Agreement nor any right,
obligation or interest herein shall be assignable by any of the parties
hereto, and any attempted assignment without each of the other parties'
consent shall be void. This agreement shall be construed in accordance with
the laws of the State of Missouri.
13.5 Schedules. All information set forth in the Company Disclosure Schedule
and the Unitrin Disclosure Schedule shall be deemed a representation and
warranty of the Company and Unitrin, respectively, as to the accuracy of such
information.
13.6 Press Releases. Except as may otherwise be required by law, no
publicity release or announcement concerning this Agreement or the
transactions contemplated hereby shall be made prior to the Effective Time
without advance approval thereof by the Company and Unitrin. The Company and
Unitrin will cooperate with each other in the development and distribution of
all news releases and other public information disclosures with respect to
this Agreement or any of the transactions contemplated hereby.
13.7 Notices. Any notice, request, instruction or other document to be given
hereunder by any party to the others shall be in writing and delivered
personally or sent by registered or certified mail, postage prepaid, overnight
express service or confirmed facsimile transmission, if to Unitrin, addressed
to Unitrin, Inc., One East Wacker Drive, 10th Floor, Chicago, Illinois 60601,
Attention: Richard C. Vie, facsimile: (312) 661-4690 (with a copy to Unitrin,
Attention: Scott Renwick, Esq., facsimile: (312) 661-4941); and if to the
Company addressed to The Reliable Life Insurance Company, 231 West Lockwood
Avenue, St. Louis, Missouri 63119, Attention: Lewis B. Shepley, facsimile:
(314) 968-4899, (with a copy to Bryan Cave LLP, One Metropolitan Square, 211
North Broadway, Suite 3600, St. Louis, Missouri 63102-2750, Attention: William
F. Seabaugh, Esq., facsimile: (314) 259-2020), or to such other persons as may
be designated in writing by the parties.
A-28
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and delivered as of the day and year first above written.
Attest: Unitrin, Inc.
/s/ Scott Renwick /s/ Richard C. Vie
- --------------------------------- By: _________________________________
Attest: Unitrin Acquisition Corporation
/s/ Scott Renwick /s/ Richard C. Vie
- --------------------------------- By: _________________________________
Attest: The Reliable Life Insurance Company
/s/ Ralph L. Grossman /s/ Douglas B. Chomeau
- --------------------------------- By: _________________________________
A-29
<PAGE>
APPENDIX B
DISSENTERS' RIGHTS
ARTICLE XIV OF THE AMENDED AND RESTATED
ARTICLES OF INCORPORATION OF THE
RELIABLE LIFE INSURANCE COMPANY
1. If the Corporation is a party to a merger or consolidation, except as
described in Section 5 of this Article XIV below, and a shareholder of the
Corporation shall file with the Corporation, prior to or at the meeting of
shareholders at which the plan of merger or consolidation is submitted to a
vote, a written objection to such plan of merger or consolidation, and shall
not vote in favor thereof, and such shareholder, within 20 days after the
merger or consolidation is effective, shall make written demand on the
surviving or new corporation for payment of the fair market value of his or
her shares as of the day prior to the date on which the vote was taken
approving the merger or consolidation (or in the event the plan of merger or
consolidation is not required to be submitted to shareholders for a vote,
shall make such a written demand on the new or surviving corporation within 20
days after the merger or consolidation is effective or within 20 days after
written notice to the shareholders of the effectiveness of the merger or
consolidation, whichever is later), the surviving or new corporation shall pay
to such shareholder, upon surrender of his or her certificate or certificates
representing such shares, the fair market value thereof. Such demand shall
state the number and class of the shares owned by such dissenting shareholder.
Any shareholder failing to make demand within the 20 day period shall be
conclusively presumed to have consented to the merger or consolidation and
shall be bound by the terms thereof.
2. If within 30 days after the date on which such merger or consolidation
was effected (or, if later, within 30 days after the notice to shareholders of
the effectiveness of any merger or consolidation not required to be submitted
to the shareholders for a vote), the value of such shares is agreed upon
between the dissenting shareholder and the surviving or new corporation,
payment therefor shall be made within 90 days after the date on which such
merger or consolidation was effected (or, if later, within 90 days of such
notice), upon the surrender of such shareholder's certificate or certificates
representing said shares. Upon payment of the agreed value, the dissenting
shareholders shall cease to have any interest in such shares or in the
Corporation.
3. If within such period of 30 days, the shareholder and the surviving or
new corporation do not so agree, then the dissenting shareholder may, within
60 days after the expiration of the 30 day period, file a petition in any
court of competent jurisdiction within the county in which the registered
office of the surviving or new corporation is situated, asking for a finding
and determination of a fair market value of such shares, and shall be entitled
to judgment against the surviving or new corporation for the amount of such
fair market value as of the date prior to the date on which said vote was
taken approving such merger or consolidation (or on which such merger or
consolidation was effective, if it was not required to be submitted to the
shareholders for a vote), together with interest thereon to the date of such
judgment. The judgment shall be payable only upon and simultaneously with
surrender to the surviving or new corporation of the certificate or
certificates representing such shares. Upon the payment of the judgment, the
dissenting shareholder shall cease to have any interest in such shares, or in
the surviving or new corporation. Such shares may be held and disposed of by
the surviving or new corporation as it may see fit. Unless the dissenting
shareholder shall file such petition within the time herein limited, such
shareholder and all persons claiming under him or her shall be conclusively
presumed to have approved and ratified the merger or consolidation, and shall
be bound by the terms thereof.
4. The right of a dissenting shareholder to be paid the fair market value of
his or her shares as herein provided shall cease if and when the Corporation
shall abandon the merger or consolidation.
5. Notwithstanding anything else herein contained, no shareholder will be
entitled to any dissenter's rights with respect to any merger or consolidation
effecting a reorganization of the Corporation in which the shareholders'
relative equity ownership interests in the assets of the Corporation or any
surviving or resulting corporation remain unchanged and there are no classes
of stock authorized by the surviving or resulting corporation other than those
corresponding to the classes of capital stock of the Corporation immediately
prior to the merger or consolidation.
B-1
<PAGE>
APPENDIX C
OPINION OF
SOCIETE GENERALE SECURITIES CORPORATION
June 18, 1997
Board of Directors
The Reliable Life Insurance Company
231 West Lockwood Avenue
Webster Groves, Missouri 63119
Gentlemen:
The Reliable Life Insurance Company, a Missouri life insurance company (the
"Company"), Unitrin, Inc. (the "Acquiror") and a wholly owned subsidiary of
the Acquiror (the "Sub") propose to enter into an Agreement and Plan of
Reorganization (the "Agreement") which provides, among other things, for a
merger (the "Merger") of the Sub with and into the Company pursuant to which
the Company will become a wholly owned subsidiary of the Acquiror and each
outstanding share of Class A Common Stock, par value $1.00 per share, of the
Company immediately prior to the Effective Time of the Merger (collectively,
the "Class A Shares"), will be converted into the right to receive, subject to
the election and allocation procedures set forth in the Agreement, either (i)
2.235 shares of the common stock of the Acquiror, par value $.10 per share
(the "Acquiror Shares"), together with the associated preferred share purchase
rights issued under the Rights Agreement between the Acquiror and First
Chicago Trust Company of New York, as Rights Agent, dated as of August 3, 1994
or (ii) $119.00 in cash without interest (together, the "Merger
Consideration"). You have asked us to render our opinion as to the fairness of
the Merger Consideration pursuant to the Agreement from a financial point of
view to the holders of the Class A Shares.
In arriving at our opinion, we have (i) reviewed certain publicly available
business and financial information relating to the Company and the Acquiror,
including the proxy statement (the "Proxy Statement") to be filed with the
Missouri Insurance Department; (ii) reviewed certain financial and other
information of the Company and the Acquiror prepared by their respective
managements, including historical pro forma financial statements, analyses and
forecasts of certain costs savings and related expenses and synergies expected
to result from the Merger (the "Expected Savings and Synergies") and forecasts
of the Company prepared according to Statutory Accounting Principles; (iii)
conducted discussions with members of senior management of the Company and the
Acquiror concerning their respective businesses and prospects, before and
after giving effect to the Merger, and the Expected Savings and Synergies;
(iv) reviewed the historical market prices and trading activity for the Class
A Shares and the Acquiror Shares and compared them with those of certain
publicly traded companies which we deemed to be relevant; (v) compared the
historical and projected results of operations of the Company and the Acquiror
with those of certain companies which we deemed to be relevant; (vi) compared
the proposed financial terms of the Merger with the financial terms of certain
other mergers and acquisitions which we deemed to be relevant; (vii) reviewed
a draft of the Agreement dated June 13, 1997 and the Letter of Intent dated
May 7, 1997 in the form provided to us and have assumed that the final form of
the Agreement will not vary in any manner that is material to our analysis;
(viii) reviewed the Subordinated Promissory Note and Loan Agreement between
the Company and Southwest Bank of St. Louis both dated March 31, 1997 and (ix)
reviewed such other financial studies and analyses and performed such other
investigations and took into account such other matters as we deemed
appropriate.
For purposes of rendering our opinion we have assumed, in all respects
material to our analysis, that the representations and warranties of each
party contained in the Agreement and all related documents and instruments
(collectively, the "Documents") are true and correct, that each party will
perform all of the covenants and agreements required to be performed by it
under such Documents and that all conditions to the consummation of the Merger
will be satisfied without waiver thereof. We have also assumed that all
material
C-1
<PAGE>
governmental, regulatory or other consents and approvals will be obtained and
that in the course of obtaining any necessary governmental, regulatory or
other consents and approvals, or any amendments, modifications or waivers to
any documents to which either of the Company or the Acquiror are party, no
restrictions will be imposed or amendments, modification or waivers made that
would have any material adverse effect on the contemplated benefits to the
Company and the Acquiror of the Merger.
In preparing our opinion, we have with your consent assumed and relied upon
the accuracy and completeness of all the financial and other information
provided to, discussed with, or otherwise made available to us, or publicly
available, and have not independently verified such information or undertaken
an independent evaluation or appraisal of any of the assets or liabilities of
the Company or the Acquiror or been furnished with any such evaluation or
appraisal. In addition, we have not conducted any physical inspection of the
properties or facilities of the Company or the Acquiror. With respect to the
financial forecasts, and the Expected Savings and Synergies, furnished to or
discussed with us by the Company or the Acquiror, we have assumed that they
have been reasonably prepared and reflect the best currently available
estimates and judgments of the Company's and the Acquiror's management as to
the expected future financial performance of the Company or the Acquiror, or
the surviving entity after giving effect to the Merger, as the case may be,
including after taking into account the impact of the Merger, and that all
such Expected Savings and Synergies will be realized in the amounts and at the
time indicated thereby. We have further assumed that the Merger will be
accounted for as a purchase under generally accepted accounting principles and
that it will qualify as a tax-free reorganization for U.S. federal income tax
purposes. Our opinion is necessarily based on market, economic and other
conditions as they exist on the date hereof.
We are not expressing any opinion as to what the value of the Acquiror
Shares actually will be when issued to the Company's stockholders pursuant to
the Merger or the prices at which such Acquiror Shares will trade subsequent
to the Merger. With respect to the Acquiror's investments in Litton
Industries, Inc., Curtiss-Wright Corporation and Western Atlas, Inc.
(collectively, the "Investees"), we relied on the Acquiror's publicly
available financial statements regarding the market value of the Investees'
securities held by the Acquiror and we did not undertake any investigation of
the Investees. We were not requested to, and did not, solicit third party
indications of interest in acquiring all or any part of the Company. Our
opinion does not in any manner address the Company's underlying business
decision to effect the Merger.
We will receive a fee for rendering this opinion. As we have previously
advised you, SGSC and its affiliates, in the ordinary course of business, have
from time to time provided, and in the future may continue to provide,
commercial and investment banking services to the Company and the Acquiror,
and have received fees for the rendering of such services. In the ordinary
course of business, SGSC and its affiliates may trade the securities of the
Company and/or the Acquiror for their own account and for the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities.
This opinion is for the information of the Board of Directors only in
connection with its consideration of the Merger, does not constitute a
recommendation to any stockholder as to how such stockholder should vote on
the proposed Merger or any other matter related thereto, or whether such
stockholder should elect to receive cash or Acquiror Shares, and is not to be
quoted or referred to, in whole or in part, or disclosed in any document, nor
shall this letter be used for any other purposes, without SGSC's prior written
consent. We hereby consent, however, to the inclusion of this opinion as an
exhibit to the Proxy Statement and the Registration Statement (as defined in
the Agreement) distributed in connection with the Merger, together with a
summary hereof in a form reasonably acceptable to us and our counsel, and in
any filing with applicable regulatory authorities.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Merger Consideration is fair from a financial point of view
to the holders of the Class A Shares.
Very truly yours,
Societe Generale Securities
Corporation
C-2
<PAGE>
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Delaware law, a corporation may indemnify any person who was or is a
party or is threatened to be made a party to an action (other than an action
by or in the right of the corporation) by reason of his service as a director,
officer, employee or agent of the corporation, or his service, at the
corporation's request, as a director, officer, employee or agent of another
corporation or other enterprise, against expenses (including attorneys' fees)
that are actually and reasonably incurred by him ("Expenses"), and judgments,
fines and amounts paid in settlement that are actually and reasonably incurred
by him, in connection with the defense or settlement of such action, provided
that he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the corporation's best interests, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe that his
conduct was unlawful. Although Delaware law permits a corporation to indemnify
any person referred to above against Expenses in connection with the defense
or settlement of an action by or in the right of the corporation, provided
that he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the corporation's best interests, if such person has been
judged liable to the corporation, indemnification is only permitted to the
extent that the Court of Chancery (or the court in which the action was
brought) determines that, despite the adjudication of liability, such person
is entitled to indemnity for such Expenses as the court deems proper. The
General Corporation Law of the State of Delaware ("DGCL") also provides for
mandatory indemnification of any director, officer, employee or agent against
Expenses to the extent such person has been successful in any proceeding
covered by the statute. In addition, the DGCL provides the general
authorization of advancement of a director's or officer's litigation expenses
in lieu of requiring the authorization of such advancement by the Board of
Directors in specific cases, and that indemnification and advancement of
expenses provided by the statute shall not be deemed exclusive of any other
rights to which those seeking indemnification or advancement of expenses may
be entitled under any bylaw, agreement or otherwise.
The Certificate of Incorporation of the Registrant provides for the broad
indemnification of the directors and officers of the Registrant and for
advancement of litigation expenses to the fullest extent permitted by current
Delaware law.
The Certificate of Incorporation of the Registrant eliminates the personal
liability of a director to the Registrant or its shareholders under certain
circumstances, for monetary damages for breach of fiduciary duty as a
director.
Registrant maintains a directors and officers liability insurance policy
insuring the directors and officers of Registrant and its subsidiaries in
certain instances.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as a part of this Registration Statement:
(a) EXHIBITS.
The following exhibits are filed herewith or incorporated herein by
reference:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 Agreement and Plan of Reorganization, dated as of June 20, 1997,
by and among Unitrin, Unitrin Acquisition Corporation and Reliable
(attached as Appendix A to the Proxy Statement/Prospectus included
as part of this Registration Statement).
3.1 Certificate of Incorporation of Unitrin (incorporated herein by
reference to Exhibit 3.1 to Unitrin's Registration Statement on
Form 10 dated February 15, 1990).
3.2 Amended and Restated By-Laws of Unitrin (incorporated herein by
reference to Exhibit 3.2 to Unitrin's 1994 Annual Report on Form
10-K).
4 Rights Agreement between Unitrin and First Chicago Trust Company
of New York, as rights agent, dated as of August 3, 1994
(incorporated herein by reference to Exhibit 1 to Unitrin's
Registration Statement on Form 8-A dated August 3, 1994).
5.1+ Opinion of Scott Renwick, Esq.
8.1+ Tax opinion of Bryan Cave LLP.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Coopers & Lybrand L.L.P.
23.3+ Consent of Scott Renwick, Esq. (included in Exhibit 5.1).
23.4+ Consent of Bryan Cave LLP (included in Exhibit 8.1).
23.5+ Consent of Societe Generale Securities Corporation.
99.1+ Form of Election Form for Reliable shareholders.
99.2+ Form of Proxy Card for Reliable Special Meeting.
</TABLE>
- --------
+To be filed by amendment.
(b) FINANCIAL STATEMENT SCHEDULES.
The following financial statement schedules and report thereon are filed as
part of this Registration Statement:
<TABLE>
<S> <C>
Report of Independent Accountants.................................... II-3
Scheudle I - Summary of Investments.................................. II-4
Schedule III - Supplemental Insurance Information.................... II-5
Schedule IV - Reinsurance............................................ II-6
</TABLE>
II-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of The Reliable Life Insurance Company:
In connection with our audits of the consolidated financial statements of
The Reliable Life Insurance Company as of December 31, 1996 and 1995, and for
each of the three years in the period ended December 31, 1996, which financial
statements are included in this registration statement, we have also audited
the financial statement schedules listed in Part II, Item 21(b) 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.
/s/ Coopers & Lybrand L.L.P.
St. Louis, Missouri February 20, 1997
II-3
<PAGE>
THE RELIABLE LIFE INSURANCE COMPANY
SCHEDULE I--SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------------------------------------- -----------------------------------------
AMOUNT AT WHICH AMOUNT AT WHICH
SHOWN IN THE SHOWN IN THE
TABLE OF INVESTMENT COST VALUE BALANCE SHEET COST VALUE BALANCE SHEET
------------------- ------------ ------------ --------------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities:
Bonds:
United States
Government and
government agencies
and authorities...... $158,794,666 $162,463,232 $162,463,232 $152,214,578 $160,655,007 $160,655,007
States, municipalities
and political
subdivisions......... 32,877,770 33,567,550 33,567,550 36,019,751 37,114,894 37,114,894
Public utilities...... 15,611,697 16,750,829 16,750,829 15,082,154 16,905,766 16,905,766
Convertibles and bonds
with warrants
attached............. 4,357,345 4,427,959 4,427,959 -- -- --
All other corporate
bonds................ 99,044,840 102,231,967 102,231,967 97,735,610 104,340,519 104,340,519
Notes receivable....... 250,000 250,000 250,000 569,235 569,235 569,235
Redeemable preferred
stock................. 80,465,218 80,173,752 80,173,752 73,504,865 74,723,216 74,723,216
------------ ------------ ------------ ------------ ------------ ------------
Total fixed
maturities.......... 391,401,536 399,865,289 399,865,289 375,126,193 394,308,637 394,308,637
------------ ------------ ------------ ------------ ------------ ------------
Equity securities:
Common stocks:
Banks, trust and
insurance companies.. 139,283 755,456 755,456 129,421 436,891 436,891
Industrial,
miscellaneous and all
other................ 260,843 440,063 440,063 270,676 294,870 294,870
Nonredeemable
preferred stocks..... 2,681,735 2,769,637 2,769,637 3,500,000 3,500,000 3,500,000
------------ ------------ ------------ ------------ ------------ ------------
Total equity
securities.......... 3,081,861 3,965,156 3,965,156 3,900,097 4,231,761 4,231,761
------------ ------------ ------------ ------------ ------------ ------------
Mortgage loans on real
estate................. 22,078,007 xxx 22,078,007 27,311,204 xxx 26,748,204
Real estate............. 4,109,582 xxx 3,399,280 4,220,302 xxx 3,494,680
Real estate--Acquired in
satisfaction of debt... 7,637,295 xxx 4,617,109 7,602,722 xxx 4,582,536
Policy loans............ 28,806,034 xxx 28,806,034 26,669,900 xxx 26,669,900
Short-term investments.. 12,732,926 xxx 12,732,926 12,312,878 xxx 12,312,878
------------ ------------ ------------ ------------ ------------ ------------
Total investments... $469,847,241 $ xxx $475,463,801 $457,143,296 $ xxx $472,348,596
============ ============ ============ ============ ============ ============
</TABLE>
Real estate and mortgage loans reflect provisions for losses considered to be
other than temporary.
II-4
<PAGE>
THE RELIABLE LIFE INSURANCE COMPANY
SCHEDULE III--SUPPLEMENTAL INSURANCE INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (000'S OMITTED)
<TABLE>
<CAPTION>
DEFERRED FUTURE POLICY OTHER POLICY BENEFITS, CLAIMS,
POLICY BENEFITS, LOSSES, CLAIMS AND NET LOSSES AND AMORTIZATION OF
ACQUISITION CLAIMS AND LOSS UNEARNED BENEFITS PREMIUM INVESTMENT SETTLEMENT DEFERRED POLICY
COST EXPENSES PREMIUM PAYABLE REVENUE INCOME EXPENSES ACQUISITION COSTS
----------- ----------------- -------- ------------ ------- ---------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996............ $70,437 $376,287 $2,925 $ 8,998 $94,005 $32,348 $56,258 $10,101
1995............ 65,164 365,405 4,743 10,686 97,315 31,422 60,327 10,038
1994............ 58,161 355,575 8,209 11,421 92,041 30,726 57,817 9,542
<CAPTION>
OTHER
OPERATING
EXPENSES
---------
<S> <C>
1996............ $52,657
1995............ 50,202
1994............ 46,513
</TABLE>
II-5
<PAGE>
THE RELIABLE LIFE INSURANCE COMPANY
SCHEDULE IV--REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
PERCENTAGE OF
CEDED TO ASSUMED FROM AMOUNT ASSUMED
1996 GROSS AMOUNT OTHER COMPANIES OTHER COMPANIES NET AMOUNT TO NET
- ---- -------------- --------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Life insurance in force. $3,577,106,000 $ 42,738,000 $ -- $3,534,368,000 0%
============== ============ ========== ============== ====
Premiums earned:
Life insurance........ $ 81,045,726 $ 452,357 $ -- $ 80,593,369 0%
Accident and health
insurance............ 11,956,866 855,946 2,020,696 13,121,616 15%
Property and liability
insurance............ -- -- 289,755 289,755 100%
-------------- ------------ ---------- -------------- ----
Total premiums
earned............. $ 93,002,592 $ 1,308,303 $2,310,451 $ 94,004,740 2%
============== ============ ========== ============== ====
<CAPTION>
1995
- ----
<S> <C> <C> <C> <C> <C>
Life insurance in force. $3,532,882,000 $126,998,000 $ -- $3,405,884,000 0%
============== ============ ========== ============== ====
Premiums earned:
Life insurance........ $ 79,146,242 $ 913,473 $ -- $ 78,232,769 0%
Accident and health
insurance............ 14,747,406 2,273,897 5,395,304 17,868,813 30%
Property and liability
insurance............ -- -- 1,213,710 1,213,710 100%
-------------- ------------ ---------- -------------- ----
Total premiums
earned............. $ 93,893,648 $ 3,187,370 $6,609,014 $ 97,315,292 7%
============== ============ ========== ============== ====
<CAPTION>
1994
- ----
<S> <C> <C> <C> <C> <C>
Life insurance in force. $3,394,609,000 $171,631,000 $ -- $3,222,978,000 0%
============== ============ ========== ============== ====
Premiums earned:
Life insurance........ $ 76,425,715 $ 2,532,496 $ 346,409 $ 74,239,628 0%
Accident and health
insurance............ 14,861,052 4,315,342 6,524,879 17,070,589 38%
Property and liability
insurance............ -- -- 731,154 731,154 100%
-------------- ------------ ---------- -------------- ----
Total premiums
earned............. $ 91,286,767 $ 6,847,838 $7,602,442 $ 92,041,371 8%
============== ============ ========== ============== ====
</TABLE>
II-6
<PAGE>
(c) REPORTS, OPINIONS AND APPRAISALS.
The opinion of Societe General Securities Corporation is attached as
Appendix C to the Proxy Statement/Prospectus filed as part of this
Registration Statement.
ITEM 22. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange
Act that is incorporated by reference in the Registration Statement 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.
(b) 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
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(c) The Registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (b) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities 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 purposes of determining any
liability under the Securities Act, 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.
(d) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the SEC such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
(e) 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.
(f) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired or involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-7
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, UNITRIN INC. HAS DULY
CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CHICAGO, STATE OF
ILLINOIS, ON JULY 16, 1997.
UNITRIN, INC.
/s/ Richard C. Vie
By: _________________________________
Richard C. Vie
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON
THE DATE INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Richard C. Vie President, Chief Executive July 16, 1997
____________________________________ Officer and Director
Richard C. Vie
/s/ Jerrold V. Jerome Chairman of the Board and July 16, 1997
____________________________________ Director
Jerrold V. Jerome
/s/ Eric J. Draut Treasurer and Chief July 16, 1997
____________________________________ Financial Officer
Eric J. Draut (principal accounting and
financial officer)
/s/ James E. Annable Director July 16, 1997
____________________________________
James E. Annable
/s/ Reuben L. Hedlund Director July 16, 1997
____________________________________
Reuben L. Hedlund
/s/ George A. Roberts Director July 16, 1997
____________________________________
George A. Roberts
/s/ Fayez S. Sarofim Director July 16, 1997
____________________________________
Fayez S. Sarofim
/s/ Henry E. Singleton Director July 16, 1997
____________________________________
Henry E. Singleton
</TABLE>
II-8
<PAGE>
EXHIBIT 23.1
The Board of Directors
UNITRIN, Inc.
We consent to the use of our reports incorporated herein by reference and to
the reference to our firm under the heading "Experts" in the registration
statement.
KPMG Peat Marwick LLP
Chicago, Illinois
July 15, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4 of
our reports dated February 20, 1997, except for Note 14, for which the date is
June 20, 1997, on our audits of the consolidated financial statements and the
financial statement schedules of The Reliable Life Insurance Company and
Subsidiaries. We also consent to the reference to our Firm under the caption
"Experts."
/s/ Coopers & Lybrand l.l.p.
St. Louis, Missouri
July 15, 1997
