<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
MIDLAND FINANCIAL GROUP, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
Elena Barham
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock
----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
5,563,923
----------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
$9.00 is the agreed upon price per share as set forth in the Agreement
----------------------------------------------------------------------
and Plan of Merger
----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$50,075,307
----------------------------------------------------------------------
(5) Total fee paid:
[X] Fee paid previously with preliminary materials:
[X] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: $10,015
-------------------
(2) Form, Schedule or Registration Statement No.:
Schedule 14A (Preliminary)
---------------------------
(3) Filing Party: Registrant
---------------------------
(4) Date Filed: November 27, 1996
---------------------------
<PAGE> 2
MIDLAND FINANCIAL GROUP, INC.
825 Crossover Lane
Memphis, Tennessee 38117
February 7, 1997
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders of
Midland Financial Group, Inc. ("Midland"), which will be held on Friday, March
7, 1997, at the Company's offices at 825 Crossover Lane, Suite 112, Memphis,
Tennessee 38117 at 9:00 a.m., Central time (the "Special Meeting").
At this meeting, you will be asked to consider and vote upon a proposed
merger (the "Merger") involving Midland and The Progressive Corporation
("Progressive"), pursuant to which TPC Acquisition Corporation, a wholly-owned
subsidiary of Progressive ("Merger Sub"), will be merged with and into Midland.
Upon consummation of the Merger, Midland will be the surviving company as a
wholly-owned subsidiary of Progressive, and each share of common stock, par
value $1.00 per share, of Midland ("Common Stock"), will be converted into the
right to receive from Progressive $9.00 in cash.
Midland's Common Stock is traded on the Nasdaq National Market under the
symbol "MDLD." On February 4, 1997, the high and low sales prices of such Common
Stock were $8.37 and $8.84, respectively.
The Merger is more fully described in the accompanying Proxy Statement and
a copy of the Agreement and Plan of Merger dated as of November 6, 1996 (the
"Merger Agreement") is set forth as Appendix A to the accompanying Proxy
Statement.
THE BOARD OF DIRECTORS BELIEVES THAT THE MERGER IS FAIR TO AND IN THE BEST
INTERESTS OF MIDLAND AND ITS SHAREHOLDERS. THE BOARD OF DIRECTORS HAS APPROVED
THE MERGER AGREEMENT AND RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE MERGER
AGREEMENT.
All shareholders are invited to attend the Special Meeting in person.
Approval of the Merger requires the affirmative vote of a majority of the
outstanding shares of Common Stock.
The accompanying Proxy Statement provides detailed information concerning
the Merger and certain additional information. You are urged to read and
carefully consider this information. Also enclosed are copies of Midland's
Annual Report on Form 10-K for the year ended December 31, 1995, as amended, and
its Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, as
amended.
Because of the significance of the proposed transaction to Midland, your
participation in the meeting, in person or by proxy, is especially important.
In order that your shares may be represented at the Special Meeting, you
are urged promptly to complete, sign, date and return the accompanying proxy
card in the enclosed envelope, whether or not you plan to attend the Special
Meeting. If you attend the Special Meeting in person, you may, if you wish, vote
personally on all matters brought before the Special Meeting even if you have
previously returned your Proxy.
Sincerely,
Joseph W. McLeary
Chairman and Chief Executive Officer
<PAGE> 3
MIDLAND FINANCIAL GROUP, INC.
----------------------------
NOTICE OF
SPECIAL MEETING OF SHAREHOLDERS
To Be Held on March 7, 1997
----------------------------
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of Midland
Financial Group, Inc. ("Midland") will be held on Friday, March 7, 1997 at the
Company's offices at 825 Crossover Lane, Suite 112, Memphis, Tennessee 38117 at
9:00 a.m., Central time, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt the Agreement
and Plan of Merger dated as of November 6, 1996 (the "Merger Agreement") among
Midland, The Progressive Corporation ("Progressive") and TPC Acquisition
Corporation ("Merger Sub") and the transactions contemplated thereby, a copy of
which is set forth as Appendix A to the attached Proxy Statement. The Merger
Agreement provides for, among other things, the proposed merger of Merger Sub, a
Tennessee corporation, that is a wholly-owned subsidiary of Progressive, with
and into Midland (the "Merger") with Midland to be the surviving corporation in
the Merger; and
2. To transact such other business as may properly come before the meeting.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only shareholders of record at the close of business on January 13, 1997,
are entitled to notice of, and to vote at, the meeting and any adjournments
thereof.
Approval of the Merger Agreement requires the affirmative vote of a
majority of the outstanding shares of Midland common stock.
THE BOARD OF DIRECTORS OF MIDLAND RECOMMENDS THAT SHAREHOLDERS VOTE TO
APPROVE THE MERGER AGREEMENT.
BY ORDER OF THE BOARD
OF DIRECTORS
ELENA BARHAM
Secretary
Memphis, Tennessee
February 7, 1997
<PAGE> 4
PROXY STATEMENT
MIDLAND FINANCIAL GROUP, INC.
PROXY STATEMENT FOR SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON MARCH 7, 1997
This Proxy Statement and the accompanying form of proxy are being furnished
in connection with the solicitation of proxies by the Board of Directors of
Midland Financial Group, Inc. ("Midland"), to be used at the Special Meeting of
Shareholders of Midland to be held on March 7, 1997 at 9:00 a.m., Central time
(the "Special Meeting"). This Proxy Statement and the accompanying proxy are
first being mailed to shareholders on or about February 7, 1997.
At the Special Meeting, shareholders will consider and vote upon the
approval and adoption of the Agreement and Plan of Merger dated as of November
6, 1996 (the "Merger Agreement"), among The Progressive Corporation
("Progressive"), Midland and TPC Acquisition Corporation, a wholly-owned
subsidiary of Progressive ("Merger Sub"). The Merger Agreement provides for the
merger (the "Merger") of Merger Sub with and into Midland. Upon the
effectiveness of the Merger, Midland will be the surviving corporation as a
wholly-owned subsidiary of Progressive (the "Surviving Corporation").
Pursuant to the terms of the Merger Agreement, upon the effectiveness of
the Merger (the "Effective Time"), each share of common stock, $1.00 par value
per share, of Midland (the "Common Stock") outstanding prior to the Effective
Time will be converted into a right to receive from Progressive $9.00 in cash
(the "Merger Consideration"). A copy of the Merger Agreement is attached hereto
as Appendix "A" and is incorporated herein by reference.
THE BOARD OF DIRECTORS OF MIDLAND RECOMMENDS THAT SHAREHOLDERS VOTE TO
APPROVE THE MERGER AGREEMENT.
Only shareholders of record at the close of business on January 13, 1997
(the "Record Date"), will be entitled to notice of, and to vote at, the Special
Meeting. At the close of business on the Record Date, there were 5,550,198
shares of Common Stock outstanding and entitled to vote at the Special Meeting.
Each share of Common Stock is entitled to one vote. The holders of a majority of
the Common Stock issued and outstanding and entitled to vote at the Special
Meeting, present in person or represented by proxy, shall constitute a quorum
for the transaction of business thereat. An "abstention" will be considered
present for quorum purposes, but will have the same effect as a vote "against"
the proposal to approve the Merger Agreement. Broker "non-votes" will not be
considered present for quorum purposes and will have the same effect as a vote
"against" the proposal to approve the Merger Agreement. A "broker non-vote"
refers to shares represented at the Special Meeting in person or by proxy by a
broker or nominee where such broker or nominee (i) has not received voting
instructions on a particular matter from the beneficial owners or persons
entitled to vote and (ii) the broker or nominee does not have the discretionary
voting power on such matter.
If the accompanying proxy card is executed and returned, it will be voted
at the Special Meeting in accordance with the specifications made thereon, or if
no specifications are made, will be voted for approval of the Merger Agreement
and for approval of the other business presented at the Special Meeting;
however, a proxy may be revoked at any time before it is voted by submission of
a written revocation to Midland, by the return of a new proxy to Midland or by
the shareholder's personal vote at the Special Meeting. A written revocation or
new proxy may be sent to Midland at 825 Crossover Lane, Memphis, Tennessee 38117
Attention: Secretary, and must be received prior to the Special Meeting. No
special form of revocation is required. The presence of a shareholder at the
Special Meeting does not automatically revoke his proxy.
SHAREHOLDERS ARE REQUESTED TO PROMPTLY SIGN AND DATE THE ACCOMPANYING PROXY
CARD AND RETURN IT IN THE ENCLOSED POSTAGE-PAID, ADDRESSED ENVELOPE, EVEN IF
THEY PLAN TO ATTEND THE SPECIAL MEETING. FAILURE TO RETURN A PROPERLY EXECUTED
PROXY CARD OR TO VOTE AT THE SPECIAL MEETING WILL HAVE THE SAME EFFECT AS A VOTE
AGAINST THE MERGER AGREEMENT.
The Merger will be a taxable transaction to shareholders of Midland for
federal income tax purposes.
------------------
<PAGE> 5
SUMMARY
The following is a summary of certain information contained elsewhere in this
Proxy Statement. Reference is made to, and this summary is qualified in its
entirety by, the more detailed information contained elsewhere in this Proxy
Statement and in the attached Appendices. Shareholders are urged to read
carefully this Proxy Statement and the attached Appendices in their entirety.
THE SPECIAL MEETING AND REQUIRED VOTE
The Special Meeting of Midland shareholders will be held on Friday, March
7, 1997, at the Company's offices at 825 Crossover Lane, Suite 112, Memphis,
Tennessee 38117 at 9:00 a.m., Central time. Only holders of record of Common
Stock at the close of business on January 13, 1997 (the "Record Date"), will be
entitled to vote at the Special Meeting. On the Record Date, there were issued
and outstanding 5,550,198 shares of Common Stock held by 91 holders of record.
Each such share is entitled to one vote on each matter which is brought before
the shareholders at the Special Meeting.
At the Special Meeting, the shareholders will be asked to consider and vote
upon a proposal to approve and adopt the Merger Agreement, which provides for
the merger of Merger Sub with and into Midland, with Midland being the Surviving
Corporation. Approval of the Merger Agreement requires the affirmative vote of a
majority of the outstanding shares of Common Stock.
As of the Record Date, directors and executive officers of Midland owned
beneficially an aggregate of 1,050,390 shares of Common Stock, or approximately
18.9% of the shares of Common Stock outstanding and entitled to vote on such
date.
As of the Record Date, Progressive, through a wholly owned subsidiary,
owned beneficially an aggregate of 460,500 shares of Common Stock, or
approximately 8.3% of the shares of Common Stock outstanding on such date.
Progressive may purchase additional shares of Common Stock after the date
hereof, although Progressive will not be eligible to vote such shares at the
Special Meeting since any additional shares purchased will not have been owned
by Progressive on the Record Date.
The directors and executive officers of Midland and representatives of
Progressive have indicated they will vote all of the shares of Common Stock they
own as of the Record Date, representing approximately 27.2% of the outstanding
shares of Common Stock, for the approval of the Merger Agreement.
THE MERGER
Parties to the Merger
Midland. Midland, through Midland Risk Insurance Company and Specialty Risk
Insurance Company, its wholly-owned property and casualty insurance
subsidiaries, specializes in the underwriting, marketing and servicing of
non-standard personal automobile insurance. Through its Auto 13 program, Midland
also provides automobile insurance for individuals who file for bankruptcy
protection.
Midland underwrites and markets its products through a branch office
network with three major company-owned regional offices and through three
independently owned general agencies, which use approximately 8,500 independent
agents. Midland conducts its business in 20 states, primarily in the southern
and western United States.
Midland's principal executive offices are located at 825 Crossover Lane,
Memphis, Tennessee 38117 and its telephone number is (901) 680-9100. For more
information about Midland, reference is made to Midland's Annual Report on Form
10-K for the year ended December 31, 1995, as amended, and its Quarterly Report
on Form 10-Q for the quarter ended September 30, 1996, as amended, which are
being mailed to shareholders together with this Proxy Statement.
-2-
<PAGE> 6
Progressive. Progressive is an insurance holding company which, through
its subsidiaries, provides personal automobile insurance and other specialty
property-casualty insurance and related services throughout the United States
and in Canada.
Progressive's core business writes insurance for private passenger
automobiles, recreational vehicles and small fleets of commercial vehicles.
These products are marketed through a network of more than 30,000 independent
insurance agents, intermediaries such as employers, other insurance companies
and national insurance brokerages, and direct to customers through employed
sales people, owned insurance agencies and by direct mail, television and radio
advertising.
In addition, Progressive's diversified businesses provide financial
institution customers with physical damage insurance and related tracking
services to protect their interests in loan collateral as well as officers and
directors liability and employee dishonesty insurance, and manage involuntary
Commercial Auto Insurance Procedures which have been established in various
states for commercial risks.
Progressive's principal executive offices are located at 6300 Wilson Mills
Road, Mayfield Village, Ohio 44143 and its telephone number is (216) 446-2851.
Merger Sub. Merger Sub is a wholly-owned subsidiary of Progressive which
was formed for the sole purpose of effecting the Merger. Merger Sub's principal
executive offices are located at 6300 Wilson Mills Road, Mayfield Village, Ohio
44143 and its telephone number is (216) 446-2851.
Merger Consideration
The Merger Agreement provides that each share of Common Stock issued and
outstanding prior to the Effective Time will be converted in the Merger into a
right to receive from Progressive $9.00 in cash. Upon consummation of the
Merger, holders of Common Stock will cease to hold shares in Midland and will
not acquire any common shares of Progressive ("Progressive Common Shares") as a
result of the Merger.
Rationale for the Merger
On February 26, 1996, Midland entered into an Agreement and Plan of Merger
(the "Danielson Merger Agreement") with Danielson Holding Corporation
("Danielson") under which Mission Sub E, Inc., a wholly-owned subsidiary of
Danielson, would merge into Midland (the "Danielson Transaction"). Under the
terms of the Danielson Merger Agreement, Midland shareholders were to receive,
as merger consideration, a combination of cash, preferred stock of Danielson,
and common stock of Danielson, with each shareholder to elect as to the form of
merger consideration to be received. The nominal value of the merger
consideration for the Danielson Transaction was $14.50 for each share of Midland
common stock, based on valuation provisions agreed upon in the Danielson Merger
Agreement. The Danielson Transaction was subject to a number of conditions,
including a successful common stock offering by Danielson to raise not less than
$55.5 million to pay the cash portion of the merger consideration. Two Danielson
executives and Charles H. Gray, III, Midland's President and Chief Operating
Officer, were killed on July 17, 1996 when TWA Flight No. 800 crashed. Following
the deaths of the Danielson executives and Mr. Gray, the Danielson Transaction
was terminated on July 24, 1996 by mutual agreement of Midland and Danielson.
On August 9, 1996, the Board of Directors of Midland (the "Board" or the
"Midland Board") reviewed Midland's operational issues and general situation
including management succession issues, issues regarding certain product lines,
its banking relationship and the future operations of Midland. The Board
reviewed the need to fill the vacancy caused by the death of Mr. Gray and to
determine how to provide for management succession in the future. The Board
reviewed the operational and underwriting changes which Midland had made to
address the causes of the 1995 net losses of $10.1 million and the extent to
which Midland had properly reserved for losses in product lines. The Board
observed that pursuant to its amended loan agreement with its lender, a
principal payment of $10 million would be due in March 1997, and the Board
considered the prospects of obtaining regulatory approval for the declaration of
dividends by Midland's subsidiaries necessary to fund such payment.
Additionally, the Board reviewed the February 1996 downgrading
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<PAGE> 7
by A.M. Best of Midland Risk Insurance Company and Specialty Risk Insurance
Company, subsidiaries of Midland, from B+ (Very Good) to B (Adequate). At the
time of the downgrading, A.M. Best placed the ratings under review, pending the
outcome of the Danielson Transaction and had indicated that it viewed the
Danielson Transaction favorably and that it expected to upgrade the ratings to
B+ (Very Good) if the transaction were consummated. After the Danielson
Transaction was terminated, A.M. Best had indicated it would continue to monitor
Midland, review any management changes and review the third quarter results when
they were available. The Board also discussed the potential actions which could
be initiated by the state regulatory authorities following a potential
downgrading by A.M. Best and Midland's potential inability to make the principal
payment on its debt due in March 1997.
In light of the foregoing, the Board decided to explore possible strategic
alternatives including a minority investment and a merger or a sale of Midland.
After two months of soliciting expressions of interest from and discussions with
a number of companies, Midland reached an agreement in principle with an
investor who would make a loan to Midland and receive warrants to purchase
Common Stock. Subsequently on October 31, 1996, Midland management was advised
by its staff actuary of adverse development in its loss and loss adjustment
expense reserves and management determined that Midland would incur a loss in
its third quarter in a material amount, which was later identified as $3 to $4
million. The Midland Board then concluded that the proposed investment was
inadequate to address Midland's circumstances in order to return Midland to
profitability. After considering all the alternatives the Board believed were
available, including continuing to operate Midland on a stand-alone basis, the
Board viewed the Merger as the transaction which would provide Midland
shareholders with the best value reasonably available. See "The
Merger - Background of the Merger."
Recommendation of the Board of Directors
The Board believes that the Merger is fair to, and in the best interests
of, Midland and its shareholders. The Board has approved the Merger Agreement
and recommends that the shareholders of Midland vote FOR approval of the Merger
Agreement. For a discussion of the factors considered by the Board in reaching
its decision, see "The Merger - Reasons for the Merger; Recommendation of the
Board."
Opinion of Midland's Financial Advisor
The Robinson-Humphrey Company, Inc. ("R-H"), has acted as one of the
financial advisors to Midland in connection with the Merger. On November 5,
1996, the date on which the Board approved the Merger, R-H delivered an oral
opinion to the Board to the effect that, as of the date of such opinion, the
Merger Consideration was fair, from a financial point of view, to the holders of
the Common Stock. R-H has confirmed such opinion by delivery of a written
opinion to that effect dated the date of this Proxy Statement. The full text of
the written opinion of R-H dated the date of this Proxy Statement which sets
forth the assumptions made, matters considered and limitations on the review
undertaken by R-H, is attached as Appendix B to this Proxy Statement and should
be read carefully in its entirety. See "The Merger - Opinion of Midland's
Financial Advisor."
Regulatory Approvals Required
The Merger is subject to review under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), by the Federal Trade
Commission ("FTC") and the Department of Justice ("DOJ"). On December 9, 1996,
Midland and Progressive were notified that early termination of the requisite
waiting period under the HSR Act was granted effective as of such date. The
Merger is also subject to, among other approvals, the prior approval of
insurance regulatory authorities in the States of Tennessee and California. The
Tennessee Department of Commerce and Insurance (the "Tennessee Department") and
the California Department of Insurance (the "California Department") have both
approved the application. See "The Merger - Regulatory Approvals."
-4-
<PAGE> 8
Conditions to the Merger
In addition to obtaining requisite shareholder and regulatory approvals,
the obligations of Progressive and Midland to consummate the Merger are subject
to the satisfaction or waiver of various conditions, including, among other
things, the obtaining of required third party consents, the receipt of customary
legal opinions, the truth and correctness of representations and warranties set
forth in the Merger Agreement and the absence of certain material adverse
changes with respect to Midland. See "The Merger Agreement Conditions to the
Merger."
Certain Covenants
The Merger Agreement contains various covenants of Progressive and Midland
with respect to certain matters in the period prior to the Effective Time.
Midland has agreed to conduct its business and operations prior to the Effective
Time in the ordinary course consistent with past practices, except as
contemplated by the Merger Agreement, but not take certain actions without the
prior written consent of Progressive. Midland has also agreed to hold a meeting
of its shareholders at which the Board will recommend approval and adoption by
the Midland shareholders of the Merger Agreement and the Merger. Additionally,
Midland has agreed that, except as required to comply with the fiduciary duties
of the Board, it will not solicit other transactions similar to the Merger. Both
Progressive and Midland have agreed, among other things, to take all actions
necessary, proper or advisable to consummate the transactions contemplated by
the Merger Agreement and cooperate to make certain filings and obtain certain
consents with respect to the Merger. See "The Merger Agreement - Covenants;
Additional Covenants."
Termination, Break-up Fees and Expenses
The Merger Agreement may be terminated by either Midland or Progressive if
the Merger has not been consummated by April 30, 1997, unless extended by the
agreement of the Midland Board and the Board of Directors of Progressive ("Final
Termination Date"), or at any time by mutual consent. In addition, the Merger
Agreement may be terminated prior to such date (a) by either party if (i) the
other party materially breaches a representation, warranty or covenant contained
in the Merger Agreement and fails to cure such breach in a timely manner or (ii)
the requisite vote of the shareholders is not obtained at the Special Meeting or
(b) by Progressive, if the recommendation of the Midland Board is withdrawn or
modified in any manner which is adverse to Progressive, or (c) by Midland, if
the Midland Board has withdrawn its recommendation to the Midland shareholders
after having determined such action is necessary in order for the Board to act
in a manner consistent with its fiduciary obligations under existing laws (See
"The Merger Agreement - No Solicitation; Transaction Moratorium").
In the event the Merger Agreement is terminated (a) by Progressive because
Midland has failed to perform any material covenant or obligation before or on
the Final Termination Date, (b) by Progressive if the Midland Board withdraws
its recommendation to the shareholders, (c) by either party if the requisite
shareholder vote is not obtained, (d) by Progressive if Midland is in material
breach of a representation, warranty or covenant which breach is not timely
cured, or (e) by either party if Midland terminates the Merger Agreement because
of a proposal for an Acquisition Transaction (as defined in the Merger
Agreement), then Midland is required to reimburse Progressive for its expenses
in an amount up to $1 million. Midland has agreed to pay Progressive an
additional $1.75 million if the Merger Agreement is terminated upon the
occurrence of any of the events described in this paragraph and within 12 months
of such termination (i) it is publicly announced that Midland will enter into an
Acquisition Transaction (as defined in the Merger Agreement), (ii) Midland
consummates an Acquisition Transaction, or (iii) Midland enters into an
agreement with respect to an Acquisition Transaction. Additionally, if Midland
terminates the Merger Agreement because Progressive has not performed any
material covenant or obligation, then Progressive is required to reimburse
Midland for its expenses in an amount up to $1 million. See "The
Merger - Agreement Termination; Break-up Fees and Expenses."
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<PAGE> 9
Certain Federal Income Tax Consequences
The Merger will be a taxable transaction to shareholders of Midland for
federal income tax purposes. All Midland shareholders should read carefully the
discussion under "Certain Federal Income Tax Consequences" and are urged to
consult their own tax advisors as to the specific consequences to them of the
Merger under federal, state, local or any other applicable tax laws.
Interests of Certain Persons in the Merger
Midland's management and certain members of the Board may be deemed to have
certain interests in the Merger that are in addition to their interests as
shareholders of Midland generally and which may create potential conflicts of
interest. These interests include, among others, receipt of financial advisory
fees and provisions in the Merger Agreement with respect to continued
employment, employee stock options, other employee benefits, indemnification and
insurance and severance benefits.
Each of Elena Barham, Senior Vice President and Chief Financial Officer,
and James E. Farmer, Vice President-Underwriting, has executed a new employment
agreement with Midland which will become effective at the Effective Time. Each
of these agreements provides for a three-year term with total compensation for
the three years of $600,000 and nonforfeitable options to purchase 3,500
Progressive Common Shares. See "The Merger - Interests of Certain Persons in the
Merger - Employment Agreements."
Midland has entered into severance compensation agreements with Joseph W.
McLeary, Chairman and Chief Executive Officer, and Philip R. Zanone, Vice
Chairman and Chief Investment Officer, which are effective only upon
consummation of the Merger pursuant to which, among other things, each will be
paid an aggregate amount of $500,000 through the year ending December 31, 1998.
See "The Merger - Interests of Certain Persons in the Merger - Severance
Agreements."
Croft & Bender will receive a fee of $250,000 in connection with its
services to Midland as a financial advisor. Theodore J. Bender, III, a director
of Midland, is a principal in such firm. See "The Merger - Interests of Certain
Persons in the Merger - Financial Advisor Fee."
No Dissenters' Rights
Under Tennessee law, the holders of the Common Stock are not entitled to
dissenters' rights in connection with the Merger. See "The Merger - No
Dissenters' Rights."
MARKET PRICE OF COMMON STOCK
The high and low sale prices per share of Common Stock as of November 5,
1996, the last business day preceding public announcement of the execution of
the Merger Agreement, were $7.00 and $6.75, respectively. On February 4, 1997,
the high and low sales prices of the Common Stock were $8.37 and $8.84,
respectively.
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<PAGE> 10
SELECTED FINANCIAL DATA
Set forth below is certain interim unaudited consolidated selected
financial information for Midland as of and for the nine months ended September
30, 1996. This information should be read in conjunction with the historical
consolidated financial statements of Midland which are either incorporated
herein by reference or delivered herewith. The interim financial data, in the
opinion of management, contain all adjustments (consisting only of normal
recurring adjustments) necessary to a fair presentation of such data.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1996 1995
---------------------- -------------
(Dollars in thousands)
<S> <C> <C>
STATEMENT OF INCOME DATA:
Gross premiums written $146,668 $164,420
Net premiums written 90,494 138,408
Premiums earned 107,948 132,848
Total income (loss) 124,127 148,882
Net income (loss) (2,487) (320)
Net income (loss) available to stockholders (2,487) (320)
Cash dividends per share -0- .15
Weighted average shares outstanding 5,547 5,458
SELECTED GAAP RATIOS:
Loss ratio 90.1% 81.6%
Expense ratio 23.4% 26.0%
----- -----
Combined ratio 113.5% 107.0%
===== =====
</TABLE>
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------ -----------------
<S> <C> <C>
BALANCE SHEET DATA:
Total investments, cash and equivalents $152,666 $174,803
Total assets 285,244 283,531
Notes payable and other debt 23,000 27,000
Stockholders' equity 46,922 48,845
Book value per share 8.46 9.06
</TABLE>
RECENT DEVELOPMENTS
The Company has amended its Quarterly Reports on Form 10-Q for the quarters
ended March 31, June 30 and September 30, 1996 to reflect the effect of the
inadvertent omission of certain loss data from the actuarial analysis performed
as of March 31 and June 30, 1996, aggregating approximately $3.3 million of
incurred commercial automobile liability losses and loss adjustment expenses.
The Company had recorded an increase of $6 million to its reserves in its
initial report of financial results for the quarter ended September 30, 1996.
The Company has now restated its quarterly unaudited consolidated financial
statements (i) for the quarter ended September 30, 1996 to reflect a reduction
of incurred losses and loss adjustment expenses of $3.3 million and (ii) for the
quarter ended March 31, 1996 and the six months ended June 30, 1996, to reflect
an increase of an aggregate of $3.3 million of incurred losses and loss
adjustment expenses. Results for the nine months ended September 30, 1996, are
unchanged.
At September 30, 1996, the Company was in default of certain financial
covenants under its bank credit facility. The lender has requested to be paid in
full at March 31, 1997. Due to the current dividend restrictions on the
Company's insurance subsidiaries, the Company will be unable to meet its 1997
debt service requirements without receiving special regulatory approval to
dividend capital out of its subsidiaries to the Company. Management anticipates
that the Progressive transaction will be consummated and the debt paid prior to
March 31, 1997. See "The Merger - Reasons for the Merger; Recommendation of the
Board."
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INTRODUCTION
MEETING OF SHAREHOLDERS
This Proxy Statement is being furnished to the holders of Common Stock in
connection with the solicitation of proxies by and on behalf of the Board for
use at the Special Meeting to be held at 9:00 a.m., Central time, on Friday,
March 7, 1997, at the Company's offices at 825 Crossover Lane, Suite 112,
Memphis, Tennessee 38117, and at any adjournments thereof. The Board has fixed
the close of business on January 13, 1997, as the Record Date for determining
the shareholders of Midland entitled to notice of and to vote at the Special
Meeting. This Proxy Statement and the enclosed proxy are first being sent to
holders of Common Stock on or about February 7, 1997.
PURPOSE OF MEETING
At the Special Meeting, Midland's shareholders will consider and vote upon
(i) the approval and adoption of the Merger Agreement and (ii) such other
business as may properly come before the Special Meeting or any adjournments
thereof.
VOTING REQUIREMENTS AT MEETING
At the Special Meeting, approval and adoption of the Merger Agreement
require the affirmative vote of the holders of a majority of the outstanding
shares of Common Stock. The presence at the Special Meeting, in person or by
proxy, of the holders of 2,775,100 of the total number of shares of Common Stock
outstanding on the Record Date will constitute a quorum for the transaction of
business by such holders at the Special Meeting. On the Record Date, there were
5,550,198 outstanding shares of Common Stock, each holder of which is entitled
to one vote per share with respect to each matter to be voted on at the Special
Meeting. Midland has no class or series of stock outstanding other than Common
Stock entitled to vote at the Special Meeting or otherwise entitled to vote with
respect to the Merger Agreement.
An "abstention" will be considered present for quorum purposes, but will
have the same effect as a vote "against" the proposal to approve the Merger
Agreement. Broker "non-votes" will not be considered present for quorum purposes
and will have the same effect as a vote "against" the proposal to approve the
Merger Agreement. A "broker non-vote" refers to shares represented at the
Special Meeting in person or by proxy by a broker or nominee where such broker
or nominee (i) has not received voting instructions on a particular matter from
the beneficial owners or persons entitled to vote and (ii) the broker or nominee
does not have the discretionary voting power on such matter.
As of the Record Date, directors and executive officers of Midland owned
beneficially an aggregate of 1,050,390 shares of Common Stock, or approximately
18.7% of the shares of Common Stock outstanding and entitled to vote on such
date.
As of the Record Date, Progressive owned beneficially an aggregate of
460,500 shares of Common Stock, or approximately 8.3% of the shares of Common
Stock outstanding on such date. Progressive may purchase additional shares of
Common Stock after the Record Date, although Progressive will not be eligible to
vote such shares at the Special Meeting since the additional shares will not
have been owned by Progressive on the Record Date.
The directors and executive officers of Midland and representatives of
Progressive have indicated they will vote all of the shares of Common Stock they
own as of the Record Date, representing approximately 27.2% of the outstanding
shares of Common Stock, for the approval of the Merger Agreement.
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PROXIES
All proxies that are properly executed by holders of Common Stock and
received by Midland prior to the Special Meeting will be voted in accordance
with instructions noted thereon. Any proxy that does not specify to the contrary
will be voted in favor of approval and adoption of the Merger Agreement. Any
holder of Common Stock who submits a proxy will have the right to revoke it, at
any time before it is voted, by filing with the Secretary of Midland written
notice of revocation or a duly executed later-dated proxy, or by attending the
Special Meeting and voting such Common Stock in person.
It is important that proxies be returned promptly. Shareholders who do not
expect to attend the Special Meeting in person are urged to mark, sign and date
the accompanying proxy card and mail it in the enclosed return envelope, which
requires no postage if mailed in the United States, so that their votes can be
recorded.
THE MERGER
GENERAL
This section of the Proxy Statement describes certain aspects of the
Merger, the Merger Agreement and other related matters. The following
description does not purport to be complete and is qualified in its entirety by
reference to the Merger Agreement, which is attached as Appendix A to this Proxy
Statement and is incorporated herein by reference. All shareholders are urged to
read the Merger Agreement in its entirety.
The Merger Agreement provides that, subject to the satisfaction or waiver
of certain conditions, including but not limited to the receipt of all necessary
third party, regulatory and shareholder approvals, Merger Sub will be merged
with and into Midland. Midland will survive the Merger as a wholly-owned
subsidiary of Progressive. As a result of the Merger, each share of Common Stock
outstanding prior to the Effective Time will be converted into the right to
receive from Progressive $9.00 in cash. Upon consummation of the Merger, holders
of Common Stock will cease to hold shares in Midland and will not acquire any
Progressive Common Shares as a result of the Merger.
BACKGROUND OF THE MERGER
On February 26, 1996, Midland entered into the Danielson Merger Agreement
with Danielson. Under the terms of the Danielson Merger Agreement, Midland
shareholders were to receive, as merger consideration, a combination of cash,
preferred stock of Danielson, and common stock of Danielson, with each
shareholder to elect as to the form of merger consideration to be received. The
nominal value of the merger consideration for the Danielson Transaction was
$14.50 for each share of Midland common stock, based on valuation provisions
agreed upon in the Danielson Merger Agreement. The Danielson Transaction was
subject to a number of conditions, including a successful common stock offering
by Danielson to raise not less than $55.5 million to pay the cash portion of the
merger consideration. Two Danielson executives and Charles H. Gray, III,
Midland's President and Chief Operating Officer, were killed on July 17, 1996
when TWA Flight No. 800 crashed. Following the deaths of the Danielson
executives and Mr. Gray, the Danielson Transaction was terminated on July 24,
1996 by mutual agreement of Midland and Danielson.
On August 9, 1996, a special meeting of the Board was held to review
Midland's operational issues and general situation including management
succession issues, issues regarding certain product lines, its banking
relationship and the future operations of Midland. The Board discussed the need
to fill the vacancy in management caused by the death of Mr. Gray in July 1996
and to determine how to provide for management succession in the future. The
Board reviewed Midland's net loss of $10.1 million for the year ended December
31, 1995, which it believed was primarily attributable to pricing inadequacies
relating to full coverage programs in Arizona and California and inefficient
claims handling in those states. The Board
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discussed the operational and underwriting changes which Midland had made to
address the causes of the 1995 losses and the extent to which losses in product
lines were properly reserved. The Board observed that pursuant to its amended
loan agreement with its lender, a principal payment of $10 million is due in
March 1997, and the Board considered the prospects of obtaining regulatory
approval for the declaration of dividends by Midland's subsidiaries necessary to
fund such payment.
Additionally, the Board reviewed the February 1996 downgrading by A.M. Best
of Midland Risk Insurance Company and Specialty Risk Insurance Company,
subsidiaries of Midland, from B+ (Very Good) to B (Adequate). At the time of the
downgrading, A.M. Best placed the ratings under review, pending the outcome of
the Danielson Transaction. A.M. Best had indicated that it viewed the Danielson
Transaction favorably and that it expected to upgrade the ratings to B+ (Very
Good) if the transaction were consummated. Conversely, A.M. Best had indicated
that the ratings would be under significant downward pressure if the Danielson
Transaction were not completed. A.M. Best ratings, which range from A++
(Superior) to F (In Liquidation), reflect such rating agency's independent
opinion of a company's financial strength and ability to meet its obligations to
policyholders. Such ratings are based on a comparative analysis of the financial
condition and operating performance of insurance companies as determined by
their publicly available reports. After the Danielson Transaction was
terminated, A.M. Best had indicated it would continue to monitor Midland, review
any management changes and review the third quarter results when they were
available. The Board believed a further downgrading by A.M. Best would
negatively impact Midland's relationship with its agency force and result in a
significant loss of some of Midland's most profitable business. The Board also
discussed the potential actions which could be initiated by state regulatory
authorities following a potential downgrading by A.M. Best and about its
potential inability to make the principal payment on its debt due in March 1997.
In light of the foregoing, the Board decided to explore possible strategic
alternatives including a minority investment and a merger or a sale of Midland
and authorized the engagement of Theodore J. Bender, III, a member of the Board
and a principal in Croft & Bender, LLC ("Croft & Bender"), as a financial
advisor to Midland, to work with Midland's other financial advisor, R-H. Mr.
Bender formerly had been employed by R-H and, as a Managing Director of R-H, had
supervised R-H's financial advisory services for Midland, including services for
the Danielson Transaction. In order to provide continuity and to take advantage
of Mr. Bender's previous experience as a financial advisor to Midland, the Board
determined to engage Croft & Bender. Although the Board did not consider the
engagement of Croft & Bender as a potential conflict of interest, Mr. Bender
indicated that he would abstain from voting on any resulting proposal considered
by the Board.
At the time of its decision to explore possible transactions, the Board
specifically determined that no decision had been made as to any preferred form
of transaction or that Midland would agree to enter into any transaction. The
Board authorized Croft & Bender to identify and contact companies which might be
interested in investing in Midland or acquiring Midland by sale or merger. The
Board did not impose any restrictions or provide any criteria for identifying
potential candidates. Subsequent to this meeting, approximately 19 companies
were contacted by Croft & Bender and/or Midland senior management to determine
if they had an interest in a transaction with Midland and, if so, whether the
form of a potential transaction would be a merger with, acquisition of or a
minority investment in Midland. Croft & Bender identified companies which were
either engaged in the non-standard automobile insurance business or known to
Croft & Bender to have an interest in acquiring or investing in a company
engaged in the non-standard automobile insurance business and companies with
acquisition or investment strategies which indicated they might have a potential
interest in an investment in or acquisition of Midland. R-H was not involved in
the initial contacts with these companies because Mr. Bender had previously been
the primary contact representing Midland's financial advisor while he was at
R-H, and the Board wanted one person to make the contacts so as not to duplicate
the efforts of its financial advisors. R-H responded to the extent any financial
analysis or other additional information were necessary. Of the approximately 19
companies initially contacted, ten
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companies indicated a preliminary interest and, following execution of a
confidentiality agreement, were provided information concerning Midland.
On September 17, 1996, at a special meeting of the Board, Mr. Bender
reviewed the status of discussions with the ten potentially interested companies
including the preliminary structure for each possible transaction. Mr. Bender
reported that an initial meeting had been held with three of the companies, two
meetings had been held with five of the companies and three meetings had been
held with one of the companies. No meeting had been held with one of the
companies. He also reported that three of the companies had indicated a
potential interest in making an investment in Midland, three were potential
buyers of Midland, three were uncertain as to whether they would be interested
in buying Midland or investing in Midland and one was uncertain whether it would
propose a transaction in the form of a merger with or a purchase of Midland.
At this meeting, R-H made a presentation which included (a) an overview of
Midland's financial results for the three year period 1993 to 1995 and for the
six months ended June 30, 1996; (b) a summary of management's forecast for the
period 1996-1998 and the basis for the key assumptions to such forecasts; (c) a
review of the pro forma financial statements giving effect to various potential
minority investments in Midland; (d) an analysis of Midland's stock price and
trading volume over the prior 12 month period; (e) an analysis of current stock
market information for selected publicly traded insurance companies which R-H
deemed comparable; and (f) a summary of merger and acquisition transactions in
the non-standard automobile insurance industry.
After Mr. Bender's and R-H's presentations, the Board decided to pursue
discussions with all interested parties and to focus on discussions with four of
the companies which had indicated the strongest interest and whose preliminary
indications of transaction terms were the most attractive to Midland. Subsequent
to the Board meeting, R-H identified four additional prospects and management
and Mr. Bender decided to contact each of them to determine if any of them were
interested. Ten companies conducted on-site due diligence of Midland.
After completion of due diligence by each of the companies, four companies
elected to continue discussions. One company ("Company A") was interested in a
potential merger of Company A and Midland. Messrs. McLeary, Zanone and Bender
met with representatives of Company A at the offices of Company A on August 20,
1996, to discuss a potential merger of Midland and Company A. Also present at
the meeting were the financial advisors of Company A. At this first meeting,
discussion centered on the terms and conditions of a potential merger.
Subsequent meetings were held at the offices of Midland in Memphis, Tennessee,
on September 9 and 25, 1996, at which time discussions continued regarding the
terms and conditions of a potential merger.
Company B was interested in making a minority investment in the form of a
loan or making a loan and arranging a bank loan in an aggregate amount
sufficient to enable Midland to pay in full its existing bank debt and receiving
warrants to purchase Common Stock as additional consideration for making the
loan. Messrs. McLeary, Zanone and Bender met with representatives of Company B
at the offices of Company B on August 28, 1996, at which time the discussion
consisted primarily of providing introductory information about Midland to
Company B. There were no other meetings. However, thereafter and until October
15, 1996, Mr. McLeary spoke with representatives of Company B by telephone about
various aspects of the proposed financing. American Financial Group, Inc.
("AFG"), was also interested in making a minority investment in the form of a
loan transaction involving the issuance of warrants as additional compensation.
Messrs. McLeary and Zanone met with representatives of AFG in Cincinnati, Ohio,
on September 5 and October 16, 1996, to discuss the terms and conditions of
AFG's proposed investment in Midland.
The fourth company, Progressive, was interested in purchasing all of the
stock of Midland for a combination of cash and Progressive Common Shares. On
August 27, 1996, preliminary discussions regarding
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the terms of a potential proposal from Progressive were held at Midland's
offices in Memphis, Tennessee and were attended by Messrs. McLeary, Zanone,
Farmer and Ms. Barham of Midland and Chuck Chokel, Chief Financial Officer, and
Edward Combs, General Manager-Midcontinent Region, of Progressive.
A special meeting of the Midland Board was scheduled for October 24, 1996
to review the proposals from these four companies and to determine if any of the
proposals were acceptable. On October 21, 1996, Company B advised Midland that
it did not intend to pursue further discussions. Prior to the October 24, 1996,
Midland Board meeting, Company A, AFG and Progressive submitted drafts of
transaction documents which were distributed to the members of the Midland
Board. Financial and general information as to Company A, AFG and Progressive
were also provided to the Board prior to the meeting.
On October 24, 1996, the Board met to consider the three proposed
transactions. Mr. Bender and representatives of R-H presented the financial
terms of each of the three transactions and, together with management, reviewed
management's forecast for Midland. Company A proposed a merger pursuant to which
Midland and Company A would merge and holders of Company A stock would receive
shares of Midland Common Stock at a conversion ratio of 1.3 shares of Midland
Common Stock for each share of Company A stock, which proposal valued Company A
stock at an approximately 30% premium to the then current market price of
Company A stock. In addition, Company A proposed to escrow $10-12 million of
Common Stock held by Midland shareholders to be sold in the event additional
loss reserves were needed.
Progressive's initial proposal was a purchase of 100% of the Common Stock
of Midland at $10.50 per share. The consideration was to consist of 80% of
Progressive Common Shares and 20% cash. The offer was contingent upon
Progressive's execution of a satisfactory agreement with National Specialty
Lines ("NSL"), Midland's general agent located in Miami, Florida, and agreements
with management of Midland satisfactory to Progressive.
Under the AFG proposal (the "AFG Transaction"), AFG agreed to lend Midland
$20 million for a term of five years at a fixed interest rate of 9% per annum,
subject to Midland's right to extend the maturity date for two years, with an
increase in the interest rate to 11% per annum. AFG was to receive warrants with
a term of seven years to purchase 2,105,000 shares of Common Stock for $9.50 per
share.
After discussion of each of the three proposals, management reviewed the
financial performance, condition, business operations and prospects of Midland
on a stand-alone basis. Management's presentation assumed a decline in premium
volume in 1997 due to rate increases taken in 1996 and planned for 1997, a
continued decrease of full coverage business in California and a de-emphasis of
full coverage policies in Arizona. Management also assumed the loss ratio would
decline due to the reinsurance of 100% of Midland's commercial business as of
July 1, 1996; the rate increases taken in 1996 and proposed for 1997; and the
exodus of operations from the states of Mississippi and Illinois.
Midland's legal advisors from the firm of Baker, Donelson, Bearman &
Caldwell, Memphis, Tennessee, reviewed with the Board the legal structure and
legal terms of each transaction.
Mr. Bender reminded the Midland Board that, as financial advisor to
Midland, he would abstain from voting on the proposals. The Board then
deliberated on the terms of the various transactions, as well as the prospects
for Midland in the event it did not accept any of the proposals, and decided to
accept the AFG Transaction. The Board rejected Company A's proposal because the
Board did not believe the consideration was adequate since the exchange ratio
proposed by Company A resulted in holders of Midland Common Stock receiving less
than $7.00 a share which was less than the then current market value of the
Midland Common Stock. The Board rejected Progressive's initial proposal
primarily because of its uncertainty that NSL would arrive at a satisfactory
arrangement with Progressive and viewed as a negative the fact that any
negotiations that Progressive might have with NSL were outside Midland's
control. The Board's approval of the AFG Transaction was subject to receipt of
an opinion from R-H that the AFG Transaction would be fair to the
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Midland shareholders from a financial point of view. On Friday, October 25,
1996, Midland publicly announced an agreement in principle with AFG.
On October 31, 1996, Midland management was advised by its staff actuary of
adverse development in its loss and loss adjustment expense reserves and
management determined that Midland would incur a loss in its third quarter in a
material, but as yet undetermined, amount. On October 31, 1996, AFG was informed
about the development and Midland and AFG agreed to defer execution of
definitive agreements until more information became available as to the amount
of the necessary addition to the loss reserve and the amount of the third
quarter loss. The Midland Board then concluded that the proposed investment by
AFG was inadequate to address Midland's circumstances in order to return Midland
to profitability. The Board, believing there were no other companies which could
be identified which might have an interest in a transaction with Midland,
determined not to reopen the search. The Board was also concerned that the
disruptions caused by the process were beginning to affect the operations of the
business negatively. After consultation with Mr. Bender and its legal advisor,
Midland directed Mr. Bender to contact Progressive to determine if Progressive
remained interested in acquiring Midland. Progressive responded that it remained
interested and discussions were reopened. On November 1, 1996, AFG was advised
that Midland had decided to consider a sale of the company in light of the
adverse development in its loss and loss adjustment expense reserves. AFG was
invited to make a purchase proposal if it wished to do so.
Negotiations with Progressive were conducted during the period of November
1 to November 5, 1996. On November 1, 1996, Mr. Chokel, from Progressive, and
Messrs. McLeary and Bender, from Midland, discussed the terms of Progressive's
revised offer which included a purchase price of $9.00 per share of Common Stock
of Midland with the consideration in the form of 80% Progressive Common Shares
and 20% cash and discussed other terms and conditions of a proposed transaction.
On November 2, 1996, Messrs. McLeary, Zanone and Bender and Ms. Barham from
Midland; a representative of Midland's legal advisors; a representative of R-H;
Mr. Chokel from Progressive; and representatives of Baker & Hostetler, LLP,
Cleveland, Ohio, legal advisors for Progressive, participated in a telephone
conference call. The participants reviewed a draft of a proposed agreement
between Progressive and Midland.
Also on November 2, 1996, the Board received a financial analysis prepared
by R-H of the proposed transaction with Progressive. The financial analysis
included the following: (a) pro forma financial statements for Progressive which
gave effect to Progressive's purchase of Midland at a price of $9.00 per share
with the consideration in the form of 80% Progressive Common Shares and 20%
cash; (b) a summary of recent merger and acquisition transactions in the
non-standard automobile insurance and property and casualty industries; (c) a
historical analysis of Progressive's stock price, trading volume and trading
multiples, and (d) a summary of Progressive's financial results for the period
1986 to 1995.
Discussions between Messrs. Chokel and McLeary continued on November 4 and
early on November 5, 1996, concerning the form of merger consideration. As
originally proposed, the conversion ratio for the Midland Common Stock was based
on the average price of Progressive Common Shares over a 60-day trading ending
three business days before the consummation of the transaction. However, on
November 5, Progressive revised its original proposal to provide that the price
of the Progressive Common Shares to be used to compute the conversion ratio
would be the average trading price of Progressive Common Shares over a 60-day
trading period ending three business days before the consummation of the
transaction, but in no event would the average price per share of Progressive
Common Shares to be used to compute the conversion ratio be greater than 15%
above or less than 15% below the average trading price of Progressive Common
Shares on the date the merger agreement was executed. In the alternative,
Progressive offered the option of an all cash transaction.
At a special meeting on the evening of November 5, 1996, the Board was
advised that AFG had informed management on that day that AFG was not prepared
to make an offer to acquire Midland and that AFG could not proceed with the AFG
Transaction until it had more information about the third quarter
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results. Mr. McLeary noted to the Board that earlier in the day Progressive had
proposed that the conversion ratio would be subject to the adjustment described
above and, additionally, had proposed the alternative of an all cash
transaction.
The Board then heard a presentation from R-H with respect to the financial
terms and the fairness to Midland shareholders from a financial point of view of
each form of transaction proposed by Progressive. The written materials
presented were based on a transaction, the consideration for which was in the
form of 80% Progressive Common Shares and 20% cash, since R-H was not aware at
the time the report was prepared that an all cash proposal had been made.
However, during the presentation, R-H orally reviewed with the Board the
financial terms and fairness of the proposed all cash transaction. R-H's
financial analysis included the following: (a) pro forma financial statements
for Progressive which gave effect to Progressive's purchase of Midland at a
price of $9.00 per share with the consideration in the form of 80% Progressive
Common Shares and 20% cash; (b) an analysis of the Merger Consideration as a
multiple of Midland's (i) book value per share, (ii) earnings per share and
(iii) most recent closing stock price; (c) a summary of recent merger and
acquisition transactions in the non-standard automobile insurance and property
and casualty industries; (d) an analysis of current stock market information for
selected publicly traded insurance companies which R-H deemed comparable; (e) a
historical analysis of Progressive's stock price, trading volume and trading
multiples, and (f) a summary of Progressive's financial results for the period
1986 to 1995. See "Opinion of Midland's Financial Advisor." Midland's legal
advisor then discussed with the Board the legal structure and legal terms of the
proposed transaction.
The Board then deliberated on the two merger consideration alternatives of
the proposed Progressive transaction and discussed in detail the various
considerations identified below under "Reasons for the Merger; Recommendations
of the Board." The Board took into consideration the fact that the Progressive
Common Shares had appreciated over 25% in the prior 20 trading days, the current
price to earnings and price to book multiples of Progressive Common Shares, as
well as the potential effect of the proposed adjustment to the conversion ratio.
As a result, the Board concluded the all cash transaction of $9.00 per share for
Midland Common Stock was more attractive. While Progressive's initial proposal
earlier in October was for $10.50 per share for Midland Common Stock, the Board
recognized that the decrease to $9.00 per share reflected the adverse
development in Midland's loss and loss adjustment expense reserves. The Board
accepted the $9.00 per share price because (i) it believed the price reflected
the willingness of Progressive to take the risk that additional reserves might
be required; (ii) it was uncertain whether the AFG Transaction would still be
available, and (iii) it believed there were no other attractive alternatives
available.
R-H delivered an oral opinion to the Board to the effect that, as of the
date of such opinion, the Merger Consideration ($9.00 per share in cash) was
fair, from a financial point of view, to the holders of the Common Stock. The
change in the form of consideration to be offered by Progressive from a
combination of Progressive Common Shares and cash to an all cash transaction was
considered by R-H to make the fairness issue clearer since the fluctuation of
the price of Progressive Common Shares was not an issue in the all cash
transaction. After considering the presentations of its financial and legal
advisors, and presentations from certain of its officers with respect to the
financial performance, condition, business operations and prospects of Midland
on a stand-alone basis (including the third quarter loss), the Board approved
the Merger Agreement by unanimous vote of all directors (other than Mr. McLeary,
Chairman of the Board and Chief Executive Officer, and Mr. Zanone, Vice Chairman
and Chief Investment Officer, who abstained from voting because of their
interests in severance arrangements and Mr. Bender who abstained because of his
interest in Croft & Bender which had served as one of Midland's financial
advisors).
On November 6, 1996, Progressive and Midland executed the Merger Agreement
and made a public announcement of the Progressive transaction, that the AFG
Transaction had been terminated and that Midland would incur a loss in the third
quarter in the range of $3 to $4 million.
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REASONS FOR THE MERGER; RECOMMENDATION OF THE BOARD
The Board believes that the terms of the Merger are fair to and in the best
interests of Midland and its shareholders and recommends that Midland
shareholders vote FOR approval of the Merger. The Board considered the following
factors in reaching its conclusions:
(a) The fact that the Merger Consideration of $9.00 per share would be paid
to Midland shareholders in cash was viewed as favorable to the Board's
determination.
(b) The opinion, analyses and presentations of R-H described above in
"Background of the Merger" and below under "Opinion of Midland Financial
Advisor," including the oral opinion of R-H on November 5, 1996, to the
effect that the Merger was fair to the Midland shareholders from a
financial point of view. In this respect, while Midland did not explicitly
adopt, and did not rely solely on, R-H's financial analyses, the Board
placed special emphasis on such analyses in its overall evaluation of the
Merger and viewed such analyses as favorable to its determination. The
Midland Board viewed R-H's opinion as favorable to its determination
because R-H is a nationally recognized investment banking firm with
experience in the valuation of businesses in connection with various types
of transactions, including mergers, and in providing advisory services for
companies in the insurance industry.
(c) The financial performance, condition, business operations, management
and prospects of Midland and current industry, economic and market
conditions. In this regard, the Board recognized as favorable to its
determination the following facts:
(i) Midland strengthened its prior year loss reserves by approximately
$11.0 million in 1995 and by an additional $6.0 million in September
1996 due to the adverse development in its loss and loss adjustment
expense reserves. As a result of reserve strengthening, Midland
reported a net loss of $10.1 million for the year ended December 31,
1995, and a net loss of $2.5 million for the nine months ended
September 30, 1996. Progressive was limited in its ability to
terminate the Merger Agreement on the basis of a breach of a
representation or warranty by Midland in the event it further
strengthened its loss reserves, since the Merger Agreement provided
that, as defined, "Material Adverse Effect" for Midland excluded any
adjustment to Midland's loss reserves unless the aggregate net
adjustment for periods ending after September 30, 1996 exceeded $10
million.
(ii) Midland's underwriting profitability had deteriorated over the
past three years. Midland's combined ratio calculated in accordance
with generally accepted accounting principles ("GAAP") had declined
from 93.3% in 1993 to 96.4% in 1994 to 115.0% in 1995 and was 113.5%
for the nine months ended September 30, 1996.
(iii) Midland would not have the ability to pay dividends from its
insurance subsidiaries to the holding company without prior regulatory
approval for the foreseeable future. Under Tennessee law, Midland's
insurance subsidiaries may not pay dividends in excess of their
accumulated earned statutory surplus without prior regulatory
approval. As of September 30, 1996, Midland had an accumulated earned
statutory deficit of $9.7 million.
(iv) Midland's current senior loan agreement requires Midland to repay
$14.5 million in senior debt in 1997 (including a $10.0 million
payment in March 1997) and an additional $5.5 million in 1998. As a
result of the current dividend restrictions on Midland's insurance
subsidiaries, Midland would be unable to meet its 1997 debt service
without receiving special regulatory approval to dividend capital out
of its insurance subsidiaries to Midland; (v) In
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<PAGE> 19
February 1996, A.M. Best lowered its rating on Midland's insurance
subsidiaries from B+ (Very Good) to B (Adequate).
Based on this information and despite the fact that historical financial
performance for the last five years, with the exception of 1995, had been
profitable, the Board had considerable doubt as to the ability of Midland
to return to profitability in the near-term and determined that the factors
described above were favorable to its belief that the Merger is in the best
interests of the Midland shareholders.
(d) Midland's ability to terminate the Merger Agreement under certain
circumstances if required by the fiduciary duties of the Board in
responding to a competing proposal from a third party. The Board viewed
such factor as favorable to its determination because of its belief that a
third party wishing to make a financially superior proposal for Midland
would have the opportunity to do so. Additionally, the Board did not view
the termination fee as described under "The Merger Agreement Termination,
Break-up Fees and Expenses" as a meaningful deterrent to a third party
wishing to make a financially superior proposal to Midland.
(e) The facts that (i) the efforts of Croft & Bender and R-H to identify
possible strategic partners had been extensive, (ii) the level of interest
expressed in Midland by other possible strategic partners with whom
Midland, Croft & Bender or R-H had been in contact would not be increased
and (iii) there were no other attractive alternatives the Board viewed as
favorable to its determination that the Merger is in the best interests of
the Midland shareholders.
The Board considered as potentially negative the following factors:
(a) The fact that the Merger will be a taxable transaction to Midland
shareholders for federal income tax purposes.
(b) The possibility that Midland may be required, if the Merger Agreement
is terminated under certain circumstances, to reimburse Progressive's
expenses up to $1 million, in addition to having to pay its own expenses
incurred in connection with the Merger.
(c) The fact that the Danielson Transaction would have resulted in
consideration having an nominal value of $14.50 per share. However, the
Board did not believe that such a comparable purchase price was now
attainable because (i) the consideration in the Danielson Transaction
represented an approximate 22% premium over the closing price of a share of
Common Stock of $11.875 per share on February 26, 1996, the last business
day preceding the announcement of the Danielson Transaction (The closing
price of a share of Midland Common Stock on November 5, 1996, the last
business preceding announcement of the Progressive transaction was $6.875
per share.) and the consideration was to be paid 50% in cash, 40% in
preferred stock and 10% in common stock of Danielson (The Merger
Consideration in the Progressive transaction is all cash); (ii) Midland had
suffered the losses in the third quarter as described above; (iii)
Midland's President and Chief Operating Officer had not been replaced; (iv)
after the termination of the Danielson Transaction, Danielson had no
interest in further pursuing a transaction with Midland; and (v) none of
the proposals presented by any of the companies contacted approached such
amount. Additionally, the Board recognized that while the nominal value of
the consideration in the Danielson Transaction was $14.50, there were
material financing requirements and no guarantee that those requirements
could have been met.
The interest of Ms. Barham and Mr. Farmer in connection with continued
employment and of Messrs. McLeary and Zanone was considered by the Board in its
discussions relating to the Merger but such interests were not a factor in the
Board's reaching its determination that the Merger is fair to, and in the best
interests of, the Midland shareholders. See "Interests of Certain Persons in the
Merger." In view of the wide variety
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<PAGE> 20
of factors considered by the Board, the Board did not quantify or otherwise
attempt to assign relative weights to the specific factors considered in making
its determination.
THE BOARD RECOMMENDS THAT MIDLAND SHAREHOLDERS VOTE FOR APPROVAL OF THE
MERGER AGREEMENT.
OPINION OF MIDLAND'S FINANCIAL ADVISOR
Midland initially engaged R-H on February 6, 1996, to provide investment
banking advice and services to Midland in connection with Midland's review and
analysis of potential business combinations. On February 26, 1996, the Midland
Board voted to approve a merger agreement that called for Danielson to acquire
Midland for $14.50 per share to be paid 50% in cash, 40% in Danielson Preferred
Stock, and 10% in Danielson Common Stock. In connection with the Danielson
Transaction, R-H delivered a written opinion to the Midland Board that the
Danielson Transaction was fair from a financial point of view to the holders of
Midland Common Stock. On July 24, 1996, Midland and Danielson agreed to mutually
terminate the Danielson Transaction after Midland's president and chief
operating officer and two members of Danielson senior management were killed in
the crash of TWA Flight 800 on July 17, 1996. On August 9, 1996, the Midland
Board engaged Croft & Bender to explore strategic alternatives for Midland.
Between August 9, 1996 and November 5, 1996, representatives from Croft & Bender
and Midland's senior management held discussions with various parties interested
in either making a minority investment in Midland, merging with Midland, or
acquiring Midland.
On November 5, 1996, the Midland Board met to consider Progressive's
proposal to acquire Midland. In connection with its review of the Progressive
proposal, Midland's Board requested that R-H evaluate the fairness, from a
financial point of view, to the holders of Common Stock of the consideration to
be received by holders of Common Stock. At this meeting, R-H rendered an oral
opinion to the Midland Board that, as of such date, the Merger Consideration
($9.00 per share in cash) was fair, from a financial point of view, to the
holders of Common Stock. The Midland Board had not imposed any restriction on
R-H in connection with R-H's due diligence investigation of Midland or the
rendering of the fairness opinion. R-H subsequently delivered to the Midland
Board a written opinion, dated the date of this Proxy Statement, confirming its
opinion that the Merger Consideration was fair, from a financial point of view,
to holders of Midland Common Stock. In connection with its opinion dated the
date of this Proxy Statement, R-H performed procedures to update certain of its
analyses and reviewed the assumptions on which such analyses were based and the
factors considered in connection therewith.
In rendering its opinion, R-H reviewed and analyzed: (i) the terms of the
Merger Agreement; (ii) financial and operating information with respect to the
business, operations and prospects of Midland furnished to it by Midland; (iii)
the historical stock prices and trading history of the Midland Common Stock;
(iv) a comparison of the financial terms of the Merger Agreement with certain
other transactions which R-H deemed relevant; (v) the financial and stock market
information of selected publicly-traded companies which R-H deemed comparable to
Midland; (vi) certain other factors, including the proposals and responses, as
communicated to R-H, that resulted from the discussions that Midland management
and Croft & Bender, also a financial advisor to Midland, held with various
potential acquirors and investors; and (vii) certain publicly available
information on Progressive, including the 1995 Annual Report, the Annual Report
on Form 10-K for the year ended December 31, 1995, the Quarterly Report on Form
10-Q for the period ended September 30, 1996, news releases and research
reports. In addition, R-H held discussions with the management of Midland
concerning its business, operations, assets, present financial condition and
future prospects and undertook such other studies, analyses and investigations
as R-H deemed appropriate.
In rendering its opinion, R-H assumed and relied upon the accuracy and
completeness of the financial and other information used by it in arriving at
its opinion without independent verification and further relied upon the
assurances of management of Midland that they were not aware of any facts
existing at such time
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<PAGE> 21
that would make such information inaccurate or misleading. With respect to
financial forecasts provided to and discussed with R-H by management of Midland,
R-H assumed that such forecasts and projections were reasonably prepared and
reflected the best currently available estimates and judgments of management as
to the future financial performance of Midland. In arriving at its opinion, R-H
has not conducted a physical inspection of the properties or facilities of
Midland and did not make or obtain any evaluations or appraisals of the assets
or liabilities of Midland. R-H relied as to all legal matters on advice of
counsel to Midland. The opinion of R-H was based upon economic, market,
financial and other conditions as they existed on November 5, 1996, and the date
of this Proxy Statement and on the information made available to R-H as of such
dates and on the review and analyses conducted by R-H as of such dates. It
should be understood that, although subsequent developments may affect its
opinion, R-H does not have any obligation to update or revise its opinion.
The full text of the written opinion of R-H, dated the date of this Proxy
Statement, which sets forth the assumptions made, procedures followed, other
matters considered and limits of the review by R-H, appears as Appendix B to
this Proxy Statement. Midland shareholders are urged to read this opinion in its
entirety. R-H's opinion was directed only to the fairness, from a financial
point of view, of the Merger Consideration to be paid by Progressive to the
Midland shareholders pursuant to the Merger Agreement. R-H's opinion was
delivered for the information of the Midland Board and does not constitute a
recommendation as to how any shareholder should vote at the Midland meeting or
any other meeting of Midland's shareholders called to consider the Merger. R-H
did not participate in the discussions or negotiations leading up to the Merger
or to the terms and conditions of the Merger Agreement, and thus R-H did not and
could not recommend the amount of merger consideration to be paid to Midland
shareholders. This summary of the opinion of R-H is qualified in its entirety by
reference to the full text of such opinion.
The following is a summary of the material factors considered and principal
financial analyses performed by R-H to arrive at the R-H opinion. R-H analyzed
certain financial results and performed certain procedures, including each of
the financial analyses described below, and reviewed with the management of
Midland the assumptions on which such analyses were based and other factors.
Midland's Historical Operating Results and Financial Condition
R-H reviewed Midland's historical operating results and current financial
condition. The following is a summary of certain financial results and measures
of financial condition considered by R-H in arriving at its opinion.
- Midland strengthened its prior year loss reserves by approximately
$11.0 million in 1995 and by an additional $6.0 million in September
1996 due to adverse development in its loss and loss adjustment
expense reserves. As a result of reserve strengthening, Midland
reported a net loss of $10.1 million for the year ended December 31,
1995, and a net loss of $2.5 million for the nine months ended
September 30, 1996.
- Midland's underwriting profitability has deteriorated over the past
three years. Midland's GAAP combined ratio has declined from 93.3% in
1993 to 96.4% in 1994 to 115.0% in 1995 and was 113.5% for the nine
months ended September 30, 1996.
- Midland will not have the ability to pay dividends from its insurance
subsidiaries to the holding company without prior regulatory approval
for the foreseeable future. Under Tennessee law, Midland's insurance
subsidiaries may not pay dividends in excess of their accumulated
earned statutory surplus without prior regulatory approval. As of
September 30, 1996, Midland had an accumulated earned statutory
deficit of $9.7 million.
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<PAGE> 22
- Midland's current senior loan agreement requires Midland to repay
$14.5 million in senior debt in 1997 (including a $10.0 million
payment in March 1997) and an additional $5.5 million in 1998. As a
result of the current dividend restrictions on Midland's insurance
subsidiaries, Midland would be unable to meet its 1997 debt service
without receiving special regulatory approval to dividend capital out
of its insurance subsidiaries to Midland.
- In February 1996, A.M. Best lowered its rating on Midland's insurance
subsidiaries from B+ (Very Good) to B (Adequate).
Comparable Transaction Analysis
R-H performed an analysis of precedent transactions involving non-standard
automobile insurance companies in order to obtain a valuation range for the
Common Stock based upon selected merger and acquisition transactions in the
non-standard automobile segment of the property and casualty insurance industry
which in R-H's judgment were deemed to be comparable to the Merger for purposes
of this analysis. R-H reviewed a total of seven precedent transactions involving
non-standard automobile insurers. The transactions included (acquiree/acquiror):
GGS Management/Superior Insurance Co. (4/96); Viking Insurance Holdings/Guaranty
National Corporation (7/95); Victoria Financial Corporation/USF&G Corporation
(5/95); Bankers and Shippers Insurance Company/Integon Corporation (10/94);
Leader National Corporation/American Premier Underwriters (5/93); American
Financial Corporation/Penn Central Corporation (12/90); and Integon
Corporation/Jupiter Industries (8/90). R-H reviewed the consideration paid in
such transactions for the equity of the selling company as a multiple of GAAP
net operating income (net income excluding realized gains on the investment
portfolio) and GAAP shareholders' equity. The median and low multiples of price
paid for common stock to GAAP shareholders' equity for the prior fiscal quarter
were 1.4x and 1.0x, respectively. Based on a per share offer price of $9.00, the
implied multiple of price to be paid for Midland Common Stock to Midland's
shareholders' equity as of September 30, 1996 was 1.1x, which is within the
range of the price to shareholder equity multiples paid in the precedent
transactions. The median and low multiples of price paid for common stock to
trailing 12 months GAAP net operating income were 12.1x and 10.9x. Based on a
per share offer price of $9.00, the implied multiple of price to be paid for
Midland Common Stock to Midland's GAAP operating income for the 12 months ended
September 30, 1996, is not meaningful as Midland incurred an operating loss for
the 12 months ended September 30, 1996.
No transaction utilized in the comparable transaction analysis is identical
to the Merger. In evaluating precedent transactions, R-H made judgments and
assumptions with regard to industry performance, general business, economic,
market and financial condition and other matters, many of which are beyond the
control of Midland, such as the impact of competition on the business of Midland
and the industry generally, industry growth or changes in the financial markets
in general.
Comparable Company Analysis
R-H compared selected financial data and market information for Midland to
the corresponding financial data and market information for two groups of
selected public companies in the property and casualty insurance industry. The
first group consisted of property and casualty companies specializing in
non-standard automobile insurance ("Non-Standard Insurers") and included
Guaranty National Corporation, Integon Corporation, Mobile America Corporation,
Omni Insurance Group, Progressive, SAFECO Corporation, and State Auto Financial
Corporation. The second group consisted of regional, multi-line property and
casualty insurance companies ("Regional P&C Insurers") and included Alfa
Corporation, American Financial Group, Cincinnati Financial Corporation, Donegal
Group, EMC Insurance Group, Gainsco, Inc., Harleysville Group, Merchants Group,
Inc., Meridian Insurance Group, Ohio Casualty Corporation, Selective Insurance
Group, and Titan Holdings Corp. The Non-Standard Insurers were selected by R-H
as companies that are representative of the particular segment of the insurance
industry in which Midland operates and which have similar operating
characteristics to Midland. The Regional P&C Insurers were selected by R-H as
companies
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<PAGE> 23
that were similar to Midland in terms of their general business operations,
markets, size, and financial characteristics. However, R-H recognizes that each
of the comparable companies is distinguishable from Midland in certain respects,
including, without limitation, equity market capitalization, ratio of premiums
to statutory surplus, loss and expense ratios and A.M. Best rating.
For each of the comparable companies, R-H reviewed the stock price of the
company, based upon its closing stock price on November 4, 1996, as a multiple
of its net operating income per share (net income, excluding realized gains on
the investment portfolio divided by the number of shares outstanding on a
fully-diluted basis) and shareholders' equity per share, in each case calculated
in accordance with GAAP. With regard to the Non-Standard Insurers, the median
multiple of the stock price to trailing 12 months GAAP net operating income per
share was 12.7x and ranged from 10.0x to 18.4x. The median multiple of the stock
price to consensus estimates for 1996 GAAP net operating income per share was
12.8x and ranged from 8.7x to 17.3x. The median multiple of the stock price to
GAAP shareholders' equity per share for the fiscal quarter ended June 30, 1996,
was 1.7x and ranged from 1.0x to 3.2x. With regard to the Regional P&C Insurers,
the median multiple of the stock price to trailing 12 months GAAP net operating
income per share was 15.3x and ranged from 8.7x to 32.9x. The median multiple of
the stock price to 1996 consensus estimates for GAAP net operating income per
share was 14.6x and ranged from 9.4x to 22.4x. The median multiple of the stock
price to GAAP shareholders' equity per share for the fiscal quarter ended
September 30, 1996, was 1.3x and ranged from 0.8x to 2.0x. Based on a per share
offer price of $9.00, the multiple of the consideration offered for Midland
Common Stock to Midland's shareholders' equity per share as of September 30,
1996, was 1.1x. The multiple of the consideration offered for Midland Common
Stock to Midland's GAAP net operating income per share for the trailing 12
months ended September 30, 1996, is not meaningful as Midland incurred an
operating loss during this period.
Stock Price Trading History
R-H examined the stock price trading history for Midland relative to its
acquisition price. For the 52-week period ending November 5, 1996, the date
immediately prior to the date on which the Progressive transaction was
announced, Midland's highest daily closing price was $14.00 and lowest daily
closing price was $6.75. Midland's average closing price for the five trading
days and the 30 trading days prior to the announcement of the Progressive
transaction was $7.20 and $8.75, respectively. The closing price on November 5,
1996, the day before the Progressive transaction was announced, was $6.875.
Other Responses and Proposals
R-H also took into consideration various other factors including the
responses and proposals, as communicated to R-H, that resulted from the
discussions that Croft & Bender and Midland's senior management held with
various parties that were interested either in acquiring or merging with Midland
or making a minority investment in Midland. Approximately 19 different parties
were contacted by Croft & Bender regarding their interest in Midland. Ten of
these parties conducted on-site due diligence meetings with Midland. After
concluding due diligence, no party made a definitive offer that was not subject
to significant contingencies to acquire or merge with Midland at a price equal
to or greater than the $9.00 per share value offered by Progressive.
The summary set forth above does not purport to be a complete description
of the analyses performed by R-H. The preparation of a fairness opinion involves
various determinations as to the most appropriate and relevant methods of
financial analysis and the application of these methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. The preparation of the fairness opinion did not involve a
mathematical evaluation or weighing of the results of the individual analyses
performed, but required R-H to exercise its professional judgment, based on its
experience and expertise, in considering a wide variety of analyses taken as a
whole.
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<PAGE> 24
INFORMATION CONCERNING MIDLAND'S FINANCIAL ADVISOR
R-H is a recognized investment banking firm and, as a customary part of its
investment banking activities, is regularly engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, private placements, and valuations for corporate and
other purposes. Midland's management selected R-H because of its expertise,
reputation and familiarity with Midland and the insurance industry. Midland's
relationship with R-H began in 1992, when R-H served as lead underwriter for
Midland's initial public offering of Common Stock. Since 1992, from time to
time, Midland has requested R-H to provide various financial advisory services
and analyses. No fees were paid by Midland to R-H during 1994 or 1995. In the
ordinary course of R-H's business, R-H actively trades in the Common Stock for
its own account and for the account of its customers and, accordingly, may at
any time hold a long or short position in such securities.
Pursuant to a letter agreement dated February 9, 1996 (the "R-H Engagement
Letter"), Midland engaged R-H to provide investment banking services to Midland
in connection with Midland's review and analysis of potential business
combinations. In connection with Midland's engagement of R-H, Midland has paid
R-H retainer fees totaling $50,000 in 1996. Midland also paid R-H a fee of
$200,000 for rendering an opinion as to whether or not the consideration to be
received by Midland shareholders in the Danielson Transaction was fair. Midland
has agreed to pay R-H a fee of $250,000 upon rendering an opinion as to whether
or not the consideration payable to Midland's shareholders under the Progressive
transaction is fair from a financial point of view. Midland has also agreed to
reimburse R-H for reasonable expenses incurred by R-H and to indemnify R-H
against certain liabilities in connection with its engagement.
MERGER CONSIDERATION
The Merger Agreement provides that each share of Common Stock issued and
outstanding prior to the Effective Time will be converted in the Merger into the
right to receive from Progressive $9.00 in cash. Upon consummation of the
Merger, holders of Common Stock will cease to hold shares in Midland and will
not acquire any Progressive Common Shares as a result of the Merger.
REGULATORY APPROVALS
The Merger is subject to review under the HSR Act by the FTC and the DOJ.
On December 9, 1996, Midland and Progressive were notified that early
termination of the requisite waiting period under the HSR Act was granted
effective as of such date.
The Merger is also subject to, among other approvals, the prior approval of
insurance regulatory authorities in the States of Tennessee and California. Both
the Tennessee Department and the California Department have approved the
application.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the Merger, Midland shareholders should be aware that
certain members of the Board and management of Midland have certain interests
that are in addition to the interests of Midland shareholders generally and may
cause them to have potential conflicts of interest.
Employment Agreements
At the Effective Time, the current employment agreements of Elena Barham
and James E. Farmer will terminate. Each of Ms. Barham and Mr. Farmer has
executed a new employment agreement with Midland which will become effective at
the Effective Time. Each of these agreements provides for a three-year term with
a guaranteed total compensation for the three years of $600,000, consisting of a
base salary of $150,000
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<PAGE> 25
per annum, an annual cash bonus if certain performance goals are met and, at the
end of three years, a cash payment of the difference, if any, between (a) the
value of the cash compensation and any exercisable stock options for Progressive
Common Shares granted subsequent to the Effective Time and (b) $600,000. At the
Effective Time, each of Mr. Barham and Mr. Farmer will be granted nonforfeitable
options to purchase 3,500 Progressive Common Shares with an exercise price equal
to the closing price of Progressive Common Shares on the New York Stock Exchange
on the closing date of the Merger and first exercisable on the third anniversary
date of the Effective Time. Employment is terminated automatically in the event
of the employee's death and, upon notice in the event of the employee's
disability or conviction of a felony or dereliction of duty as determined by
Progressive. If the employee voluntarily resigns or is terminated as described
above, the employee receives only that compensation earned through the
termination date. Mr. Farmer's employment further provides that in the event
Progressive requires him to move to a location other than Memphis, Tennessee,
and if such location is unacceptable to him, he may exercise a right to receive
$200,000 in cash and terminate his employment.
No agreements have been made with respect to non-management employees of
Midland.
Severance Arrangements
Midland has entered into severance compensation agreements with Messrs.
McLeary and Zanone which are effective only upon consummation of the Merger
pursuant to which each will be paid an aggregate amount of $500,000 through the
year ending December 31, 1998. This represents a reduction of $250,000 plus
benefits which Midland would have been obligated to pay to such individuals
under their current employment contracts in the event of a change of control.
Additionally, Messrs. McLeary and Zanone may continue to use at no cost to them
office space at Midland's current facility through November 30, 1997. The Merger
Agreement requires that the agreement between Midland Risk Insurance Company and
NewSouth Capital Management, Inc. ("NewSouth"), the investment advisor to
Midland's investment portfolio, be terminated. Messrs. McLeary and Zanone each
own 7.8% of the outstanding stock of NewSouth.
Indemnification; Insurance
Progressive has generally agreed that Midland, as the Surviving
Corporation, will indemnify the present and former officers and directors of
Midland for a period of three years from the Effective Time, from any loss,
claim, damage, cost or expense suffered due to the fact that such person was an
officer or director of Midland prior to the Effective Time. In addition,
Progressive has agreed that Midland, as the Surviving Corporation, will maintain
directors' and officers' liability insurance for Midland directors and officers
at the present levels of coverage for three years from the Effective Time,
subject to certain limitations. See "The Merger Agreement - Indemnification."
Midland Stock Options
The Merger Agreement provides for the cashless exercise on the business day
(the "Exercise Date") immediately prior to the consummation of the Merger (the
"Closing Date") of all "in-the-money" Midland stock options. See "The Merger
Agreement - Stock Options."
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Assuming the per share value of $9.00 on the Exercise Date, the number of
options held by, and the number of shares that on the Exercise Date would be
issued to, each of the officers and directors of Midland listed below and
management of Midland as a group are set forth below:
<TABLE>
<CAPTION>
# of options # of shares
held as of received on
Name Exercise Date Exercise Date
---- ------------- -------------
<S> <C> <C>
Joseph W. McLeary.................................. 4,200 2,467
Philip R. Zanone................................... 4,200 2,467
Management (as a group)............................ 14,000 8,472
</TABLE>
Financial Advisor Fee
Croft & Bender will receive a fee of $250,000 in connection with its
services to Midland as a financial advisor. Theodore J. Bender, III, a director
of Midland is a principal in such firm.
EFFECT ON EMPLOYEE BENEFIT PLANS
In the Merger Agreement, Progressive acknowledged that it intends to cause
Midland, as the Surviving Corporation, and each of its subsidiaries to provide
any employees of Midland or its subsidiaries who continue to be employed after
the Effective Time by Midland, as the Surviving Corporation, or its subsidiaries
with employee benefits that are at least approximately equivalent to the
benefits being provided to Midland employees immediately prior to the Effective
Time.
NO DISSENTERS' RIGHTS
Under Tennessee law, the holders of Common Stock are not entitled to
dissenters' rights in connection with the Merger. State laws impose fiduciary
duties on directors of a corporation to act in the interests of a corporation's
shareholders. Shareholders may pursue a private action against a corporation's
directors for breach of fiduciary duty if a shareholder believes that the
directors of a corporation have not acted in the interests of such corporation's
shareholders. The unavailability of dissenters' rights under Tennessee law does
not preclude shareholders of Midland from exercising other rights which may be
available to them in connection with the Merger.
THE MERGER AGREEMENT
THE INFORMATION CONTAINED IN THIS PROXY STATEMENT WITH RESPECT TO THE
MERGER AGREEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE COMPLETE TEXT
OF THE MERGER AGREEMENT ATTACHED HERETO AS APPENDIX A, WHICH IS INCORPORATED
HEREIN BY REFERENCE. SHAREHOLDERS ARE URGED TO READ THE MERGER AGREEMENT
CAREFULLY.
EFFECTIVE TIME
The Merger Agreement provides that the Merger will become effective at the
time a certificate of merger (the "Certificate of Merger") is duly filed with
the Secretary of State of the State of Tennessee or at such later time as the
Certificate of Merger specifies. Such filing, together with all other filings or
recordings required by Tennessee law in connection with the Merger, will be made
within 10 business days following the later of (i) the date of the approval of
the Merger Agreement by Midland shareholders or (ii) the date of the
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<PAGE> 27
satisfaction or, to the extent permitted under the Merger Agreement, waiver of
all conditions to the Merger contained in the Merger Agreement.
THE MERGER
At the Effective Time, Merger Sub will be merged with and into Midland, at
which time the separate corporate existence of Merger Sub will cease and Midland
will be the Surviving Corporation and a wholly-owned subsidiary of Progressive.
From and after the Effective Time, the Surviving Corporation will possess all
the assets, rights, privileges, powers and franchises and be subject to all of
the liabilities, restrictions, disabilities and duties of Midland and Merger
Sub, as provided under Tennessee law. The Certificate of Incorporation and
Bylaws of Midland in effect immediately prior to the Effective Time will be the
Certificate of Incorporation and Bylaws of the Surviving Corporation.
CONSIDERATION TO BE RECEIVED IN THE MERGER
At the Effective Time, (i) each share of Common Stock outstanding
immediately prior to the Effective Time will be converted into the right to
receive from Progressive $9.00 in cash ("Merger Consideration"); (ii) (ii) each
share of common stock of Merger Sub outstanding immediately prior to the
Effective Time will remain outstanding and will constitute one share of common
stock of the Surviving Corporation; and (iii) each share of Common Stock held by
Midland as treasury stock immediately prior to the Effective Time will be
canceled and no payment will be made with respect thereto.
PAYMENT PROCEDURES AND EXCHANGE AGENT
On or prior to the Effective Time, Progressive will deposit the Merger
Consideration with National City Bank, Cleveland, Ohio, as exchange agent (the
"Exchange Agent"). Promptly after the Effective Time, the Exchange Agent will
mail to each former holder of record of Common Stock a form of letter of
transmittal, together with instructions for the exchange of such holder's
certificates previously representing Common Stock for the Merger Consideration.
SHAREHOLDERS SHOULD NOT SEND IN ANY STOCK CERTIFICATES REPRESENTING COMMON STOCK
UNTIL THEY RECEIVE THE LETTER OF TRANSMITTAL AND INSTRUCTIONS FROM THE EXCHANGE
AGENT.
Promptly following the surrender by a shareholder to the Exchange Agent of
one or more certificates previously representing Common Stock, together with a
properly completed and executed letter of transmittal, the Exchange Agent will
issue and mail to such holder a check in the amount of Merger Consideration to
which such holder is entitled.
After the Effective Time, there will be no transfers on Midland's stock
transfer books of Common Stock issued and outstanding immediately prior to the
Effective Time. Until surrendered to the Exchange Agent, each certificate
previously representing Common Stock shall be deemed at any time after the
Effective Time to represent only the right to receive the Merger Consideration
upon such surrender. No interest will be paid or accrued on the Merger
Consideration, nor will any dividends be paid to, or accrued for the benefit of,
former holders of Common Stock after the Effective Time.
None of Progressive, the Surviving Corporation, or the Exchange Agent shall
be liable to any former holder of Common Stock for any amount properly delivered
to a public official pursuant to applicable abandoned property, escheat or
similar laws. In addition, any portion of the Merger Consideration which remains
undistributed after 180 days after the Effective Time will be delivered to
Progressive, and any former shareholders of Midland thereafter may look only to
Progressive for payment of the Merger Consideration.
If a certificate for Common Stock has been lost, stolen or destroyed, the
Exchange Agent will issue the Merger Consideration properly payable in
accordance with the Merger Agreement upon receipt of
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<PAGE> 28
appropriate evidence as to such loss, theft or destruction, appropriate evidence
as to the ownership of such certificate by the claimant and appropriate and
customary indemnification, which may include payment of a premium for an
indemnity bond.
STOCK OPTIONS
Each option to purchase shares of Common Stock and Midland's 1989 Incentive
Stock Option Plan and 1992 Long-Term Incentive Plan (collectively, the
"Options") will be amended to provide that (a) each "in-the-money" Option,
whether or not exercisable, will become fully vested on the business day
immediately preceding the Effective Time, (b) each Option will terminate as of
the Effective Time if not exercised prior to such time, and (c) except for
persons who have been granted Options within six months of the Effective Time
and are required to file reports under Section 16(a) of the Securities Exchange
Act of 1934, as amended, each holder will be deemed, as of the date such
amendments were made, to have exercised such Options on the business day
immediately preceding the Effective Time. The deemed exercise of Options will be
by means of a "cash-less" exchange, pursuant to which Midland will issue to each
Option holder shares of Common Stock representing the difference between (i) the
$9.00 per share value of Common Stock and (ii) the per share exercise price as
stated in each Option. The amendment of the Options will be conditioned upon the
consummation of the Merger.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties by
each of Progressive, Midland and Merger Sub relating to, among other things: (a)
corporate organization, existence and good standing; (b) corporate power and
authority to enter into and perform the Merger Agreement (subject to approval
thereof by the Midland shareholders); (c) the validity and binding effect of the
Merger Agreement; (d) consents or approvals of governmental bodies or any third
parties; (e) capital structure; (f) litigation; (g) compliance with applicable
laws; (h) accuracy of documents filed with the SEC; and (i) compliance with
contracts and commitments. Further, Midland made representations and warranties
related to (a) labor matters, (b) tax matters, (c) employee benefits, (d) the
absence of certain changes and events, (e) the absence of undisclosed
liabilities, (f) the accuracy and adequacy of loss reserves, (g) reports and
financial statements, (h) intercompany and affiliate transactions, (i) premium
balance receivables, and (j) investment portfolio.
All of the representations and warranties set forth in the Merger Agreement
will terminate as of the closing of the Merger.
COVENANTS
Midland has agreed that, from the date of the Merger Agreement until the
Effective Time, it will, and will cause its subsidiaries, to conduct its
business and operations in the ordinary course consistent with past practices
and, except as contemplated by the Merger Agreement, will not take certain
actions without the prior written consent of Progressive, which actions include
without limitation: (a) amendments to its charter documents; (b) stock splits,
combinations or reclassification; (c) stock redemptions or reacquisitions; (d)
except for shares reserved for issuance upon the exercise of certain options and
warrants, the issuance, sale or grant of any shares of its capital stock; (e)
the sale or encumbrance of any assets (other than the disposition of assets
which are not, individually or in the aggregate, material to Midland and its
subsidiaries taken as a whole); (f) entering into new, or modifying any
existing, employment arrangements or granting salary increases, bonuses or
severance pay (other than in the ordinary course of business and consistent with
past practice and which are not material); (g) entering into any other
agreements, commitments or contracts which are outside of the ordinary course of
business consistent with past practice or not on an arm's length basis; (h)
making any acquisition of a business entity or, except in the ordinary course of
business, any other assets; (i) other than borrowings under existing credit
facilities or other borrowings in the ordinary course, which additional
borrowings will not in the aggregate exceed $1,000,000 outstanding at any time,
incur indebtedness, make
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<PAGE> 29
loans, advances, capital contributions or investment in unaffiliated entities or
cancel debt; (j) making any change in the lines of business in which it
participates or is engaged; (k) enter into any agreement providing for the
acceleration of payment as a result of a change in control; (l) except as
required by law, change its pricing, accounting, tax practice and other
policies, or its methodology of calculation of certain financial items, or make
any material tax election or settle or compromise any material income tax
liability; (m) take any actions that would make any of its representations
contained in the Merger Agreement untrue in any material respects up to and
until the Effective Time; (n) enter into any contract, arrangement or
understanding requiring the purchase of equipment, materials, supplies or
services over a period greater than 12 months and for the expenditure of greater
than $500,000 per year which is not cancelable without penalty on 30 days' or
less notice; (o) the failure to maintain in full force the insurance policies in
effect on the date of the Merger Agreement; (p) the failure to notify
Progressive of a claim for damage, which claim is covered by such insurance and
would have a material adverse effect on Midland prior to the Closing Date; (q)
the failure to comply with all laws and orders applicable to it; (r) the
adoption of a plan of complete or partial liquidation or resolutions providing
for or authorizing such liquidation or a dissolution, merger (other than the
Merger), consolidation, restructuring, recapitalization or other reorganization;
or (s) the authorization or proposing of any of the foregoing or entering into
any contract, agreement or commitment to do any of the foregoing.
NO SOLICITATION; TRANSACTION MORATORIUM
Midland has agreed that, other than with respect to the Merger, it will
not, and it will not permit its subsidiaries, or any of the officers, directors,
employees or agents of Midland and its subsidiaries to, directly or indirectly,
initiate, solicit, encourage, participate in any negotiations regarding, furnish
any confidential information in connection with, endorse or otherwise cooperate
with, assist, participate in or facilitate the making of any proposal or offer
for, or which may be reasonably expected to lead, to the acquisition or merger,
consolidation or other business combination of Midland and its subsidiaries in
any manner (an "Acquisition Transaction"). Midland may take certain actions with
respect to an Acquisition Transaction if the Board determines, in good faith and
on written advice from independent counsel, that such actions are necessary in
order for the Board to act in a manner consistent with the Board's fiduciary
obligations under existing laws. If Midland takes any action, other than
preliminary discussions, in response to a potential Acquisition Transaction,
Midland will immediately notify Progressive in writing. Upon Progressive's
receipt of such notice, all of Progressive's duties and obligations under the
Merger Agreement will be suspended for a period (the "Transaction Moratorium
Period") beginning on the date of such notice and ending on the date Progressive
receives notice from Midland that it has ceased all such contacts and discussion
regarding potential Acquisition Transactions. If a Transaction Moratorium Period
continues for a period in excess of 30 days, Progressive may terminate the
Merger Agreement prior to its receipt of notice from Midland terminating a
Transaction Moratorium Period, and avail itself of all remedies available in the
Merger Agreement. As a consequence of any Transaction Moratorium Period, each of
the dates relating to or affecting a date by which Progressive is required to
perform its duties and obligations under the Merger Agreement will be extended
on a day-for-day basis for each day in any Transaction Moratorium Period.
ACCESS TO INFORMATION
Midland has agreed that, until the Effective Time or earlier termination of
the Merger Agreement, it will provide Progressive access to information
concerning itself, subject to the confidentiality provisions of the Merger
Agreement and existing contractual and legal restrictions.
ADDITIONAL COVENANTS
In addition to the covenants summarized above, each of Progressive and
Midland has agreed to: (a) subject to the terms and conditions of the Merger
Agreement, use its reasonable efforts to take all actions necessary, proper or
advisable under applicable laws and regulations to consummate the transactions
contemplated by the Merger Agreement; (b) cooperate to make certain filings and
obtain certain consents
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<PAGE> 30
necessary to consummate the transactions completed by the Merger Agreement; (c)
with respect to Midland, cause a meeting of the shareholders to be duly called
and held, at which, subject to the requirements of its fiduciary duties, the
Board will recommend approval and adoption by the Midland shareholders of the
Merger Agreement and the Merger and the transactions contemplated thereby; (d)
take all actions necessary in connection with this Proxy Statement and in
connection with the payment by Progressive of the Merger Consideration and (e)
with respect to Midland, provide notice to terminate the agreement by and
between Midland Risk and NewSouth.
CONDITIONS TO THE MERGER
The obligations of each of Progressive and Midland to consummate the Merger
are subject to the satisfaction of certain conditions including without
limitation: (a) approval and adoption of the Merger Agreement by the requisite
vote of the shareholders of Midland (b) the receipt of all necessary
authorizations, including the expiration or termination of any waiting period
applicable to the Merger under the HSR Act; and (c) the absence of any
governmental suit, action, inquiry, investigation or proceeding which seeks to
prevent consummation of the Merger.
The obligation of Progressive to consummate the transactions contemplated
by the Merger is subject to the satisfaction of additional conditions including,
without limitation: (a) receipt of an opinion from counsel to Midland; (b) the
truth and correctness as of the Closing Date, in all material respects, of the
representations and warranties of Midland contained in the Merger Agreement; (c)
Midland's performance of or compliance in all material respects with its
obligations under the Merger Agreement; (d) each of Joseph W. McLeary and Philip
R. Zanone shall have entered into severance agreements with Midland; (e) the
absence of any Material Adverse Effect (as defined in the Merger Agreement) as
to Midland; and (f) receipt of all necessary third party consents.
The obligation of Midland to consummate the Merger is subject to certain
conditions including, without limitation: (a) receipt of an opinion from counsel
to Progressive; (b) the truth and correctness, in all material respects, of the
representations and warranties of Progressive contained in the Merger Agreement;
(c) Progressive's performance of or compliance in all material respects with its
obligations under the Merger Agreement; and (d) receipt of all necessary third
party consents.
TERMINATION, BREAK-UP FEES AND EXPENSES
The Merger Agreement may be terminated by either Midland or Progressive if
the Merger has not been consummated by the Final Termination Date (April 30,
1997), unless extended by the agreement of the Midland Board and the Board of
Directors of Progressive or at any time by mutual consent. In addition, the
Merger Agreement may be terminated prior to such date (a) by either party if (i)
the other party materially breaches a representation, warranty or covenant
contained in the Merger Agreement and fails to cure such breach in a timely
manner, (ii) the requisite vote of the Midland shareholders is not obtained at
the Special Meeting or (b) by Progressive, if the recommendation of the Midland
Board is withdrawn or modified in any manner which is adverse to Progressive, or
(c) by Midland, if it has withdrawn its recommendation to the Midland
shareholders after having determined such action is necessary in order for the
Board to act in a manner consistent with its fiduciary obligations under
existing laws. See "No Solicitation; Transaction Moratorium."
In the event the Merger Agreement is terminated (a) by Progressive because
Midland has failed to perform any material covenant or obligation before or on
the Final Termination Date, (b) the Board withdraws its recommendation to the
shareholders, (c) by either party if the requisite shareholder vote is not
obtained, (d) by Progressive if Midland is in material breach of a
representation, warranty or covenant which breach is not timely cured, or (e) by
either party if Midland terminates the Merger Agreement because of a proposal
for an Acquisition Transaction, then Midland is required to reimburse
Progressive for its expenses
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<PAGE> 31
in an amount up to $1 million. Midland has agreed to pay Progressive an
additional $1.75 million if the Merger Agreement is terminated upon the
occurrence of any of the events described in this paragraph and within 12 months
of such termination (i) it is publicly announced that Midland will enter into an
Acquisition Transaction, (ii) Midland consummates an Acquisition Transaction, or
(iii) Midland enters into an agreement with respect to an Acquisition
Transaction. Additionally, if Midland terminates the Merger Agreement because
Progressive has not performed any material covenant or obligation, then
Progressive is required to reimburse Midland for its expenses in an amount up to
$1 million.
INDEMNIFICATION
From the Effective Time, as to any claims made or asserted (even if not
resolved) prior to the third anniversary of the Effective Time, to the extent
permitted by applicable law, the Surviving Corporation will indemnify, defend
and hold harmless any person who is or was, at any time prior to the Effective
Time, a director, officer, employee or agent of Midland or its subsidiaries
(each, an "Indemnified Party"), from and against all losses, claims, damages,
costs, expenses, liabilities, judgments and settlement amounts that are paid or
incurred in connection with any claim, action, suit, proceeding or investigation
that is based in whole or in part or arises out of (a) any action or omission by
an Indemnified Party in his or her capacity as a director, officer, employee or
agent of Midland or its subsidiaries, or (b) the Merger Agreement or the
transactions contemplated by such agreement.
For a period of three years from and after the Effective Time, the
Surviving Corporation will cause to be maintained in effect (a) all available
policies of directors' and officers' liability insurance maintained by Midland
and its subsidiaries on the date of the Merger Agreement, or (b) policies of at
least the same coverage and amounts containing terms that are no less
advantageous to the insured parties, with respect to claims arising from facts
or events that occurred on or prior to the Effective Time. Notwithstanding the
foregoing, the Surviving Corporation will not be obligated to expend any amount
per annum in excess of the aggregate premiums paid by Midland and its
subsidiaries as of the date of the Merger Agreement, in order to maintain such
insurance.
ACCOUNTING TREATMENT
Progressive intends to treat the Merger as a purchase for accounting
purposes.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion of the principal federal income tax consequences
of the Merger is based upon the provisions of the Internal Revenue Code of 1986,
as amended, the regulations thereunder, judicial authority, administrative
rulings and practice as of the date hereof and the advice of Baker, Donelson,
Bearman & Caldwell, counsel to Midland. The following discussion does not
address the federal income tax consequences to special classes of taxpayers,
including, without limitation, foreign corporations, tax exempt entities and
persons who acquired their shares of Common Stock pursuant to the exercise of an
employee option or otherwise as compensation.
Shareholders are encouraged to consult their tax advisors concerning the
federal income tax consequences in their particular circumstances, as well as
any tax consequences arising under foreign, state or local law.
The cancellation of shares of Common Stock in exchange for cash pursuant to
the Merger will be a taxable transaction to the holders thereof for federal
income tax purposes and may also be a taxable transaction under applicable
state, local and other tax laws.
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<PAGE> 32
In general, a shareholder who receives the Merger Consideration will
recognize gain or loss equal to the difference between the adjusted tax basis of
his shares of Common Stock and the amount of cash received in exchange therefor.
Such gain or loss will be capital gain or loss if, as should be the case for
most holders of Common Stock, the shares are capital assets in the hands of the
shareholder and will be long-term capital gain or loss if the holding period for
the Common Stock is more than one year. The foregoing discussion may not apply
to shareholders who acquired their Common Stock pursuant to the exercise of
stock options or other compensation arrangements with the Company, who are not
citizens or residents of the United States or who are otherwise subject to
special tax treatment under the Code.
Each holder of Common Stock who receives the Merger Consideration and each
holder of an option outstanding under the Company's stock option plan who
receives a cash payment from the Company with respect thereto will, in general,
be required to provide to the Exchange Agent a Social Security or other taxpayer
identification number, or in certain instances other information, in order to
avoid "back-up withholding" requirements which might otherwise apply under the
Code. Any such person who does not furnish such information may be subject to a
penalty imposed by the Internal Revenue Service.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE DOES NOT NECESSARILY SET
FORTH ALL OF THE TAX CONSEQUENCES OF THE MERGER THAT MAY BE RELEVANT TO ALL
SHAREHOLDERS IN ALL CIRCUMSTANCES. SHAREHOLDERS SHOULD THEREFORE CONSULT THEIR
TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER,
INCLUDING THE EFFECTS OF APPLICABLE STATE, LOCAL OR OTHER TAX LAWS.
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<PAGE> 33
OWNERSHIP OF COMMON STOCK BY PRINCIPAL SHAREHOLDERS AND MANAGEMENT
To the best knowledge of Midland, based on information filed with the
Securities and Exchange Commission and Midland's stock records, the following
table sets forth, as of January 13, 1997, the number of shares of Common Stock
beneficially owned by (i) each person who beneficially owns more than 5% of the
Common Stock, (ii) directors and executive officers, and (iii) directors and
executive officers as a group.
<TABLE>
<CAPTION>
Name and Address Amount and Nature Percent
of Beneficial Owner of Beneficially Owned (1) of Class
--------------------------------- ------------------------------------------
<S> <C> <C>
(i) MARCo Holdings, L.P. (2)
C/O Michael A. Robinson
One Commerce Square, Suite 1700
Memphis, Tennessee 512,448 9.2
The Progressive Corporation (3)
6300 Wilson Mills Road
Mayfield Village, Ohio 44143 460,500 8.3
Fenimore Asset Management, Inc.
118 N. Grand Street, Box 310
Cobleskill, New York, 10243 451,150 8.1
John J. Shea, Jr., M.D. (4) 310,777 5.6
Philip R. Zanone (5)(6) 416,853 7.4
(ii) John J. Shea, Jr., M.D. (4) 310,777 5.6
Philip R. Zanone (5)(6) 416,853 7.4
Joseph W. McLeary (6)(7) 182,765 3.3
J. Shea Leatherman (8) 164,038 3.0
Elena Barham (6) 74,477 1.3
James E. Farmer (6) 70,830 1.3
Sidney A. Stewart (6) 21,650 *
F. Ross Johnson (9) 38,200 *
Theodore J. Bender, III (10) 14,000 *
(iii) All Directors and Executive
Officers as a Group
(9 persons) 1,308,590 22.5
</TABLE>
- ---------------
* Less than one percent
(1) The numbers shown include the shares that are not currently outstanding but
which certain shareholders are entitled to acquire or will be entitled to
acquire within sixty (60) days. Such shares are deemed to be outstanding
for the purpose of computing the percentage of outstanding Common Stock
owned by the particular shareholder and by the group, but are not deemed to
be outstanding for the purpose of computing the percentage of ownership of
any other person.
(2) As disclosed on Schedule 13D, a copy of which was provided to Midland in
May 1996, includes 102,630 shares directly owned by MARCo Holdings, L.P.
and 84,000 shares that Michael A. Robinson may acquire by exercise of
warrants. Also includes 130,000 shares owned by Charles P. and Anne W.
Brown; 45,818 shares owned by C.P. Brown Family Trust; 108,000 owned by
Thomas W. Barbara D. Staed; and 14,000 shares owned by each of Blaine
Brantly Staed Irrevocable Trust; Leslie Shelton Staed Irrevocable Trust and
Whitney Egan Staed Irrevocable Trust.
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<PAGE> 34
(3) As disclosed on Schedule 13D, a copy of which was provided to Midland. The
shares are held of record by Progressive Investment Company, Inc., a wholly
owned subsidiary of Progressive. In addition, Chuck Chokel, Chief Financial
Officer of Progressive, beneficially owns 1,100 shares.
(4) Dr. Shea's address is Shea Clinic, 6133 Poplar Pike, P.O. Box 17987,
Memphis, Tennessee 38187-0987.
(5) Includes 55,734 shares owned by his wife, Irwin L. Zanone, as to which Mr.
Zanone disclaims beneficial ownership; includes 51,200 shares issuable upon
the exercise of options granted under Midland's stock option plans;
excludes options to purchase 12,000 shares which are not exercisable within
the next 60 days.
(6) The address of each of Midland's officers and of Mr. Stewart is Midland
Financial Group, Inc., 825 Crossover Lane, Suite 112, Memphis, Tennessee
38117.
(7) Includes 1,000 shares owned by his wife, Joyce C. McLeary; 44,904 shares
owned by McLeary Financial Group, L.P., of which Mr. McLeary is a limited
partner; 51,200 shares issuable upon the exercise of stock options granted
under Midland stock option plans; excludes options to purchase 12,000
shares that are not exercisable within the next 60 days.
(8) Mr. Leatherman's address is Route 1, Box 193, Robinsonville, Mississippi
38664.
(9) Mr. Johnson's address is 2660 Peachtree Street, N.W., Atlanta, Georgia
30305. Mr. Johnson's ownership includes 2,000 shares owned by his wife,
Laurie Johnson, for which he disclaims beneficial ownership.
(10) Mr. Bender's address is 3541 Ridgewood Road, Atlanta, Georgia 30327.
FINANCIAL INFORMATION
Financial information for Midland is included in its Annual Report on Form
10-K for the year ended December 31, 1995, as amended, and its Quarterly Report
on Form 10-Q for the quarter ended September 30, 1996, as amended, both of which
are enclosed with this Proxy Statement.
MARKET PRICES AND DIVIDENDS
Midland's Common Stock is traded on the Nasdaq National Market under the
symbol "MDLD." The following table sets forth for the periods indicated the high
and low sales prices and dividends paid by Midland. On the Record Date, Midland
had 91 shareholders of record and based on information available to it, Midland
believes it has more than 1700 beneficial owners of its Common Stock.
<TABLE>
<CAPTION>
High Low Dividends
------ ------ ---------
<S> <C> <C> <C>
1995
First quarter.......................................... 18 3/4 14 3/4 .05
Second quarter......................................... 19 17 1/2 .05
Third quarter.......................................... 19 1/2 9 .05
Fourth quarter......................................... 12 1/2 18 1/2 .05
1996
First quarter.......................................... 14 11 1/4 .05
Second quarter......................................... 12 7/8 10 7/8 --
Third quarter.......................................... 12 7/8 8 --
Fourth quarter......................................... 10 6 3/4 --
1997
First quarter through February 4....................... 8 3/4 8 27/32 --
</TABLE>
On November 5, 1996, the last full day of trading prior to the announcement
of the Merger Agreement, the closing sale price of a share of Common Stock was
$6.875. At December 31, 1995 and September 30, 1996 the book value of a share of
Common Stock was $9.06 and $8.46, respectively.
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<PAGE> 35
GENERAL
INDEPENDENT PUBLIC ACCOUNTANTS
A representative of KPMG Peat Marwick LLP, Midland's certified public
accountants, is expected to be present at the Special Meeting, will have an
opportunity to make a statement if he desires to do so and is expected to be
available to respond to all appropriate questions relating to the financial
statements.
SHAREHOLDER PROPOSALS
If the Merger is not consummated, Midland anticipates that its Annual
Meeting for the fiscal year ending December 31, 1996 will occur at the
traditional time, in May 1997. Consequently, a proposal submitted by a
shareholder for action at such meeting should have been received at Midland's
principal executive office prior to December 1, 1996, in order to be eligible
for inclusion in Midland's proxy statement therefor.
OTHER MATTERS
As of the date of this Proxy Statement, the Board knows of no matters which
will be presented for consideration at the Special Meeting other than the
proposal set forth in this Proxy Statement. If any other matters properly come
before the Special Meeting, it is intended that the persons named in the proxy
will act in respect thereof in accordance with their best judgment.
SOLICITATION OF PROXIES AND COST THEREOF
The cost of solicitation, which will be undertaken by mail, telephone,
telegraph, and personal contact, will be borne by Midland. Expenses of
solicitation will include reimbursement to brokerage firms and other custodians,
nominees, and fiduciaries for their reasonable expenses in forwarding
solicitation material regarding the Special Meeting to beneficial owners.
Midland's regularly retained investor relations consultant, Corporate
Communications, Inc., will assist in the solicitation of proxies from
shareholders, and further solicitation may be undertaken by directors, officers
and employees of Midland, none of whom will be additionally compensated
therefor, but who will be reimbursed for out-of-pocket expenses
ADDITIONAL INFORMATION
Midland is subject to the informational requirements of the Exchange Act,
and in accordance therewith files reports and other information with the
Securities and Exchange Commission (the "SEC"). Reports and other information
filed by Midland can be inspected and copied at the public reference facilities
at the SEC's office at 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Regional Offices at Seven World Trade Center, New York, New York 10048 and
Citicorp Center, 500 W. Madison Street, Chicago, Illinois 60621-2511. 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. Such
material may also be accessed electronically by means of the SEC's home page on
the Internet at http://www.sec.gov. Such material and other information
concerning Midland can be inspected and copied at the offices of The National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Midland delivers herewith or hereby incorporates by reference its Annual
Report on Form 10-K for the year ended December 31, 1995, as amended, its
Quarterly Reports on Form 10-Q for the quarters ended March 31, as amended, June
30, as amended, and September 30, 1996, as amended, and its Current Report on
Form 8-K filed November 14, 1996. All documents filed by Midland pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Proxy Statement and prior to the date of the Special
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<PAGE> 36
Meeting shall be deemed to be incorporated by reference into this Proxy
Statement and to be a part hereof from the date of filing of such documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes hereof to the extent that a statement contained herein (or in any
other subsequently filed document that is or is deemed to be incorporated by
reference herein) modifies or supersedes such previous statement. Any statement
so modified or superseded shall not be deemed to constitute a part hereof except
as so modified or superseded.
This Proxy Statement incorporates documents by reference which are not
presented herein or delivered herewith. These documents (other than exhibits to
such documents unless such exhibits are specifically incorporated by reference
herein) are available, without charge, upon oral or written request by any
person to whom this Proxy Statement has been delivered. Shareholders who wish to
receive copies of such documents may call Midland at (901) 680-9100 or write to
Midland Financial Group, Inc., 825 Crossover Lane, Memphis, Tennessee 38117,
Attention: Elena Barham.
By Order of the Board of Directors:
Elena Barham,
Secretary
February 7, 1997
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<PAGE> 37
Appendix A
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of November 6, 1996 (this
"Agreement"), among Midland Financial Group, Inc., a Tennessee corporation (the
"Company"), The Progressive Corporation, an Ohio corporation (the "Purchaser"),
and TPC Acquisition Corporation, a Tennessee corporation (the "Merger Sub").
WITNESSETH:
WHEREAS, the respective boards of directors of the Company, the Purchaser
and the Merger Sub have approved the Merger of the Merger Sub with and into the
Company (the "Merger"), upon the terms and subject to the conditions set forth
herein;
WHEREAS, the Purchaser, the Merger Sub and the Company desire to make
certain representations, warranties, covenants and agreements in connection with
the Merger; and
WHEREAS, for federal income tax purposes, it is intended that the Merger
not qualify as a tax-free reorganization within the meaning of Section 368 of
the Internal Revenue Code;
NOW, THEREFORE, in consideration of the mutual covenants and undertakings
contained herein, and subject to and on the terms and conditions herein set
forth, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
When used in this Agreement, the following terms shall have the respective
meanings set forth below:
"Acquisition Transaction" has the meaning given to such term in Section
6.2(a).
<PAGE> 38
"Affiliate" has the meaning given to such term in Rule 12b-2 promulgated
under the Exchange Act.
"Agency Agreements" has the meaning given to such term in Section 4.26.
"Agents" has the meaning given to such term in Section 4.26.
"Annual Convention Statement" means an annual convention statement or
equivalent of the Company filed with applicable state insurance commissioners.
"Antitrust Division" has the meaning given to such term in Section 6.10.
"Assets" means the assets of the Company and its Subsidiaries reflected on
the Balance Sheet or acquired in the ordinary course of business since the
Balance Sheet Date.
"Authorization" means any consent, approval or authorization of, expiration
or termination of any waiting period requirement (including pursuant to the HSR
Act) by, or filing, registration, qualification, declaration or designation
with, any Governmental Body.
"Balance Sheet" means the audited consolidated balance sheet of the Company
as of the Balance Sheet Date, together with the notes thereon and the related
unqualified report of KPMG Peat Marwick LLP, the Company's certified public
accountants, previously delivered to the Purchaser.
"Balance Sheet Date" means December 31, 1995.
"Business Day" means any day other than Saturday or Sunday and any other
day on which commercial banks in New York, New York, Cleveland, Ohio or Memphis,
Tennessee are required or permitted to be closed.
"Certificate of Merger" means the Certificate of Merger with respect to the
merger of the Merger Sub with and into the Company, containing the provisions
required by, and executed in accordance with, Section 48-21-107 of the TBCA.
"Certificates" means one or more certificates which immediately prior to
the Effective Time represented outstanding Shares.
"Closing" means the closing of the Merger contemplated hereby.
"Closing Date" has the meaning given to such term in Section 2.2.
"Code" means the Internal Revenue Code of 1986, as amended, and all
regulations promulgated thereunder, as in effect from time to time.
"Company" means Midland Financial Group, Inc., a Tennessee corporation.
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"Company Benefit Arrangement" has the meaning given to such term in Section
4.15(a).
"Company Common Stock" means the common stock, no par value, of the
Company.
"Company Disclosure Schedule" means the disclosure schedule of the Company
dated the date of this Agreement delivered concurrently with the execution and
delivery of this Agreement by the Company to the Purchaser.
"Company Employee Plan" has the meaning given to such term in Section
4.15(a).
"Company Financial Statements" has the meaning given to such term in
Section 4.18.
"Company Material Adverse Effect" means a material adverse effect on (i)
the business, assets, liabilities, results of operations, condition (financial
or otherwise) or prospects of the Company and its Subsidiaries, taken as a whole
or (ii) the validity or enforceability of, or the ability of any party hereto to
perform its obligations under, and to consummate the transactions contemplated
by, this Agreement or any other agreement or instrument contemplated hereby or
to be entered into in connection herewith. Notwithstanding the foregoing, no
adjustments to the Company's Loss Reserves shall be deemed material unless the
aggregate net adjustment for periods ending after September 30, 1996 exceeds $10
million.
"Company Option" has the meaning given to such term in Section 3.3.
"Company Permits" has the meaning given to such term in Section 4.5(a).
"Company SEC Reports" means all reports (including without limitation,
definitive proxy statements), forms, schedules, registration statements and
other documents together with all amendments and supplements thereto, which the
Company has been required to file with the SEC since January 1, 1992.
"Company Shareholders' Meeting" has the meaning given to such term in
Section 6.3.
"Company's Shareholders' Approval" has the meaning given to such term in
Section 6.3.
"Computer Intellectual Property" has the meaning given to such term in
Section 4.21.
"Constituent Corporations" means each of the Merger Sub and the Company.
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"Contract" means any note, bond, mortgage, security agreement, indenture,
license, franchise, permit, concession, contract, lease or other instrument,
obligation or agreement of any kind.
"Effective Time" means the date and time of the effectiveness of the Merger
pursuant to Section 2.2 and in accordance with the TBCA.
"Employees" means the officers, employees, agents, directors or independent
contractors of a Person or any of its Subsidiaries, whether former or current.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and all regulations promulgated thereunder, as in effect from time to
time.
"ERISA Affiliates" means any trade or business, whether or not
incorporated, that is now or has at any time in the past been treated as a
single employer with the Company or any of its Subsidiaries under Section 414(b)
or (c) of the Code and the Treasury Regulations thereunder.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder.
"Exchange Agent" means the exchange agent selected by the Purchaser and
reasonably acceptable to the Company, to effectuate the payment for Shares in
the Merger.
"Exchange Fund" shall have the meaning given to such term in Section
3.2(a).
"Final Termination Date" means April 30, 1997.
"FTC" has the meaning given to such term in Section 6.10.
"Governmental Body" means any federal, state, municipal, political
subdivision or other governmental court, tribunal, arbitrator, authority,
official, department, commission, board, bureau, agency or instrumentality,
domestic or foreign.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended, and the rules and regulations promulgated thereunder.
"Indemnified Liabilities" has the meaning given to such term in Section
6.8(a).
"Indemnified Parties" has the meaning given to such term in Section 6.8(a).
"Indemnifying Party" has the meaning given to such term in Section 6.8(a).
"Intellectual Property" has the meaning given to such term in Section 4.21.
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"Intellectual Property Agreements" has the meaning given to such term in
Section 4.21.
"Law" means any statute, law, rule, regulation or ordinance of any
Governmental Body.
"Lien" means any lien, claim, mortgage, encumbrance, pledge, security
interest, equity and charge of any kind.
"Loss Reserves" means all undiscounted reserves for incurred losses
including, without limitation, case reserves, reserves for incurred but not
reported losses and reserves for loss adjustment expenses, both allocated and
unallocated (and without any deduction for salvage, subrogation or reinsurance
recoverables).
"Marketing Intellectual Property" has the meaning given to such term in
Section 4.21.
"Merger" means the merger of the Merger Sub with and into the Company as
contemplated by Section 2.1.
"Merger Consideration" means the cash to be delivered in connection with
the Merger as set forth in Section 3.1(a).
"Merger Sub" has the meaning given to such term in the first paragraph
hereof.
"NYSE" means the New York Stock Exchange.
"Options" means any subscriptions, options, warrants, rights (including
"phantom" stock rights), preemptive rights or other contracts, commitments,
understandings or arrangements, including any right of conversion or exchange
under any outstanding security, instrument or agreement to issue or sell any
shares of capital stock of a corporation or any securities, exchangeable for or
exercisable into any such shares.
"Order" means any judgment, decree, order, writ, permit or license of any
Governmental Body.
"Permitted Investments" means short-term U.S. government obligations or
interest-bearing money market accounts that invest solely in such obligations.
"Person" means any individual or corporation, company, partnership, trust,
incorporated or unincorporated association, joint venture or other entity of any
kind.
"Plan" means the Company's 1989 Incentive Stock Option Plan and 1992
Long-Term Incentive Plan.
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"Potential Acquiror" has the meaning given to such term in Section 6.2(a).
"Proxy Statement" has the meaning given to such term in Section 6.4.
"Purchaser" has the meaning given to such term in the first paragraph
hereof.
"Purchaser Benefit Arrangement" means each plan (other than any Purchaser
Employee Plan), program, policy, contract or arrangement providing for bonuses,
pensions, deferred pay, stock or stock-related awards, severance pay, salary
continuation or similar benefits, hospitalization, medical, dental or disability
benefits, life insurance or other employee benefits, or compensation to or for
any Employees of the Purchaser or any beneficiaries or dependents of any
Employees of the Purchaser (other than directors' and officers' liability
insurance policies), whether or not oral or written or insured or funded, or
constituting an employment or severance agreement or arrangement with any
officer or director of the Purchaser or any Significant Subsidiary.
"Purchaser Common Shares" means the Common Shares, $1.00 par value per
share, of the Purchaser.
"Purchaser Employee Plan" means each "employee benefit plan," as such term
is defined in Section 3(3) of ERISA, established by the Purchaser, any of its
Subsidiaries, or any ERISA Affiliate or under which the Purchaser, any of its
Subsidiaries, or any ERISA affiliate contributes or under which any Employees of
the Purchaser or any beneficiary thereof is covered, is eligible for coverage or
has benefit rights with respect to service to the Purchaser, any of its
Subsidiaries or any ERISA Affiliate or under which any obligation exists to
issue capital stock of the Purchaser or any of its Subsidiaries.
"Purchaser Financial Statements" has the meaning given to such term in
Section 5.10.
"Purchaser Material Adverse Effect" means a material adverse effect on (i)
the business, assets, liabilities, results of operations, condition (financial
or otherwise) or prospects of the Purchaser and its Subsidiaries, taken as a
whole or (ii) the validity of enforceability of, or the ability of any party
hereto to perform its obligations under, and to consummate the transactions
contemplated by, this Agreement or any other agreement or instrument
contemplated hereby or to be entered into in connection herewith.
"Purchaser Permits" has the meaning given to such term in Section 5.4(a).
"Purchaser Representatives" has the meaning given to such term in Section
6.6.
"Purchaser SEC Reports" means all reports (including, without limitation,
definitive proxy statements), forms, schedules, registration statements and
other documents
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together with all amendments and supplements thereto which the Purchaser has
been required to file with the SEC since January 1, 1991.
"Quarterly Convention Statement" means a quarterly statement of the Company
prepared on selected pages of the Annual Convention Statement form.
"Reinsurance Agreement" has the meaning given to such term in Section 4.27.
"Representative" has the meaning given to such term in Section 6.2(a).
"R-H" means The Robinson-Humphrey Company, Inc.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"Shares" means the shares of Company Common Stock issued and outstanding
immediately prior to the Effective Time, after giving effect to the exercise or
cancellation of each Company Option pursuant to Section 3.3.
"Significant Response" has the meaning given to such term in Section
6.2(b).
"Significant Subsidiary" has the meaning given to such term in Rule 1-02(w)
of Regulation S-X promulgated by the SEC.
"Subsidiary" means as to any Person, any other Person of which at least 50%
of the equity or voting interests are owned, directly or indirectly, by such
first Person.
"Support Agreement" means an agreement among a shareholder of the Company,
the Purchaser and the Merger Sub dated the date hereof and relating to voting at
the Company Shareholders' Meeting.
"Surviving Corporation" has the meaning given to such term in Section 2.1.
"Surviving Corporation Common Stock" means the common stock, no par value,
of the Surviving Corporation.
"Taxpayers" means as to any Person, such Person, any predecessor of such
Person and all Affiliates of such Person (including, without limitation, all
members for income tax purposes of any affiliated group of corporations of which
such Person or any such predecessor corporation is or has been a member).
"TBCA" means the Tennessee Business Corporation Act.
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"Transaction Moratorium Period" has the meaning given to such term in
Section 6.2(b).
"Wholly Owned Subsidiary" means a Subsidiary of which 100% of the issued
and outstanding common stock is owned directly or indirectly by the parent
company.
ARTICLE 2
THE MERGER
2.1 The Merger. Subject to the terms and conditions hereof, at the
Effective Time and in accordance with the provisions of this Agreement and the
applicable provisions of the TBCA, the Merger Sub shall be merged with and into
the Company which shall continue as the surviving corporation (the "Surviving
Corporation"). Thereupon the separate corporate existence of the Merger Sub
shall cease, and the Surviving Corporation shall continue in existence under the
laws of the State of Tennessee.
2.2. Effective Time of the Merger. On or prior to the Closing Date, the
Merger shall be consummated by filing with the Secretary of State of the State
of Tennessee, as provided in Section 48-21-105 of the TBCA, the Certificate of
Merger, in such form as is required by and executed in accordance with Section
48-11-301 of the TBCA and satisfactory to the parties hereto, on behalf of the
Constituent Corporations. The Merger shall become effective at the time of
filing or at such later time as shall be specified in the Certificate of Merger.
Prior to such filing, a closing (the "Closing") shall be held at the offices of
Baker & Hostetler, 3200 National City Center, Cleveland, Ohio 44114, or such
other place as the parties may agree, on a date set by the Purchaser (the
"Closing Date"), which date shall be within ten business days following the
later of (i) the date of the meeting of shareholders of the Company at which a
vote is taken to approve the Merger, and (ii) the date upon which all conditions
set forth in Article 7 hereof have been satisfied or waived.
2.3. Certificate of Incorporation. The Certificate of Merger shall provide
that, upon the filing thereof, the Certificate of Incorporation of the Company
shall be the Certificate of Incorporation of the Surviving Corporation.
2.4. Effect of the Merger. Subject to the foregoing, the effects of the
Merger shall be as provided in the applicable provisions of the TBCA.
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ARTICLE 3
MERGER CONSIDERATION; STATUS AND CONVERSION OF SHARES
3.1. Conversion or Cancellation of Shares in the Merger. Subject to the
provisions of this Agreement, at the Effective Time, by virtue of the Merger and
without any action on the part of the holders thereof, the shares of the
Constituent Corporations shall be converted or canceled, as the case may be, in
the following manner:
(a) Each Share (other than shares of Company Common Stock held in treasury)
shall be converted into the right to receive from the Purchaser Nine Dollars
($9.00) in cash (the "Merger Consideration").
(b) Each share of Common Stock, no par value per share, of the Merger Sub
issued and outstanding immediately prior to the Effective Time shall remain
outstanding and be converted into one share of Surviving Corporation Common
Stock.
(c) At the Effective Time, each share of Company Common Stock, if any, held
in treasury immediately prior to the Effective Time shall be canceled and
retired and no payment shall be made with respect thereto.
3.2. Payment for Shares in the Merger. The manner of making payment for and
conversion of Shares in the Merger shall be as follows:
(a) At the Effective Time, the Purchaser shall make available to the
Exchange Agent for the benefit of those Persons who immediately prior to the
Effective Time were the holders of Shares, cash payable as Merger Consideration
(the "Exchange Fund"). The Exchange Agent shall, pursuant to irrevocable
instructions, effect the payments of cash provided for in Section 3.1 out of the
Exchange Fund.
(b) Promptly after the Effective Time, the Exchange Agent shall mail to
each holder of record of a Certificate (i) a form of letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and title
to the Certificate shall pass, only upon proper delivery of the Certificate to
the Exchange Agent) and (ii) instructions for use in effecting the surrender of
the Certificate for payment therefor. Upon surrender of a Certificate for
cancellation to the Exchange Agent, together with such letter of transmittal
duly executed and any other required documents, the holder of such Certificate
shall be entitled to receive for each of the Shares represented by such
Certificate the Merger Consideration pursuant to this Article 3, and the
Certificate so surrendered shall forthwith be canceled. Until so surrendered,
the Certificate shall represent solely the right to receive the cash with
respect to each of the Shares represented thereby. If any cash is to be paid to
any Person other than the Person to which the Certificate surrendered is
registered, it shall be a condition of such payment that the Certificate so
surrendered shall be properly endorsed and otherwise in proper form for transfer
and that the Person requesting such payment shall pay to the Exchange Agent any
transfer or other taxes required by reason of the payment to a
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Person other than the registered holder of the Certificate surrendered, or shall
establish to the satisfaction of the Exchange Agent that such tax has been paid
or is not applicable.
(c) Any portion of the Exchange Fund which remains undistributed to former
shareholders of the Company for 180 days after the Effective Time shall be
delivered to the Purchaser, upon demand of the Purchaser, and any former
shareholders of the Company shall thereafter look only to the Purchaser for
payment of their claim for the Merger Consideration.
3.3. Status of Options. Prior to the Closing Date, the Company shall cause
the Plan and/or each Option outstanding on such date for the purchase of shares
of Company Common Stock granted under any employee stock option or compensation
plan or arrangement of the Company and its Subsidiaries (a "Company Option") to
be amended in the following respects: (i) each Company Option, whether or not
such Company Option is then exercisable, shall become fully vested and
exercisable as of the close of business on the Business Day immediately
preceding the Closing Date, (ii) each Company Option shall terminate as of the
Effective Time unless exercised prior to the Effective Time, and (iii) except
with respect to any Company Option granted after the date six months prior to
the Closing Date to a person required to file reports under Section 16(a) of the
Exchange Act, each holder of a Company Option shall be deemed as of the Business
Day immediately prior to the Closing Date to have irrevocably exercised in full
his Company Option as of such Business Day by means of a "cashless" exercise
pursuant to which the Company, when issuing shares of Company Common Stock on
exercise, will withhold from such issuance shares with an aggregate value (when
valued at the Average Share Price) equal to the exercise price payable upon such
exercise, in lieu of the payment by the holder of the exercise price in cash.
The amendment of Company Options provided for in this Section shall be
conditional upon the consummation of the Merger such that, in the event the
Merger is not consummated and this Agreement is terminated, the Company Options
shall in all respects revert to the terms in effect prior to the Business Day
immediately prior to the Closing Date and all notices of exercise deemed given
pursuant to this Section shall be null and void. No payment, assumption or
conversion shall occur in the Merger with respect to terminated Options. All
Shares issued upon exercise of Company Options pursuant to this Section 3.3
shall be deemed issued and outstanding at the Effective Time for purposes of the
Merger.
3.4. Closing of the Company's Transfer Books. The stock transfer books of
Company shall be closed at the close of business on the Business Day immediately
preceding the date of the Effective Time. In the event of a transfer of
ownership of Company Stock which is not registered in the transfer records of
Company, the Merger Consideration to be distributed pursuant to this Agreement
may be delivered to a transferee, if a Certificate is presented to the Exchange
Agent, accompanied by all documents required to evidence and effect such
transfer and by payment of any applicable stock transfer taxes. The Purchaser
and the Exchange Agent shall be entitled to rely upon the stock transfer books
of the Company to establish the identity of those persons entitled to receive
the Merger Consideration specified in this Agreement for their shares of Company
Common Stock,
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which books shall be conclusive with respect to the ownership of such shares. In
the event of a dispute with respect to the ownership of any such shares, the
Surviving Corporation and the Exchange Agent shall be entitled to deposit any
Merger Consideration represented thereby in escrow with an independent party and
thereafter be relieved with respect to any claims to such Merger Consideration.
3.5. No Further Ownership Rights in Company Common Stock. All Merger
Consideration issued upon surrender of a Certificate in accordance with the
terms hereof shall be deemed to have been issued in full satisfaction of all
rights pertaining to such shares of Company Common Stock represented thereby,
and there shall be no further registration of transfers on the stock transfer
books of the Company of shares of Company Common Stock outstanding immediately
prior to the Effective Time. If, after the Effective Time, Certificates are
presented to the Surviving Corporation for any reason, they shall be canceled
and exchanged as provided in this Article 3.
3.6. No Liability. None of the Purchaser, the Surviving Corporation or the
Exchange Agent shall be liable to any person in respect of any cash from the
Exchange Fund delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law. If any Certificates shall not have
been surrendered prior to seven years after the Effective Time, any such cash,
dividends or distributions in respect of such Certificate shall, to the extent
permitted by Law or Order, become the property of the Purchaser, free and clear
of all claims or interest of any person previously entitled thereto.
3.7 Investment of Exchange Fund. The Exchange Agent shall invest any cash
included in the Exchange Fund, as directed by the Purchaser, on a daily basis in
Permitted Investments. Any interest and other income resulting from such
investments shall be paid to the Purchaser upon termination of the Exchange Fund
pursuant to Section 3.2(c).
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as otherwise set forth in the Company Disclosure Schedule, the
Company hereby represents and warrants to the Purchaser and the Merger Sub as
follows:
4.1. Organization of the Company. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Tennessee, has full corporate power and authority to conduct its business as and
to the extent it is presently being conducted and as and to the extent proposed
by the Company to be conducted and to own, lease and operate its properties and
assets. The Company is duly qualified, licensed or admitted to do business as a
foreign corporation and is in good standing in each jurisdiction in which the
property owned, leased or operated by it or the nature of the business conducted
by it makes such qualification licensing or admission necessary and where the
failure to be so qualified, licensed or admitted has or could reasonably be
expected (so
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<PAGE> 48
far as can be foreseen at the time) to have a Company Material Adverse Effect.
Each jurisdiction in which the Company is qualified to do business as a foreign
corporation is listed in Section 4.1 of the Company Disclosure Schedule. Except
for the Company's Subsidiaries, the Company does not directly or indirectly own
any equity or similar interest in, or any interest convertible into or
exchangeable or exercisable for, any equity or similar interest in, any
corporation, partnership, joint venture or other business association or entity
other than portfolio securities acquired by the Company in the ordinary course
of business.
4.2. Authorization. The Company has all necessary corporate power and
authority to enter into this Agreement, has taken all corporate action necessary
to consummate the transactions contemplated hereby and, subject to obtaining the
Company Shareholders' Approval, to perform its obligations hereunder. The
execution, delivery and performance of this Agreement by the Company and the
consummation by the Company of the transactions contemplated hereby have been
duly and validly approved by the Board of Directors of the Company. Subject to
Section 6.2, the Board of Directors of the Company has recommended adoption of
this Agreement by the shareholders of the Company and directed that this
Agreement be submitted to the shareholders of the Company for their
consideration, and no other corporate proceedings on the part of the Company or
its shareholders are necessary to authorize the execution, delivery and
performance of this Agreement by the Company and the consummation by the Company
of the transactions contemplated hereby, other than obtaining the Company
Shareholders' Approval. This Agreement has been duly and validly executed and
delivered by the Company and constitutes a legal, valid and binding obligation
of the Company enforceable against the Company in accordance with its terms,
except as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of
creditors' rights generally and by general equitable principles (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
4.3. Subsidiaries. Section 4.3 of the Company Disclosure Schedule sets
forth a complete and accurate list of all of the Company's Subsidiaries and
indicates the Company's ownership interest in each. Section 4.3 of the Company
Disclosure Schedule also sets forth the jurisdiction of incorporation of each of
the Company's Subsidiaries, each jurisdiction in which such Subsidiary is
qualified, licensed or admitted to do business and the number of shares of
capital stock of such Subsidiary authorized and outstanding. Each Subsidiary of
the Company (i) is a corporation or other legal entity duly organized, validly
existing and (if applicable) in good standing under the laws of the jurisdiction
of its incorporation or organization and has the full power and authority to
own, lease or operate its properties and assets and to conduct its business as
and to the extent currently conducted, except where the failure to be duly
organized, validly existing and in good standing does not have, and could not
reasonably be expected (so far as can be foreseen at the time) to have, a
Company Material Adverse Effect, and (ii) is duly qualified, licensed or
admitted and in good standing in each jurisdiction in which the property owned,
leased or operated by it or the nature of the business conducted by it makes
such qualification, license or admission necessary, except where the failure to
be so qualified, licensed or admitted does not have and
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<PAGE> 49
could not reasonably be expected (so far as can be foreseen at the time) to have
a Company Material Adverse Effect.
4.4. Capital Stock.
(a) As of the date hereof, the authorized capital stock of the Company
consists solely of 50,000,000 shares of Company Common Stock, of which 5,550,198
shares are issued and outstanding, no shares are held in the treasury of the
Company and 490,000 shares are reserved for issuance pursuant to outstanding
Options granted under the Company's Plan, and 93,324 shares are reserved for
issuance pursuant to outstanding warrants. The exercise prices of the
outstanding options and warrants are set forth in Section 4.4(a) of the Company
Disclosure Schedule. Except for shares of Company Common Stock issued upon
exercise of outstanding Options granted pursuant to the Company's Plan, or
exercise of the outstanding warrants and except as contemplated by Section
6.1(a), there has not been, and as of the Closing Date there will not have been,
any change in the number of issued and outstanding shares of Company Common
Stock or shares of Company Common Stock held in treasury or reserved for
issuance since the Balance Sheet Date. All of the issued and outstanding shares
of Company Common Stock are, and all shares reserved for issuance will be upon
issuance, in accordance with the terms specified in the instruments or
agreements pursuant to which they are issuable, duly authorized, validly issued,
fully paid and nonassessable. Except as described in this Section 4.4 and
pursuant to this Agreement, there are no outstanding Options obligating the
Company or any of its Subsidiaries to issue or sell any shares of capital stock
of the Company or to grant, extend or enter into any Option with respect
thereto.
(b) All of the outstanding shares of capital stock of each Subsidiary of
the Company are duly authorized, validly issued, fully paid and nonassessable
and, except as disclosed in Section 4.4 of the Company Disclosure Schedule, are
owned, beneficially and of record, by the Company, free and clear of any Liens.
Except as described in Section 4.4(a) above, there are no (i) outstanding
Options obligating the Company or any of its Subsidiaries to issue or sell any
shares of capital stock of any Subsidiary of the Company or to grant, extend or
enter into any such Option or (ii) voting trusts, proxies or other commitments,
understandings, restrictions or arrangements in favor of any person other than
the Company or a Subsidiary, wholly owned directly or indirectly, by the Company
with respect to the voting of or the right to participate in dividends or other
earnings on any capital stock of any Subsidiary of the Company.
(c) There are no outstanding contractual obligations of the Company or any
Subsidiary of the Company to repurchase, redeem or otherwise acquire any shares
of Company Common Stock or any capital stock of any Subsidiary of the Company or
to provide funds to, or make any investment (in the form of a loan, capital
contribution or otherwise) in, any Subsidiary of the Company or any other
Person.
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4.5. Government Approvals; Compliance with Laws and Orders.
(a) To the best of the Company's knowledge, the Company and each of its
Subsidiaries has obtained from the appropriate Governmental Bodies or
self-regulatory organizations which are charged with regulating or supervising
any business conducted by the Company or any Subsidiary of the Company all
permits, variances, exemptions, orders, approvals and licenses necessary for the
conduct of its business and operations as and to the extent currently conducted
(the "Company Permits"), which Company Permits are valid and remain in full
force and effect, except where the failure to have obtained such Company Permits
or the failure of such Company Permits to be valid and in full force and effect,
individually or in the aggregate, does not have and could not reasonably be
expected (so far as can be foreseen at the time) to have a Company Material
Adverse Effect. The Company and its Subsidiaries are in compliance with the
terms of the Company Permits, except failures so to comply which, individually
or in the aggregate, do not have and could not reasonably be expected (so far as
can be foreseen at the time) to have a Company Material Adverse Effect.
(b) Neither the Company nor any of its Subsidiaries has received notice of
any Order or any complaint, proceeding or investigation of any Governmental Body
or self-regulatory organization which is charged with regulating or supervising
any business conducted by the Company or any Subsidiary of the Company pending
or, to the knowledge of the Company, threatened, which affects or could
reasonably be expected (so far as can be foreseen at the time) to affect the
validity of any such Company Permit or impair the renewal thereof, except where
the invalidity of any such Company Permit or the non-renewal thereof does not
have and could not reasonably be expected (so far as can be foreseen at the
time) to have a Company Material Adverse Effect. As of the date hereof, neither
the Company nor any of its Subsidiaries is a party or subject to any agreement,
consent decree or Order, or other understanding or arrangement with, or any
directive of, any Governmental Body or self-regulatory organization that is
charged with regulating or supervising any business conducted by the Company or
any Subsidiary of the Company which imposes any material restrictions on or
otherwise affects in any material way the conduct of the insurance business of
the Company or any of its Subsidiaries.
(c) To the best of the Company's knowledge, the Company and its
Subsidiaries are not and have not been in violation of or default under any Laws
or Order of any Governmental Body or self-regulatory organization which is
charged with regulating or supervising any business conducted by the Company or
any Subsidiary of the Company, except for violations which, individually or in
the aggregate, have not had and could not reasonably be expected (so far as can
be foreseen at the time) to have a Company Material Adverse Effect.
4.6. Absence of Certain Changes or Events. Since the Balance Sheet Date,
except as disclosed in the Company SEC Reports filed prior to the date hereof or
as disclosed in the Company Disclosure Schedule, to the best of the Company's
knowledge (i) there has not been any change, event or development (or threat
thereof) which has had, or
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that could reasonably be expected (so far as can be foreseen) to have,
individually or in the aggregate, a Company Material Adverse Effect, (ii) the
Company and its Subsidiaries have conducted their respective businesses only in
the ordinary course consistent with past practice and (iii) neither the Company
nor any of its Significant Subsidiaries has taken any action which, if taken
after the date hereof, would constitute a breach of any provision of Section
6.1. Without limiting the generality of the foregoing, since the Balance Sheet
Date except as disclosed in Company SEC Reports filed prior to the date hereof
or as disclosed in the Company Disclosure Schedule, there has not been any:
(a) change in the condition (financial or otherwise), assets, liabilities,
working capital, reserves, earnings, business or prospects of the Company or any
of its Subsidiaries, except for changes contemplated hereby or changes which
have not, individually or in the aggregate, had a Company Material Adverse
Effect;
(b) (i) except for normal periodic increases in the ordinary course of
business consistent with past practice, increase in the compensation payable or
to become payable to any Company Employee whose total cash compensation for
services rendered to the Company or any of its Subsidiaries is currently at an
annual rate of more than $100,000, (ii) except in the ordinary course of
business consistent with past practice bonus, incentive compensation, service
award or other like benefit granted, made or accrued, contingently or otherwise,
for or to the credit of any of the Company Employees, (iii) except in the
ordinary course of business consistent with past practice or as required by law,
employee welfare, pension, retirement, profit-sharing or similar payment or
arrangement made or agreed to by the Company or any of its Subsidiaries for any
Company Employee; provided, however, that any employee welfare, pension,
retirement, profit-sharing or similar payment or arrangement made or agreed to
by the Company or any of its Subsidiaries for any Company Employee pursuant to
the existing plans and arrangements described in Section 4.15 of the Company
Disclosure Schedule shall be permitted, or (iv) new employment agreement to
which the Company or any of its Subsidiaries is a party;
(c) except in the ordinary course of business consistent with past practice
or as required by law, addition to or modification of the employee benefit
plans, arrangements or practices described in Section 4.15 of the Company
Disclosure Schedule affecting Company Employees other than (i) contributions
made for 1994 or 1995 in accordance with the normal practices of the Company or
its Subsidiaries or (ii) the extension of coverage to other Company Employees
who became eligible after the Balance Sheet Date;
(d) sale, assignment or transfer of any of the assets of the Company or any
of its Subsidiaries, which are material, singly or in the aggregate, to the
Company and its Subsidiaries, taken as a whole, other than in the ordinary
course of business;
(e) cancellation of any indebtedness or waiver of any rights of substantial
value to the Company and its Subsidiaries, taken as a whole, whether or not in
the ordinary course of business;
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(f) amendment, cancellation or termination of any Contract, license or
other instrument material to the Company and its Subsidiaries, taken as a whole;
(g) capital expenditure or the execution of any lease or any incurring of
liability therefor by the Company or any of its Subsidiaries, involving payments
in excess of $50,000 in any 12-month period or $250,000 in the aggregate;
(h) failure to repay when due any material obligation of the Company or any
of its Subsidiaries, except in the ordinary course of business or where such
failure would not have a Company Material Adverse Effect;
(i) material change in accounting methods or practices by the Company or
any of its Subsidiaries affecting their respective assets, liabilities or
business;
(j) material revaluation by the Company or any of its Subsidiaries of any
of their respective assets, including, without limitation, writing-off notes or
accounts receivable which are, individually or in the aggregate, material to the
Company and its Subsidiaries, taken as a whole;
(k) damage, destruction or loss (whether or not covered by insurance)
having a Company Material Adverse Effect;
(l) mortgage, pledge or other encumbrance of any assets of the Company or
any of its Subsidiaries, which are material, singly or in the aggregate, to the
Company and its Subsidiaries taken as a whole except purchase money mortgages
arising in the ordinary course of business;
(m) declaration, setting aside or payment of dividends or distributions in
respect of any capital stock of the Company or any redemption, purchase or other
acquisition of any of the Company's equity securities;
(n) issuance by the Company or any of its Subsidiaries of, or commitment of
the Company or any of its Subsidiaries to issue, any shares of capital stock or
other equity securities or Options other than the issuance of Company Common
Stock upon the exercise of Options as provided in Section 3.3;
(o) indebtedness incurred by the Company or any of its Subsidiaries for
borrowed money or any commitment to borrow money entered into by the Company or
any of its Subsidiaries, or any loans made or agreed to be made by the Company
or any of its Subsidiaries;
(p) liabilities incurred involving $250,000 or more, except in the ordinary
course of business and consistent with past practice, or any increase or change
in any assumptions underlying or methods of calculating any bad debt,
contingency or other reserves other than in the ordinary course of business
consistent with past practices;
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(q) payment, discharge or satisfaction of any liabilities other than the
payment, discharge or satisfaction (i) in the ordinary course of business and
consistent with past practice of liabilities reflected or reserved against in
the Balance Sheet or incurred in the ordinary course of business and consistent
with past practice since the Balance Sheet Date and (ii) of other liabilities
involving not more than $250,000 singly and not more than $750,000 in the
aggregate; or
(r) agreement or commitment by the Company or any of its Subsidiaries to do
any of the foregoing.
4.7. Compliance with Contracts and Commitments.
(a) Section 4.7(a) of the Company Disclosure Schedule contains an accurate
and complete listing of each material Contract, whether written or oral,
required to be described in the Company SEC Reports or filed as exhibits thereto
pursuant to the Exchange Act. Except as disclosed in Section 4.7 of the Company
Disclosure Schedule, each of such Contracts (other than Contracts which have
expired or terminated in accordance with the terms thereof) is in full force and
effect and (i) to the best of the Company's knowledge, neither the Company nor
any of its Subsidiaries nor, to the best of the Company's knowledge, any other
party thereto has breached or is in default thereunder, (ii) to the best of the
Company's knowledge, no event has occurred which, with the passage of time or
the giving of notice or both would constitute such a breach or default, (iii) to
the best of the Company's knowledge, no claim of material default thereunder has
been asserted or threatened and (iv) neither the Company nor any of its
Subsidiaries nor, to the knowledge of the Company, any other party thereto is
seeking the renegotiation thereof or substitute performance thereunder, except
where such breach or default, or attempted renegotiation or substitute
performance, individually or in the aggregate, does not have and could not
reasonably be expected (so far as can be foreseen at the time) to have a Company
Material Adverse Effect.
(b) Except as set forth in Section 4.7(b) of the Company Disclosure
Schedule, neither the Company nor any Subsidiary of the Company is in violation
of any term of (i) its charter, bylaws or other organizational documents, (ii)
any agreement or instrument related to indebtedness for borrowed money or any
other Contract to which it is a party or by which it is bound, (iii) any
applicable law, ordinance, rule or regulation of any Governmental Body, or (iv)
any applicable Order of any Governmental Body, or self-- regulatory organization
which is charged with regulating or supervising any business conducted by the
Company or any Subsidiary of the Company, the consequences of which violation,
whether individually or in the aggregate, have or could reasonably be expected
(so far as can be foreseen at the time) to have a Company Material Adverse
Effect.
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4.8. Non-Contravention; Approvals and Consents.
(a) Except as set forth in Section 4.8 of the Company Disclosure Schedule,
the execution and delivery of this Agreement by the Company do not, and the
performance by the Company of its obligations hereunder and the consummation of
the transactions contemplated hereby will not, conflict with, result in a
violation or breach of, constitute (with or without notice or lapse of time or
both) a default under, result in or give to any Person any right of payment or
reimbursement termination, cancellation, modification or acceleration of, or
result in the creation or imposition of any Lien upon any of the assets or
properties of the Company or any of its Subsidiaries under, any of the terms,
conditions or provisions of (i) the Certificate of Incorporation or Bylaws (or
other comparable charter document) of the Company or any of its Subsidiaries, or
(ii) subject to the obtaining of the Company Shareholders' Approval and the
taking of the actions described in paragraph (b) of this Section, (A) Laws or
Orders of any Governmental Body or self-regulatory organization which is charged
with regulating or supervising any business conducted by the Company or any
Subsidiary of the Company, applicable to the Company or any of its Subsidiaries
or any of their respective assets or properties, or (B) any Contract to which
the Company or any of its Subsidiaries is a party or by which the Company or any
of its Subsidiaries or any of their respective assets or properties is bound,
excluding from the foregoing clauses (A) and (B) conflicts, violations,
breaches, defaults, terminations, modifications, accelerations and creations and
impositions of Liens which, individually or in the aggregate, could not
reasonably be expected to have a Company Material Adverse Effect.
(b) Except for (i) the filing of a premerger notification report by the
Company under the HSR Act, (ii) the filing of the Proxy Statement with the SEC
pursuant to the Exchange Act, (iii) the filing of the Certificate of Merger and
other appropriate merger documents required by the TBCA with the Secretary of
State of the State of Tennessee, and appropriate documents with the relevant
authorities of other states in which the Constituent Corporations are qualified
to do business and (iv) any filings required to be made with the Tennessee State
Department of Commerce and Insurance and any other regulatory authority in each
jurisdiction in which the Company or any of its Subsidiaries conducts insurance
business, no consent, approval or action of, filing with or notice to any
Governmental Body or other public or private third party is necessary or
required under any of the terms, conditions or provisions of any Law or Order of
any Governmental Body or self-regulatory organization which is charged with
regulating or supervising any business conducted by the Company or any
Subsidiary of the Company, or any Contract to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries or
any of their respective assets or properties is bound for the execution and
delivery of this Agreement by the Company, the performance by the Company of its
obligations hereunder or the consummation of the transactions contemplated
hereby, other than such consents, approvals, actions, filings and notices which
the failure to make or obtain, as the case may be, individually or in the
aggregate, could not reasonably be expected to have a Company Material Adverse
Effect.
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4.9. Litigation. Except as disclosed in Section 4.9 of the Company
Disclosure Schedule, there are no actions, suits, arbitrations, investigations
or proceedings (adjudicatory, rulemaking or otherwise) pending or, to the
knowledge of the Company, threatened against the Company or any of its
Subsidiaries (or any Company Employee Plan or Company Benefit Arrangement), or
any property of the Company or any such Subsidiary (including Proprietary
Rights), in any court or before any arbitrator of any kind or before or by any
Governmental Body, except actions, suits, arbitrations, investigations or
proceedings which, individually or in the aggregate, have not had and if
adversely determined or resolved, could not reasonably be expected (so far as
can be foreseen at the time) to have a Company Material Adverse Effect.
4.10. Labor Matters. The Company is in material compliance with all
applicable laws respecting employment practices, terms and conditions of
employment and wages and hours and is not engaged in any unfair labor practice.
There is no unfair labor practice charge or complaint against the Company
pending before the National Labor Relations Board or any other governmental
agency arising out of the Company's activities, and the Company has no knowledge
of any facts or information which would give rise thereto.
4.11. Absence of Undisclosed Liabilities. Except as disclosed in Section
4.11 of the Company Disclosure Schedule, the Company has no liabilities or
obligations (whether choate or inchoate, absolute or contingent, or otherwise)
except (i) liabilities which are reflected and reserved against or disclosed on
the Balance Sheet, (ii) liabilities incurred in the ordinary course of business
and consistent with past practice since the Balance Sheet Date and which have
not resulted in, and could not reasonably be expected to result in, individually
or in the aggregate, a Company Material Adverse Effect.
4.12. Liabilities Other than Loss Reserves; Loss Reserves; Stated Capital.
Except as set forth on Section 4.12 of the Company Disclosure Schedule and in
the Company SEC Reports filed prior to the date hereof and Annual Convention
Statements and Quarterly Convention Statements filed prior to the date hereof,
as of December 31, 1995, neither the Company nor any Subsidiary had any direct
or indirect indebtedness, liability, claim, loss, damage, deficiency, obligation
or responsibility, fixed or unfixed, choate or inchoate, liquidated or
unliquidated, secured or unsecured, accrued, absolute, contingent or otherwise,
of any kind other than Loss Reserves ("Non-Loss Reserve Liabilities") required
by statutory accounting principles to be reflected or reserved against in a
financial statement, which would have a Company Material Adverse Effect that was
not fully and adequately reflected or reserved against on the Company's 1995
Annual Convention Statement. The adequacy of reinsurance recoverables have been
prepared in accordance with statutory accounting principles consistently applied
with prior periods (except as expressly set forth therein or required by a rule
or regulation of Tennessee) and have not been intentionally understated or
overstated by the Company. The Loss Reserves of the Company and each of its
Subsidiaries as set forth in the audited consolidated financial statements and
unaudited interim financial statements of the Company included in the Company
SEC Reports were determined in good faith by the Company in accordance with
generally accepted accounting principles and were
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believed by the Company to be reasonable when made. The Loss Reserves
attributable to the Company's and the Subsidiaries' insurance business
including, without limitation, reserve and other liability amounts in respect of
insurance policies, whether direct or assumed by reinsurance, established or
reflected in the respective statutory annual statements for the three years
ended December 31, 1995 of the Company and each of the Subsidiaries, were
determined in accordance with generally accepted actuarial standards
consistently applied and are in compliance, in all material respects, with the
requirements of the insurance laws, rules and regulations of Tennessee as well
as those of any other applicable jurisdictions (collectively, "Applicable
Insurance Laws"). To the Company's knowledge, except as set forth in Section
4.12 of the Company Disclosure Schedule, the Loss Reserves were adequate to
cover the total amount of all matured and unmatured liabilities and obligations
of the Company and each of the Subsidiaries under all their respective
outstanding insurance policies, funding agreements and annuity, guaranteed
interest, reinsurance, coinsurance and other similar contracts at September 30,
1996. Subject to the description set forth in Section 4.12 of the Company
Disclosure Schedule, the Company and each of the Subsidiaries own assets that
qualify as admitted assets under Applicable Insurance Laws in an amount at least
equal to the sum of all such reserves and liability amounts and its minimum
statutory capital and surplus as required by the insurance laws, rules and
regulations of Tennessee or, to the extent material to the Company and the
Subsidiaries taken as a whole, any other jurisdiction.
4.13. No Brokers. Except as set forth in Section 4.13 of the Company
Disclosure Schedule, neither the Company nor any Subsidiary or affiliate of the
Company has entered into or will enter into any Contract or understanding,
whether oral or written, with any Person which will result in the obligation of
the Purchaser to pay any finder's fee, brokerage commission or similar payment
in connection with the transactions contemplated hereby.
4.14. No Other Agreements to Sell the Assets or the Company. Neither the
Company nor any Subsidiary has any legal obligation, absolute or contingent, to
any other person to sell any Assets, to sell any capital stock of the Company or
any of its Significant Subsidiaries or to effect any merger, consolidation or
other reorganization of the Company or any of its Significant Subsidiaries or to
enter into any agreement with respect thereto.
4.15. Employee Benefit Plans.
(a) The Company Disclosure Schedule sets forth a true and complete list of
all the following: (i) each employee benefit plan, as such term is defined in
Section 3(3) of ERISA, established by the Company, any of its Subsidiaries, or
any ERISA Affiliate or under which the Company, any of its Subsidiaries, or any
ERISA Affiliate contributes or under which any Employee of the Company or any
beneficiary thereof is covered, is eligible for coverage or has benefit rights
with respect to service to the Company, any of its Subsidiaries or any ERISA
Affiliate or under which any obligation exists to issue capital stock of the
Company or any of its Subsidiaries (each, a "Company Employee Plan"), and (ii)
each other plan, program, policy, contract or arrangement providing for bonuses,
pensions, deferred pay, stock or stock-related awards, severance pay, salary
continuation or
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similar benefits, hospitalization, medical, dental or disability benefits, life
insurance or other employee benefits, or compensation to or for any Company
Employees or any beneficiaries or dependents of any Company Employees (other
than directors' and officers' liability insurance policies), whether or not oral
or written or insured or funded, or constituting an employment or severance
agreement or arrangement with any officer or director of the Company or any
Subsidiary (each, a "Company Benefit Arrangement"). Any such Company Employee
Plans or Company Benefit Arrangements maintained for any officer, director or
employee of a Subsidiary of the Company that is not a Subsidiary are not in the
aggregate material to the Company and its Subsidiaries taken as a whole, but are
identified in Section 4.15 of the Company Disclosure Schedule. The Company
Disclosure Schedule also (i) sets forth a true and complete list of each Company
Employee Plan maintained by the Company, any ERISA Affiliate, or any of its
Subsidiaries, during the five years preceding the date of this Agreement that
was covered during such period by Title IV of ERISA, (ii) identifies each
Company Employee Plan that is intended to be qualified under Section 401(a) of
the Code, and (iii) identifies the Company Employee Plans and Company Benefit
Arrangements that are maintained, respectively, by each of the Company and its
Subsidiaries. The Company has made available to the Purchaser with respect to
each Company Employee Plan and Company Benefit Arrangement: (i) a true and
complete copy of all written documents comprising such Company Employee Plan or
Company Benefit Arrangement (including amendments and individual agreements
relating thereto) or, if there is no such written document, an accurate and
complete description of such Company Employee Plan or Company Benefit
Arrangement; (ii) the most recent Form 5500 or Form 5500-C (including all
schedules thereto), if applicable; (iii) the most recent financial statements
and actuarial reports, if any, including, without limitation, any such reports
relating to any health or medical plan; (iv) the summary plan description
currently in effect and all material modifications thereof, if any; and (v) the
most recent Internal Revenue Service determination letter, if any. Any such
Company Employee Plans and Company Benefit Arrangements not so provided are not
in the aggregate material to the Company and its Subsidiaries taken as a whole,
but are identified in Section 4.15 of the Company Disclosure Schedule.
(b) Except as disclosed in Section 4.15 of the Company Disclosure Schedule,
each Company Employee Plan and Company Benefit Arrangement has been established
and maintained in accordance with its terms and in compliance with all
applicable laws including, but not limited to, ERISA and the Code. To the best
of the Company's knowledge, neither the Company nor any of its Subsidiaries nor
any of their respective Employees nor any other disqualified person or
party-in-interest with respect to any Company Employee Plan, have engaged
directly or indirectly in any "prohibited transaction," as such term is defined
in Section 4975 of the Code or Section 406 of ERISA, with respect to which the
Company or its Subsidiaries could have or has any material liability. All
contributions required to be made to the Company Employee Plans and Company
Benefit Arrangements have been made timely or, to the extent such contributions
have not been made timely, the liability resulting therefrom is not material.
Each Company Employee Plan that is intended to be qualified under Section 401(a)
of the Code and whose related trust is intended to be exempt from taxation under
Section 501(a) of the Code has received, or has applied for and has not been
denied, a favorable determination letter with respect to its
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qualification, and to the Company's best knowledge, nothing has occurred which
could cause a loss of such qualification. Neither the Company, any ERISA
Affiliate nor any Subsidiary of the Company has incurred any liability to the
Pension Benefit Guaranty Corporation other than a liability for premiums not yet
due.
(c) Neither the Company, any ERISA Affiliate nor any Subsidiary of the
Company has ever maintained, sponsored or contributed to any employee plan that
is or was subject to Section 412 of the Code or has incurred "accumulated
funding deficiency" (as defined in Section 412 of the Code), whether or not
waived.
(d) Neither the Company, any ERISA Affiliate nor any Subsidiary of the
Company has ever maintained or sponsored or contributed to any employee pension
benefit plan.
(e) Neither the Company nor any ERISA Affiliate has any liability under
Title IV of ERISA, nor do any circumstances exist that could result in any of
them having any liability under Title IV of ERISA. To the best of the Company's
knowledge, neither the Company nor any Subsidiary of the Company has any
liability for any failure to comply with the continuation coverage requirements
of Section 601 et seq. of ERISA and Section 4980B of the Code.
(f) There are no actions, suits, arbitrations, inquiries, investigations or
other proceedings (other than routine claims for benefits) pending or, to the
Company's knowledge, threatened, with respect to any Company Employee Plan or
Company Benefit Arrangement.
(g) No Employees and no beneficiaries or dependents of Employees are or may
become entitled under any Company Employee Plan or Company Benefit arrangement
to post-employment welfare benefits of any kind including, without limitation,
death or medical benefits (other than coverage mandated by Section 4980B of the
Code).
(h) There are no agreements with, or pending petitions for recognition of,
a labor union or association as the exclusive bargaining agent for any of the
employees of the Company or any of its Subsidiaries; no such petitions have been
pending at any time within two years of the date of this Agreement and, to the
Company's best knowledge, there has not been any organizing effort by any union
or other group seeking to represent any employees of the Company or any of its
Subsidiaries as their exclusive bargaining agent at any time within two years of
the date of this Agreement. There are no labor strikes, work stoppages or other
labor troubles, other than routine grievance matters, now pending, or, to the
Company's knowledge, threatened, against the Company or any of its Subsidiaries,
nor have there been any such labor strikes, work stoppages or other labor
troubles, other than routine grievance matters, with respect to the Company or
any of its Subsidiaries at any time within two years of the date of this
Agreement.
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(i) Neither the Company, nor any Subsidiary has scheduled or agreed upon
future increases of benefits levels (or creations of new benefits) with respect
to any Company Employee Plan or Company Benefit Arrangement, and no such
increases or creation of benefits have been proposed or made the subject of
representations to employees under circumstances which make it reasonable to
expect that such increases would be granted. No loan is outstanding between the
Company, any Subsidiary of the Company, or any ERISA Affiliate and any Employee
of the Company.
4.16. Proxy Statement; Registration Statement.
(a) The Proxy Statement as amended or supplemented from time to time, and
any other documents to be filed by the Company with the SEC or any other
Governmental Body or self-regulatory organization which is charged with
regulating or supervising any business conducted by the Company or any
Subsidiary of the Company in connection with the Merger and the other
transactions contemplated hereby will not, on the date of its filing or, in the
case of the Proxy Statement, at the date it is mailed to shareholders, at the
time of the Company Shareholders' Meeting and at the Effective Time, 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 are made, not misleading insofar as
the information therein relates to the Company. The Proxy Statement and all such
other documents filed by the Company with the SEC under the Exchange Act will
comply as to form in all material respects with the requirements of the Exchange
Act and the Securities Act.
(b) Neither the information supplied or to be supplied by or on behalf of
the Company for inclusion, nor the information incorporated by reference from
documents filed by the Company with the SEC, in any document to be filed by the
Purchaser with the SEC or any other Governmental Body or self-regulatory
organization which is charged with regulating or supervising any business
conducted by the Company or any Subsidiary of the Company in connection with the
Merger or any other transaction contemplated hereby will on the date of its
filing or effectiveness 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
are made, not misleading.
4.17. Tax Matters. To the best of the Company's knowledge, the Company
Taxpayers have duly filed with the appropriate Governmental Bodies all tax
reports and returns required to be filed by them, including all federal, state,
local and foreign tax returns and reports and have paid in full all taxes
required to be paid by such Company Taxpayers before such payment became
delinquent. To the best of the Company's knowledge, the Company has made
adequate provision, in conformity with generally accepted accounting principles
consistently applied, for the payment of all taxes which may subsequently become
due. All taxes which any Company Taxpayer has been required to collect or
withhold have been duly collected or withheld and, to the extent required when
due, have been or will be duly paid to the proper taxing authority.
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The consolidated federal income tax returns of the Company and its
predecessors and the federal income tax returns of each Subsidiary of the
Company whose results of operations are not consolidated in the federal income
tax returns of the Company, have been examined by the Internal Revenue Service
for the period ending December 31, 1993 and have not been examined for any
periods ending thereafter. There are no audits known by the Company to be
pending of the Company's tax returns, and there are no claims which have been or
may be asserted relating to any of the Company's tax returns filed for any year
which if determined adversely would result in the assertion by any governmental
agency of any deficiency which could reasonably be expected to result in,
individually or in the aggregate, a Company Material Adverse Effect. There have
been no waivers of statutes of limitations by the Company.
None of the Company Taxpayers has filed a statement under Section 341(f) of
the Code (or any comparable state income tax provision) consenting to have the
provisions of Section 341(f)(2) (collapsible corporations provisions) of the
Code (or any comparable state income tax provision) apply to any disposition of
any of the Company's assets or property, and no property of the Company is
property which the Purchaser or the Company is or will be required to treat as
owned by another person pursuant to the provisions of Section 168(f) (safe
harbor leasing provisions) of the Code. The Company is not a United States Real
Property Holding Corporation within the meaning of Section 897 (FIRPTA) of the
Code. The Company is not, nor has it in the past been, a party to any
tax-sharing agreement or similar arrangement with any other party.
For the purpose of this Agreement, any federal, state, local or foreign
income, gross receipt, sales, use, ad valorem, transfer, franchise, withholding,
payroll, employment, excise, property, occupancy or other tax, levy, impost,
fee, imposition, assessment or similar charge, together with any related
addition to tax, interest or penalty thereon, is referred to as a "tax."
4.18. Reports and Financial Statements. The Company has filed with the SEC
all Company SEC Reports and has previously made available to the Purchaser true
and complete copies of all the Company SEC Reports. As of their respective
dates, the Company SEC Reports (i) complied as to form in all material respects
with the requirements of the Securities Act, or the Exchange Act, as the case
may be, and (ii) did not contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The audited consolidated financial statements and unaudited
interim consolidated financial statements (including, in each case, the notes,
if any, thereto) included in the Company SEC Reports (the "Company Financial
Statements") complied as to form in all material respects with the published
rules and regulations of the SEC with respect thereto, and fairly present
(subject, in the case of the unaudited interim financial statements, to normal,
recurring year-end audit adjustments which are not expected, individually or in
the aggregate to result in a Company Material Adverse Effect) the consolidated
financial position of the Company and its consolidated subsidiaries as of the
respective dates thereof and the consolidated results of their operations and
cash flows for the
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respective periods then ended, in each case, in accordance with generally
accepted accounting principles consistently applied. Each Significant Subsidiary
of the Company is treated as a consolidated subsidiary of the Company in the
Company Financial Statements for all periods covered thereby.
4.19. Payments. The Company has not, directly or indirectly, paid nor has
it delivered any fee, commission or other sum of money or item or property,
however characterized, to any finder, agent, government official or other party,
in the United States or any other country, which is in any manner related to the
business or operations of the Company, which the Company knows or has reason to
believe to have been illegal under any federal, state or local laws of the
United States or any other country having jurisdiction; and the Company has not
participated, directly or indirectly, in any boycotts or other similar practices
affecting any of its actual or potential customers and has at all times done
business in an open and ethical manner.
4.20. Information Supplied. The financial and other information provided to
the Purchaser by or on behalf of the Company on or prior to the date hereof and
listed on the Company Disclosure Schedule at Section 4.20 of such Schedule
relating to (i) loans of the Company or its Subsidiaries secured by an interest
in real property, (ii) the reserves and other amounts of liabilities or
obligations of the Company and its Subsidiaries in respect of insurance
contracts, annuity contracts and guaranteed interest contracts as established or
reflected on the books and records of the Company and its Subsidiaries, and
(iii) reinsurance, retrocession, coinsurance and similar contracts was prepared
in good faith and, as of the dates provided and in light of the circumstances
under which such information was provided (as supplemented by further
information provided by the Company to the Purchaser prior to the date hereof),
accurately reflected in all material respects the status or matters purported to
be reflected by such financial or other information. To the best of the
Company's knowledge, the information listed on Company Disclosure Schedule at
Section 4.20 thereof which was provided to the Purchaser by the Company with
respect to the business, operations and financial condition of the Company is
not false or misleading in any material respect, as of the dates provided and in
light of the circumstances under which such information was provided (as
supplemented by further information provided by the Company to the Purchaser
prior to the date hereof).
4.21. Intellectual Property. Section 4.21 of the Company Disclosure
Schedule lists all material trademarks, trade names, copyrights, or applications
used by the Company or a Subsidiary ("Marketing Intellectual Property"). The
Company or such Subsidiary owns or, to the extent disclosed in such Section
4.21, has adequate rights to use all Marketing Intellectual Property which is
used in the operation of Company and its Subsidiaries' businesses as of the date
hereof. The Company or one of its Subsidiaries owns or, to the extent disclosed
in Section 4.21, has adequate rights to use all computer programs, firmware and
documentation relating thereto (other than licenses of generally available
standard computer programs) ("Computer Intellectual Property" and collectively
with Marketing Intellectual Property, "Intellectual Property") which is material
to the operation of the Company and its Subsidiaries' businesses as of the date
hereof (the agreements relating
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thereto are referred to as the "Intellectual Property Agreements"). As to any
Intellectual Property owned by the Company or any Subsidiary, such Intellectual
Property is owned free and clear of all material claims of others, including
employees, former employees or independent contractors of the Company or any
Subsidiary, and as of the date hereof, neither the Seller nor any Subsidiary has
received notice that the use of such Intellectual Property in the business of
the Company or the Subsidiaries violates or infringes upon the claimed rights of
others. As to the Intellectual Property Agreements, except as set forth in
Section 4.21 of the Company Disclosure Schedule, as of the date hereof, (i) all
such agreements are in full force and effect, (ii) neither Seller nor any
Subsidiary, nor to the knowledge of the Company any other party thereto, is in
default under any such agreement in any material respect, (iii) neither the
Company nor any Subsidiary is or might become obligated to make any royalty or
similar payments under any such agreements except as stated therein, and (iv)
the rights of the Company or any Subsidiary under such agreements will not be
affected by the consummation of the transactions provided for herein. Except as
set forth in Section 4.21 of the Company Disclosure Schedule, neither the
Company nor any Subsidiary has granted to any person any license or other right
to use in any manner any of the Intellectual Property owned by the Company or
any Subsidiary or has granted any sublicense or right to use any Intellectual
Property licensed to the Company or any Subsidiary under the Intellectual
Property Agreements.
4.22. Real Estate. Section 4.22 of the Company Disclosure Schedule sets
forth a list and summary description of (a) all real property owned by the
Company and the Subsidiaries and all buildings located on such real property,
other than real property acquired through salvage or subrogation; and (b)(i) all
material leases, subleases or other agreements under which the Company or any
Subsidiary is lessor of any real property; (ii) all material options held by the
Company or any Subsidiary or material contractual obligations on their part to
purchase or acquire any interest in real property; and (iii) all material
options granted by the Company or any Subsidiary or material contractual
obligations on their part to sell or dispose of any interest in real property.
The Company or a Subsidiary of the Company (as indicated on Section 4.22 of the
Company Disclosure Schedule) is the owner of record or beneficial owner, or
lessor under the leases or holder of the options (except those set forth in
response to item (b)(iii)), as the case may be, of each of the items set forth
in Section 4.22 of the Company Disclosure Schedule. Except as set forth in
Section 4.22 of the Company Disclosure Schedule, neither the Company nor any
Subsidiary nor, to the best knowledge of the Company, any other party thereto is
in default under such leases, subleases and other agreements and neither the
Company nor any Subsidiary has received any notice of any default thereunder,
and each of the options set forth on Section 4.22 of the Company Disclosure
Schedule is in full force and effect.
4.23. Intercompany and Affiliate Transactions; Insider Interests.
(a) Except as otherwise disclosed in the Company SEC Reports, Section 4.23
of the Company Disclosure Schedule lists all intercompany agreements or
arrangements of any kind between or among the Company and/or the Subsidiaries,
on the one hand, and
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the Company's officers, directors or stockholders owning more than 5% of Company
Common Stock, on the other hand.
(b) Except as set forth in Section 4.23 of the Company Disclosure Schedule
and except as otherwise disclosed in the Company SEC Reports, none of the
Company's officers or directors has any direct or indirect interest either by
way of stock ownership or otherwise, in any firm, corporation, association or
business enterprise, which competes with the Company or any of its Subsidiaries;
is a supplier, client, customer, agent or broker of the Company or the
Subsidiaries; or is otherwise engaged in the business engaged in by the Company
and such Subsidiaries. Ownership of capital stock listed on a national
securities exchange or traded in the over-the-counter market of any corporation
shall not be deemed a violation of this Section, provided the owner thereof and
his affiliates do not own more than an aggregate of 5% of the capital stock of
such corporation.
4.24. Insurance for the Benefit of the Company and Its Subsidiaries.
Section 4.24 of the Company Disclosure Schedule lists all insurance policies or
contracts providing coverage to the Company and its Subsidiaries as of the date
hereof. All such policies or contracts of insurance are of a scope and in an
amount usual and customary for businesses engaged in the businesses of the
Company and its Subsidiaries and are sufficient for compliance with all
requirements of law and of all agreements to which the Company or any such
Subsidiary is a party as of the date hereof. To the best of the Company's
knowledge, as of the date hereof, all insurance policies pursuant to which any
such insurance is provided are in full force and effect and no effective notice
of cancellation or termination of any such insurance policies has been given to
the Company or any Subsidiary of the Company by the carrier of any such policy.
Through the date hereof, all premiums required to be paid in connection
therewith have been paid in full.
4.25. Title to Assets; Liens. Except as disclosed in Section 4.25 of the
Company Disclosure Schedule, the Company and the Subsidiaries have good and
marketable title to all of their respective premiums receivable, property,
equipment and other assets, and such assets are free and clear of any mortgages,
liens, charges, encumbrances or title defects of any nature whatsoever, except
for such mortgages, liens, charges, encumbrances or title defects which would
not, individually or in the aggregate, materially and adversely affect the value
of such property as carried on the financial statements which are included in
the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.
The Company and the Subsidiaries have valid and enforceable leases for the
premises and the equipment, furniture and fixtures purported to be leased by
them.
4.26. Conduct of Business; Agents
(a) All policies of insurance issued by the Company as now in force are, to
the extent required under applicable law, on forms which have been 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 and/or approved or
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are otherwise in compliance with existing law and premium rates established by
the Company conform thereto.
(b) The Company has furnished to the Purchaser a list of all written
contracts ("Agency Agreements") between the Company or any of its Subsidiaries
and its agents, managing general agents or brokers ("Agents"). Attached to
Section 4.26 of the Company Disclosure Schedule is a copy of the Company's and
each of its Subsidiaries' standard agency agreement, including copies of all
schedules and exhibits customarily attached thereto and made a part of such
Agency Agreements. Each of the Agency Agreements is valid, binding and in full
force and effect in accordance with its terms, assuming no default by any such
Agent under any such contract or agreement and except for such contracts the
failure of which to be valid, binding and in full force and effect would not
have a Company Material Adverse Effect. Neither the Company nor any Subsidiary
is in default in any material respect with respect to any such contract or other
agreement (described in the preceding sentence including the exception) and no
such contract or other agreement contains any provision providing that the other
party thereto may terminate the same by reason of the transactions contemplated
by this Agreement or any other provision which would be altered or otherwise
become applicable solely by reason of such transactions.
(c) As of the date hereof, all of the Company's Agents are duly licensed
(to the extent that such licenses are required) in the jurisdictions in which
the Agent places or sells insurance and each Agent is duly authorized and
appointed by the Company or the applicable Subsidiary pursuant to applicable
Laws. All written contracts or agreements between any Agent, on one hand, and
the Company or any Subsidiary, on the other hand, are in compliance with all
applicable Laws. To the best knowledge of the Company, no Agent is the subject
of, or party to, any disciplinary action or proceeding under any applicable Law.
(d) As of the date hereof, the Company is unaware of any Agent that intends
to, or, has threatened to, terminate or materially change its relationship with
the Company or the Subsidiaries as a result of the Merger or the contemplated
operations of the Company and the Subsidiaries after the Merger is consummated,
which termination or change could have a Company Material Adverse Effect.
4.27. Insurance Policies; Reinsurance.
(a) Section 4.27 of the Company Disclosure Schedule sets forth a true and
complete list of all reinsurance treaties and contracts or fronting agreements
applicable to the Company or the Subsidiaries (individually, a "Reinsurance
Agreement"). Each Reinsurance Agreement to which the Company or any of the
Subsidiaries is a party is valid and binding on the Company or the Subsidiary
and in full force and effect in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency or other similar laws
affecting the enforcement of creditors' rights generally and except that the
availability of equitable remedies, including specific performance, is subject
to the discretion of the court before which the enforcement of any proceeding
therefor may be brought. Neither the
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Company nor any of the Subsidiaries is in default in any material respect with
respect to any such Reinsurance Agreement, and no such Reinsurance Agreement
contains any provision providing that the other party thereto may terminate the
same by reason of the transactions contemplated by this Merger Agreement, or
contains any other provision which would be altered or otherwise become
applicable by reason of such transactions.
(b) To the best of the Company's knowledge, all policies and contracts of
insurance and reinsurance entered into or issued, as the case may be, by the
Company or its Subsidiaries or which are being entered into or issued by the
Company or the Subsidiaries as of the date hereof, are in compliance, and at the
respective dates of issuance were in compliance, with all applicable laws and,
to the extent required under applicable law, are on forms approved by the
appropriate Governmental Bodies in the jurisdictions where issued or have been
filed with and not objected to by such Governmental Body within the period
provided for objection. Any premium rates with respect to insurance or
reinsurance policies or contracts currently issued by the Company or its
Subsidiaries which are required to be filed with or approved by any Governmental
Body have been so filed or approved in accordance with applicable law, and the
premiums charged thereon conform thereto.
(c) Neither the Company nor any of its Subsidiaries is a party to any
underwriting management agreement.
4.28. Regulatory Filings. The Company will make, or has made, available for
inspection by the Purchaser all material registrations, filings or submissions
made with respect to the Company and each of its Subsidiaries with any
Governmental Body and each and every Annual Convention Statement and Quarterly
Convention Statement filed with or submitted to any state governmental or
insurance regulatory body and any reports of examinations issued by any such
state governmental or insurance regulatory body since December 31, 1990. Each of
the Company and its Subsidiaries has filed all reports, statements, documents,
registrations, filings or submissions required to be filed by it with any
Governmental Body, except where failure to so file would not have a Company
Material Adverse Effect and 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 the
applicable statute of limitations, and (ii) as otherwise agreed to in writing by
the applicable governmental or regulatory body. Except as indicated in Section
4.28 of the Company Disclosure Schedule, (x) all such registrations, filings and
submissions were in material compliance with applicable law when filed, and (y)
no material deficiencies have been asserted by any such governmental or
regulatory agency with respect to such registrations, filings or submissions
that have not been remedied or otherwise satisfied.
4.29. Premium Balances Receivable. The premium balances receivable of the
Company and its Subsidiaries as reflected in the Balance Sheet, to the extent
uncollected on the date hereof and the premium balances receivable reflected on
the books of the Company and the Subsidiaries as of the date hereof, are valid
and existing and represent monies due, and the Company has made reserves
reasonably considered adequate for receivables not collectible in the ordinary
course of business, and (subject to the aforesaid reserves) the
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premium balances receivable are subject to no refunds or other adjustments and
to no defenses, rights of setoff, assignments, restrictions, encumbrances or
conditions enforceable by third parties on or affecting any material amount
thereof.
4.30. Investment Portfolio and Other Assets. The Company, including, for
purposes of this Section 4.30, its Subsidiaries, owns an investment portfolio
acquired in the ordinary course of business, and a true and complete list of the
securities and other investments in such investment portfolio, as of October 31,
1996, with information included thereon as to the cost of each such investment
and the market value thereof as of such date, is contained in Section 4.30 of
the Company Disclosure Schedule. As of October 31, 1996, to the best of the
Company's knowledge, (i) none of the investments included in such investment
portfolio is in default in the payment of principal or interest or dividends or
impaired to any extent and (ii) all investments included in such investment
portfolio comply with all insurance laws and regulations of each of the states
to which the Company and each of its Subsidiaries are subject relating thereto
and with all federal and state securities laws.
4.31. State Security Deposits. Section 4.31 of the Company Disclosure
Schedule sets forth a true, correct and complete list of all securities
deposited with state insurance departments relative to the Schedule of Deposits
appearing in the Company's Annual Convention Statement for December 31, 1995.
4.32. Vote Required. The affirmative vote of the holders of record of a
majority of the outstanding shares of Company Common Stock with respect to the
adoption of this Agreement is the only vote of the holders of any class or
series of the capital stock of the Company required to adopt this Agreement and
approve the Merger and the other transactions contemplated hereby.
4.33. Chapter 35 of the TBCA. The provisions of Sections 48-35-101 et seq.
of the TBCA will not apply to this Agreement, the Merger or the other
transactions contemplated hereby.
4.34. Fairness Opinion. The Company has received the oral opinion of R-H to
the effect that the consideration to be received by the holders of Company
Common Stock pursuant to the Merger is fair from a financial point of view to
such holders.
4.35. Disclosure. The representations and warranties of the Company in this
Merger Agreement, modified by the Company Disclosure Schedule, do not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements contained herein not misleading.
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ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF
THE PURCHASER AND THE MERGER SUB
Except as otherwise set forth in the Purchaser Disclosure Schedule, the
Purchaser and the Merger Sub hereby represent and warrant to the Company as
follows:
5.1. Organization of the Purchaser and the Merger Sub. The Purchaser is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Ohio, the Merger Sub is a corporation duly organized, validly
existing and in good standing under the laws of the State of Tennessee and each
of the Purchaser and the Merger Sub has full corporate power and authority to
conduct its business as and to the extent it is presently being conducted and as
and to the extent proposed by the Purchaser to be conducted and to own, lease
and operate its properties and assets. The Purchaser is duly qualified, licensed
or admitted to do business as a foreign corporation and is in good standing in
each jurisdiction in which the property owned, leased or operated by it or the
nature of the business conducted by it makes such qualification, licensing or
admission necessary and where the failure to be so qualified, licensed or
admitted has or could reasonably be expected (so far as can be foreseen at the
time) to have a Purchaser Material Adverse Effect. Except for the Purchaser's
Subsidiaries, the Purchaser does not directly or indirectly own any material
equity or similar interest in, or any interest convertible into or exchangeable
or exercisable for any material equity or similar interest in, any corporation,
partnership, joint venture or other business association or entity other than
portfolio securities acquired by the Purchaser in the ordinary course of
business.
5.2. Authorization. Each of the Purchaser and the Merger Sub has all
necessary corporate power and authority to enter into this Agreement and has
taken all corporate action necessary to consummate the transactions contemplated
hereby and to perform its obligations hereunder. The execution, delivery and
performance of this Agreement by the Purchaser and the Merger Sub and the
consummation by the Purchaser and the Merger Sub of the transactions
contemplated hereby have been duly and validly approved by the Board of
Directors of the Purchaser and the Board of Directors and shareholder of the
Merger Sub. No other corporate proceedings on the part of the Purchaser or its
stockholders are necessary to authorize the execution, delivery and performance
of this Agreement by the Purchaser and the consummation by the Purchaser of the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by the Purchaser and the Merger Sub and constitutes a
legal, valid and binding obligation of the Purchaser enforceable against the
Purchaser and the Merger Sub in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting the enforcement of creditors' rights
generally and by general equitable principles (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
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5.3. Capital Stock.
(a) As of the date hereof, the authorized capital stock of the Purchaser
consists solely of 200,000,000 Purchaser Common Shares, 20,000,000 Serial
Preferred Shares, without par value, and 5,000,000 Voting Preference Shares,
without par value. All of the issued and outstanding Purchaser Common Shares
are, and all shares reserved for issuance will be, upon issuance in accordance
with the terms specified in the instruments or agreements pursuant to which they
are issuable, duly authorized, validly issued, fully paid and nonassessable.
(b) Except as disclosed in the Purchaser SEC Reports filed prior to the
date hereof, all of the outstanding shares of capital stock of each Significant
Subsidiary of the Purchaser are duly authorized, validly issued, fully paid and
nonassessable and are owned, beneficially and of record, by the Purchaser or a
Subsidiary of the Purchaser, free and clear of any Liens.
(c) There are no outstanding contractual obligations of the Purchaser or
any Significant Subsidiary of the Purchaser to repurchase, redeem or otherwise
acquire any material number of shares of Purchaser Common Shares or any capital
stock of any Significant Subsidiary of the Purchaser or to provide a material
amount of funds to, or make any material investment (in the form of a loan,
capital contribution or otherwise) in, any Significant Subsidiary of the
Purchaser or any other Person.
5.4. Government Approvals; Compliance with Laws and Orders.
(a) To the best of the Purchaser's knowledge, the Purchaser and each of its
Significant Subsidiaries has obtained from the appropriate Governmental Bodies
or self-regulatory organizations which are charged with regulating or
supervising any business conducted by the Purchaser or any Significant
Subsidiary of the Purchaser all permits, variances, exemptions, orders,
approvals and licenses necessary for the conduct of its business and operations
as and to the extent currently conducted (the "Purchaser Permits"), which
Purchaser Permits are valid and remain in full force and effect, except where
the failure to have obtained such Purchaser Permits or the failure of such
Purchaser Permits to be valid and in full force and effect, individually or in
the aggregate, does not have and could not reasonably be expected (so far as can
be foreseen at the time) to have a Purchaser Material Adverse Effect. The
Purchaser and its Significant Subsidiaries are in compliance with the terms of
the Purchaser Permits, except failures so to comply which, individually or in
the aggregate, do not have and could not reasonably be expected (so far as can
be foreseen at the time) to have a Purchaser Material Adverse Effect.
(b) Neither the Purchaser nor any of its Significant Subsidiaries has
received notice of any Order or any complaint, proceeding or investigation of
any Governmental Body or self-regulatory organization which is charged with
regulating or supervising any business conducted by the Purchaser or any
Significant Subsidiary of the Purchaser pending or, to the knowledge of the
Purchaser, threatened, which affects or could
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reasonably be expected (so far as can be foreseen at the time) to affect the
validity of any such Purchaser Permit or impair the renewal thereof, except
where the invalidity of any such Purchaser Permit or the nonrenewal thereof does
not have and could not reasonably be expected (so far as can be foreseen at the
time) to have a Purchaser Material Adverse Effect. As of the date hereof,
neither the Purchaser nor any of its Significant Subsidiaries is a party or
subject to any agreement, consent decree or Order, or other understanding or
arrangement with, or any directive of, any Governmental Body or self-regulatory
organization which is charged with regulating or supervising any business
conducted by the Purchaser or any Significant Subsidiary of the Purchaser which
imposes any material restrictions on or otherwise affects in any material way
the conduct of the insurance business of the Purchaser or any of its Significant
Subsidiaries.
(c) To the best of the Purchaser's knowledge, the Purchaser and its
Significant Subsidiaries are not and have not been in violation of or default
under any Laws or Order of any Governmental Body or self-regulatory organization
which is charged with regulating or supervising any business conducted by the
Purchaser or any Significant Subsidiary of the Purchaser, except for violations
which, individually or in the aggregate, have not had and could not reasonably
be expected (so far as can be foreseen at the time) to have a Purchaser Material
Adverse Effect.
5.5. Compliance with Contracts and Commitments.
(a) Each material Contract to which the Purchaser is a party is in full
force and effect and (i) to the best of the Purchaser's knowledge, none of the
Purchaser or any of its Significant Subsidiaries or any other party thereto has
breached or is in default thereunder, (ii) to the best of the Purchaser's
knowledge, no event has occurred which, with the passage of time or the giving
of notice or both would constitute such a breach or default, (iii) no claim of
material default thereunder has, to the knowledge of the Purchaser, been
asserted or threatened, and (iv) none of the Purchaser or any of its Significant
Subsidiaries or, to the knowledge of the Purchaser, any other party thereto is
seeking the renegotiation thereof or substitute performance thereunder, except
where such breach or default, or attempted renegotiation or substitute
performance, individually or in the aggregate, does not have and could not
reasonably be expected (so far as can be foreseen at the time) to have a
Purchaser Material Adverse Effect.
(b) Neither the Purchaser nor any Significant Subsidiary of the Purchaser
is in violation of any term of (i) its charter, bylaws or other organizational
documents, (ii) any agreement or instrument related to indebtedness for borrowed
money or any other Contract to which it is a party or by which it is bound,
(iii) any applicable law, ordinance, rule or regulation of any Governmental
Body, or (iv) any applicable Order of any Governmental Body, or self-regulatory
organization which is charged with regulating or supervising any business
conducted by the Purchaser or any Significant Subsidiary of the Purchaser, the
consequences of which violation, whether individually or in the aggregate, have
or could reasonably be expected (so far as can be foreseen at the time) to have
a Purchaser Material Adverse Effect.
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5.6. Non-Contravention; Approvals and Consents.
(a) The execution and delivery of this Agreement by the Purchaser do not,
and the performance by the Purchaser of its obligations hereunder and the
consummation of the transactions contemplated hereby will not, conflict with,
result in a violation or breach of, constitute (with or without notice or lapse
of time or both) a default under, result in or give to any person any right of
payment or reimbursement, termination, cancellation, modification or
acceleration of, or result in the creation or imposition of any Lien upon any of
the assets or properties of the Purchaser or any of its Significant Subsidiaries
under any of the terms, conditions or provisions of (i) the Articles of
Incorporation or Code of Regulations (or other comparable charter document) of
the Purchaser or any of its Significant Subsidiaries, or (ii) subject to the
taking of the actions described in paragraph (b) of this Section, (x) Laws or
Orders, of any Governmental Body or self-regulatory organization which is
charged with regulating or supervising any business conducted by the Purchaser
or any Significant Subsidiary of the Purchaser, applicable to the Purchaser or
any of its Significant Subsidiaries or any of their respective assets or
properties, or (y) any Contract to which the Purchaser or any of its Significant
Subsidiaries is a party or by which the Purchaser or any of its Significant
Subsidiaries or any of their respective assets or properties is bound, excluding
from the foregoing clauses (x) and (y) conflicts, violations, breaches,
defaults, terminations, modifications, accelerations and creations and
impositions of Liens which, individually or in the aggregate, could not
reasonably be expected to have a Purchaser Material Adverse Effect.
(b) Except for (i) the filing of a premerger notification report by the
Purchaser under the HSR Act, (ii) the filing of the Certificate of Merger and
other appropriate merger documents required by the TBCA with the Secretary of
State of the State of Tennessee and appropriate documents with the relevant
authorities of other states in which the Constituent Corporations are qualified
to do business, and (iii) the making of any required filings with the Ohio
Department of Insurance, the Tennessee State Department of Commerce and
Insurance, and any other insurance regulatory authority which is charged with
regulating or supervising any business conducted by the Company or any
subsidiary of the Company, no consent, approval or action of, filing with or
notice to any Governmental Body or other public or private third party is
necessary or required under any of the terms, conditions or provisions of any
Law or Order of any Governmental Body or self-regulatory organization which is
charged with regulating or supervising any business conducted by the Purchaser
or any Significant Subsidiary of the Purchaser, or any Contract to which the
Purchaser or any of its Significant Subsidiaries is a party or by which the
Purchaser or any of its Significant Subsidiaries or any of their respective
assets or properties is bound for the execution and delivery of this Agreement
by the Purchaser, the performance by the Purchaser of its obligations hereunder
or the consummation of the transactions contemplated hereby, other than such
consents, approvals, actions, filings and notices which the failure to make or
obtain, as the case may be, individually or in the aggregate, could not
reasonably be expected to have a Purchaser Material Adverse Effect.
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5.7. Litigation. There are no actions, suits, arbitrations, investigations
or proceedings (adjudicatory, rulemaking or otherwise) pending or, to the
knowledge of the Purchaser, threatened against the Purchaser or any of its
Significant Subsidiaries (or any Purchaser Employee Plan or Purchaser Benefit
Arrangement), or any property of the Purchaser or any such Significant
Subsidiary (including Proprietary Rights), in any court or before any arbitrator
of any kind or before or by any Governmental Body, except actions, suits,
arbitrations, investigations or proceedings which, individually or in the
aggregate, have not had and if adversely determined or resolved could not
reasonably be expected (so far as can be foreseen at the time) to have a
Purchaser Material Adverse Effect.
5.8. No Brokers. Neither the Purchaser nor any Subsidiary or affiliate of
the Purchaser has entered into or will enter into any Contract or understanding,
whether oral or written, with any Person which will result in the obligation of
the Purchaser to pay any finder's fee, brokerage commission or similar payment
in connection with the transactions contemplated hereby.
5.9. Proxy Statement. Neither the information supplied or to be supplied by
or on behalf of the Purchaser for inclusion, nor the information incorporated by
reference from documents filed by the Purchaser with the SEC, in the Proxy
Statement in connection with the Merger or any other transaction contemplated
hereby will, on the date of its filing or on the date first mailed to
shareholders of the Company, 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 are made, not misleading.
5.10. Reports and Financial Statements. The Purchaser has filed with the
SEC all Purchaser SEC Reports and has made available to the Company true and
complete copies of all the Purchaser SEC Reports. As of their respective dates,
the Purchaser SEC Reports (i) complied as to form in all material respects with
the requirements of the Securities Act, or the Exchange Act, as the case may be,
and (ii) did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The audited consolidated financial statements and unaudited
interim consolidated financial statements (including, in each case, the notes,
if any, thereto) included in the Purchaser SEC Reports (the "Purchaser Financial
Statements") complied as to form in all material respects with the published
rules and regulations of the SEC with respect thereto, and fairly present
(subject, in the case of the unaudited interim financial statements, to normal,
recurring year-end audit adjustments which are not expected, individually or in
the aggregate, to be material or to result in a Purchaser Material Adverse
Effect) the consolidated financial position of the Purchaser and its
consolidated subsidiaries as of the respective dates thereof and the
consolidated results of their operations and cash flows for the respective
periods then ended, in each case, in accordance with generally accepted
accounting principles consistently applied. Each Significant Subsidiary of the
Purchaser is treated as a consolidated subsidiary of the Purchaser in the
Purchaser Financial Statements for all periods covered thereby.
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ARTICLE 6
ADDITIONAL COVENANTS AND AGREEMENTS OF THE PARTIES
6.1. Conduct of the Business of the Company. Except as expressly
contemplated by this Agreement or as set forth in the Company Disclosure
Schedule, during the period from the date of this Agreement to the Effective
Time: (i) the Company will, and will cause each of its Subsidiaries to, conduct
its business only in, and the Company will not take, and will cause each of its
Subsidiaries not to take, any action except in, the ordinary course consistent
with past practice, (ii) the Company will not, and the Company will cause each
of its Subsidiaries not to, enter into any material transaction other than in
the ordinary course of business consistent with past practice, and (iii) to the
extent consistent with the foregoing, with no less diligence and effort than
would be applied in the absence of this Agreement, the Company will, and will
cause each of its Subsidiaries to, preserve intact its current business
organizations and reputation, keep available the service of its current officers
and employees, preserve its relationships with customers, suppliers and others
having business dealings with it with the objective that their goodwill and
ongoing businesses shall be unimpaired at the Effective Time and comply in all
material respects with all Laws and Orders of all Governmental Bodies or
regulatory authorities applicable to it. Without limiting the generality of the
foregoing and except as otherwise expressly permitted in this Agreement, prior
to the Effective Time, the Company will not and will not permit any of its
Subsidiaries to, without the prior written consent of the Purchaser (except to
the extent set forth in the Company Disclosure Schedule):
(a) except for (i) 490,000 shares of Company Common Stock reserved for
issuance upon exercise of Company Options outstanding as of the date hereof or
issuable pursuant to additional Company Options which may be granted after the
date hereof but prior to the Effective Time, and (ii) 93,324 shares of Company
Common Stock reserved for issuance pursuant to warrants, issue, deliver, sell,
dispose of, pledge or otherwise encumber, or authorize or propose the issuance,
delivery, sale, disposition or pledge or other encumbrance of (A) any additional
shares of its capital stock of any class (including the Shares), or any
securities or rights convertible into, exchangeable for, or evidencing the right
to subscribe for any shares of its capital stock, or any rights, warrants,
options, calls, commitments or any other agreements of any character to purchase
or acquire any shares of its capital stock or any securities or rights
convertible into, exchangeable for, or evidencing the right to subscribe for,
any shares of its capital stock, or (B) any other securities in respect of, in
lieu of, or in substitution for, Shares outstanding on the date hereof;
(b) except as contemplated in subsection (a) above, directly or indirectly
redeem, repurchase or otherwise acquire, or propose to redeem, repurchase or
otherwise acquire, any of its outstanding securities (including the Shares) or
any Option with respect thereto;
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(c) split, combine, subdivide, reclassify or take similar action with
respect to any shares of its capital stock or issue or authorize or propose the
issuance of any other securities in respect of, in lieu of or in substitution
for shares of its capital stock or declare, set aside for payment or pay any
dividend, or make any other actual, constructive or deemed distribution in
respect of any shares of its capital stock or otherwise make any payments to
shareholders in their capacity as such, other than in a manner consistent with
prior business practices;
(d) (i) increase in any manner the compensation or fringe benefits of any
of its directors, officers or employees, except for normal increases in the
ordinary course of business consistent with past practice that, in the
aggregate, do not result in a material increase in benefits or compensation
expense to the Company and its Subsidiaries taken as a whole, (ii) pay or agree
to pay any pension, retirement allowance or other employee benefit not required
or contemplated by any of the existing benefit, severance, pension or employment
plans, agreements or arrangements as in effect on the date hereof to any such
director, officer or employees, whether past or present that, in the aggregate,
result in a material increase in benefits or compensation expense to the Company
and its Subsidiaries taken as a whole, (iii) enter into any new or amend any
existing employment agreement with any such director, officer or employee,
except for employment agreements with new employees entered into in the ordinary
course of business consistent with past practice, that, in the aggregate, do not
and will not result in a material increase in benefits or compensation expense
to the Company and its Subsidiaries taken as a whole, or except as may be
approved in writing by the Purchaser, (iv) enter into any new or amend any
existing severance agreement with any such director, officer or employee, except
as permitted in the Company Disclosure Schedule and except for severance
agreements in the ordinary course of business consistent with past practice,
that in the aggregate do not and will not result in a material increase in the
benefits or compensation expense to the Company and its Subsidiaries taken as a
whole, or (v) except as may be required to comply with applicable law, become
obligated under any new pension plan or arrangement, welfare plan or
arrangement, multiemployer plan or arrangement, employee benefit plan or
arrangement, severance plan or arrangement, benefit plan or arrangement, or
similar plan or arrangement, which was not in existence on the date hereof, or
amend any such plan or arrangement in existence on the date hereof if such
amendment would have the effect of enhancing or accelerating any benefits
thereunder, except for plans, arrangements or amendments in the ordinary course
of business consistent with past practice that, in the aggregate, do not result
in a material increase in the benefits or compensation expense to the Company
and its Subsidiaries taken as whole;
(e) enter into any contract or amend or modify any existing contract, or
engage in any new transaction outside the ordinary course of business consistent
with past practice or not on an arm's-length basis, with any Affiliate of the
Company or any of its Subsidiaries;
(f) adopt a plan of complete or partial liquidation, or resolutions
providing for or authorizing such liquidation or a dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization of the
Company or any of its Subsidiaries (other than
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the Merger, and other than such of the foregoing with respect to any Subsidiary
of the Company as do not change the beneficial ownership interest of the Company
in such Subsidiary);
(g) make any acquisition, by means of merger, consolidation, purchase of a
substantial equity interest in or a substantial portion of the assets of, or
otherwise, of (i) any business or corporation, partnership, association or other
business organization or division thereof or (ii) except in the ordinary course
and consistent with past practice, any other assets;
(h) adopt or propose any amendments to its Certificate of Incorporation or
Code of Regulations except as contemplated by this Agreement, or alter through
merger, liquidation, reorganization, restructuring or in any other fashion the
corporate structure or ownership of any Subsidiary not constituting an inactive
Subsidiary of the Company;
(i) other than borrowings under existing credit facilities or other
borrowings in the ordinary course (but in all cases only in the aggregate at any
time outstanding up to $1,000,000 of additional borrowings after the date
hereof), (i) incur any indebtedness for borrowed money or guarantee any such
indebtedness other than in the ordinary course of business consistent with past
practices or, except in the ordinary course consistent with past practice, (ii)
make any loans, advances or capital contributions to, or investments in, any
other Person (other than to the Company or any Wholly Owned Subsidiary of the
Company), or (iii) voluntarily purchase, cancel, prepay or otherwise provide for
a complete or partial discharge in advance of a scheduled repayment date with
respect to, or waive any right under, any indebtedness for borrowed money other
than in the ordinary course of business consistent with past practice;
(j) make any change in the lines of business in which it participates or is
engaged;
(k) enter into any agreement providing for acceleration of payment or
performance or other consequence as a result of a change of control of the
Company or its Subsidiaries;
(l) enter into any contract, arrangement or understanding requiring the
purchase of equipment, materials, supplies or services over a period greater
than 12 months and for the expenditure of greater than $500,000 per year which
is not cancelable without penalty on 30 days' or less notice; or
(m) except to the extent required by applicable law, (i) permit any
material change in (A) pricing, marketing, purchasing, investment, accounting,
financial reporting, inventory, credit, allowance or tax practice or policy or
(B) any method of calculating any bad debt, contingency or other reserve for
accounting, financial reporting or tax purposes or (ii) make any material tax
election or settle or compromise any material income tax liability with any
Governmental Body or regulatory authority;
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(n) other than dispositions of assets which are not, individually or in the
aggregate, material to the Company and its Subsidiaries taken as a whole, sell,
lease, grant any security interest in or otherwise dispose of or encumber any of
its assets or properties;
(o) take any action that would cause any representations set forth in
Article 4 not to be true in all material respects from and after the date hereof
until the Effective Time;
(p) fail to maintain in full force the insurance policies in effect on the
date hereof or change any self-insurance program in effect in any material
respect;
(q) in the event that a claim is made for damage, which damage would have a
Company Material Adverse Effect during the period prior to the Closing Date
which is covered by such insurance, fail to promptly notify the Purchaser of the
pendency of such a claim;
(r) do any act or omit to do any act, or permit any act or omission to act,
which will cause a breach of any Contract or commitment of the Company or any of
its Subsidiaries, except to the extent that such breach would not have a Company
Material Adverse Effect;
(s) fail to duly comply with all Laws and Orders applicable to it and its
properties, operations, business and employees except to the extent that such
noncompliance would not have a Company Material Adverse Effect; or
(t) authorize, recommend, propose or announce an intention to do any of the
foregoing, or enter into any Contract to do any of the foregoing.
6.2. No Solicitation; Transaction Moratorium
(a) The Company shall not, and shall not permit any of its Subsidiaries to,
nor shall it authorize or permit any officer, director, employee, investment
banker, financial advisor, attorney, accountant or other agent or representative
(each, a "Representative") retained by or acting for or on behalf of it or any
of its Subsidiaries to, directly or indirectly, initiate, solicit, encourage,
participate in any negotiations regarding, furnish any confidential information
in connection with, endorse or otherwise cooperate with, assist, participate in
or facilitate the making of any proposal or offer for, or which may reasonably
be expected to lead to, an Acquisition Transaction (defined below) by any Person
or group (a "Potential Acquiror"); provided, however, that (i) the Company may
furnish or cause to be furnished information concerning the Company and its
businesses, properties or assets to a Potential Acquiror (provided that such
information is supplied on terms, including confidentiality terms, substantially
similar to those set forth in the Confidentiality Letter between the Purchaser
and the Company), (ii) the Company may engage in discussions or negotiations
with a Potential Acquiror, (iii) following receipt of a proposal or offer for an
Acquisition Transaction, the Company may take and disclose to its shareholders a
position contemplated
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by Rules 14d-9 and 14e-2(a) under the Exchange Act or otherwise make disclosure
to the Company's shareholders, and (iv) following receipt of a proposal or offer
for an Acquisition Transaction, the Board of Directors may withdraw or modify
its recommendation to the Company's shareholders contemplated by Section 6.3 and
thereby elect to terminate this Agreement pursuant to Section 8.1(h), but in
each case referred to in the foregoing clauses (i) through (iv) only if and to
the extent that the Board of Directors of the Company shall conclude in good
faith on the basis of written advice from independent outside counsel and after
consultation with its financial advisors that such action is necessary in order
for such Board of Directors to act in a manner consistent with its fiduciary
obligations under applicable law. The Company will immediately cease and cause
to be terminated any existing activities, discussions or negotiations with any
parties conducted heretofore with respect to any Acquisition Transaction. As
used in this Agreement, "Acquisition Transaction" means any merger,
consolidation or other business combination involving the Company or any of its
Significant Subsidiaries or any acquisition in any manner of all or a
substantial portion of the equity of, or all or a substantial portion of the
assets of, the Company or any of its Significant Subsidiaries, whether for cash,
securities or any other consideration or combination thereof other than pursuant
to the transactions contemplated by this Agreement.
(b) If at any time the Company or any Representative of the Company
provides a Significant Response (as defined below) to any inquiry or
solicitation by a Potential Acquiror, the Company shall immediately deliver to
the Purchaser a written notice advising Purchaser of the fact that such
Significant Response has been given. As a consequence of the delivery of such
notice, all duties and obligations of the Purchaser hereunder shall be suspended
during the Transaction Moratorium Period. "Transaction Moratorium Period" means
a period beginning on the date of such notice and ending on the date of
Purchaser's receipt of a written notice signed by the President of the Company
certifying that all discussions and contacts between the Company and its
Representatives, on one hand, and the Potential Acquiror to whom the Company had
provided a Significant Response and any Representatives or Affiliates thereof,
on the other, have ended and are not expected to resume. In the event that a
Transaction Moratorium Period continues for a period in excess of 30 days, the
Purchaser may, at any time prior to its receipt of a notice terminating such
Transaction Moratorium Period, terminate this Agreement pursuant to Section
8.1(h). If the Company delivers a notice of Significant Response, the Final
Termination Date and each of the dates set forth herein as relating to or
affecting a date by which the Purchaser is required to perform duties and
obligations hereunder shall in each case be extended on a day-for-day basis for
each day in any Transaction Moratorium Period. "Significant Response" means any
action by the Company or any of its Representatives in response to an inquiry,
solicitation or request for documents or other information received by the
Company from a Potential Acquiror other than participation by the Company in a
preliminary discussion or discussions with such Potential Acquiror or any
Representative thereof and shall include, without limitation, (i) any action by
the Company or any of its Representatives to provide a Potential Acquiror
information regarding the Company other than publicly available information,
(ii) any execution by the Company and a Potential Acquiror of a confidentiality
agreement relating to information about the Company, and (iii)
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any participation by the Company or any of its Representatives in substantive
discussions regarding the terms and conditions of an Acquisition Transaction or
regarding a term sheet or similar document relating to an Acquisition
Transaction.
6.3. Meeting of Company Shareholders.
Subject to the provisions of Section 6.2, (i) the Company will take all
action necessary in accordance with applicable law and its Certificate of
Incorporation and Bylaws to convene a meeting of its shareholders (the "Company
Shareholders' Meeting") as promptly as practicable to consider and vote upon the
approval of the Merger and the other transactions contemplated hereby (the
"Company's Shareholders' Approval") and (ii) the Board of Directors of the
Company shall recommend and declare advisable such approval and shall not modify
or revoke such recommendation and declaration and the Company shall take all
lawful action to solicit, and use all reasonable efforts to obtain, such
approval. The Purchaser agrees to cooperate in all reasonable respects with the
Company in the Company's efforts to obtain the Company Shareholders' Approval.
6.4 Proxy Statement. The Company and the Purchaser will, as promptly as
practicable, cooperate to prepare and file with the SEC a proxy statement in
connection with the Merger and the vote of the Company's shareholders with
respect to the transactions contemplated by this Agreement (such proxy
statement, together with any amendments thereof or supplements thereto, in each
case in the form or forms mailed to the Company's shareholders, is herein called
the "Proxy Statement"). The Company and the Purchaser will use all reasonable
efforts to have, or cause the Proxy Statement to become definitive as promptly
as practicable following the clearance of the Proxy Statement by the SEC. The
Company and the Purchaser also will take any other related action required to be
taken under federal or state securities laws, and the Company will use all
reasonable efforts to cause the Proxy Statement to be mailed to shareholders of
the Company at the earliest practicable date.
6.5. Reasonable Efforts. The Company and the Purchaser shall, and shall use
all reasonable efforts to, cause their respective Subsidiaries to: (i) promptly
make all filings and seek to obtain all Authorizations required under all
applicable laws with respect to the Merger and the other transactions
contemplated hereby and will cooperate with each other with respect thereto;
(ii) use all reasonable efforts to promptly take, or cause to be taken, all
other actions and do, or cause to be done, all other things necessary, proper or
appropriate to satisfy the conditions set forth in Article 7 and to consummate
and make effective the transactions contemplated by this Agreement on the terms
and conditions set forth herein as soon as practicable (including seeking to
remove promptly any injunction or other legal barrier that may prevent such
consummation); and (iii) not take any action (including, without limitation,
effecting or agreeing to effect or announcing an intention or proposal to
effect, any acquisition, business combination or other transaction) which might
reasonably be expected to impair the ability of the parties to consummate the
Merger at the earliest possible time (regardless of whether such action would
otherwise be permitted or not prohibited hereunder).
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6.6. Access to Information. Subject to currently existing contractual and
legal restrictions applicable to the Company (which the Company represents and
warrants are not material) and upon reasonable notice, the Company shall (and
shall cause each of its Subsidiaries to) afford to officers, employees, counsel,
accountants and other authorized representatives of the Purchaser (the
"Purchaser Representatives") access, during normal business hours throughout the
period prior to the Effective Time, to its properties, books and records
(including without limitation, the work papers of independent accountants) and,
during such period, shall (and shall cause each of its Subsidiaries to) furnish
promptly to such Purchaser Representatives all information concerning its
business, properties and personnel as may reasonably be requested, provided that
no investigation pursuant to this Section 6.6 shall affect or be deemed to
modify any of the representations or warranties made by the Company. The
Purchaser agrees that it will not, and will cause its Purchaser Representatives
not to, use any information obtained pursuant to this Section 6.6 for any
purpose unrelated to the consummation of the transactions contemplated by this
Agreement. Subject to the requirements of law, the Purchaser will keep
confidential, and will cause its the Purchaser Representatives to keep
confidential, all information and documents obtained pursuant to this Section
6.6 except as otherwise consented to by the Company; provided, however, that the
Purchaser shall not be precluded from making any disclosure which it deems
required by law in connection with the transactions contemplated by this
Agreement. If the Purchaser is required to disclose any information or documents
pursuant to the immediately preceding sentence, the Purchaser shall promptly
give written notice of such disclosure that is proposed to be made to the
Company so that the parties can work together to limit the disclosure to the
greatest extent possible and, in the event that the Purchaser is legally
compelled to disclose any information, to seek a protective order or other
appropriate remedy or both. Upon any termination of this Agreement, the
Purchaser will collect and deliver to the other party all documents obtained
pursuant to this Section 6.6 or otherwise for the Purchaser or the Purchaser
Representatives by it or any of the Purchaser Representatives then in their
possession and any copies thereof. All requests for access to the Company and
its Subsidiaries pursuant to this Section 6.6 shall be made through the
Purchaser Representatives named in the Purchaser Disclosure Schedule.
6.7. Supplements or Amendments.
(a) If at any time prior to the Company Shareholders' Meeting any event
with respect to the Company or any of its Subsidiaries or any of their
respective officers and directors should occur which is required to be described
in an amendment of, or a supplement to, the Proxy Statement, the Company shall
notify the Purchaser thereof by reference to this Section 6.7(a) and such event
shall be so described, and such amendment or supplement shall be promptly filed
with the SEC and, as required by law, disseminated to the shareholders of the
Company and such amendment or supplement shall comply with all provisions of
applicable law. If at any time prior to the Effective Time, the Company or any
of its Subsidiaries or any of their respective officers or directors become
aware of any fact or condition which would cause any material statement in the
Proxy Statement to have been untrue or would cause the Proxy Statement to omit
to state a material fact required to have been 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 Company shall
promptly notify the Purchaser in writing of such fact or condition.
(b) If it any time prior to the Company Shareholders' Meeting any event
with respect to the Purchaser, any of its Subsidiaries or their respective
officers or directors should occur which is required to be described in an
amendment of, or a supplement to, the Proxy Statement, the Purchaser shall
notify the Company thereof by reference to this Section 6.7(b) and such event
shall be so described, and such amendment or supplement shall be promptly filed
with the SEC and, as required by law, disseminated to the stockholders of the
Company and such amendment or supplement shall comply with all provisions of
applicable law. If at any time prior to the Effective Time, the Purchaser or any
of its Subsidiaries or any of their respective officers or directors becomes
aware of any fact or condition which would cause any material statement in the
Proxy Statement to have been untrue or would cause the Proxy Statement to omit
to state a material fact required to have been stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading, the Purchaser shall promptly notify the Company
in writing of such fact or condition.
6.8. Directors' and Officers' Indemnification and Insurance.
(a) From and after the Effective Time, the Surviving Corporation (the
"Indemnifying Party") shall, as to any claim or claims made or asserted (even if
not resolved) prior to the third anniversary of the Effective Time, indemnify,
defend and hold harmless each person who is now, or has been at any time prior
to the date hereof or who becomes prior to the Effective Time a director,
officer, employee or agent of the Company or any of its Subsidiaries (each, an
"Indemnified Party") against (i) all losses, claims, damages, costs and expenses
(including attorneys' fees), liabilities, judgments and settlement amounts that
are paid or incurred in connection with any claim, action, suit, proceeding, or
investigation (whether civil, criminal, administrative or investigative and
whether asserted or claimed prior to, at or after the Effective Time) that is
based in whole or in part on, or arises in whole or in part out of, the fact
that such Indemnified Party is or was a director, officer, employee or agent of
the Company or any of its Subsidiaries or in the case of a present or former
director, officer or employee of the Company or a Subsidiary, a fiduciary of any
employee benefit plan or arrangement of the Company or any of its Subsidiaries
and, in either case relates to or arises out of any action or omission occurring
at or prior to the Effective Time ("Indemnified Liabilities"), and (ii) all
Indemnified Liabilities based in whole or in part on, or arising in whole or in
part out of, or pertaining to this Agreement or the transactions contemplated
hereby, in each case to the full extent a corporation is permitted under
applicable law to indemnify its own directors, officers, employees or agents, as
the case may be; provided that no Indemnifying Party shall be liable for any
settlement of any claim effected without its written consent, which consent
shall not be unreasonably withheld. Without limiting the foregoing in the event
that any such claim, action, suit, proceeding or investigation is brought
against any Indemnified Party (whether arising prior to or after the Effective
Time), (w) the Indemnifying Party will pay expenses in advance of the final
disposition of any such claim, action, suit, proceeding or investigation to each
Indemnified
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Party to the full extent permitted by applicable law provided that the person to
whom expenses are advanced provides an undertaking to repay such advance if it
is ultimately determined that such person is not entitled to indemnification;
(x) the Indemnified Parties shall retain counsel reasonably satisfactory to the
Indemnifying Parties; (y) the Indemnifying Parties shall pay all reasonable fees
and expenses of such counsel for the Indemnified Parties (subject to the final
sentence of this paragraph) promptly as statements therefor are received; and
(z) the Indemnifying Parties shall use all commercially reasonable efforts to
assist in the vigorous defense of any such matter. Any Indemnified Party wishing
to claim indemnification under this Section, upon learning of any such claim,
action, suit, proceeding or investigation, shall notify the Indemnifying Party,
but the failure so to notify an Indemnifying Party shall not relieve it from any
liability which it may have under this paragraph except to the extent such
failure irreparably prejudices such party. The Indemnified Parties as a group
may retain only one law firm to represent them with respect to each such matter
unless there is, under applicable standards of professional conduct, a conflict
on any significant issue between the positions of any two or more Indemnified
Parties.
(b) The Surviving Corporation shall, until the third anniversary of the
Effective Time, cause to be maintained in effect, to the extent available, the
policies of directors' and officers' liability insurance maintained by the
Company and its Subsidiaries as of the date hereof (or policies of at least the
same coverage and amounts containing terms that are no less advantageous to the
insured parties) with respect to claims arising from facts or events that
occurred on or prior to the Effective Time; and in no event shall the coverage
for the transactions contemplated hereby, be excluded: provided that in no event
shall the Surviving Corporation be obligated to expend in order to maintain or
procure insurance coverage pursuant to this paragraph any amount per annum in
excess of the aggregate premiums paid by the Company and its Subsidiaries as of
the date hereof for such purpose, but in such case shall purchase as much
coverage as possible for such maximum annual amount; and provided, further, that
in the event any claim or claims are asserted or made within such three-year
period, the obligations of the Surviving Corporation to maintain in effect
insurance shall continue until the disposition of any and all claims.
(c) In the event that any action, suit, proceeding or investigation
relating to this Agreement or to the transactions contemplated by this Agreement
is commenced, whether before or after the Closing, the parties hereto agree to
cooperate and use their respective reasonable efforts to vigorously defend
against and respond thereto.
(d) This Section 6.8 shall survive the Effective Time and is intended to
benefit the Indemnified Parties and their successors and assigns and shall be
binding on all successors and assigns of the Purchaser, the Company and the
Surviving Corporation.
(e) The Surviving Corporation shall honor, to the fullest extent permitted
by applicable law, all indemnification agreements existing as of the date hereof
between the Company and any of the Indemnified Parties.
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6.9. Consents. Between the date hereof and the Closing Date, the Company
and the Purchaser shall use their respective best efforts, without payment of
any consideration to the persons or entities from whom or which consents or
agreements are required, to obtain at the earliest practicable date, and prior
to the Closing Date, all consents and agreements of third parties necessary for
the performance by the Company and the Purchaser of their respective obligations
under this Agreement or any agreement referred to herein or contemplated hereby
or to the consummation of the transactions contemplated hereby or thereby except
for those consents and agreements which, if not obtained, would not have a
Company Material Adverse Effect or a Purchaser Material Adverse Effect. No
consideration, whether such consideration shall consist of the payment of money
or shall take any other form, for any such consent or agreement necessary to the
consummation of the transactions contemplated hereby shall be given or promised
by either of the Company or the Purchaser or any of their respective
Subsidiaries without the prior written approval of the other party.
6.10. Filings and Authorizations. The Company and the Purchaser shall, as
promptly as practicable following the execution and delivery of this Agreement,
file or supply, or cause to be filed or supplied, all notifications, reports and
other information required to be filed or supplied pursuant to the HSR Act and
applicable state insurance laws in connection with the transactions contemplated
by this Agreement. In addition to and not in limitation of the foregoing, each
of the parties will (w) take promptly all actions necessary to make the filings
required of the Purchaser and the Company or their affiliates under the HSR Act,
(x) comply at the earliest practicable date with any request for additional
information received by such party or its affiliates from the Federal Trade
Commission (the "FTC") or the Antitrust Division of the Department of Justice
(the "Antitrust Division") pursuant to the HSR Act, (y) cooperate with the other
party in connection with such party's filings under the HSR Act and in
connection with resolving any investigation or other inquiry concerning the
Merger or the other matters contemplated by this Agreement commenced by either
the FTC or the Antitrust Division or state attorneys general and (z) request
early termination of the waiting period under the HSR Act. Each of the Company
and the Purchaser will proceed diligently and in good faith and will use all
commercially reasonable efforts to do, or cause to be done, all things
necessary, proper or advisable to, as promptly as practicable, (i) make, or
cause to be made, all such other filings and submissions as may be required to
consummate the Merger and the other transactions contemplated hereby in
accordance with the terms of this Agreement, (ii) obtain, or cause to be
obtained, all authorizations, approvals, consents and waivers from all persons
and governmental authorities necessary to be obtained in order to consummate
such transfer and such transactions, and (iii) take, or cause to be taken, all
other actions necessary, proper or advisable in order to fulfill their
respective obligations hereunder.
6.11. Further Assurances; Notice of Breach; Cure. At any time and from time
to time after the Closing, the parties agree to use their best efforts to
cooperate with each other, to execute and deliver such other documents,
instruments of transfer or assignment (which documents and instruments must be
in form reasonably satisfactory to each party executing the same), files, books
and records and do all such further acts and
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things as may reasonably be required to carry out the transactions contemplated
hereunder. Each party shall promptly notify the other party in writing of any
information delivered to or obtained by such party which would prevent the
satisfaction of any condition set forth in Article 7 or consummation of the
transactions contemplated by this Agreement, or would indicate a breach of the
representations or warranties of any of the parties to this Agreement. After
giving or receiving notice that any representation, warranty or covenant set
forth herein has been breached or that any condition set forth in Article 7
cannot be satisfied, the affected party shall have 15 days to cure same or to
demonstrate to the other party's reasonable satisfaction that such breach or
condition both is curable and will be cured prior to the estimated Effective
Time. If such party fails to cure or demonstrate such ability to cure such
breach or satisfy such condition, the other party shall have the right to waive
the breach or failure of condition unless the nature of such breach or failure
of condition renders closing under this Agreement impossible. If such breach or
failure of condition is not waived, this Agreement may be terminated in
accordance with Section 8.1.
6.12. Continuation of Compensation and Employee Benefit Plans. The
Purchaser and the Company acknowledge and agree that the Purchaser shall have
the sole and exclusive right to determine its future benefit and employment
policies and that it is not intended that, and in no event shall, the provisions
of this Section 6.12 create any right or interest of any person (including,
without limitation, the Company or any employee of the Company or any ERISA
Subsidiary). The Purchaser acknowledges that it intends to cause the Surviving
Corporation to establish or continue to maintain as of the Closing Date, benefit
plans and programs providing benefits for non-union employees of the Company or
any ERISA Subsidiary that in the aggregate (as to the current and former
employee groups, respectively) are at least approximately equivalent to the
benefits being provided for such employees of the Company and an ERISA
Subsidiary under the Company Employee Plans existing immediately before the
Closing Date. Effective as of the Closing Date, Purchaser shall cause the
Surviving Corporation to assume all duties, obligations and liabilities with
respect to the compensation and benefits payable to or on account of current or
former employees of the Company or any ERISA Subsidiary with respect to the
relationship of such employee(s) with any such entities.
6.13. Cooperation on Litigation. The Purchaser and the Company agree to
furnish or cause to be furnished to each other, upon reasonable request, as
promptly as practicable, such information (including access to books and
records) and assistance as is reasonably necessary for the preparation for or
the prosecution or defense of any suit, action, litigation or arbitration or
other proceeding or investigation against the Purchaser or the Company,
respectively. The party requesting such information and assistance shall
reimburse the other party for all reasonable out-of-pocket costs and expenses
incurred by such party in providing such information and in rendering such
assistance.
6.14 Employment Arrangements. The employment agreements effective January
1, 1995 between the Company and each of Joseph W. McLeary, Philip R. Zanone,
Elena Barham and James E. Farmer shall be terminated as of the Closing and the
Company shall on or prior to the Closing enter into separate agreements with
each of those individuals.
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<PAGE> 83
6.15 NewSouth Capital Management Agreement. Notice to terminate the
agreement by and between the Midland Risk Insurance Company ("Midland Risk") and
NewSouth Capital Management, Inc. shall have been duly delivered on or before
November 15, 1996, in accordance with the terms of such agreement and shall be
effective ninety (90) days thereafter without the payment of any penalty or
premium on the part of the Company or Midland Risk.
ARTICLE 7
CONDITIONS TO CLOSING
7.1. Conditions to Obligations of the Parties. The respective obligations
of each party to consummate the transactions contemplated hereby shall be
subject to the fulfillment, on or prior to the Closing Date, of each of the
following conditions, unless waived in writing by the party being benefited
thereby, to the extent permitted by applicable law:
(a) Company's Shareholders' Approval. The Company shall have obtained
the Company's Shareholders' Approval from the requisite holders of Shares
in accordance with applicable law and the Certificate of Incorporation and
Bylaws of the Company.
(b) Government Consents. All (i) Authorizations specified in the
Company Disclosure Schedule and the Purchaser Disclosure Schedule and (ii)
other Authorizations required in connection with the execution and delivery
of this Agreement and the performance of the obligations hereunder shall
have been made or obtained in each case without limitation or restriction
unacceptable to the Purchaser in its reasonable judgment, except, in the
case of Authorizations referred to in clause (ii) above, where the failure
to have obtained such Authorizations could not reasonably be expected (so
far as can be foreseen at the time) to have a Purchaser Material Adverse
Effect or a Company Material Adverse Effect, as the case may be.
(c) No Suits or Injunctions. There shall be no suit, action, inquiry,
investigation or proceeding instituted (x) by any Governmental Body which
seeks to prevent consummation of the Merger or (y) which is reasonably
likely to result in material damages in connection with the transactions
contemplated hereby which, in each case, continues to be outstanding.
7.2. Conditions to Obligations of the Purchaser. The obligations of the
Purchaser to consummate the transactions contemplated by this Agreement are
subject to the fulfillment at or prior to the Effective Time of each of the
following conditions, any or all of which may be waived in whole or part by the
Purchaser to the extent permitted by applicable law:
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<PAGE> 84
(a) Representations and Warranties True. Each of the representations
and warranties made by the Company in this Agreement shall be true and
correct in all material respects as of the Closing Date as though made on
and as of the Closing Date or, in the case of representations and
warranties made as of a specified date earlier than the Closing Date, on
and as of such earlier date.
(b) Performance. The Company shall have performed or complied in all
material respects with all agreements and conditions contained herein
required to be performed or complied with by it prior to or at the time of
the Closing.
(c) Compliance Certificate. The Company shall have delivered to the
Purchaser a certificate, dated the Closing Date, signed by the President or
any Vice President of the Company, certifying as to the fulfillment of the
conditions set forth in Sections 7.2(a) and (b).
(d) Opinion of Counsel for the Company. The Purchaser shall have
received from Baker, Donelson, Bearman & Caldwell, P.C. or other counsel
for the Company satisfactory to the Purchaser an opinion, dated the Closing
Date, in substantially the form set forth in Schedule 7.2 hereto.
(e) Third Party Consents. All required authorizations, consents or
approvals of any third party (other than a Governmental Body), the failure
to obtain which could have a Company Material Adverse Effect, shall have
been obtained.
(f) Support Agreements. There shall not have been a breach of any
obligation by any shareholder which has entered into a Support Agreement.
(g) Employment Agreements. Each of Elena Barham and James E. Farmer
shall have terminated their existing employment agreement with the Company
and shall have entered into new employment agreements with the Company to
be effective upon Closing, such agreements to be in form and substance
satisfactory to the respective parties, in the exercise of reasonable
discretion.
(h) Termination of Employment Agreements. Joseph W. McLeary and Philip
R. Zanone shall have entered into severance agreements with The Company
terminating their employment agreements and providing for certain other
matters, such agreements to be in form and substance satisfactory to the
respective parties, in the exercise of reasonable discretion.
(i) Material Adverse Change. Since the date of this Agreement, there
shall not have been any Company Material Adverse Effect or any material
adverse effect on the ability of the Company to consummate the transactions
contemplated hereby.
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<PAGE> 85
7.3. Conditions to Obligations of the Company. The obligations of the
Company to consummate the transactions contemplated by this Agreement are
subject to the fulfillment at or prior to the Effective Time of each of the
following conditions, any or all of which may be waived in whole or in part by
the Company to the extent permitted by applicable law.
(a) Representations and Warranties True. Each of the representations
and warranties made by the Purchaser in this Agreement shall be true and
correct in all material respects as of the Closing Date as though made on
and as of the Closing Date or, in the case of representations and
warranties made as of a specified date earlier than the Closing Date, on
and as of such earlier date.
(b) Performance. The Purchaser shall have performed or complied in all
material respects with all agreements and conditions contained herein
required to be performed or complied with by it prior to or at the time of
the Closing.
(c) Compliance Certificate. The Purchaser shall have delivered to the
Company a certificate, dated the date of the Closing, signed by an officer
of the Purchaser, certifying as to the fulfillment of the conditions
specified in Sections 7.3(a) and (b).
(d) Opinion of Counsel for the Purchaser. The Company shall have
received from Baker & Hostetler, Cleveland, Ohio, or other counsel for the
Purchaser satisfactory to the Company an opinion, dated the Closing Date,
in substantially the form set forth in Schedule 7.3 hereto.
(e) Proceedings. All corporate proceedings taken by the Purchaser in
connection with the transactions contemplated hereby and all documents
incident thereto shall reasonably be satisfactory in all respects to the
Company and the Company's special counsel, and the Company and the
Company's special counsel shall have received all such counterpart
originals or certified or other copies of such documents as they may
reasonably request.
(f) Third Party Consents. All required authorizations, consents or
approvals of any third party (other than a Governmental Body), the failure
to obtain which could have a Purchaser Material Adverse Effect, shall have
been obtained.
(g) Fairness Opinion. The Company shall have received a written
opinion of R-H, dated the date of the Proxy Statement, to the effect that
the consideration to be received pursuant to the Merger by the holders of
Shares is fair from a financial point of view to such holders.
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<PAGE> 86
ARTICLE 8
TERMINATION AND ABANDONMENT;
BREAK-UP FEE AND EXPENSE REIMBURSEMENT
8.1. Termination. This Agreement may be terminated at any time prior to the
Effective Time, whether before or after approval and adoption of this Agreement
by the shareholders of the Company:
(a) by mutual consent of the Purchaser and the Company;
(b) by either the Purchaser or the Company if any permanent injunction
or other order of a court or other competent Governmental Authority
preventing the consummation of the Merger shall have become final and
nonappealable;
(c) by either the Purchaser or the Company if the Merger shall not
have been consummated before the Final Termination Date, unless extended by
the Boards of Directors of both the Purchaser and the Company (provided
that the right to terminate this Agreement under this Section 8.1(c) shall
not be available to any party whose failure or whose Affiliate's failure to
perform any material covenant or obligation under this Agreement has been
the cause of or resulted in the failure of the Merger to occur on or before
such date);
(d) by the Purchaser if the Board of Directors of the Company shall
withdraw, modify or change its recommendation of this Agreement or the
Merger in a manner adverse to the Purchaser, or if the Board of Directors
of the Company shall have refused to affirm its recommendation within two
business days of any written request from the Purchaser which request was
made upon a reasonable basis; provided, however, such an affirmation may
not be requested during a Transaction Moratorium Period;
(e) by the Purchaser or the Company if at the meeting of Company
Shareholder's Meeting (including any adjournment or postponement thereof)
the requisite vote of the stockholders of the Company to approve the Merger
and the transactions contemplated hereby shall not have been obtained;
(f) by the Purchaser if any party to a Support Agreement shall have
breached such Support Agreement; provided that the Shareholders of the
Company shall not have approved the Merger and the transactions
contemplated hereby;
(g) by either the Purchaser or the Company in the event of a material
breach by the other party of any representation, warranty, covenant or
other agreement contained in this Agreement and such party fails to cure or
demonstrate an ability to have such breach within the time period provided
in Section 6.11; provided, however, that a party shall not have a right to
terminate this Agreement under this
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<PAGE> 87
Section 8.1(g) if such party is then in material breach of any
representation, warranty, covenant or other agreement contained in this
Agreement; and
(h) by the Company or the Purchaser as set forth in Section 6.2;
provided that a termination by the Company described in this paragraph (h)
shall not be effective until the close of business on the second Business
Day following the date on which the Purchaser receives written notice from
the Company of the Company's intent to terminate pursuant to this paragraph
(h) and unless and until the Company shall have paid the Purchaser all of
the fees and expenses described in Section 8.2.
8.2 Effect of Termination. In the event of the termination of this
Agreement pursuant to Section 8.1, this Agreement, except for the provisions of
Sections 8.2 and 9.1, shall become void and have no effect, without any
liability on the part of any party or its directors, officers or stockholders.
Notwithstanding the foregoing, nothing in this Section 8.2 shall relieve any
party to this Agreement of liability for a material breach of any provision of
this Agreement; and provided, further, however, that if it shall be judicially
determined that termination of this Agreement was caused by an intentional
breach of this Agreement, then, in addition to other remedies at law or equity
for breach of this Agreement, the party so found to have intentionally breached
this Agreement shall indemnify and hold harmless the other parties for their
respective costs, fees and expenses of their counsel, accountants, financial
advisors and other experts and advisors as well as fees and expense incident to
negotiation, preparation and execution of this agreement and related
documentation and shareholders' meetings and consents ("Costs"). If this
Agreement is terminated (i) by either party pursuant to Section 8.1(c) (other
than if terminated by the Company if the Purchaser or its affiliates fails to
perform any material covenant or obligation under this Agreement and such
failure is the cause of or resulted in the failure of the Merger to occur on or
before the Final Termination Date), (ii) pursuant to Section 8.1(d), (e) or (f),
(iii) by the Purchaser under 8.1(g), or (iv) by either party pursuant to Section
8.1(h), the Company will (x) in the case of a termination by the Purchaser,
within three Business Days following any such termination or, in the case of a
termination by the Company, prior to such termination, pay to the Purchaser in
cash by wire transfer in immediately available funds to an account designated by
the Purchaser in reimbursement for the Purchaser's expenses an amount in cash
equal to the aggregate amount of the Purchaser's Costs incurred in connection
with pursuing the transactions contemplated by this Agreement, including,
without limitation, legal, accounting and investment banking fees, up to but not
in excess of an amount equal to $1.0 million in the aggregate; and (y) the
Company will pay to the Purchaser if, within twelve months from the date of a
termination of this Agreement, an Acquisition Transaction is publicly announced,
an Acquisition Transaction closes or an agreement to consummate an Acquisition
Transaction is signed, a termination fee of $1,750,000 in cash by wire transfer
in immediately available funds to an account designated by Purchaser promptly
following the first to occur of any such an announcement, closing or signing. If
this Agreement is terminated by the Company pursuant to Section 8.1 as a result
of the failure of the Purchaser or its affiliates to perform any material
covenant or obligation under the Agreement that is the cause of the Merger not
being consummated prior to the Final Termination Date, the Purchaser will,
within three Business Days following any such
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<PAGE> 88
termination pay to the Company in cash by wire transfer in immediately available
funds to an account designated by the Company in reimbursement for the Company's
expenses an amount in cash equal to the aggregate amount of the Company's Costs
incurred in connection with pursuing the transactions contemplated by this
Agreement, including, without limitation, legal, accounting and investment
banking fees, up to but not in excess of an amount equal to $1.0 million in the
aggregate.
ARTICLE 9
MISCELLANEOUS
9.1. Expenses. Except as otherwise provided in Section 8.2, each party
shall bear its own expenses, including the fees and expenses of any attorneys,
accountants, investment bankers, brokers, finders or other intermediaries or
other Persons engaged by it, incurred in connection with this Agreement and the
transactions contemplated hereby.
9.2. Public Disclosure. Except as may be required to comply with the
requirements of applicable law, to the extent practicable, be given to the other
party hereto, and reasonable efforts to obtain such party approval shall be
made, the parties hereto agree that no press release or similar public
announcement or communication will be made or caused to be made concerning the
execution or performance of this Agreement without the prior approval of the
other party.
9.3. Governing Law; Consent to Jurisdiction. This Agreement shall be deemed
to be made in and in all respects shall be interpreted, construed and governed
by and in accordance with the laws of the State of Ohio (without regard to
principles of conflicts of law) applicable to agreements made and to be entirely
performed within such state. The Company and the Purchaser irrevocably agree
that any legal action or proceeding arising out of or in connection with this
Agreement, or the transactions contemplated hereby, shall be brought in the
United States District Court for the Northern District of Ohio. Any and all
service of process and any other notice in any such action, suit or proceeding
shall be effective against any party if given personally or by registered or
certified mail, return receipt requested, or by any other means of mail that
requires a signed receipt, postage prepaid, mailed to such party as herein
provided.
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<PAGE> 89
9.4. Notices. Any notices or other communications required under this
Agreement shall be in writing, shall be deemed to have been given and received
when delivered in person, or addressed
(a) if to the Purchaser to:
The Progressive Corporation
6300 Wilson Mills Road
Mayfield Village, Ohio 44143
Attention: Charles B. Chokel
Telephone: (216) 464-8000
Fax: (216) 446-7168
with a copy to:
Baker & Hostetler
3200 National City Center
Cleveland, Ohio 44114
Attention: R. Steven Kestner
Telephone: (216) 621-0200
Fax: (216) 696-0740
(b) if to the Company to:
Midland Financial Group, Inc.
825 Crossover Lane
Suite 112
Memphis, TN 38117-4936
Attention: Joseph W. McLeary
Telephone: (901) 680-9100
Fax: (901) 638-6395
with a copy to:
Baker, Donelson, Bearman & Caldwell, P.C.
165 Madison Avenue
First Tennessee Building, 20th Floor
Memphis, TN 38103
Attention: Charles T. Tuggle, Jr.
Telephone: (901) 577-2267
Fax: (901) 577-2303
or at such other place or places or to such other person or persons as shall be
designated in writing by the parties to this Agreement in the manner herein
provided.
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<PAGE> 90
9.5. Headings. Article, section and paragraph headings contained in this
Agreement are for reference purposes only and shall not in any way affect the
meaning or interpretation of this Agreement.
9.6. Counterparts. This Agreement may be executed in one or more
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed shall be deemed to be an original, but all of which taken
together shall constitute one and the same instrument.
9.7. Assignment. This Agreement may not be assigned by a party hereto
without the prior written consent of the other hereto. This Agreement shall be
binding upon and inure to the benefit of successors and assigns of the parties
hereto.
9.8. Severability. If any provision of this Agreement is held to be
unenforceable for any reason, it shall be adjusted rather than voided, if
possible, in order to achieve the intent of the parties to this Agreement to the
fullest extent possible. In any event, all other provisions of this Agreement
shall be deemed valid and enforceable to the fullest extent permitted.
9.9. Waivers and Amendments.
(a) This Agreement may be amended, superseded, canceled, renewed or
extended, and the terms hereof may be waived, at any time, but only by a written
instrument signed by parties or, in the case of a waiver, by the party waiving
compliance. No delay on the part of any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof, nor shall any waiver on
the part of any party of any such right, power or privilege, or any single or
partial exercise of any such right, power or privilege, preclude any further
exercise thereof or the exercise of any other such right, power or privilege.
(b) Subject to Article 8, this Agreement may be amended by the boards
of directors of the Company and Merger Sub at any time prior to the filing of a
Certificate of Merger with the Secretary of State of Tennessee, provided that an
amendment made subsequent to the adoption of this Agreement by the stockholders
of the Company shall not (i) alter or change the amount of cash to be received
in exchange for or on conversion of all or any of the shares of Company Common
Stock, (ii) alter or change any terms of the certificate of incorporation of the
Surviving Corporation to be effected by the Merger, or (iii) alter or change any
of the terms and conditions of this Agreement if such alteration or change would
adversely affect the holders of Company Common Stock.
9.10. No Third Party Beneficiaries. Except as provided in Section 6.8
nothing in this Agreement shall convey any rights or remedies upon any person or
entity that is not a party to this Agreement or a permitted assignee of a party
to this Agreement.
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<PAGE> 91
9.11. Entire Agreement. This Agreement, the Schedules and Exhibits hereto
and any collateral agreements executed in connection with the consummation of
the transactions contemplated herein, constitute the entire agreement between
the parties hereto with respect to the transactions contemplated hereby and
supersedes all prior written or oral understandings, agreements or undertakings
with respect thereto.
9.12. Survival. Notwithstanding, any provision of this Agreement to the
contrary, the representations and warranties of the Company and the Purchaser
contained in this Agreement shall not survive, and shall be of no force and
effect following, the Closing Date of the Merger.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first written above.
MIDLAND FINANCIAL GROUP, INC.
By:_______________________________________
Name:______________________________
Title:_____________________________
THE PROGRESSIVE CORPORATION
By:_______________________________________
Name:______________________________
Title:_____________________________
TPC ACQUISITION CORPORATION
By:_______________________________________
Name:______________________________
Title:_____________________________
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<PAGE> 92
APPENDIX B
February 7, 1997
Board of Directors
Midland Financial Group, Inc.
825 Crossover Lane
Suite 112
Memphis, TN 38117
Gentlemen:
In connection with the proposed acquisition of Midland Financial Group,
Inc. ("MDLD" or the "Company") by The Progressive Corporation ("Progressive")
(the "Merger"), you have asked us to render our opinion as to whether the
consideration to be offered to the shareholders of MDLD in the Merger, as
provided in the Agreement and Plan of Merger dated November 6, 1996, among such
parties (the "Merger Agreement"), is fair, from a financial point of view. We
understand that, pursuant to the terms of the Merger Agreement, holders of all
outstanding shares of the Common Stock, no par value, of MDLD (the "MDLD Common
Stock") will receive consideration of $9.00 per share, and that the
consideration to be paid to MDLD shareholders will be in the form of cash (the
"Consideration").
We have been requested by the Company to render our opinion (the "Opinion")
with respect to the fairness, from a financial point of view, to the Company's
shareholders of the Consideration to be received by such shareholders pursuant
to the terms of the Merger Agreement. We have not been requested to opine as to,
and our opinion does not in any manner address, the Company's underlying
business decision to proceed with, effect or consummate the Merger.
In arriving at our Opinion, we reviewed and analyzed: (i) the terms of the
Merger Agreement; (ii) financial and operating information with respect to the
business, operations and prospects of MDLD furnished to us by MDLD; (iii) the
historical stock prices and trading history of the MDLD Common Stock; (iv) a
comparison of the financial terms of the Merger Agreement with certain other
transactions which we deemed relevant; (v) the financial and stock market
information of selected publicly-traded companies which we deemed comparable to
MDLD; (vi) certain other factors, including the proposals and responses, as
communicated to us, that resulted from the discussions that MDLD management and
its other financial advisor held with various potential acquirors and investors;
and (vii) certain publicly available information on Progressive, including the
1995 Annual Report, the 1995 Annual Report on Form 10-K, the Quarterly Report on
Form 10-Q for the period ended September 30, 1996, news releases and research
reports. In addition, we held discussions with the management of MDLD concerning
its business, operations, assets, present conditions and future prospects and
undertook such other studies, analyses and investigations as we deemed
appropriate.
<PAGE> 93
We have relied upon the accuracy and completeness of the financial and
other information used by us in arriving at our Opinion without independent
verification, and have further relied upon the assurances of management of the
Company that they are not aware of any facts that would make such information
inaccurate or misleading. In arriving at our Opinion, we have not conducted a
physical inspection of the properties or facilities of the Company. We have not
made or obtained any evaluations or appraisals of the assets or liabilities of
the Company. We have relied as to all legal matters on advice of counsel to the
Company. Our Opinion is necessarily based upon market, economic and other
conditions as they exist and can be evaluated as of the date of this letter.
We have acted as one of the financial advisors to the Company, although we
did not participate in the discussions or negotiations leading up to the Merger
or to the terms and conditions of the Merger Agreement. We will receive a fee
for our services which will be paid upon the delivery of this Opinion. In
addition, the Company has agreed to indemnify us for certain potential
liabilities arising out of the rendering of this Opinion.
Based upon and subject to the foregoing, we are of the opinion as of the
date hereof that, from a financial point of view, the Consideration to be
received by the Company's shareholders in the Merger is fair to such
shareholders.
This Opinion is for the use and benefit of the Board of Directors of the
Company and the Company's shareholders and shall not be disclosed publicly or
made available to, or relied upon by, any third party without our prior
approval, except that: (i) this Opinion may be filed with the Securities and
Exchange Commission as an exhibit to the proxy statement being filed by the
Company in connection with the Merger; and (ii) this Opinion may be described
in, and a copy hereof may be annexed to, the proxy statement to be circulated to
the shareholders of the Company in connection with the Merger. This Opinion is
not intended to be and does not constitute a recommendation to any shareholder
as to how such shareholder should vote with respect to the Merger.
Very truly yours,
THE ROBINSON-HUMPHREY COMPANY, INC.
<PAGE> 94
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 Commission file number 0-20754
MIDLAND FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
TENNESSEE 62-1104818
(State of Incorporation) (I.R.S. Employer Identification No.)
825 CROSSOVER LANE, SUITE 112
MEMPHIS, TENNESSEE 38117
(address of principal executive offices) (Zip Code)
Registrants telephone number including area code: (901) 680-9100
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK (NO PAR VALUE)
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [ X ] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
As of March 22, 1996 there were 5,546,522 shares of Common Stock outstanding.
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the registrant (3,956,092 shares) as of March 22, 1996, was
$47,473,104 based on the closing sale price of $12.00 per share on the Nasdaq
National Market System on that date.
================================================================================
<PAGE> 95
PART I.
ITEM 1. BUSINESS
BACKGROUND
The Company, through Midland Risk Insurance Company and Specialty Risk Insurance
Company, its wholly owned property and casualty insurance subsidiaries,
specializes in the underwriting and marketing of non-standard automobile
insurance to individuals. To a lesser extent, the Company also insures
commercial automobile and related risks and coastal dwellings and provides
automobile insurance for individuals who file for protection under Chapter 13 of
the Bankruptcy Code through its Auto 13 program.
The Company markets its products through six Company-owned and three
non-Company-owned general agencies utilizing over 8,500 independent agencies
located in 20 states, primarily in the southern and western United States.
Management believes that the Company's relationship with the general agencies
and independent agencies has been an important factor in the Company's growth
during the last five years.
Gross premiums written in states where the Company currently writes insurance
policies are as follows:
<TABLE>
<CAPTION>
Gross Premiums Written
Year Ended December 31,
-------------------------------------------------
1995 1994 1993
------- ------- ------
<S> <C> <C> <C>
Alabama $ 4,775 $ 3,368 $ 2,858
Arizona 28,371 26,514 21,061
Arkansas 17,164 2,958 1,564
California 39,365 24,180 21,386
Florida 29,819 28,200 12,929
Georgia 8,895 9,843 4,599
Illinois 3,637 7,603 610
Indiana 2,244 -- --
Louisiana 17,419 15,184 16,025
Mississippi 4,761 889 --
Oklahoma 1,457 249 --
Oregon 6,654 2,467 38
South Carolina 1,598 1,864 2,980
Tennessee 22,630 10,747 6,325
Texas 5,871 3,743 3,843
Other 1,976 311 974
------- ------- ------
Total direct 196,636 138,120 95,192
Reinsurance Assumed 13,570 14,284 6,275
------- ------- ======
Total $210,206 $152,404 $101,467
======= ======= =======
</TABLE>
The following table sets forth the premiums net of reinsurance by line of
business for the periods indicated.
<TABLE>
<CAPTION>
Net Premiums Written
-------------------------------------------------------------------------------------------
1995 1994 1993
----------------------------- ----------------------------- ------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Lines of business:
Non-standard automobile
Personal(1) $139,549 81.4% $122,810 81.3% $65,388 85.1%
Commercial 28,239 16.4 24,457 16.2 9,533 12.4
Commercial
multi-peril 2,295 1.3 1,913 1.3 323 .4
Dwelling 1,599 .9 1,759 1.2 1,513 2.0
Other 151 -- 107 -- 62 .1
-------- ----- -------- ----- ------- ------
Total $171,833 100.0% $151,046 100.0% $76,819 100.00%
======== ===== ======== ===== ======= ======
</TABLE>
- ---------------------
(1) Includes net premiums written in the Company's Auto 13 program.
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<PAGE> 96
A typical policyholder of the Company seeks minimum limits of liability ranging
from $25,000 to $50,000 (depending upon state regulations), with a policy term
of either six months or 12 months, and is from 25 to 55 years of age. Premiums
for such insurance are typically higher per dollar of coverage than premiums for
standard or preferred risks. Typically, the Company's insureds have fewer assets
which they desire to protect than persons who buy standard or preferred
policies.
STRATEGY
Non-standard Personal Automobile
During the latter part of 1993 and the early part of 1994, the Company began
expanding its full coverage personal automobile products in the southeastern and
south central part of the United States. During the latter part of 1994 and
early 1995, it expanded those same products to the western part of the United
States, including two of its historically more profitable states -- Arizona and
California. The expansion in the western part of the country was accomplished by
attracting full coverage risks using transfer and multi-car discounts. In
addition, the Company was recognized as the endorsed automobile insurance
carrier for a large association of agents in the state of California. The
expansion of full-coverage risks in the western United States, particularly in
Arizona and California, occurred during an inadequate pricing cycle for physical
damage and related coverage. In addition, the Company experienced adverse
selection from certain association agents in favor of more potentially
profitable contracts with other insurance carriers. As a result of these actions
the Company incurred significant losses during the third and fourth quarters of
1995. These losses were further accentuated by a claims operation that was not
equipped to handle the increase in claims frequency.
The Company has refocused on its core business. It has also instituted
additional underwriting practices and very restrictive guidelines, including
certain prescreening techniques for all new business risks and, particularly,
full coverage risks. It has filed for and received necessary rate increases in
its major markets, except for California where it ceased writing new risks with
physical damage exposure effective October 1, 1995, until such time as its rate
filing is approved. The California rate filing has been submitted and it is
anticipated to be effective May 1996.
Commercial Automobile
The Company has written automobile and other related risks on small commercial
accounts since 1991. This commercial business represented 17.7%, 17.5% and 12.8%
of net premiums written for the years 1995, 1994 and 1993, respectively. Due to
competitive pricing and consequently a deterioration of loss ratios, the Company
made a decision to eliminate certain of its commercial programs in Illinois and
Texas in 1995. These programs generated premiums written of approximately $10
million in 1995. These eliminations are expected to lower the 1996 premium
volume on commercial accounts by approximately 30%.
Operations
The Company operates through six Company-owned and three non-Company-owned
general agency offices. During 1996, the six Company-owned offices will be
consolidated into three regional offices to provide for economies of scale while
continuing the Company's strategy of decentralization. The Company has developed
its operations by acquiring knowledgeable key personnel in local markets where
it operates. These key personnel will be consolidated into the regional offices
to provide management depth.
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<PAGE> 97
NON-STANDARD AUTOMOBILE INSURANCE
General
The personal and commercial non-standard automobile insurance markets consist of
drivers who are unable to obtain coverage from standard carriers due to
undesirable or unverifiable prior driving records, no prior insurance, poor
claims experience, a desire to purchase minimum limits of liability or other
underwriting criteria or market conditions. Generally, these individuals have
fewer assets to protect than insureds who purchase standard or preferred
policies. Premium levels for non-standard risks are substantially higher than
for standard or preferred risks. The Company focuses its sales efforts primarily
on individuals and until mid-1994 priced its products toward liability only
business. The Company has traditionally been competitive for individuals who
have histories of safe driving but require non-standard automobile insurance for
other reasons. In mid-1994, with its move to more full coverage risks, the
Company believes it became more competitive for a broader range of insureds and,
consequently attracted many first-time full coverage buyers as well as many
risks with undesirable insurance and credit histories. This situation, coupled
with what the Company believes to be an inadequately priced market in general,
resulted in a net loss of $10.1 million for the Company during 1995.
The Company believes that opportunities for insurers to write non-standard
automobile insurance are influenced by many factors, including compulsory state
insurance laws, market conditions for standard automobile insurance and state
assigned risk or other residual market plans. The Company believes the
non-standard automobile market has grown during the last five years primarily
due to regulatory changes mandating insurance in certain states and due to
standard carriers exiting certain markets. The Company also believes industry
premium growth in the immediate future will be influenced to a greater extent by
rate increases than in the past five years, due to a recent deterioration of
results for nonstandard automobile carriers which it considers to be its peers.
The Auto 13 Program
The Company offers automobile insurance to individuals who file for protection
(personal reorganization of debt) under Chapter 13 of the United States
Bankruptcy Code. The Auto 13 program provides physical damage coverage only. The
Company underwrites the Auto 13 program as a class of risks on a jurisdiction by
jurisdiction basis, rather than utilizing the underwriting criteria described
elsewhere herein. This coverage protects a creditor's security interest in a
Chapter 13 debtor's automobile and eliminates court hearings to repossess
automobiles for lack of insurance, affording judges and trustees time for other
matters. Unlike its other products, the Company markets its Auto 13 program
directly to bankruptcy judges and trustees for blanket applications to
appropriate Chapter 13 debtors rather than to individuals. During the period
that an individual debtor is in reorganization pursuant to a bankruptcy
court-approved plan of reorganization, the Company's program provides automobile
physical damage insurance for the debtor in accordance with a policy approved by
the bankruptcy trustee and the bankruptcy court. This enables the debtor to
continue employment in order to satisfy the debtor's obligations under the
approved plan. The Company believes that its Auto 13 program is the only one of
its kind in the United States.
MARKETING
The Company began to focus on the non-standard personal automobile market in
1988. Gross premiums written have grown from $27.7 million in 1991 to $210.2
million in 1995 due to the Company's expansion into selected states. The Company
expanded by attracting key personnel in targeted states. Such personnel had
numerous agency and other relationships and years of experience in their
respective markets.
The Company markets its non-standard automobile products through six
Company-owned and three non-Company-owned general agencies utilizing over 8,500
independent agencies in 20 states located primarily
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<PAGE> 98
in the southern and western regions of the United States. The general agencies
owned by the Company are presently being consolidated into three regional
offices of the Company. The three independent general agencies produce
approximately 15% of the Company's premium volume.
Because independent insurance agencies have significant influence over which
insurance company will write insurance policies for their customers, management
views its approximately 8,500 independent insurance agencies as the primary
customers of the Company. Both the general agencies and in turn the independent
agencies are compensated based on a fixed percentage of the premiums written.
During 1995, the Company terminated its relationship with a number of
independent agents, primarily in California, due to the elimination of its full
coverage programs. Several marginal or unprofitable agents were also terminated.
The Company's objective is to be a competitive provider of non-standard
automobile insurance while providing superior service to both agents and
insureds. This objective is largely accomplished through maintenance of good
agent and client relationships and computerization of certain marketing,
underwriting and control and administrative functions. Cost-effective automation
allows the Company to write a greater volume of non-standard automobile business
without significantly increasing administrative expenses and provides a system
for expeditious policy and claims processing.
Set forth below is a comparison of the statutory combined ratios of the Company
with the industry average for the periods indicated.
<TABLE>
<CAPTION>
Statutory Combined Ratios
Year Ended December 31,
------------------------------------------------------------------------
1995 1994 1993
------------------------ ------------------------ -------------
<S> <C> <C> <C>
The Company 111.5 96.3 93.7
Industry average(1) 104.0 108.7 102.7
</TABLE>
- -----------------------
(1) Source: Insurance Services Office, Inc. statistical data for property
and casualty insurance companies. Latest available industry data for
1995 is as of September 30, 1995.
The Company offers both liability and physical damage coverages in the
non-standard automobile insurance market with policies having terms of six or 12
months. The Company offers primarily statutory limits of liability coverage
which vary from state to state, but generally are no more than $25,000 per
person and $50,000 per accident for bodily injury, and in the range of $10,000
to $20,000 for property damage. The commercial and coastal dwelling programs of
the Company provide property and liability limits of up to $1,000,000.
The Company selects the states in which it does business and into which it plans
to expand based on several criteria in a given state, including the size of the
non-standard automobile insurance market, loss results, competition and
regulatory climate. In 1995, the Company expanded its writings in all its major
markets. Premium writings in Arkansas grew significantly in 1995, due to the
appointment of an independent general agent effective January 1, 1995. Premium
volume in Tennessee more than doubled in 1995 due to increased market
penetration by a Company-owned general agency opened in mid-1994. In addition,
the Company expanded into Indiana, Kentucky, and Nevada during 1995. During
1996, the Company intends to reduce its overall premium writings by 20-30% due
to the elimination of certain full coverage personal automobile programs, the
termination of certain agents in late 1995, rate increases it has implemented or
anticipates seeking in 1996, and due to the elimination in 1995 of certain of
its commercial programs, which had become unprofitable. The Company expects
growth in 1996 in certain states as its offices further penetrate the markets,
but this is expected to be more than offset by the effects of the above factors
in other states. Funds
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<PAGE> 99
necessary for the operation of the Company's business will be provided by
operations, which the Company believes will be adequate through the end of 1996.
The Company utilizes and continually enhances industry specific computer
software that provides its general and independent agencies with rating
capability and allows the Company to deliver prompt service while ensuring
consistency in underwriting and controls. The general agencies, and in certain
markets independent agents, have the authority to bind insurance coverages in
accordance with procedures established by the Company. The Company reviews all
coverages bound by the agents promptly and decides whether to accept the
insurance as quoted. Because it has established clear underwriting procedures
and guidelines and promptly reviews the underwriting decisions agents have made,
the Company considers the risk in granting agents binding authority minimal.
REINSURANCE
Effective September 30, 1995, the Company entered into a 30% quota share
reinsurance agreement with Kemper Reinsurance Company covering its personal
automobile programs. Kemper Reinsurance is rated A- by A.M.Best. Through excess
of loss reinsurance, the Company limits its retention on any one risk to $87,500
for personal and $375,000 for commercial risks. The Company's reinsurers under
its excess of loss reinsurance agreements and their respective Best's ratings
are Constitution Reinsurance Corporation (A+), Christiana General Insurance
Corporation (A), Chatham Reinsurance Corporation (B++), Transatlantic
Reinsurance Company (A+), Gerling Global Reinsurance Corporation (A) and The
Mercantile and General Reinsurance Company of America (A-).
Reinsurance makes the assuming reinsurer liable to the extent of the reinsurance
ceded. However, in the event that reinsurance companies are unable to pay their
portion of the loss based on the coverage ceded, a ceding insurer such as the
Company would be responsible for the entire loss. Accordingly, the credit
worthiness of reinsurers is extremely important to the Company. The Company
believes that all amounts due from its reinsurers are collectible.
UNDERWRITING
The Company seeks to classify risks into narrowly defined segments by utilizing
all available underwriting criteria, including driving records of insureds,
class of driver, and type of automobile. The Company maintains an extensive
database which contains statistical records with respect to its insureds and
driving and repair experience by location, class of driver and type of
automobile. The Company utilizes many factors in determining its non-standard
automobile rates, including type, age and location of the vehicle, number of
vehicles per policyholder, number and type of driving violations or accidents,
deductibles, and where allowed by law, age, sex and marital status of the
insured. Management believes this database gives the Company the ability to be
more precise in the underwriting and pricing of its products.
The rate approval process varies from state to state. Most states permit the use
of the rates only after approval by its insurance department, while fewer states
allow the use of rates after only an informational filing.
The Company uses integrated computer software to automate its underwriting and
rating processes. The automated system screens insureds by comparing data on
policy applications with criteria pre-established by the Company at the point of
underwriting decisions, correctly rates and issues policies, and captures
appropriate statistics for necessary management information. The software system
is custom enhanced to address the specific requirements of the Company's target
business.
The Company also extends its automated system to its general and independent
agencies in various forms and levels of integration. Depending upon the degree
of automation used by an agency, the Company provides
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<PAGE> 100
services and support for automated binding, underwriting, and rating of risks
within the guidelines specified as acceptable for the Company's programs. These
services supply the agency with important and pertinent information about the
prospective insured, such as the motor vehicle operation record, credit
background and claims history. This enhances the agency's knowledge of the
Company's operations and aids in the efficient and accurate selection and
pricing of risks suitable for the target business of the Company.
CLAIMS
Insurance claims are typically investigated and settled by claims adjusters on
the Company's staff or affiliated with the Company. The Company currently has
approximately 140 staff and affiliated claims adjusters located in Arizona,
Florida, Louisiana, Tennessee and Texas, with average experience approximating
10 years. These adjusters settle approximately 98% of the Company's claims. The
claims policy of the Company emphasizes timely investigations, settlement of
meritorious claims for equitable amounts, adequate reserving for claims and
control of external claims adjusting expenses. The Company believes its history
of prompt and fair claims policy has demonstrated its commitment to servicing
its agents and insureds and has been a major factor in the growth of its
non-standard automobile and other insurance programs.
During 1995, the Company's California and Arizona claims operations were
consolidated into a regional claims office in Arizona. This move, coupled with
adverse development on full coverage programs in that region, created a
significant backlog of claims, a resulting disruption in responsiveness and
consequently increased loss and loss adjustment expenses on those programs. The
Company significantly increased its claims staff to accommodate the workload and
believes it has taken adequate measures to prevent a similar service problem
from recurring. The Company also believes it suffered no significant permanent
damage to its agency and insured relationships during the disruption of service,
due to its prior track record and due to its concentrated efforts to rectify the
problem.
Claims settlement authority levels are established for each adjuster or manager
based on such person's level of experience. Upon receipt, each claim is reviewed
and assigned to an adjuster based on its type, severity and class of insurance.
The claims department is responsible for reviewing the claim, obtaining
necessary documentation and establishing appropriate loss and expense reserves.
All claims in litigation are monitored by home office supervisors.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
Loss reserves are estimates of what an insurer expects to pay claimants. The
Company is required to maintain reserves for payment of estimated losses and
loss adjustment expenses ("LAE") for both reported claims (established for each
case) and losses estimated to have been incurred but which have not yet been
reported ("IBNR"). The Company's ultimate actual liability may be more or less
than current reserve estimates. The Company uses an independent actuary to
assist in determining loss reserves.
As to reported losses, reserves are established on either a case or formula
basis depending on the type and circumstances of the loss. Case reserve amounts
are determined based on the Company's reserving practices which take into
account the type of risk, the circumstances surrounding each claim and policy
provisions relating to types of loss. Formula reserve amounts are based on
historical paid loss data for similar claims with provisions for trend changes
caused by such factors as inflation. Loss reserves are reviewed on a regular
basis and as new data becomes available, estimates are updated and corresponding
adjustments are made to loss reserves. As to incurred claims that have not yet
been reported, loss and loss expense reserves are estimated based on many
variables, including historical and statistical information, inflation, legal
developments, economic conditions, general trends in claim severity and
frequency and any other factors which could affect the adequacy of loss
reserves. The Company uses two different methods for the purpose of establishing
its IBNR reserves, depending on the maturity of the line of business as to which
the reserve is being established. Those methods are the "loss ratio" method and
the "counts and averages" method. In
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<PAGE> 101
addition, the total loss reserves calculations make provisions for estimated
amounts recoverable from salvage and subrogation based on historical results of
the Company. The Company's IBNR reserves are reviewed quarterly by the Company,
and at least semi-annually by an independent actuarial firm. Historically, the
Company's IBNR reserves have been established based on amounts recommended by
the independent actuaries. During 1996, the Company plans to add an in-house
loss reserve actuary whose responsibilities will include determining its IBNR
reserves. Adjustments in aggregate reserves are reflected in the operating
results of the period during which such adjustments are made. Although
management uses many resources to calculate reserves, there is no precise method
for determining the ultimate liability. The Company does not discount loss
reserves for financial statement purposes. In addition, there are no significant
differences between GAAP and statutory reserves.
The following table presents information on changes in the reserve for losses
and loss expenses of the Company for the periods presented:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1995 1994 1993
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Reserve for losses and loss adjustment expenses
at beginning of year $ 56,858 $35,287 $ 16,711
Less reinsurance recoverables on unpaid losses
and loss adjustment expenses 6,880 13,634 9,590
-------- ------- --------
Net reserves for losses and loss adjustment expenses
at beginning of year 49,978 21,653 7,121
-------- ------- --------
Add:
Provision for losses and loss adjustment expenses occurring:
Current year 141,130 82,241 38,341
Prior years 10,973 2,070 287
-------- ------- --------
Total 152,103 84,311 38,628
-------- ------- --------
Less:
Loss and loss adjustment expense payments for claims occurring during:
Current year 73,493 39,542 17,334
Prior years 36,383 16,444 6,762
-------- ------- --------
Total 109,876 55,986 24,096
-------- ------- --------
Net reserve for losses and loss adjustment expenses
at end of year 92,205 49,978 21,653
Plus reinsurance recoverables on unpaid losses
and loss adjustment expenses 12,311 6,880 13,634
-------- ------- --------
Reserve for losses and loss adjustment expenses
at end of year $104,516 $56,858 $ 35,287
======== ======= ========
</TABLE>
The reinsurance recoverables on paid losses and loss adjustment expenses are
$4,854,000, $2,744,000 and $2,762,000 for 1995, 1994 and 1993, respectively.
The following table sets forth the development of Company reserves for unpaid
losses and loss adjustment expenses from 1985 through 1995. "Net liability for
losses and loss adjustment expenses" sets forth the estimated liability for
unpaid losses and loss adjustment expenses recorded at the balance sheet date
for each of the indicated years. This liability represents the estimated amount
of losses and loss adjustment expenses for claims arising in the current and all
prior years that are unpaid at the balance sheet date, including losses incurred
but not reported to the Company.
-8-
<PAGE> 102
The portion of the table labeled "Net liability reestimate as of" one year later
through ten years later shows the reestimated amount of the previously recorded
liability based on experience as of the succeeding year. The estimate is
increased or decreased as payments are made and more information becomes known
about the severity of still unpaid claims. For example, the 1985 liability has
developed a deficiency of $7,000 after ten years, in that reestimated losses and
loss adjustment expenses are expected to be more than the initial estimated
liability established in the 1985 financial statements.
The portion of the table labeled "Cumulative redundancy (deficiency)" shows the
cumulative redundancy or deficiency at December 31, 1995 of the reserve estimate
shown on the top line of the corresponding column. A redundancy in reserves
means that reserves established in prior years exceeded actual losses and loss
adjustment expenses or were reevaluated at less than the originally reserved
amount. A deficiency in reserves means that the reserves established in prior
years were less than actual losses and loss adjustment expenses or that the
actual losses and loss adjustment expenses were reevaluated at more than the
originally reserved amount.
The portion of the table labeled "Net Paid (cumulative) as of" one year later
through ten years later shows the cumulative loss and loss adjustment expense
payments made in succeeding years for losses incurred prior to the balance sheet
date. For example, the 1991 column indicates that as of December 31, 1995 the
Company had $2,549,000 paid of the currently reestimated ultimate liability of
$2,616,000 in loss and loss adjustment expenses. This implies that the December
31, 1995 estimate of the remaining liability for 1990 and prior years was
$67,000.
-9-
<PAGE> 103
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------------------------------------
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
------- -------- ------- -------- ------- --------- -------- ------- ------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net liability for losses and loss
adjustment expenses estimated
at 12/31 $150 $ 894 $627 $474 $ 848 $1,041 $2,259 $ 7,121 $ 21,653 $ 49,978 $ 92,205
Net liability reestimate as of:
One year later 187 1,137 642 502 848 1,104 2,129 7,408 23,722 60,951
Two years later 171 1,023 649 492 898 1,161 2,577 7,159 26,251
Three years later 157 905 645 487 838 1,307 2,628 7,593
Four years later 158 870 647 445 892 1,309 2,616
Five years later 158 870 624 445 864 1,196
Six years later 158 862 624 418 885
Seven years later 157 862 624 441
Eight years later 157 862 624
Nine years later 157 862
Ten years later 157
Cumulative redundancy
(deficiency) as of 12/31/95 $ (7) $ 32 $ 3 $ 33 $ (37) $ (155) $ (357) $ (472) $ (4,598) $ (10,973)
Net paid (cumulative) as of:
One year later 122 907 606 450 790 904 1,060 4,784 16,456 36,383
Two years later 157 862 633 474 841 934 2,168 6,685 22,419
Three years later 151 870 642 481 818 1,173 2,417 7,252
Four years later 158 870 641 445 874 1,175 2,549
Five years later 158 870 624 445 846 1,196
Six years later 158 862 624 418 870
Seven years later 157 862 624 441
Eight years later 157 862 624
Nine years later 157 862
Ten years later 157
Gross liability for losses and
loss adjustment expenses
estimated at 12/31 $16,711 $ 35,287 $ 56,858 $104,516
Reinsurance Recoverable 9,590 13,634 6,880 12,311
Net liability at 12/31 7,121 21,653 49,978 92,205
Liability reestimate as of:
One year later 18,002 38,735 69,737
Two years later 17,014 42,741
Three years later 17,499
Reestimated recoverable 9,906 16,490 8,786
Net reestimated liability 7,593 26,251 60,951
Gross Cumulative Deficiency 788 7,454 12,879
</TABLE>
The Company has experienced a cumulative loss reserve deficiency during the past
five years, primarily due to development on accident years 1994 and 1995 related
to full coverage personal automobile programs and to certain commercial programs
as more fully discussed under Part II, Item 7, "Management's Discussion and
Analysis of Financial Conditions and Results of Operation".
-10-
<PAGE> 104
INVESTMENTS
The Company's investment objectives are to produce an attractive total rate of
return after income taxes, but, at the same time, to protect and enhance
policyholders' capital and surplus on a long-term basis and to maintain adequate
liquidity for insurance operations. The Company's investment policy provides
that at least 50% of the Company's portfolio must be in fixed maturity
securities and no more than 25% of admitted assets can be invested in common
stocks. At December 31, 1995, 89% of the Company's portfolio consisted of
investment grade fixed maturity securities while the remainder consisted of
common stock which totalled 3% of the statutory admitted assets. In addition,
investments in individual securities are limited to a percent of policyholders'
capital and surplus, depending on the security's rating and the type of
security. Fixed maturity portfolio investments of the Company generally have an
effective maturity of three to ten years. At December 31, 1995, approximately 4%
of the fixed maturity investments were callable bonds. The Company retains an
outside investment advisor to manage its entire portfolio.
During September 1995, the Company management changed its intent with respect to
securities classified as held to maturity and reclassified all securities in its
held to maturity portfolio to available for sale.
Further information related to the investment portfolio is included in the Notes
to Consolidated Financial Statements.
A.M. BEST RATING
In February 1996, A.M. Best Company, Inc. lowered its ratings on both MRIC and
SRIC to B (Adequate), and placed the rating under review, pending the outcome of
the Company's proposed merger with Danielson Holding Corporation. See Item 14(b)
below. A.M. Best has indicated they view the proposed acquisition favorably and
they would expect to upgrade the rating to B+ if the transaction is consummated.
Conversely, Best has indicated the rating would be under significant downward
pressure if the transaction is not completed. Best's ratings, which range from
A++ (superior) to F (in Liquidation), are an independent opinion of a company's
financial strength and ability to meet its obligations to policyholders. They
are based on a comparative analysis of the financial condition and operating
performance of insurance companies as determined by their publicly available
reports.
REGULATION
The Company and its property and casualty insurance underwriting subsidiaries
("P&C Subsidiaries") are subject to the insurance laws and regulations of
Tennessee, the domiciliary state of the P&C Subsidiaries, and the laws and
regulations of the other states in which the P&C Subsidiaries are licensed to do
business. At present, the P&C Subsidiaries collectively are licensed to do
business as insurance companies ("admitted") in 20 states and are approved
non-admitted insurers in 12 states. The insurance laws and regulations, as well
as the level of supervisory authority that may be exercised by the various state
insurance departments, vary by jurisdiction, but generally grant broad powers to
supervisory agencies or state regulators to examine and supervise insurance
companies and insurance holding companies with respect to every significant
aspect of the conduct of the insurance business. These laws and regulations
generally require insurance companies to maintain minimum standards of business
conduct and solvency, meet certain financial tests, file certain reports with
regulatory authorities, including information concerning their capital
structure, ownership and financial condition, and require prior approval of
certain changes in control of domestic insurance companies and their direct and
indirect parents and the payment of extraordinary dividends and distributions.
In addition, these laws and regulations require approval for certain
intercompany transfers of assets and certain transactions between insurance
companies and their direct and indirect parents and affiliates, and generally
require that all such transactions have terms no less favorable than terms that
would result from transactions between parties negotiating at arm's length.
Further, many states have enacted laws which restrict an insurer's underwriting
discretion, such as the ability to terminate policies, terminate agents or
reject insurance coverage
-11-
<PAGE> 105
applications. These laws may adversely affect the ability of insurance
companies, including the Company, to earn a profit on its underwriting
operations.
Each P&C Subsidiary is required to file quarterly and annual statutory financial
statements in each jurisdiction in which it is licensed, and is subject to
single and aggregate risk limits and other statutory restrictions concerning the
types and quality of investments and the filing and use of policy forms and
premium rates. Additionally, the P&C Subsidiaries' accounts and operations are
subject to periodic examination by the Tennessee Commissioner of Commerce and
Insurance and by other state insurance regulatory authorities. The Tennessee
Commissioner of Commerce and Insurance is presently performing a regular
examination of the P&C Subsidiaries for the four years ended December 31, 1994,
further described in Note 12 to Notes to Consolidated Financial Statements.
The Tennessee insurance laws and regulations, including insurance holding
company laws, impose restrictions on the amount of dividends that may be paid by
the P&C Subsidiaries. As a result of these laws and regulations, the maximum
amount of dividends that a P&C Subsidiary may pay at any point in time without
prior regulatory approval is the greater of (a) 10% of the statutory
policyholders' surplus of such P&C Subsidiary as of the preceding December 31,
or (b) the net income of such P&C Subsidiary for the preceding calendar year,
less the amount of dividends paid during the preceding 12 months.
Most states have enacted legislation regulating insurance holding companies such
as the Company. The insurance holding company laws and regulations vary by
state, but generally require an insurance holding company and its insurance
company subsidiaries licensed to do business in the state to register and file
certain reports with the regulatory authorities, including information
concerning capital structure, ownership, financial condition, certain
intercompany transactions and general business operations. State holding company
laws also require prior notice or regulatory agency approval of direct or
indirect changes in control of an insurer or its holding company and of certain
material intercompany transfers of assets within the holding company structure.
Tennessee insurance laws and regulations provide that no person may acquire
control of the Company, and thus indirect control of the P&C Subsidiaries,
without obtaining the prior approval of the Tennessee Commissioner of Commerce
and Insurance. Any purchaser of 10% or more of the voting stock of an insurance
holding company is deemed to have acquired control of that company and is
required to obtain the approval of the Tennessee Commissioner of Commerce and
Insurance before consummating such purchase.
Most states in which the P&C Subsidiaries transact business have guaranty fund
laws pursuant to which insurers doing business in such states are assessed by a
state insurance guaranty association in order to fund liabilities to
policyholders and claimants of insolvent insurance companies. Assessments are
based on an insurer's writings in relation to the writings of all guaranty fund
participants. Assessments have not been material to the Company.
An insurer's profitability may also be adversely affected by court decisions.
Premium rates are established using actuarial methods in order to permit an
insurer to earn an underwriting profit. A court decision may undermine or change
the assumptions used in the analysis so as to impact the projected level of
profitability.
In expanding its operations into additional states, the Company is selective. It
carefully considers the legislative and regulatory environment in each state
before commencing operations and will not do business in states where the
climate is not conducive to the operation of its business.
In December, 1993, the NAIC approved a model Risk-Based Capital formula for
determining Risk-Based Capital requirements for property and casualty insurers.
MRIC and SRIC have capital in excess of any regulatory action or reporting
level.
-12-
<PAGE> 106
For the year ended December 31, 1995, MRIC and SRIC failed certain NAIC
Financial Ratios from the Insurance Regulatory Information System ("IRIS") as
follows:
MRIC
- Two Year Overall Operating Ratio of 103% exceeded the usual range of
<100%, due to adverse loss experience described elsewhere herein.
- Investment Yield of 4.2% was less than the lower end of the usual
range (4.5%) due to MRIC's classification of its equity ownership in SRIC as
common stock and due to a significant concentration in tax preferential
securities.
- Liabilities to Liquid Assets of 106% was slightly above the upper
usual range of 105%, due to substantial increases in the year end reserves for
Incurred But Not Reported Losses. This test measures total liabilities against
invested assets, but excludes premiums and agents' receivable balances.
- Agents' Balances to Surplus of 54% exceeds the usual range of <40%
due to a significant balance of receivables on direct bill policies. These are
offset by a liability for unearned premiums which is not considered in the
calculation.
SRIC
- Change in Net Writings of 63% exceeded the usual upper range limit of
33% due to expansion of the Company's programs in Tennessee in 1995, as
described elsewhere herein. Net premiums to surplus ratio, however, of 2.16 to
1, indicating the Company is not excessively leveraged at current premium
levels.
- Investment Yield of 4.5% equalled the minium range of 4.5% due to a
significant increase in invested assets in mid-1995 and due to a concentration
in tax preferential securities.
- Agents' Balances to Surplus of 47% exceeds the usual range of <40%
due to significant direct bill premiums receivable which are offset by
liabilities for unearned premiums.
These results are reviewed by the NAIC and the Company anticipates being placed
on the NAIC watch list.
RESIDUAL MARKETS
Many states require that companies writing private passenger automobile
insurance in that state participate in a residual market mechanism. Although
regulations vary by state, residual market mechanisms are generally designed to
provide insurance coverage for consumers who are unable to obtain insurance in
the voluntary automobile insurance market. In some states, companies participate
in the administration, profit and/or loss associated with those consumers'
policies to the extent provided by state regulations. In other states, assigned
risk pools are utilized. Assigned risk pool insureds are assigned on a rotating
basis to automobile insurers based on the individual insurer's share of the
total automobile insurance market for that state. Insurers then issue and
service those individual insurance risks assigned to them and accept the profit
or loss for those policies. Residual markets have not had a material effect on
the business or results of operations of the Company.
COMPETITION
The Company competes in each state in which it operates for both agents and
insureds with both large national underwriters and smaller regional companies.
Certain of these competitors are larger and have greater financial resources
than the Company. The non-standard automobile insurance business is price
-13-
<PAGE> 107
sensitive and certain competitors of the Company have, from time to time,
decreased their prices in an attempt to gain market share. Management believes
that the Company's prices are generally competitive, but the Company competes
primarily on the basis of underwriting criteria and superior service to its
agents and insureds for drivers with histories of safe driving purchasing
non-standard automobile policies.
EMPLOYEES
At December 31, 1995 the Company employed a total of 424 employees. The Company
is not a party to collective bargaining agreements and management believes
employee relations are excellent.
ITEM 2. PROPERTIES
The corporate headquarters of the Company are located in Memphis, Tennessee,
where the Company leases approximately 32,000 square feet of office space. The
Company-owned general agencies are located in Phoenix, Arizona, Mission Viejo,
California, Shreveport, Louisiana, Dallas, Texas, Portland, Oregon, and
Nashville, Tennessee. These offices occupy an aggregate of approximately 100,000
square feet of leased office space. The Company also leases several small Auto
13 service offices. The Company owns no real properties and believes that its
leased facilities are adequate for its needs.
ITEM 3. LEGAL PROCEEDINGS
In August 1994, the Company and three of its wholly owned subsidiaries were
named in a civil lawsuit on behalf of two Chapter 13 debtors and as putative
representatives of a plaintiff's class challenging the validity of the Chapter
13 automobile insurance program in Alabama. The plaintiffs sought certification
of a class, a declaration that the insurance policies violate Alabama statutes,
a permanent injunction against further implementation of the Chapter 13
automobile insurance program in Alabama, and reimbursement of premiums received
by the Company under the Chapter 13 automobile program in Alabama. The Company
and its subsidiaries denied the material allegations of the complaint and were
awarded Dismissal by Summary Judgement in August 1995. The plaintiffs filed a
motion for reconsideration which was denied in October 1995. The plaintiffs have
appealed this determination and no decision has been rendered to date.
In May 1995, the Company, one of its officers and one of its subsidiaries were
named in a wrongful termination lawsuit by a former employee. The matter is in
the discovery stages. Management believes that it had valid cause for the
dismissal of this employee and will vigorously defend the case. Management
believes that the resolution of this matter will not have a material impact on
the Company's operations.
The Company and its subsidiaries are involved in asserted claims in the normal
course of business. Management believes the outcome of these matters in the
aggregate will not have a material adverse effect on the consolidated financial
statements of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 1995 to a vote of
security holders.
-14-
<PAGE> 108
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock trades on the Nasdaq National Market under the symbol
"MDLD." At March 22, 1996, the Company had approximately 2,600 shareholders,
including beneficial owners holding shares in nominee or "street name."
The table below sets forth the high and low stock prices, as well as dividends
declared on common stock, for the two-year period ended December 31, 1995:
<TABLE>
<CAPTION>
QUARTER ENDED: High Low Dividends Declared
----------------- ---------------- -------------------
1994
<S> <C> <C> <C>
March 31............................................. $23 3/4 $18 3/4 $--
June 30.............................................. 22 1/2 18 1/2 --
September 30......................................... 24 1/4 20 3/4 .05
December 31.......................................... 24 14 .05
1995
March 31............................................. 18 3/4 14 3/4 .05
June 30.............................................. 19 17 1/2 .05
September 30......................................... 19 1/2 9 .05
December 31.......................................... 12 1/2 8 1/8 .05
</TABLE>
As of March 22, 1996 market makers in the Company's common stock included:
Bear, Stearns & Co., Inc.; Herzog, Heine, Geduld, Inc.; Loeb Partners
Corporation; Morgan Keegan & Company, Inc.; Raymond James & Associates, Inc.;
Sherwood Securities Corp.; Stephens, Inc.
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS EXCEPT PER SHARE DATA).
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------
1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- -----------
STATEMENT OF INCOME DATA:
<S> <C> <C> <C> <C> <C>
Gross premiums written $210,206 $152,404 $101,467 $60,927 $27,671
Net premiums written 171,833 151,046 76,819 24,748 12,492
Premiums earned 172,394 118,218 55,272 20,571 11,878
Total income 193,046 131,486 64,509 25,137 12,071
Net income (loss) (10,071) 7,925 7,068 2,929 1,116
Net income (loss) available to
stockholders (10,071) 7,925 7,068 1,628 994
Net income (loss) available to
stockholders (1.88) 1.45 1.34 .56 .64
Cash dividend per share .20 .10 -- .09 1.3
Weighted average shares outstanding 5,369 5,477 5,305 2,900 1,613
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------
1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- -----------
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Total investments, cash and
equivalents $174,803 $165,895 $102,987 $49,483 $13,364
Total assets 283,531 221,820 148,708 76,315 20,630
Notes payable and other debt 27,000 40,000 20,000 286 1,128
Mandatorily redeemable preferred
stock -- -- -- -- 4,805
Stockholders' equity 48,845 57,794 50,620 39,880 6,480
Book value per share 9.06 10.81 9.57 9.18 4.40
SELECTED GAAP RATIOS:
Loss ratio 88.2% 71.3% 69.9% 69.2% 62.3%
Expense ratio 26.8 25.1 23.4 23.0 29.5
-------- ------- ------- ------ -------
Combined ratio 115.0% 96.4% 93.3% 92.2% 91.8%
======== ======= ======= ====== =======
</TABLE>
-15-
<PAGE> 109
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS.
The information presented in this discussion and analysis is on the basis of
generally accepted accounting principles ("GAAP")
RESULTS OF OPERATIONS
Year Ended December 31, 1995 compared to the Year Ended December 31,1994
For the year ended December 31, 1995, the Company reported a $10.1 million net
loss. This loss resulted from adverse claims development primarily in Arizona
and California personal automobile programs and to a lesser extent from certain
commercial automobile programs.
During 1994, the Company made a decision to expand its full coverage personal
automobile programs, particularly in two of its larger states, Arizona and
California, where it had previously written substantially liability only
coverage. This decision was based upon several factors, including: the Company
was experiencing a high cancellation rate and low retention rates on liability
only policies; the Company's competitors had reported underwriting profits from
full coverage business; the Company had been successful writing some full
coverage business in certain other states. However, this strategy proved costly.
Upon implementation of the expanded full coverage programs, the Company's
monthly premium volume increased slightly in Arizona, but doubled in California.
In 1995, gross premiums written in Arizona and California were $28.4 and $39.4
million, respectively. Gross premiums written in Arizona and California for 1994
were $26.5 million and $24.2 million, respectively. Both programs generated
sharply increased frequency and consequently, higher loss ratios on the full
coverage business. The increased frequency also presented a claims processing
backlog and consequently increased loss and loss adjustment expenses.
After extensive analysis, the Company concluded that it had attracted a
disproportionate share of insureds with undesirable insurance and credit
histories; market premium levels were inadequate; and in certain situations, the
Company's agents had adversely selected against it in favor of higher incentive
commissions from other carriers. Since identifying these problems, the Company
eliminated its full coverage programs in California and tightened controls over
full coverage in Arizona to more carefully select risks, and in addition,
terminated unprofitable agents. Enhanced underwriting procedures have been
implemented in all states in which the Company operates. In addition, rate
increases have been implemented in Florida, Georgia, Texas and Arizona and will
be implemented in California, Louisiana, Arkansas and Tennessee in early to mid
1996. These actions are expected to reduce the Company's personal automobile
premium writings by approximately 20% in 1996.
To provide additional management controls, the Company established an internal
audit department and a claims audit team in 1995; in early 1996 hired additional
pricing analysts, and a national market analyst; and also in 1996 plans to
continue to upgrade claims staff and hire a Chief Actuary for loss reserving.
The Company also experienced a deterioration in results related to its Illinois
commercial programs and made a decision in early 1995 to close that branch
office and terminate the Illinois program. Expenses associated with the closing
of that branch were approximately $1 million in 1995. Additionally, claims
experience on certain commercial programs in Texas deteriorated while pricing
became very competitive. The Company decided to eliminate those unprofitable
programs as well. Commercial premium writings are also expected to decrease in
1996, by approximately 30% due to these changes.
During 1995, the Company strengthened its prior year loss reserves by
approximately $11 million due to adverse development in both the commercial and
personal programs mentioned above and due to higher than anticipated loss
adjustment expenses. This adverse development was impacted by a processing
backlog in the western region claims office which occurred in the first half of
1995 related to the Arizona and California full-
-16-
<PAGE> 110
coverage programs. The Company believes it has adequately provided for the
development, as well as implemented greater controls and added sufficient claims
staff to prevent any further material adjustments to prior year reserves.
The Company's combined ratio has deteriorated during the last two years to 115%
in 1995; from 96.4% in 1994 and 93.3% in 1993. In 1994, this was due in part to
increased loss ratios but also to increased net acquisition costs caused by the
elimination of quota-share reinsurance January 1, 1994. For 1995, the Company's
loss ratio was significantly higher, at 88.2% versus 71.3% in 1994 due to
adverse experience in the current year as well as to the adverse development of
prior years. The expense ratio for 1995 increased to 26.8% compared to 25.1% in
1994 due to the write off of deferred acquisition costs associated with
discontinued programs and premium reserve deficiencies on certain continuing
lines of business together totaling approximately $5.4 million. These increased
acquisition costs were partially offset by ceding commissions the Company
received from a 30% quota share reinsurance program implemented as of September
30, 1995 for its personal automobile policies. This program was established with
Kemper Reinsurance Company and included a cession of in-force and unearned
premiums as of September 30, 1995.
Overall, the Company's gross premium volume for 1995 grew 38% to $210 million
and its net premium volume grew 14% to $172 million as compared to 1994. This
growth came primarily from California, due to the implementation of new full
coverage programs; from Arkansas, where the Company appointed a new general
agency in 1995; and from growth within Tennessee, where the Company opened a new
general agency office in mid-1994. This growth in volume also caused the
increase in policy fees in 1995 to $10.6 million from $6.5 million in 1994.
Investment income increased by 59% in 1995 as compared to 1994 due to the
investment of the $10 million obtained under the Company's credit facility and
due to the investment of operating cash generated in 1995. The value of the
Company's investment portfolio grew by $25.6 million to $162.3 million at
December 31, 1995, compared to $136.7 million at December 31, 1994.
Increases in loss and loss adjustment expenses were a result of the Company's
growth and the unusual matters discussed above.
While premiums earned increased by 46% in 1995 as compared to 1994, policy
acquisition costs increased by 60%. As noted above, the expense ratio also
increased in 1995. These increases were due to the writeoff of deferred policy
acquisition costs from discontinued programs and from premium reserve
deficiencies.
Operating expenses for 1995 increased significantly to $6.4 million, as compared
to $3.7 million for 1994, due to the Company's continued growth and due to
significant investments in information technology systems and marketing
programs.
Interest expense nearly doubled in 1995 due to the increase in average debt
outstanding related to the Company's bank credit facility.
Year Ended December 31, 1994 compared to the Year Ended December 31,1993
Gross premiums written increased by 50% to $152,404,000 in 1994 compared to
$101,467,000 in 1993. This growth came from several states, including Arizona,
California, Florida and Georgia. Net written premiums increased 97% to
$151,046,000 from $76,819,000 in the prior year, due to the growth in gross
premiums written, but also to the elimination of quota share reinsurance
effective January 1, 1994.
Commissions and policy fees increased 37% in 1994 to $6,491,000 from $4,748,000
in 1993, due to the growth in premium volume.
-17-
<PAGE> 111
Investment income in 1994 increased by 86% compared to 1993 due to the
investment of cash generated from operations, which benefitted by the
elimination of quota share reinsurance, and due to the investment of the
proceeds of the Company's $20 million credit facility. The Company was also able
to take advantage of rising interest rates with this newly invested cash as well
as cash generated from maturities in its investment portfolio.
Other income is derived from premium finance operations, which remained fairly
stable through 1994.
Losses and loss adjustment expenses increased by 118% to $84,311,000 from
$36,628,000 in 1993, due to the growth in premium volume and to the elimination
of quota share reinsurance. Also, as previously announced, the Company
experienced increased frequency which it attributed to heavy rains in most of
its major markets during October and November, 1994, increasing the loss ratio
to 80.7% for the fourth quarter, compared to 67.4% for the first nine months.
The loss ratio for the year was 71.3% compared to 69.9% in 1993.
Policy acquisition costs increased by 152% to $31,431,000 in 1994, compared to
$12,494,000 in 1993. This was directly attributable to the growth in premium
volume. The expense ratio increased to 25.1% in 1994 compared to 23.4% in 1993
due to the elimination of quota share reinsurance, which generated ceding
commission income to offset acquisition costs in prior years.
Interest expense increased to $970,000 in 1994 compared to $52,000 in 1993 due
to outstanding debt under the Company's credit facility through 1994.
The income tax rate for 1994 remained fairly constant at 27.3%, compared to
27.1% in 1993 due to the concentration of the Company's investment portfolio in
tax-preference securities.
LIQUIDITY AND CAPITAL RESOURCES
The operating cash requirements of the Company relate primarily to the payment
of claims, policy acquisition costs and operating expenses. Due to the nature of
risks the Company insures (but for acts of nature, as to which the Company
carries catastrophe reinsurance), the Company's liabilities can be estimated.
These liabilities generally develop and are resolved over a period of less than
three years. Therefore, the Company generally has a predictable schedule of cash
needs. The Company manages its investment activities to maintain adequate
liquidity for operating purposes and to protect its policyholders and
stockholders (i.e., "matching" of liquidity and cash requirements). The
Company's portfolio is heavily weighted toward intermediate fixed maturity
securities. The Company generally invests in investment grade securities and has
a policy of not acquiring real estate investments. Historically, the Company has
not experienced any "mismatches" related to liquidity management and none are
anticipated. At December 31, 1994, the Company's fixed maturity securities were
classified as held to maturity. During 1995, the Company's Investment Committee
made a decision to liquidate and reinvest the proceeds of certain of those
securities to take advantage of higher available yields. As a result, the
Company has reclassified the entire portfolio to available for sale and the
securities are carried at fair value at December 31, 1995. There are no
foreseeable requirements to liquidate any investments prior to their scheduled
maturities.
The Company's objective is to maintain a capital adequacy ratio based on the
industry standard of a maximum of 3:1. For the year ended December 31, 1995, the
capital adequacy ratio was 3:1, compared to 2.41:1 for 1994. During 1996, the
Company anticipates this ratio will decrease due to two factors. The Company
expects to write less premiums in 1996 as a result of its decision to eliminate
certain programs and due to rate increases already taken or anticipated to be
taken during 1996. Second, the Company will utilize its 30% quota share
reinsurance facility on its personal automobile programs throughout 1996. This
reinsurance was obtained effective September 30, 1995.
-18-
<PAGE> 112
The Company secured a $20 million permanent credit facility in December 1993,
which was utilized to expand underwriting capacity in 1994. This facility was
increased to $30 million in December, 1994, with the increase being utilized to
expand underwriting capacity during 1995. At September 30, 1995, the Company
defaulted on certain financial covenants contained in the related loan
agreement. The default was not cured prior to December 31, 1995. The loan
agreement was amended, including revised financial covenants, effective March 1,
1996. Under the terms of the restated loan agreement, the Company is not
required to pay principal until June 30, 1996, and quarterly thereafter through
June 30, 1998. Interest is payable quarterly. See Note 6 "Notes Payable" and
Note 15 "Subsequent Events" of Notes to Consolidated Financial Statements for
further discussion.
IMPACT OF INFLATION
Although the Company's results of operations have not been affected by
inflation, inflation can have a significant impact on property and casualty
insurers because premium rates are established before the amount of losses and
loss adjustment expenses are known. The Company attempts to anticipate increases
from inflation in establishing rates, subject to limitations imposed for
competitive pricing.
The Company considers inflation when estimating liabilities for losses and loss
adjustment expenses, particularly for claims having a long period between
occurrence and settlement. The liabilities for losses and loss adjustment
expenses are management's estimates of the ultimate net cost of underlying
claims and expenses and are not discounted for the time value of money. In times
of high inflation, the normally higher yields on investment income may partially
offset potentially higher claims and expenses.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1 of Notes to Consolidated Financial Statements for the impact of
recent accounting pronouncements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial Statements are included herein beginning on page 20.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no disagreements with the Company's independent accountants on
any matters of accounting principles or practices or financial statement
disclosures.
-19-
<PAGE> 113
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
------------------------------
1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and equivalents $ 12,479 $ 29,196
Investment securities (note 3):
Held to maturity:
Fixed maturities, at amortized cost
(fair value $122,953) -- 129,287
Available for sale:
Equity securities, at fair value
(cost $13,039 and $5,877 respectively) 13,408 5,533
Fixed maturities, at fair value
(amortized cost $146,637 and $1,981, respectively) 148,916 1,879
---------- ----------
Total investments 162,324 136,699
Receivables:
Agents and insureds 39,741 17,252
Premium finance contracts 365 1,523
Reinsurance - direct 17,165 9,624
- assumed 654 1,241
Prepaid reinsurance premium 21,207 561
Accrued investment income 2,296 2,244
Deferred policy acquisition costs 9,617 15,148
Equity investments in nonconsolidated companies 293 424
Furniture and equipment, at cost, net of accumulated
depreciation of $1,979 and $1,085, respectively 3,398 2,518
Notes receivable (note 9) 2,158 2,256
Deferred income taxes (note 7) 3,813 1,042
Income taxes recoverable 5,414 --
Other assets 2,607 2,092
---------- ----------
$ 283,531 $ 221,820
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses
(notes 4 and 5) $ 104,516 $ 56,858
Unearned premiums (note 5) - direct 77,311 55,901
- assumed 5,162 6,479
Due to reinsurers (note 5) 7,946 --
Notes payable (notes 6 and 15) 27,000 40,000
Other liabilities 12,751 4,788
---------- ----------
234,686 164,026
---------- ----------
Stockholders' equity (note 13):
Common stock, no par value. Authorized 50,000,000 shares;
5,389,022 and 5,344,222 shares issued, respectively 39,420 39,258
Additional paid-in capital 1,887 1,887
Retained earnings 5,796 16,943
Unrealized appreciation (depreciation) of
securities available for sale, net 1,742 (294)
---------- ----------
48,845 57,794
---------- ----------
Commitments and contingencies (notes 5, 10 and 11) $ 283,531 $ 221,820
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE> 114
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Dollars in thousands - except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1995 1994 1993
- -------------------------------------------------------------------------------------------------------------
INCOME:
<S> <C> <C> <C>
Premiums earned (note 5) $ 172,394 $ 118,218 $ 55,272
Policy fees 10,649 6,491 4,748
Investment income (note2) 9,258 6,190 3,330
Net realized investment gains (note 3) 578 42 698
Other income 167 545 461
----------- ----------- -----------
193,046 131,486 64,509
----------- ----------- -----------
EXPENSES:
Losses and loss adjustment expenses (notes 4 and 5) 152,103 84,311 38,628
Policy acquisition costs 50,070 31,431 12,494
Operating expenses 6,368 3,745 3,547
Interest 1,880 970 52
Amortization of intangible assets 135 129 106
----------- ----------- -----------
210,556 120,586 54,827
----------- ----------- -----------
Income (loss) before provision for
income taxes and equity interests (17,510) 10,900 9,682
Provision for income taxes (benefit)(note 7) (7,445) 2,980 2,620
----------- ----------- -----------
Income (loss) before equity interests (10,065) 7,920 7,062
Equity interests (6) 5 6
----------- ----------- -----------
Net income (loss) $ (10,071) $ 7,925 $ 7,068
=========== =========== ===========
PER SHARE DATA:
Net income (loss) $ (1.88) $ 1.45 $ 1.34
=========== =========== ===========
Weighted average common shares outstanding 5,369,461 5,477,666 5,305,824
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 115
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Common Stock
------------
Shares Additional Unrealized
issued and paid-in Retained appreciation
outstanding Amount capital earnings (depreciation) Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1992 4,346,123 $ 35,392 $ 1,887 $ 2,483 $ 118 $ 39,880
Net income -- -- -- 7,068 -- 7,068
Warrants exercised 872,505 3,429 -- -- -- 3,429
Options exercised 70,686 231 -- -- -- 231
Appreciation of
equity securities -- -- -- -- 12 12
--------- ---------- ---------- ---------- ---------- ----------
Balances at
December 31, 1993 5,289,314 39,052 1,887 9,551 130 50,620
Net income -- -- -- 7,925 -- 7,925
Cash dividends paid
($.10 per share) -- -- -- (533) -- (533)
Options exercised 14,000 46 -- -- -- 46
Warrants exercised 40,908 160 -- -- -- 160
Change in fair value
of securities available
for sale net of tax
of $231 -- -- -- -- (424) (424)
--------- ---------- ---------- ---------- ---------- ----------
Balances at
December 31, 1994 5,344,222 39,258 1,887 16,943 (294) 57,794
Net (loss) -- -- -- (10,071) -- (10,071)
Cash dividends paid
($.20 per share) -- -- -- (1,076) -- (1,076)
Options exercised 44,800 162 -- -- -- 162
Change in fair value
of securities available
for sale net of tax
of $1,058 -- -- -- -- 2,036 2,036
--------- ---------- ---------- ---------- ---------- ----------
Balances at
December 31, 1995 5,389,022 $ 39,420 $ 1,887 $ 5,796 $ 1,742 $ 48,845
========= ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 116
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands - except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1995 1994 1993
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (10,071) $ 7,925 $ 7,068
Adjustments to reconcile net income (loss)
to net cash provided by
operating activities:
Net realized (gains) losses on securities 3 (42) (698)
Gain on disposal of fixed assets (33) -- --
Depreciation 894 550 353
Amortization of intangibles 285 351 139
Amortization of discounts and premiums 529 673 264
Deferred taxes (3,828) (526) (249)
Changes in assets and liabilities:
Agent and insured receivables, net (22,489) (10,983) (2,089)
Reinsurance receivables (27,600) 12,826 (7,414)
Premium finance receivables 1,158 (716) (256)
Accrued interest receivable (52) (1,085) (545)
Deferred policy acquisition costs 5,531 (8,062) (5,541)
Other assets (868) (527) (677)
Unpaid losses and loss adjustment expenses 47,658 21,571 18,576
Unearned premiums 20,093 23,505 24,176
Due to reinsurers 7,946 (8) (2,246)
Other liabilities 7,461 430 1,582
Income taxes (5,854) 593 100
----------- ----------- -----------
Net cash provided by operating activities 20,763 46,475 32,543
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities and calls of securities-held to maturity 3,260 4,985 1,145
-available for sale 1,909 251 --
Sales of securities-held to maturity -- 3,160 13,820
-available for sale 15,274 5,720 --
Purchases of securities-held to maturity (29,356) (67,139) (42,824)
-available for sale (13,208) (7,884) --
Investments in nonconsolidated companies 131 (14) 572
Fixed asset additions (2,071) (1,414) (1,104)
Fixed asset disposals 329 -- --
Investment in insurance programs 68 (404) (342)
----------- ----------- -----------
Net cash used in investing activities (23,664) (62,739) (28,733)
----------- ----------- -----------
</TABLE>
23
<PAGE> 117
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable to banks 10,000 30,000 20,000
Note receivable from sale of equity investment 91 72 (405)
Notes receivable from others 7 (249) (1,674)
Proceeds from exercise of common stock warrants -- 160 3,429
Proceeds from issuance of common stock options 162 46 231
Repayment of debt (23,000) (10,000) (286)
Dividend to stockholders (1,076) (533) --
Payments received on notes from stockholders -- -- 94
Net cash provided by (used) in financing activities (13,816) 19,496 21,389
----------- ----------- -----------
Net increase (decrease) in cash and equivalents (16,717) 3,232 25,199
Cash and equivalents:
Beginning of year 29,196 25,964 765
----------- ----------- -----------
End of year $ 12,479 $ 29,196 $ 25,964
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 1,378 $ 936 $ 4
Income taxes 2,225 2,739 3,020
Noncash investing and financing activities:
Transfers to securities available for sale 149,190 -- --
Unrealized gain (loss) on securities available for sale 3,094 (655) --
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 118
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Midland
Financial Group, Inc. (the "Company") and its subsidiaries, except Agents'
Financial Services, Inc. a 40% owned affiliate ("AFS"). The Company's
investment in AFS is carried at cost plus its equity in the undistributed
earnings since date of acquisition. All significant intercompany transactions
have been eliminated.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the period then ended.
Material estimates that are particularly susceptible to significant change in
the near term relate to the determination of the liability for unpaid loss and
loss adjustment expense and the recoverability of deferred policy acquisition
costs. In connection with the determination of these items, management uses
actuarial projections, historical data and current business conditions to
formulate estimates, including assumptions related to the ultimate cost to
settle claims. These estimates by their nature are subject to uncertainties for
various reasons. The Company's results of operations and financial condition
could be adversely affected should the ultimate payments required to settle
claims be materially in excess of the reserves currently provided.
NATURE OF OPERATIONS
The Company writes non-standard personal automobile insurance and commercial
automobile insurance for small businesses through six Company-owned and three
independent general agencies. These general agencies market the Company's
products through approximately 8,500 independent insurance agents in 20 states,
primarily in the southeastern and southwestern regions of the United States.
During 1995, the Company wrote a significant amount of business in Arizona,
California and Florida representing 13%, 19% and 14%, respectively, of gross
written premiums.
The nature of the non-standard automobile insurance business is such that the
Company can from time to time, experience abnormally high levels of claims
payouts in the event of unusual weather and other conditions, such as heavy
rain, hail, wind storms and flooding. The Company utilizes both quota share and
excess of loss reinsurance coverage and catastrophic reinsurance options to
limit its exposure on these risks.
Increasing public interest in the availability and affordability of insurance
has prompted legislative, regulatory and judicial activity in several states.
This includes efforts to contain insurance prices, restrict underwriting
practices and risk classifications, mandate rate reductions and refunds and
generally expand regulation affecting the insurance industry. These regulatory
and judicial activities could impact the Company's premium volume.
The Company manages its credit risk on its investment securities by
maintaining a highly-diversified investment portfolio with limited
concentrations in any given region or industry. Interest rate risk is managed
through a combination of highly liquid debt instruments purchased with an
original maturity of three months or less or fixed maturity securities with an
average contractual maturity of approximately 5 years.
PREMIUMS AND POLICY FEES
Premiums, net of amounts ceded to reinsurers, are recognized as income
ratably over the terms of the policies. Unearned premiums represent premiums
applicable to the unexpired terms of the policies.
The Company operates six general agencies which receive non-refundable fees
for processing policy applications. Such income is recognized when the effort is
completed, generally in the month received.
25
<PAGE> 119
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reinsurance
In the normal course of business, the Company seeks to reduce the loss that
may arise from catastrophes or other events that cause unfavorable underwriting
results by reinsuring certain levels of risk in various areas of exposure with
other insurance enterprises or reinsurers. Amounts recoverable from reinsurers
are estimated in a manner consistent with the claim liability associated with
the reinsured policy.
Deferred Policy Acquisition Costs
The costs of selling policies (principally commissions and premium taxes) are
deferred and reduced by the amount recovered from reinsurers through ceding
commissions. The net acquisition costs deferred are amortized to expense over
the periods in which the related premiums are earned. In addition, during 1995,
the Company wrote off approximately $5.4 million of these costs related to
premium reserve deficiencies. Anticipated losses and loss adjustment expenses
and investment earnings, based on past experience, are considered in determining
the recoverable acquisition costs to be deferred.
Net deferred policy acquisition costs were (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of period $ 15,148 $ 7,086 $ 1,545
Acquisition costs deferred 44,539 39,493 18,035
Amortized to expense during the period (50,070) (31,431) (12,494)
----------- ----------- -----------
Balance, end of period $ 9,617 $ 15,148 $ 7,086
=========== =========== ===========
</TABLE>
Unpaid Losses and Loss Adjustment Expenses
The liability for unpaid losses and loss adjustment expenses includes
reported and incurred but not reported losses and loss adjustment expenses.
Losses and loss adjustment expenses include the estimated costs of
investigating and settling unpaid losses. Such amounts are determined on the
basis of claims adjusters' evaluations and other estimates, and accordingly,
there can be no assurance that the ultimate liability will not vary from such
estimates.
Investment Securities
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (SFAS No. 115). Under SFAS No. 115, fixed maturity securities
for which a company has the ability and management has the positive intent to
hold to maturity are classified as held to maturity securities and are reported
at amortized cost. Fixed maturity and equity securities that are bought and held
principally for the purpose of selling them in the near term are classified as
trading securities and are reported at fair value, with unrealized gains and
losses included in earnings. Fixed maturity and equity securities not classified
as either held to maturity securities or trading securities are classified as
available for sale securities and are reported at fair value, with unrealized
gains and losses (net of deferred taxes) charged or credited as a separate
component of stockholders' equity.
During September 1995, Company management changed its intent with respect to
securities classified as held to maturity and reclassified all securities in its
held to maturity portfolio to available for sale. The transfer had no impact on
earnings. However, a $1.6 million fair value
26
<PAGE> 120
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
adjustment was recorded, resulting in a net $1 million increase in stockholders'
equity, net of tax. Realized gains and losses on the sale of investments are
recognized in the determination of net income or loss on the basis of specific
identification. Amortization of premiums and accretion of discounts are computed
using the interest method. Changes in the valuation of securities which are
considered other than temporary are recorded as losses in the period recognized.
Income Taxes
The Company files a consolidated federal income tax return with its
wholly-owned subsidiaries.
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Depreciation
Depreciation on furniture and equipment is provided on a straight-line basis
over the estimated useful lives of the assets (three to seven years).
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity at acquisition of three months or less to be cash equivalents.
Earnings per Share
Earnings per common share are based on the weighted average number of common
shares outstanding, including common stock equivalents, during the periods
presented. Outstanding options and warrants are considered common stock
equivalents at that point where the market price exceeds the option price. The
resultant effect on earnings per share is calculated using the treasury stock
method. At December 31, 1995, these common stock equivalents were anti-dilutive.
Fair Value Disclosures
The following methods were used to estimate the fair value of each class of
financial instruments for which it was practicable to estimate that value. Fixed
maturities and equity securities are valued using quoted market prices, if
available. If a quoted market price is not available, fair value is estimated
using quoted market priced of similar securities. Due to the relatively
short-term nature of cash, short-term investments, accounts receivable, and
accounts payable, their carrying amounts are reasonable estimates of fair value.
Fair value of long-term debt is approximately equal to its recorded value. The
fair value of Catastrophe Insurance Contracts is determined based on the
settlement price on the date of valuation as determined by the exchange on which
the contract was traded.
Recent Accounting Pronouncements
SFAS No. 121 "Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed Of," issued in March, 1995, provides guidance
for recognition of impairment losses related to long-lived assets, and certain
intangibles and related goodwill. The Statement is effective for fiscal years
beginning after December 15, 1995.
27
<PAGE> 121
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SFAS No. 123 "Accounting for Stock-Based Compensation" was issued in October,
1995, and provides for a fair value method of accounting for stock-based
compensation arrangements rather than the intrinsic value method now followed.
Adoption of the fair value method for purposes of
preparing basic financial statements is not required although disclosure of the
effect of such adoption is. The Statement is effective for options awarded after
December 15, 1995.
Management believes the adoption of the above-mentioned statements will not
have a material impact on the Company's consolidated financial statements.
Reclassifications
Certain items in the prior years' financial statements have been reclassified
to conform with the 1995 presentation.
(2) INVESTMENT INCOME
Components of investment income were as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1995 1994 1993
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities $ 7,699 $ 5,318 $ 2,837
Equity securities 607 164 194
Call options on U.S. Treasury Notes (361) 359 --
Cash and cash equivalents 1,894 349 299
----------- ----------- -----------
Investment income $ 9,839 $ 6,190 $ 3,330
=========== =========== ===========
</TABLE>
(3) INVESTMENT SECURITIES
Realized and unrealized investment gains and losses were as follows (in
thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1995 1994 1993
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Realized gains:
Fixed maturities $ 764 $ 7 $ 104
Equity securities 227 530 965
----------- ----------- -----------
Total gains 991 537 1,069
----------- ----------- -----------
Realized losses:
Fixed maturities 42 45 138
Equity securities 10 450 233
Catastrophe Insurance Contracts 942 -- --
----------- ----------- -----------
Total losses 994 495 371
----------- ----------- -----------
Net realized
securities gains (losses) $ (3) $ 42 $ 698
=========== =========== ===========
Change in unrealized gains (losses):
Fixed maturities $ 8,715 $ (7,812) $ 1,272
=========== =========== ===========
Equity securities $ 713 $ (931) $ 12
=========== =========== ===========
</TABLE>
28
<PAGE> 122
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and estimated fair value of securities follow (in thousands):
<TABLE>
<CAPTION>
December 31, 1995
---------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
Obligations of the U.S.
Government and its agencies $ 1,207 $ 8 $ -- $ 1,215
Obligations of states and
political subdivisions 83,838 1,536 108 85,266
Corporate notes and debentures 19,722 125 37 19,810
Redeemable preferred stock 41,870 1,064 309 42,625
Equity securities 13,039 483 114 13,408
---------- ---------- ---------- ----------
$ 159,676 $ 3,216 $ 568 $ 162,324
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
--------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to maturity:
Obligations of the U.S.
Government and its agencies $ 1,521 $ -- $ 70 $ 1,451
Obligations of states and
political subdivisions 85,749 15 3,200 82,564
Corporate notes and debentures 3,667 9 189 3,487
Redeemable preferred stock 38,350 1 2,900 35,451
---------- ---------- ---------- ----------
129,287 25 6,359 122,953
---------- ---------- ---------- ----------
Available for sale:
Corporate notes and debentures 1,730 21 120 1,631
Redeemable preferred stock 251 -- 3 248
Equity securities 5,877 145 489 5,533
---------- ---------- ---------- ----------
7,858 166 612 7,412
---------- ---------- ---------- ----------
$ 137,145 $ 191 $ 6,971 $ 130,365
========== ========== ========== ==========
</TABLE>
The amortized cost and estimated fair value of fixed maturities by
contractual maturity are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties (in thousands):
<TABLE>
<CAPTION>
Amortized Estimated
cost fair value
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Available for Sale:
Due in one year or less $ 18,838 $ 18,858
Due after one year through five
years 70,525 71,056
Due after five years through ten
years 37,938 39,242
Due after ten years 19,336 19,760
---------- ----------
$ 146,637 $ 148,916
========== ==========
</TABLE>
29
<PAGE> 123
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Proceeds from sales of securities available for sale during 1995 were
$15,274,000. Gross gains of $991,000 and gross losses of $52,000 were realized
on these sales. In 1994, held to maturity securities with an amortized cost of
$3,163,000 were sold resulting in realized losses of $3,000. All sales from the
held to maturity portfolio in 1994 were made within three months of the
contractual maturity of the security. Proceeds from sales of securities
available for sale during 1994 were $5,720,000. Gross gains of $537,000 and
gross losses of $492,000 were realized on those sales. Proceeds from sales of
securities during 1993 were $13,820,000. Gross gains of $1,069,000 and gross
losses of $371,000 were realized in 1993.
Investments in fixed maturities on deposit with various regulatory bodies as
required by law are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------------
1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Arkansas Commissioner of Insurance $ 50 $ 50
California Commissioner of Insurance 200 --
Georgia Commissioner of Insurance 25 25
Louisiana Commissioner of Insurance 140 70
Nevada Commissioner of Insurance 250 250
New Mexico Department of Insurance 375 375
Oklahoma Commissioner of Insurance 100 100
South Carolina Department of Insurance 650 650
Tennessee Department of Insurance 2,025 1,675
---------- ----------
$ 3,815 $ 3,195
========== ==========
</TABLE>
Investments in securities of a single issuer aggregating more than 10% of
stockholders' equity follow (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------------
1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Shelby County, TN $ 6,670 $ 5,895
Metro Nashville, Davidson County, TN 6,570 5,733
Memphis, TN Electric System 5,206 4,575
</TABLE>
(4) Unpaid Losses and Loss Adjustment Expenses
The Company's consulting actuary has determined that the Company's liability
for unpaid losses and loss adjustment expenses is 2% less than the actuary's
selected ultimate liability and falls within an acceptable range of actuarial
estimates.
30
<PAGE> 124
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents information on changes in the reserve for losses
and loss adjustment expenses of the Company for the periods presented (in
thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reserve for losses and loss adjustment expenses at
beginning of year $ 56,858 $ 35,287 $ 16,711
Less reinsurance recoverables on unpaid losses and
loss adjustment expenses 6,880 13,634 9,590
--------- -------- --------
Net reserves for losses and loss adjustment
expenses at beginning of year 49,978 21,653 7,121
Add:
Provision for losses and loss
adjustment expenses occurring:
Current year 141,130 82,241 38,341
Prior Years 10,973 2,070 287
--------- -------- --------
Total 152,103 84,311 38,628
--------- -------- --------
Less:
Loss and loss adjustment expense
payments for claims occurring:
Current year 73,493 39,542 17,334
Prior years 36,383 16,444 6,762
--------- -------- --------
Total 109,876 55,986 24,096
--------- -------- --------
Net reserve for losses and loss
adjustment expenses at end of year 92,205 49,978 21,653
Plus reinsurance recoverables on
unpaid losses and loss adjustment expenses 12,311 6,880 13,634
--------- -------- --------
Reserve for losses and loss adjustment
expenses at end of year $ 104,516 $ 56,858 $ 35,287
========= ======== ========
</TABLE>
The reinsurance recoverables on paid losses and loss adjustment expenses are
$4,854, $2,744 and $2,762 for 1995, 1994, and 1993, respectively.
During 1995, Midland strengthened its prior year loss reserves by
approximately $11.0 million due to adverse development in both the commercial
and personal programs and due to higher than anticipated LAE. This adverse
development was impacted by a processing backlog in the western region claims
office which occurred in the first half of 1995 related to the Arizona and
California full-coverage programs.
(5) Reinsurance
During 1993 the wholly-owned property and casualty insurance subsidiaries of
the Company maintained "quota share" reinsurance agreements whereby a portion of
premiums written, incurred losses and loss adjustment expenses were ceded to
other insurance companies. These quota-share reinsurance agreements were not
utilized in 1994. At September 30, 1995, these subsidiaries entered into a 30%
quota share agreement with Kemper Reinsurance Company, including a cession of
unearned premiums as of that date. This agreement provides reinsurance on the
Company's personal automobile programs, which generally are for mandatory limits
of liability and other coverages of no more than $25,000 per person and
31
<PAGE> 125
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$50,000 per accident for bodily injury, and in the range of $10,000 to $20,000
for property
damage.
The commercial and coastal dwelling programs of the Company provide property
and liability limits of up to $1,000,000 Through excess of loss reinsurance, the
Company limits its retention on any one risk to $375,000.
Under reinsurance agreements, in the event that the reinsuring company is
unable to pay its portion of the loss based on the coverage ceded, the Company
would be responsible for the entire loss. The Company evaluates the financial
viability of its reinsurers on a regular basis and has no reason to believe that
these reinsurers will be unable to pay their portion of the loss based on the
coverage ceded.
Amounts ceded under all reinsurance agreements were as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums written $ 38,372 $ 1,359 $ 24,648
Premiums earned 17,719 10,801 25,461
Losses and loss adjustment expenses incurred 14,770 7,279 18,936
Unearned premiums 21,207 554 9,996
Unpaid losses and loss adjustment expenses 12,311 6,880 13,634
</TABLE>
(6) Notes Payable
Components of notes payable were as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Short-term borrowings from bank; 8.5% interest;
Repaid January 1995 -- $ 20,000
Bank credit facility, $30 million, secured by
subsidiary operations:
Fixed portion of borrowings; 7.11% interest; -- 10,000
Floating portion of borrowings; LIBOR+ 2.25%
(8.5% at December 31, 1995) $ 27,000 10,000
-------- --------
$ 27,000 $ 40,000
======== ========
</TABLE>
At September 30, 1995, the Company defaulted on certain financial covenants
related to the bank credit facility, due to generating a net loss from
operations. The Company has since been unable to cure the default. On January
25, 1996, the Company signed an agreement with the lender to change the entire
facility to a floating interest rate equivalent to 8.5% retroactive to October
1, 1995. In addition, the Company paid a $67,500 amendment fee and the lender
fixed the facility at $27 million decreasing with future principal payments.
Effective March 1, 1996, the loan agreement was restructured, with the
payment of an additional $50,000 fee. The floating rate was adjusted to LIBOR+
3.25% through June 30, 1996 and LIBOR+ 3.50% thereafter.
In anticipation of the completion of the Company's proposed merger with
Danielson Holding Corporation, further discussed at Note 15, "Subsequent
Events", the lender has agreed to waive a principal payment scheduled for March
31, 1996. Principal is payable quarterly thereafter through June 1, 1998.
Interest is payable quarterly March 31, 1996 through June 30, 1998.
32
<PAGE> 126
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) Income Taxes
The components of income tax expense (benefit) are as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ (3,845) $ 3,311 $ 2,705
State 228 195 164
-------- ------- -------
(3,617) 3,506 2,869
Deferred:
Federal (3,695) (528) (226)
State (133) 2 (23)
-------- ------- -------
(3,828) (526) (249)
-------- ------- -------
Total $ (7,445) $ 2,980 $ 2,620
======== ======= =======
</TABLE>
Income tax expense differs from the amounts computed by applying the federal
income tax rates to income before income taxes and equity interests due to the
following (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense at statutory rate $ (5,953) $ 3,715 $ 3,292
State taxes (net of federal deduction) 63 129 93
Dividend received deduction (661) (343) (172)
Tax exempt interest (1,180) (802) (562)
Other, net 286 281 (31)
-------- ------- -------
$ (7,445) $ 2,980 $ 2,620
======== ======= =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1995 and 1994, respectively, are presented below in thousands:
<TABLE>
<CAPTION>
1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Unearned premiums $ 4,244 $ 4,327
Discounted losses 3,407 1,957
Unrealized securities losses -- 151
Deferred compensation 253 --
Net operating loss carryforwards 248 --
Other 192 253
------- -------
Total gross deferred tax asset 8,344 6,688
Less valuation allowance -- --
------- -------
Net deferred tax assets 8,344 6,688
Deferred tax liabilities:
Deferred acquisition costs (3,324) (5,301)
Equipment, principally due
to differences in depreciation (194) (95)
Unrealized securities gains (906) --
Other (107) (250)
------- -------
Total gross deferred tax liability (4,531) (5,646)
======= =======
Net deferred tax asset $ 3,813 $ 1,042
======= =======
</TABLE>
33
<PAGE> 127
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Based upon the level of historical taxable income and projections for future
taxable income over periods which the deferred tax assets are deductible,
management believes it is more likely than not the Company will realize the
benefits of the deductible differences at December 31, 1995.
(8) Related Party Transactions
During 1995, 1994 and 1993, the Company paid fees of $351,000, $324,000,
$201,000, respectively, to an investment company which has certain stockholders
and directors that are also stockholders and directors of the Company.
The Company has a line of credit to an affiliate which bears interest at
prime plus 3%. Balances outstanding related to this line of credit were $1.2
million and $1.3 million at December 31, 1995 and 1994, respectively.
(9) Employee Benefit and Incentive Plans
In April, 1989, the Company adopted a nonqualified incentive stock option
plan for officers and key employees. The plan provided for the granting of
options to purchase up to 154,000 shares of common stock of the Company at
prices not less than fair market value, as determined by the Board of Directors,
on the date options are granted. The options vest ratably over a 5 year period
and are exercisable up to 10 years from the dates of grant. In connection with
the granting of an option, the Company also granted a companion stock
appreciation right ("SAR"). The SAR gives the employee the right to surrender
for cancellation all or part of the shares covered by the option, to the extent
such option is exercisable. In the event of surrender, an employee is entitled
to receive payment of up to 100% of the option exercise price. Options with
related SAR's were granted as follows: 1989, 59,486 shares at $3.26 per share;
1990, 42,000 shares at $3.32; and 1991, 42,000 at $3.71. During 1993, options to
purchase 70,686 shares were exercised for a total of $231,000. During 1994,
options to purchase 14,000 shares were exercised for a total of $46,410. During
1995, options to purchase 44,800 shares were exercised for a total of $162,000.
In November, 1992, the plan was frozen with the simultaneous adoption of a
long-term incentive plan for officers and directors. The remaining options
available for grant under the previous plan were combined with new options
available for grant for a total of 136,514 options available. In 1993 and in
1995, the stockholders approved share increases in the number of shares
available under this plan totalling 500,000. Options under the 1992 plan are
granted at the fair market value at the date of grant, vest over varying periods
at the discretion of the committee, and expire 10 years from the date of grant.
Options to purchase 129,500 shares were granted in 1992 at an option price of
$14 per share. Options to purchase 222,000 shares were granted in 1993 at prices
from $ 20.25 to $ 21.625. Options to purchase 35,000 shares were granted in 1994
at an option price of $14.75. Options to purchase 157,000 shares were granted in
1995 at prices from $9.50 per share to $18.75 per share. No options have been
exercised with respect to the plan.
The Company has a defined contribution plan (Savings Plan) intended to be a
qualified plan under Section 401(a) and 401(k) of the Internal Revenue Code.
Eligible participants include all officers and employees with six months of
service. Employee contributions (up to 15% of defined compensation) are matched
50% by the Company up to a limit of 2.5% of the participant's compensation. The
participants vest in the Company's matched contributions in equal increments
over a four-year period. Matching expense related to the savings plan for the
years ended December 31, 1995, 1994 and 1993 were approximately $99,700,
$120,883, and $84,000, respectively.
34
<PAGE> 128
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 1994, the Company adopted a deferred compensation plan under which certain
employees may defer up to 25% of their compensation and its directors may defer
100% of their compensation. The Company matches 100% of the employee deferrals
up to 10% of their compensation in years in which the Company's net income
reaches certain levels. Amounts deposited into these plans are unsecured
liabilities of the Company. The total liability included in accrued premium
taxes and other expenses for these plans at December 31, 1995 and 1994 was
$979,174 and $373,485, respectively. The contribution matching expense related
to the plan for the year ended December 31, 1994 was $114,698. Due to the net
loss for the year ended December 31, 1995, the Company was not required to match
employee contributions. In connection with the administration of this plan, the
Company has purchased Company-owned life insurance policies insuring the lives
of certain directors, officers and key employees. The purpose of these policies
is to fund the payment of benefits to the participants.
(10) Legal Proceedings
In August 1994, the Company and three of its wholly owned subsidiaries were
named in a civil lawsuit on behalf of two Chapter 13 debtors and as putative
representatives of a plaintiff's class challenging the validity of the Chapter
13 automobile insurance program in Alabama. The plaintiffs sought certification
of a class, a declaration that the insurance policies violate Alabama statutes,
a permanent injunction against further implementation of the Chapter 13
automobile insurance program in Alabama, and reimbursement of premiums received
by the Company under the Chapter 13 automobile program in Alabama. The Company
and its subsidiaries denied the material allegations of the complaint and were
awarded Dismissal by Summary Judgement in August 1995. The plaintiffs filed a
motion for reconsideration which was denied in October 1995. The plaintiffs have
appealed this determination and no decision has been rendered to date.
In May 1995, the Company, one of its officers and one of its subsidiaries
were named in a wrongful termination lawsuit by a former employee. This lawsuit
is pending in the State of Illinois Circuit Court, Seventh Judicial Circuit. The
plaintiff seeks $200,000 in compensatory damages and $1 million in punitive
damages. The matter is in the discovery stages. Management believes that it had
valid cause for the dismissal of this employee and will vigorously defend the
case. Management believes that the resolution of this matter will not have a
material impact on the Company's operations.
The Company and its subsidiaries are involved in asserted claims in the
normal course of business. Management believes the outcome of these matters in
the aggregate will not have a material adverse effect on the consolidated
financial statements of the Company.
(11) Commitments and Contingent Liabilities
Catastrophe Insurance Contracts
The Company utilizes catastrophe insurance futures and options (CAT
contracts) to help manage the Company's risk from catastrophic losses. These CAT
contracts are traded on the Chicago Board of Trade and are designed to track
insured catastrophic losses on a regional and nationwide basis. The CAT
contracts are indexed to loss ratios as determined by Insurance Services Office,
Inc. (ISO) using data obtained from designated reporting companies. ISO
considers losses reported to the designated companies as of the end of the
quarter following the loss quarter. ISO estimates quarterly premiums based on
the most recent statutory annual statements filed by the reporting companies.
Since the premium is known and constant during the life of the CAT contract, any
changes in CAT contract prices are due entirely to changes in the amount of
reported losses.
35
<PAGE> 129
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The CAT program is used by management as a supplement to reinsurance
treaties. Depending on CBOT quotes and conditions in the traditional
catastrophic reinsurance market, the standardized nature of the CAT contracts
provides management the opportunity to "shop" for better price and coverage in
specific regions that a reinsurance company may not be able to offer in a timely
fashion.
The program has been used to reduce Midland's exposure to catastrophic risk
with the ISO September Eastern contract at the CBOT. These particular contracts
focus on the Atlantic coast and gulf regions of the country. It is in certain
areas of those regions that management believes it has catastrophic exposure
that is too costly to reinsure "traditionally." The contracts are based on
industry wide loss ratios calculated by the ISO. Management purchases or sells
calls or puts at various loss ratios to be long the loss ratio. This way, if the
industry is suffering from catastrophic losses the loss ratio will increase.
Management believes that gains in the value of the CAT contracts resulting from
catastrophic losses will offset underwriting losses. Should the value of the
contracts decline as a result of lower industry losses, Management believes that
the effect will be offset by lower underwriting losses.
During 1995, the Company wrote 384 contracts with a $9.6 million notional
value, purchased 272 contracts with a $6.8 million notional value, and
terminated 193 contracts with a $4.8 million notional value. The Company
realized gains of $855,000 on terminated contracts during 1995. At December 31,
1995, the Company had unrealized losses of $1.8 million on open contracts. The
contracts are carried at fair value at December 31, 1995. The table below
summarizes the open futures and options positions at December 31, 1995:
<TABLE>
<CAPTION>
Number Premium
of Notional Strike Expiration received Fair
contracts amount price date (paid) Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Call options 129 $ 3,225,000 70 4/30/96 $ (261,064) $ --
Put options 12 300,000 70 4/30/96 93,627 184,500
Call options 184 4,600,000 50 4/30/96 581,555 --
Futures 138 3,450,000 70 4/30/96 (2,415,000) 389,970
--- ----------- ----------- --------
463 $11,575,000 $(2,000,882) $574,470
=== =========== =========== ========
</TABLE>
Leases
The Company and its subsidiaries lease office space under noncancelable
operating leases expiring through the year 2006. Rent expense under the leases
was approximately $930,000, $669,000, and $460,000 for the years ended December
31, 1995, 1994 and 1993, respectively. Future rental commitments under
noncancelable operating leases aggregate approximately $5,632,000 at December
31, 1995 and are payable as follows (in thousands):
<TABLE>
<S> <C>
1996 $ 1,294
1997 1,262
1998 769
1999 405
2000 326
2001 and beyond 1,576
--------
$ 5,632
========
</TABLE>
(12) Regulatory Examination
The State of Tennessee Department of Commerce and Insurance (The Examiners)
has completed the fieldwork in connection with its regular examination of
Midland Risk Insurance Company (MRIC) and Specialty Risk Insurance Company
(SRIC) as of December 31, 1994 and issued its report of findings. The Examiners
have questioned the admissibility of certain of the
36
<PAGE> 130
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
assets of MRIC and SRIC, including MRIC's $9 million equity investment in SRIC,
for statutory capital purposes. The aggregate amount of assets whose
admissibility the Examiners questioned was approximately $10 million and $9.6
million at December 31, 1995 and 1994, respectively. Midland's management has
responded to the Examiners' report and indicated that it believes the assets
should be admitted for statutory capital purposes. In addition, MRIC and SRIC
continue to prepare financial statements for statutory reporting purposes, which
admit the assets questioned by the Examiners. Midland is unable to determine the
outcome, if any, of the matters raised by the Examiners. However, management
believes that the affect of not admitting such assets would not materially
impact Midland's operations because the resulting impact on Midland's risk-based
capital position and capital adequacy ratio is not expected to affect Midland's
ability to continue its anticipated level of premium writings.
(13) Statutory Capital and Surplus
Statutory accounting practices for insurance companies differ somewhat from
generally accepted accounting principles. Reconciliations of statutory capital
and surplus and income of MRIC and SRIC, as determined using statutory
accounting principles, to the amounts included in the accompanying financial
statements is as follows:
<TABLE>
<CAPTION>
At December 31,
-----------------------------
1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Combined statutory capital and surplus $ 56,588 $ 62,558
GAAP adjustments:
Deferred policy acquisition costs 9,617 15,148
Unrealized appreciation on fixed maturities 1,957 --
Deferred income taxes 4,051 (5,549)
Other 760 345
--------- ---------
GAAP stockholders' equity 72,973 72,502
Noninsurance companies adjustments:
Note payable (27,000) (20,000)
Other 2,872 5,292
--------- ---------
Stockholders' equity as presented herein $ 48,845 $ 57,794
========= =========
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Combined statutory net income (loss) $ (9,617) $ 2,068
GAAP adjustments:
Deferred policy acquisition costs (5,292) 7,159
Deferred income taxes 3,200 (2,727)
--------- ---------
GAAP net income (loss) (11,709) 6,500
Noninsurance companies adjustments 1,638 1,425
--------- ---------
Net income (loss) as presented herein $ (10,071) $ 7,925
========= =========
</TABLE>
MRIC cannot declare dividends in excess of the greater of 10% of statutory
capital and surplus or the net income for the preceding fiscal year unless
approval is obtained from the Tennessee Department of Insurance. In addition,
MRIC is required by the State of Tennessee to maintain statutory capital and
surplus of at least $2,000,000.
37
<PAGE> 131
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) Quarterly Financial Data (Unaudited)
Presented below is unaudited quarterly financial information for 1995 and
1994. The information has been restated for the effect of reclassifying
securities in the held to maturity portfolio to the available for sale portfolio
during the third quarter of 1995 (see Note 1).
<TABLE>
<CAPTION>
1995
---------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total investments
-held to maturity $ 139,330 $ 144,102 $ -- $ --
-available for sale 8,793 8,828 160,203 162,324
Total assets 219,977 254,276 287,438 283,531
Total stockholders' equity 60,407 63,206 58,111 48,845
Total income 42,870 50,691 55,321 44,164
Total expenses 39,348 47,066 64,554 60,530
Net income (loss) 2,609 2,795 (5,723) (9,752)
Net income (loss) per share .48 .51 (1.05) (1.81)
</TABLE>
<TABLE>
<CAPTION>
1994
---------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total income $ 24,359 $ 32,153 $ 36,199 $ 38,775
Total expenses 21,126 28,600 32,287 38,573
Net income 2,258 2,454 2,637 576
Net income per share .41 .45 .48 .11
</TABLE>
(15) Subsequent Events
On February 9, 1996, the Company's Board of Directors suspended the policy
adopted in August, 1994 of paying a quarterly dividend on its common stock.
On February 26, 1996, the Company entered into an Agreement and Plan of
Merger with Danielson Holding Corporation. The merger agreement was terminated
in July 1996.
Effective March 1, 1996, the Company entered into an Amended and Restated
Loan Agreement with its lender, SunTrust Bank of Nashville. This agreement
provides for principal payments quarterly June 30, 1996 through June 30, 1998
and interest payments quarterly March 31, 1996 through June 30, 1998. The loan
agreement includes new financial covenants, with which management expects to
comply.
38
<PAGE> 132
INDEPENDENT AUDITORS' REPORT
Board of Directors
Midland Financial Group, Inc.:
We have audited the consolidated balance sheets of Midland Financial Group,
Inc. and Subsidiaries as of December 31, 1995 and 1994 and the related
consolidated statements of income (loss), changes in stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1995. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Midland Financial
Group, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1995 in conformity with generally accepted accounting
principles.
As discussed in note 1, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" in 1994.
KPMG PEAT MARWICK LLP
Memphis, Tennessee
March 22, 1996, except as to note 12,
which is dated May 31, 1996
39
<PAGE> 133
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME: AGE: POSITION:
<S> <C> <C>
Joseph W. McLeary(1)(3)(6)............................. 56 Chairman of the Board, Chief Executive Officer and
Director
Philip R. Zanone(1)(3)................................. 54 Vice Chairman of the Board, Chief Investment Officer and
Director
Charles H. Gray, III(1)(3)............................. 47 President, Chief Operating Officer and Director
Elena Barham .......................................... 37 Senior Vice President, Chief Financial Officer and
Secretary
James E. Farmer........................................ 42 Vice President-Underwriting, Executive Vice President of
the Company's P&C Subsidiaries
Theodore J. Bender(1)(4)(6)............................ 48 Director
Carlos H. Cantu(4)..................................... 62 Director
F. Ross Johnson(1)(2).................................. 64 Director
J. Shea Leatherman(2)(4)(5)............................ 44 Director
John J. Shea, Jr., M.D.(6)............................. 71 Director
Sidney A. Stewart, Jr.(2)(5)........................... 69 Director
</TABLE>
- ---------------------
(1) Member of the Executive Committee.
(2) Member of the Compensation Committee.
(3) Member of the Investment Committee.
(4) Member of the Audit Committee.
(5) Member of the Stock Option Committee.
(6) Member of the Nominating Committee.
Joseph W. McLeary is the Chairman of the Board, Chief Executive Officer and a
Director of the Company and has served in these capacities since 1987. Mr.
McLeary also serves as a director of Equity Inns, Inc. and SCB Computer
Technology, Inc.
Philip R. Zanone has served as the Vice Chairman of the Board and Chief
Investment Officer since 1993. From 1987 until 1993, he was President of the
Company. He has been a Director since 1987.
Charles H. Gray, III served as the Executive Vice President, Chief Operating
Officer and a Director of the Company from 1988 until 1993. Mr. Gray is
currently the President and Chief Operating Officer and remains a Director.
Elena Barham was promoted to Senior Vice President and Chief Financial Officer
in 1993. From 1988 until 1993 she served as Vice President, Controller and
Secretary. She continues to serve as Secretary.
-40-
<PAGE> 134
James E. Farmer joined the Company in 1988 as Vice President-Underwriting of the
Company's P&C Subsidiaries. In 1993, he was promoted to and currently remains
Executive Vice President of the P&C Subsidiaries and Vice President-Underwriting
of the Company.
Theodore J. Bender, III, a Director of the Company since 1993 is a Managing
Director - Corporate Finance Department of The Robinson-Humphrey Company, Inc.,
a securities and investment banking firm. Mr. Bender has served in various
investment banking capacities over the past 18 years with The Robinson-Humphrey
Company, Inc. He serves as a director of The Robinson-Humphrey Company, Inc.
Carlos H. Cantu joined the Company as a Director in 1992. Mr. Cantu is President
and Chief Executive Officer and Director of The ServiceMaster Company, L.P., a
diversified services firm, and has served in the same capacity since 1986.
F. Ross Johnson joined the Company as a Director in 1995. Mr. Johnson has been
the Chairman and Chief Executive Officer of RJM Group, an international
management and advisory firm since 1989. Prior to that Mr. Johnson served as
Chairman and Chief Executive Officer of RJR Nabisco. He serves on the boards of
three other public companies, American Express Company, Archer Daniels Midland
Company and National Service Industries, as well as Canadian-based firms, Noma
Industries, Power Corporation, Black & McDonald and Bionaire.
J. Shea Leatherman has been a Director of the Company since 1987. Mr. Leatherman
has been President of Grant & Leatherman, Inc., a farm management company, and
the General Manager of Riverfield Farms, a farming interest located in
Mississippi, for more than five years.
Dr. John J. Shea has been a Director of the Company since 1987. Dr. Shea has
been the President and a physician at Shea Clinic Corporation for more than five
years.
Sidney A. Stewart, Jr. became a Director of the Company in 1992. Mr. Stewart
retired from Sedgwick James, Inc., an international insurance agency/brokerage
firm, in 1990 after serving as Vice Chairman since 1986. Mr.
Stewart serves as a Director of National Commerce Bancshares Corporation.
Mr. Zanone and Mr. Leatherman are brothers-in-law. Dr. Shea is the uncle of Mr.
Leatherman and of Mr. Leatherman's sister, who is the wife of Mr. Zanone. Mr.
Johnson is the father of the husband of Mr. Zanone's daughter.
-41-
<PAGE> 135
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the annual and long-term compensation for
services in all capacities to the Company for 1995, 1994 and 1993 of those
persons who were at December 31, 1995, (i) the Chief Executive Officer and (ii)
the other four most highly compensated executive officers of the Company (the
"Named Officers").
<TABLE>
<CAPTION>
Long Term
Annual Compensation (1) Compensation
------------------- ------------
Options All Other
Name and Salary Bonus Awards Compensation
Principal Position Year $ $ # $ (2)
- ------------------ ---- ------- ------ ------ ------------
<S> <C> <C> <C> <C> <C>
Joseph W. McLeary, 1995 250,000 40,000 15,000 5,500
Chairman of the Board and 1994 150,000 -0- 5,000 15,312
Chief Executive Officer 1993 100,000 62,500 25,000 3,672
Philip R. Zanone, 1995 250,000 40,000 15,000 5,500
Vice Chairman and 1994 150,000 -0- 5,000 17,432
Chief Investment Officer 1993 100,000 62,500 25,000 2,500
Charles H. Gray, III, 1995 450,000 80,000 30,000 5,500
President 1994 200,000 -0- 10,000 23,578
and Chief Operating Officer 1993 170,000 190,000 50,000 4,250
Elena Barham, 1995 200,000 40,000 12,500 5,500
Senior Vice President, 1994 125,000 -0- 5,000 15,310
Chief Financial Officer 1993 76,000 55,000 20,000 3,650
and Secretary
James E. Farmer, 1995 200,000 40,000 12,500 5,500
Vice President-Underwriting 1994 105,000 -0- 5,000 10,431
and Asst. Secretary 1993 75,000 55,000 20,000 2,875
</TABLE>
- -------------------------
(1) Compensation deferred at election of executive includable in category
and year earned.
(2) Includes the matching contributions to the Company's deferred
compensation plan as follows for 1994: Mr. McLeary, $12,812, Mr.
Zanone, $12,812; Mr. Gray, $18,958; Ms. Barham, $10,810; and Mr.
Farmer, $9,250; and of contributions to defined contribution plans.
Each of the Named Officers of the Company set forth in the foregoing cash
compensation table above is a party to an employment agreement with the Company.
The employment agreements between the Company and these Named Officers were
renegotiated effective January 1, 1995, and are for terms expiring in December,
1998 for Messrs. McLeary and Zanone and 1999 for Ms. Barham and Messrs. Gray and
Farmer, unless terminated sooner in accordance with the provisions of such
agreements. In addition, the employment agreements, as amended, provide for
minimum annual base salaries as follows: Mr. McLeary-$250,000; Mr.
Zanone-$250,000; Mr. Gray-$450,000; Ms. Barham-$200,000; and Mr.
Farmer-$200,000. If an employment agreement were terminated other than for
cause, the Company would be required to pay such individual an amount equal to
one year's base salary as a severance payment and continue benefits for two
years after termination, except for Mr. Gray, whose severance compensation is
equal to two times his base salary. The foregoing employment agreements contain
certain noncompetition covenants pursuant to which, for a period
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<PAGE> 136
of one year after termination of employment, Ms. Barham and Mr. Farmer agree not
to solicit customers or employees or to disclose confidential information of the
Company and each of Messrs. McLeary, Zanone and Gray agree, in addition to the
foregoing covenants, not to compete in any manner with the Company.
OPTION GRANTS, EXERCISES AND FISCAL YEAR END VALUES
No options were granted under the Company's 1989 Incentive Stock Option Plan in
1995; option grants shown below for 1995 were under the Company's 1992 Long-Term
Incentive Plan. Shown below is information with respect to the exercised and
unexercised options to purchase Common Shares granted in fiscal 1995 and prior
years under the 1989 Incentive Stock Option Plan and the 1992 Long-Term
Incentive Plan to the Named Officers and held by them at December 31, 1995.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF STOCK
OPTIONS/SARS PRICE APPRECIATION FOR
OPTIONS/SARS GRANTED TO EXERCISE OR EXPIRATION OPTION TERM
GRANTED EMPLOYEES IN BASE PRICE DATE -----------------------------
Name (#) FISCAL YEAR ($/SH) DATE 5% 10%
- -------------------------- -------------- ------------------- -------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Joseph W. McLeary 15,000(1) 13.0 18.75 8/01/00 $ 77,700 $171,750
Philip R. Zanone 15,000(1) 13.0 18.75 8/01/00 $ 77,700 $171,750
Charles H. Gray, III 30,000(1) 26.0 18.75 8/01/00 $155,400 $343,500
Elena Barham 12,500(1) 10.9 18.75 8/01/00 $ 64,750 $148,125
James E. Farmer 12,500(1) 10.9 18.75 8/01/00 $ 64,750 $148,125
</TABLE>
- ---------
(1) Options vest ratably over five years from date of grant.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
SHARES ACQUIRED VALUE AT FY-END (#) AT FY END ($)
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Joseph W. McLeary 16,800 240,005 45,700/17,500 35,326/-0-
Philip R. Zanone 16,800 237,905 45,700/17,500 35,326/-0-
Charles H. Gray, III -0- -0- 104,800/27.200 -0-/-0-
Elena Barham 2,800 39,718 32,300/15,000 24,668/-0-
James E. Farmer 2,800 24,668 29,500/15,000 -0-/-0-
</TABLE>
DIRECTORS' COMPENSATION
Independent directors of the Company receive an annual fee of $30,000, plus
travel expenses incurred to attend meetings. Directors who are also officers of
the Company do not receive any annual fee for their services as a director.
Directors may defer the receipt of all or a portion of their fees under the
Company's unfunded deferred compensation program.
-43-
<PAGE> 137
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors (the "Committee") is
composed entirely of independent outside directors. Decisions on compensation of
the Company's executives generally are made by the Committee and are reviewed by
the full Board (except for decisions about awards under the Company's
stock-based compensation plans, which are made solely by an independent
committee in order to satisfy Rule 16b-3 under the Securities Exchange Act of
1934). Set forth below is a report submitted by the Committee addressing the
Company's compensation policies for 1995 as they affected Joseph W. McLeary, the
Company's Chairman of the Board and Chief Executive Officer, Mr. Philip R.
Zanone, the Company's Vice-Chairman and Chief Investment Officer, Mr. Charles H.
Gray, III, the Company's President and Chief Operating Officer, Ms. Elena
Barham, the Company's Senior Vice President, Chief Financial Officer and
Secretary, and Mr. James E. Farmer, the Company's Vice President of Underwriting
and Assistant Secretary (collectively, the "Named Officers").
The Compensation Committee and the management of the Company are committed to
the principle that pay should be commensurate with performance and attainment of
predetermined financial and strategic objectives. The base salaries of the
Company's executives are contained in long-term employment agreements, but are
reviewed each year by the Committee. Through 1994, the Company relied to a large
degree on annual incentive programs to motivate the Named Officers to perform to
the full extent of their abilities for the benefit of the Company's shareholders
and compensated the Named Officers through fixed base salaries somewhat below
competitive amounts paid to senior managers in comparable positions along with
incentive compensation.
During 1995, the Committee reconsidered this philosophy, with these conclusions:
(1) Measuring and rewarding the Named Officers based on the short-term
annual performance of the Company is inconsistent with the major
objective, namely; building long-term shareholder value.
(2) Annual compensation should represent the appropriate level for Named
Officers that competitively compensates them for their performance.
(3) Long-term compensation in the form of stock options should make up a
major share of executive compensation and as a result integrate the
rewards to the executive at the same time as the shareholder receives
appreciation. Importantly, the appreciation is identical between the Named
Officers and the shareholders of the Company. There is no incentive
payment until the shareholders get stock appreciation.
The Committee recommended that future stock options have five-year terms, rather
than the current 10 years to tighten the focus and to produce improved
shareholder value. The compensation program recommended for the Named Officers
was intended to accomplish the following:
(1) Ensure that the Named Officers are properly and competitively
compensated for their performance.
(2) Ensure that their incentives are simple and straightforward and
identical to that of the shareholders they serve.
(3) Ensure that their focus is on the long-term growth in "shareholder
value" and that they are not forced to be distracted by short-term
situations that an annual incentive system generates.
-44-
<PAGE> 138
The Committee negotiated new contracts for the Named Officers including
five-year terms for each of Messrs. Gray and Farmer and Ms. Barham and four-year
terms for Messrs. McLeary and Zanone. In addition, the Named Officers were
awarded five-year stock options during 1995 by the Stock Option Committee.
July 5, 1995 COMPENSATION COMMITTEE
J. Shea Leatherman, Chairman
Sidney A. Stewart, Jr.
F. Ross Johnson
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Leatherman, Stewart and Johnson, all of whom are non-employee directors,
served as members of the Compensation Committee during 1995. There were no
compensation committee interlocks in 1995, and no insider participated in
decisions related to his compensation.
-45-
<PAGE> 139
STOCK PRICE PERFORMANCE
The following table shows a comparison of cumulative total return to
shareholders for the Company's common stock, the Nasdaq Composite Index and
Nasdaq insurance company stocks. The table assumes $10,000 invested on December
10, 1992 (the date on which the shares of the Company's common stock were first
publicly traded).
-46-
<PAGE> 140
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
To the best knowledge of the Company, based on information filed with the
Securities and Exchange Commission and the Company's stock records, the
following table sets forth, as of March 22, 1996, the number of Common Shares
beneficially owned by (i) each person who beneficially owns more than 5% of the
Common Shares, (ii) directors and persons nominated to become directors of the
Company, and Named Officers (as defined hereinafter), and (iii) directors and
officers as a group.
<TABLE>
<CAPTION>
Name and Address Amount and Nature Percent
of Beneficial Owner of Beneficially Owned (1) of Class
-------------------------- ------------------------- --------
<S> <C> <C> <C>
(i) Fenimore Asset Management, Inc.(2) 426,550 7.7
(ii) John J. Shea, Jr., M.D. (3) 315,997 5.7
Philip R. Zanone (4)(5) 441,339 7.9
Charles H. Gray, III (5)(6) 269,333 4.8
Joseph W. McLeary (5)(7) 177,265 3.2
J. Shea Leatherman (8) 164,039 3.0
Elena Barham (5) 69,477 1.2
James E. Farmer (5) 65,830 1.2
Sidney A. Stewart (5) 25,150 *
F. Ross Johnson (9) 33,000 *
Carlos H. Cantu (5) 15,000 *
Theodore J. Bender, III (10) 14,000 *
(iii) All Directors and Executive
Officers as a Group
(11 persons) 1,590,430 27.0
</TABLE>
- -------------
* Less than one percent
(1) Except as indicated in the footnotes set forth below, the persons named
in the table, to the Company's knowledge, have sole voting and investment
power with respect to all Common Shares shown as beneficially owned by
them. The numbers shown include the shares that are not currently
outstanding but which certain stockholders are entitled to acquire or
will be entitled to acquire within sixty (60) days. Such shares are
deemed to be outstanding for the purpose of computing the percentage of
outstanding Common Shares owned by the particular stockholder and by the
group, but are not deemed to be outstanding for the purpose of computing
the percentage of ownership of any other person.
(2) The address of Fenimore Asset Management, Inc. is 118 N. Grand Street,
Box 310, Cobleskill, New York, 10243.
(3) Dr. Shea's address is Shea Clinic, 6133 Poplar Pike, P.O. Box 17987,
Memphis, Tennessee 38187-0987.
(4) Includes 55,734 shares owned by his wife, Irwin L. Zanone, as to which
Mr. Zanone disclaims beneficial ownership; includes 45,700 shares
issuable upon the exercise of options granted under the Company's stock
option plans; excludes options to purchase 17,500 shares which are not
exercisable within the next 60 days.
(5) The address of each of the Company's officers and of Messrs. Cantu and
Stewart is Midland Financial Group, Inc., 825 Crossover Lane, Suite 112,
Memphis, Tennessee 38117.
(6) Includes 104,800 shares issuable upon the exercise of stock options
granted under the Company's stock option plans; excludes options to
purchase 27,200 shares that are not exercisable within the next 60 days.
-47-
<PAGE> 141
(7) Includes 1,000 shares owned by his wife, Joyce C. McLeary; 44,904 shares
owned by McLeary Financial Group, L.P., of which Mr. McLeary is a limited
partner; 45,700 shares issuable upon the exercise of stock options
granted under the Company's stock option plans; excludes options to
purchase 17,500 shares that are not exercisable within the next 60 days.
(8) Mr. Leatherman's address is Route 1, Box 193, Robinsonville, Mississippi
38664.
(9) Mr. Johnson's address is 2660 Peachtree Street, N.W., Atlanta, Georgia
30305. Mr. Johnson's ownership includes 2,000 shares owned by his wife,
Laurie Johnson, for which he disclaims beneficial ownership.
(10) Mr. Bender's address is 3541 Ridgewood Road, Atlanta, Georgia 30327.
Based solely on review of the copies of reporting forms furnished to the
Company, or written representations that no forms are required, the Company
believes that during 1995 its officers and directors and 10% stockholders
complied with all filing requirements for reporting to the Securities and
Exchange Commission their ownership and changes in ownership of Common Shares
(as required pursuant to Section 16(a) of the Securities and Exchange Act of
1934).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Messrs. McLeary and Zanone each own 7.8% of the outstanding common stock of
NewSouth Capital Management, Inc. ("NewSouth"), the investment advisor for the
Company's investment portfolio. At December 31, 1995, the Company's portfolio
represented 10% of the assets under management by NewSouth, and in 1995 fees
paid by the Company to NewSouth totaled $351,000 and represented 4.6% of all
fees received by NewSouth during such period. The Company believes that the
amount charged by NewSouth to the Company for investment management services is
competitive with fees that are charged by NewSouth and other managers for
portfolios of similar size and with similar objectives. The Company may elect to
diversify its portfolio management in the future.
In the opinion of management, the foregoing transactions with affiliates were
made under terms that were no less favorable to the Company than those that
could have been obtained from unaffiliated third parties. In the future, the
Company will not enter into any transactions with officers, directors, 5%
stockholders or affiliates unless the terms are no less favorable to the Company
than those that could be obtained from unaffiliated third parties and the
transactions are approved by a majority of the Company's directors, including a
majority of the disinterested directors.
-48-
<PAGE> 142
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Consolidated Financial Statements
Financial Statements included herein beginning on page 20.:
Consolidated Balance Sheets, as of December 31, 1995 and December
31, 1994.
Consolidated Statements of Income (Loss) for the years ended December 31,
1995, December 31, 1994 and December 31, 1993.
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1995, December 31, 1994, and December 31, 1993.
Consolidated Statements of Cash Flows for the years ended December 31,
1995, December 31, 1994 and December 31, 1993.
Notes to Consolidated Financial Statements.
Independent Auditors' Report.
(a) 2. Financial statement schedules.
Independent Auditors' Report
Schedule I-Summary of investments
Schedule II-Condensed financial information of registrant
Schedule IV-Reinsurance
All other schedules are omitted because they are not applicable or the
required information is shown in the Consolidated Financial Statements or
the Notes thereto.
(a) 3. Exhibits. See Index to Exhibits following the financial statement
schedules below.
(b) Reports on Form 8-K.
There were no Current Reports on Form 8-K filed during the quarter ended
December 31, 1995.
A Current Report on Form 8-K was filed on February 28, 1996, relating to the
execution of an Agreement and Plan of Merger dated February 26, 1996 by and
among the Company and Danielson Holding Corporation, a Delaware corporation, and
its wholly-owned subsidiary (the "Agreement"). Upon consummation of the
transaction, the Company will become a wholly-owned subsidiary of Danielson
Holding Corporation. The Agreement provides for holders of the Company's common
stock to receive consideration of 1.6 times audited book value at December 31,
1995 in a combination of cash, preferred stock and common stock of Danielson
Holding Corporation. Subject to the receipt of the requisite shareholder
approvals, other required approvals and the satisfaction or waiver by the
parties of all conditions of the Agreement, the Company anticipates completion
of the merger during the second quarter of 1996.
-49-
<PAGE> 143
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized on January 14, 1997.
MIDLAND FINANCIAL GROUP, INC.
(Registrant)
/s/ Joseph W. McLeary
- -------------------------------------------------
By: Joseph W. McLeary, Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Joseph W. McLeary Chairman of the Board Jamuary 14, 1997
- ------------------------------- and Chief Executive Officer
Joseph W. McLeary (Principal Executive Officer)
/s/ Philip R. Zanone Vice Chairman, Chief Jamuary 14, 1997
- -------------------------------
Philip R. Zanone Investment Officer and Director
/s/ Charles H. Gray, III President, Chief Operating Jamuary 14, 1997
- -------------------------------
Charles H. Gray, III Officer and Director
/s/ Elena Barham Senior Vice President, Jamuary 14, 1997
- ------------------------------- Chief Financial Officer,
Elena Barham and Secretary (Principal Financial Officer)
Director Jamuary 14, 1997
- -------------------------------
F. Ross Johnson
/s/ J. Shea Leatherman Director Jamuary 14, 1997
- -------------------------------
J. Shea Leatherman
/s/ John J. Shea, Jr. Director Jamuary 14, 1997
- -------------------------------
Dr. John J. Shea, Jr.
Director Jamuary 14, 1997
- -------------------------------
Theodore J. Bender
Director Jamuary 14, 1997
- -------------------------------
Carlos H. Cantu
/s/ Sidney A. Stewart, Jr. Director Jamuary 14, 1997
- -------------------------------
Sidney A. Stewart, Jr.
</TABLE>
<PAGE> 144
Independent Auditors' Report
The Board of Directors
Midland Financial Group, Inc.:
Under date of March 22, 1996, except as to note 12, which is dated May 31, 1996,
we reported on the consolidated balance sheets of Midland Financial Group, Inc.
and subsidiaries, as of December 31, 1995 and 1994, and the related
consolidated statements of income (loss), changes in stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1995, as contained herein. Our report refers to changes in accounting
principles related to the adoption in 1994 of the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." These consolidated financial statements and our
report thereon are included in the annual report on Form 10-K for the year
1995. In connection with our audits of the aforementioned consolidated
financial statements, we also have audited the financial statement schedules as
listed in the accompanying index. These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Memphis, Tennessee
March 22, 1996, except as to
note 12, which is dated
May 31, 1996
<PAGE> 145
SCHEDULE I
MIDLAND FINANCIAL GROUP, INC.
SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
Amount at
which shown
in the
Fair balance
Type of Investment Cost value sheet
-------- -------- ----------
<S> <C> <C> <C>
FIXED MATURITIES:
Bonds:
United States Government and government
agencies $ 1,207 $ 1,215 $ 1,215
Municipalities 83,838 85,266 85,266
All other corporate bonds 19,722 19,810 19,810
Redeemable preferred stock 41,870 42,625 42,625
-------- -------- --------
Total fixed maturities 146,637 148,916 148,916
-------- -------- --------
EQUITY SECURITIES:
Common stock 13,039 13,408 13,408
-------- -------- --------
Total equity securities 13,039 13,408 13,408
-------- -------- --------
Total Investments $159,676 $162,324 $162,324
======== ======== ========
</TABLE>
S-1
<PAGE> 146
SCHEDULE II
PAGE 1 OF 5
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
MIDLAND FINANCIAL GROUP, INC.
(PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994
---- ----
ASSETS
<S> <C> <C>
Investments in subsidiaries $76,671 $74,425
Cash and equivalents 1,869 29
Securities available for sale -- 6,732
Due from affiliates -- 13,365
Furniture and equipment 2,167 1,335
Notes receivable 1,651 1,756
Other assets 1,049 916
Deferred income taxes 125 --
Income taxes recoverable 1,470 235
------- -------
$85,002 $98,793
======= =======
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Notes payable $27,000 $40,000
Due to affiliates 7,212 --
Accrued expenses 1,945 559
Income taxes payable -- 440
------- -------
36,157 40,999
------- -------
STOCKHOLDERS' EQUITY:
Common stock 39,420 39,258
Additional paid-in capital 1,887 1,887
Retained earnings 5,796 16,943
Unrealized appreciation (depreciation) of
securities available for sale 1,742 (294)
------- -------
Total stockholders' equity 48,845 57,794
------- -------
$85,002 $98,793
======= =======
</TABLE>
See accompanying note to condensed financial statements.
S-2
<PAGE> 147
SCHEDULE II
PAGE 2 OF 5
MIDLAND FINANCIAL GROUP, INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
-------- --------- -------
<S> <C> <C> <C>
Income:
Investment income $ 1,929 $ 652 $ 186
Net realized securities gain -- -- 186
Management fees 1,284 695 552
Other -- 7 58
-------- -------- --------
3,213 1,354 982
-------- -------- --------
Expenses:
General and administrative 1,908 173 266
Interest expense 1,859 924 --
-------- -------- --------
3,767 1,097 266
-------- -------- --------
Income (loss) before income taxes and equity interests (554) 257 716
Income tax provision (114) (283) (254)
-------- -------- --------
Income (loss) before equity interests (668) (26) 462
Equity interests (6) 5 6
-------- -------- --------
Net income (loss) before equity in undistributed
income of subsidiaries (674) (21) 468
Equity in undistributed income of subsidiaries (9,397) 7,946 6,600
-------- -------- --------
Net income (loss) $(10,071) $ 7,925 $ 7,068
======== ======== ========
</TABLE>
See accompanying note to condensed financial statements.
S-3
<PAGE> 148
SCHEDULE II
PAGE 3 OF 5
MIDLAND FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stock
-----------------------
Shares Additional Unrealized
issued and paid-in Retained appreciation
outstanding Amount capital earnings (depreciation) Total
----------- ------ ------- -------- -------------- -----
<S> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1992 4,346,123 $ 35,392 $ 1,887 $ 2,483 $ 118 $ 39,880
Net income -- -- -- 7,068 -- 7,068
Warrants exercised 872,505 3,429 -- -- -- 3,429
Options exercised 70,686 231 -- -- -- 231
Appreciation of
equity securities -- -- -- -- 12 12
Balances at
December 31, 1993 5,289,314 39,052 1,887 9,551 130 50,620
Net income -- -- -- 7,925 -- 7,925
Cash dividends paid
($.10 per share) -- -- -- (533) -- (533)
Options exercised 14,000 46 -- -- -- 46
Warrants exercised 40,908 160 -- -- -- 160
Change in fair value
of securities available
for sale net of tax
of $231 -- -- -- -- (424) (424)
--------- --------- --------- --------- --------- ---------
Balances at
December 31, 1994 5,344,222 39,258 1,887 16,943 (294) 57,794
Net loss -- -- -- (10,071) -- (10,071)
Cash dividends paid
($.20 per share) -- -- -- (1,076) -- (1,076)
Options exercised 44,800 162 -- -- -- 162
Change in fair value
of securities available
for sale net of tax
of $1,058 -- -- -- -- 2,036 2,036
--------- --------- --------- --------- --------- ---------
Balances at
December 31, 1995 5,389,022 $ 39,420 $ 1,887 $ 5,796 $ 1,742 $ 48,845
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes to condensed financial statements.
S-4
<PAGE> 149
SCHEDULE II
PAGE 4 OF 5
MIDLAND FINANCIAL GROUP, INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31 1995, 1994, AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(10,071) $ 7,925 $ 7,068
Gain on investments -- -- (186)
Changes in assets and liabilities:
Other assets (133) (779) 390
Accrued expenses and other liabilities 1,386 549(11)
Income taxes payable (1,800) 505 (429)
Other noncash items 137 51 18
-------- -------- --------
Net cash provided by (used in) operating
activities (10,481) $ 8,251 6,850
-------- -------- --------
Cash flows from investing activities:
Investment in subsidiaries (2,246) (17,512) (18,659)
Purchases of investments -- (7,429) (8,985)
Sales of investments 6,732 5,720 3,811
Fixed asset additions 945 (655) (260)
Other 126 (6) (100)
-------- -------- --------
Net cash provided by (used in) investing
activities 5,557 (19,976) (24,099)
-------- -------- --------
Cash flows from financing activities:
Proceeds from credit facility 10,000 30,000 20,000
Notes receivable 102 (177) (1,579)
Proceeds from exercise of common
stock warrants and options 162 206 3,660
Repayment of debt (23,000) (10,000) --
Loans to affiliates 20,576 (10,330) (2,244)
Dividends to stockholders (1,076) (533)
-------- -------- --------
Net cash provided by financing
activities 6,764 9,166 19,837
-------- -------- --------
Increase (decrease) in cash 1,840 (2,559) 2,588
Cash at beginning of year 29 2,588 0
-------- -------- --------
Cash at end of year $ 1,869 $ 29 $ 2,588
======== ======== ========
</TABLE>
See accompanying note to condensed financial statements.
S-5
<PAGE> 150
SCHEDULE II
PAGE 5 OF 5
MIDLAND FINANCIAL GROUP, INC.
(PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTE TO CONDENSED FINANCIAL STATEMENTS
(1) The accompanying condensed financial information should be read in
conjunction with the consolidated financial statements of Midland
Financial Group, Inc. and subsidiaries as of December 31, 1995 and 1994
and for the three year period ended December 31, 1995.
S-6
<PAGE> 151
SCHEDULE IV
MIDLAND FINANCIAL GROUP, INC.
REINSURANCE
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGES)
<TABLE>
<CAPTION>
Assumed Percentage
Ceded to from of amount
Direct other other Net assumed
amount companies companies amount to net
------ --------- --------- ------ ------
<S> <C> <C> <C> <C> <C>
Year Ended December 31,
1995:
Premiums
Property casualty $ 175,226 17,719 14,887 172,394 8.64
--------- -------- --------- --------- ---------
Total $ 175,226 17,719 14,887 172,394 8.64
========= ======== ========= ========= =========
Year ended December 31,
1994:
Premiums
Property casualty $ 117,738 10,801 11,281 118,218 9.54
--------- -------- --------- --------- ---------
Total $ 117,738 10,801 11,281 118,218 9.54
========= ======== ========= ========= =========
Year ended December 31,
1993:
Premiums
Property casualty $ 78,329 25,461 2,402 55,272 4.35
--------- -------- --------- --------- ---------
Total $ 78,329 25,429 2,402 55,272 4.35
========= ======== ========= ========= =========
</TABLE>
S-7
<PAGE> 152
EXHIBIT INDEX
NUMBER ASSIGNED
IN REGULATION
S-K, ITEM 601 DESCRIPTION OF EXHIBIT
(3) 3.1 Restated Charter (1) (3.1)
3.2 Bylaws, as amended (3)
(4) 4.1 Specimen Common Stock Certificate (1) (4.1)
(10) 10.1 Tax Allocation Agreement, dated May 1, 1988, by and among
Midland Financial Group, Inc. and Memphis Fire Insurance Company,
Midland Risk Services, Inc. and Delta Claims, Inc. (1) (10.2)
10.2 Expense Allocation Agreement by and among Midland Financial Group,
Inc., Midland Risk Insurance Company, Specialty Risk Insurance
Company, Midland Risk Services, Inc., Agents Financial Services,
Inc., and Delta Claims Service, Inc., dated January 1, 1994. (2)
(10.47)
10.3 Tax Allocation Agreement by and among Midland Financial Group,
Inc. and Midland Risk Insurance Company and Specialty Risk
Insurance Company, dated January 1, 1994.(2) (10.48)
10.4 General Agency Agreement, dated July 15, 1991, by and between
Midland Risk Services--Louisiana, Inc. and Midland Risk Insurance
Company. (1) (10.23)
10.5 General Agency Agreement, dated September 5, 1991, by and between
Midland Risk Services--Arizona, Inc. and Midland Risk Insurance
Company as amended. (1) (10.29)
10.6 General Agency Agreement, dated January 1, 1989, by and between
Midland Risk Services, Inc. and Midland Risk Insurance Company.
(1) (10.30)
10.7 General Agency Agreement, dated July 2, 1992, by and between
Midland Risk Services--Texas, Inc. and Midland Risk Insurance
Company as amended. (1) (10.31)
10.8 General Agency Agreement, dated January 23, 1990, by and between
National Specialty Lines, Inc. and Midland Risk Insurance Company
as amended. (1) (10.32)
10.9 General Agency Agreement, dated October 1, 1991, by and between
Strickland General Agency, Inc. and Midland Risk Insurance Company
as amended. (1) (10.33)
10.10 General Agency Agreement dated March 1, 1994, by and between
Midland Risk Insurance Company, Specialty Risk Insurance Company
and Midland Risk Services-Tennessee, Inc. (3)
10.11 General Agency Agreement dated January 1, 1995, by and between
Midland Risk Insurance Company and Arkansas General Agency, Inc.
(3)
10.12 Quota Share Reinsurance Contract effective September 30, 1995 by
and between Midland Risk Insurance Company, Specialty Risk
Insurance Company and Kemper Reinsurance Company. (3)
10.13 Amended and Restated Loan Agreement between Midland Financial
Group, Inc. and SunTrust Bank (f/k/a Third National Bank) in
Nashville and related Promissory Note, dated April 13, 1995. (3)
<PAGE> 153
10.14 First Amendment to Amended and Restated Loan Agreement between
Midland Financial Group, Inc. and SunTrust Bank, Nashville,
National Association (f/k/a Third National Bank), and related
First Amendment to Amended and Restated Promissory Note, dated
March 1, 1996. (3)
10.15 Stock Pledge Agreement between Midland Financial Group, Inc. and
SunTrust Bank (f/k/a Third National Bank) in Nashville, dated
April 13, 1995. (3)
10.16 Stock Pledge Agreement between Midland Risk Insurance Company and
SunTrust Bank (f/k/a Third National Bank) in Nashville, dated
December 27, 1993. (3)
10.17 Amended and Restated Stock Pledge Agreement between Midland Risk
Services, Inc. and SunTrust Bank (f/k/a Third National Bank) in
Nashville, dated April 13, 1995. (3)
10.18 Amended and Restated Stock Pledge Agreement between Agents
Financial Services- Tennessee, Inc. and SunTrust Bank (f/k/a Third
National Bank) in Nashville, dated April 13, 1995. (3)
10.19 Amended and Restated Stock Pledge Agreement between Midland Risk
Services-Louisiana, Inc. and SunTrust Bank (f/k/a Third National
Bank) in Nashville, dated April 13, 1995. (3)
10.20 Acknowledgement and Consent of Pledgors in favor of SunTrust Bank,
Nashville, National Association (f/k/a Third National Bank)
related to First Amendment to Amended and Restated Loan Agreement
and First Amendment to Amended and Restated Promissory Note dated
March 1, 1996. (3)
10.21 Lease Agreement, as amended, dated September 9, 1991, between
Weston Management Company and Midland Financial Group, Inc. (1)
(10.7)
10.22 Modifications and Ratifications of Lease between Weston Management
Company as manager for Metropolitan Life Insurance Company and
Midland Financial Group, Inc., dated June 1, 1994 and November 4,
1994. (2) (10.44)
10.23 Lease Agreement dated May 17, 1995, by and between Boyle
Investment Company and Midland Financial Group, Inc. (3)
MANAGEMENT CONTRACTS, COMPENSATORY PLANS OR ARRANGEMENTS, ETC.
10.24 Form of Warrant to Purchase Common Shares issued in connection
with an offering of Series A Preferred Stock by the Company. (1)
(10.11)
10.25 Agreement to Issue Stock Warrants, dated November 24, 1992 by and
among Michael A. Robinson, MARCo Holdings, L.P., the Company and
its Directors. (1) (10.61)
10.26 1989 Incentive Stock Option Plan, dated April 21, 1981. (1) (10.9)
10.27 Form of Incentive Stock Option Agreement. (1) (10.10)
10.28 Midland Companies' Employee Savings Plan and Trust Summary Plan
Description effective January 1, 1991. (1) (10.12)
10.29 Form of Employment Agreement between Midland Financial Group,
Inc. and Joseph W. McLeary. (3)
<PAGE> 154
10.30 Form of Employment Agreement between Midland Financial Group,
Inc. and Philip R. Zanone. (3)
10.31 Form of Employment Agreement between Midland Financial Group,
Inc. and Charles Henry Gray, III. (3)
10.32 Form of Employment Agreement between Midland Financial Group,
Inc. and James E. Farmer. (3)
10.33 Form of Employment Agreement between Midland Financial Group,
Inc. and Elena Barham. (3)
10.34 1992 Long-Term Incentive Plan. (1) (10.58)
10.35 Form of Incentive Stock Option Agreement. (1) (10.59)
10.36 Form of Non-Qualified Option Agreement. (1) (10.60)
10.37 Midland Companies Director and Executive Cash or Deferred
Compensation Plan, dated April 1, 1994. (2) (10.74)
(11) 11.1 Statement re Computation of Per Share Earnings.
(21) 21.1 Subsidiaries of Registrant
(23) 23.1 Consent of KPMG Peat Marwick LLP
(28) 28.1 Schedule P-Analysis of Losses and Loss Expenses from the Annual
Statement for the year 1995 of Midland Risk Insurance Company and
Subsidiary. (3)
- ------------
(1) Incorporated by reference from the Exhibits to the Form S-1 Registration
Statement No. 33-53360 of registrant, effective December 10, 1992.
(Exhibit number in Form S-1 is set forth in italics)
(2) Incorporated by reference from the Exhibits to Annual Report on Form 10-K
for the year ended December 31, 1994. (Exhibit number, if different in
1994 10-K, is set forth in italics).
(3) Filed with Annual Report on Form 10-K for the year ended December 31,
1995, originally filed with the commission on March 1, 1996.
<PAGE> 155
EXHIBIT 11.1
MIDLAND FINANCIAL GROUP, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Primary:
Average Shares outstanding 5,369 5,322 5,118
Net effect of dilutive stock options and
warrants - based on the treasury stock
method using average market price -- 156 188
--------- --------- ---------
Common and common equivalent shares 5,369 5,478 5,306
========= ========= =========
Net income (10,071) $ 7,925 $ 7,068
Plus (less):
Preferred stock dividend -- -- --
Accretion of discount on preferred stock -- -- --
Redemption premium on preferred stock -- -- --
Assumed interest based on modified
treasury method -- -- --
--------- --------- ---------
Adjusted net income applicable to $ (10,071) $ 7,925 $ 7,068
common and common equivalent ========= ========= =========
shares
Fully diluted:
Average shares outstanding 5,369 5,322 5,118
Net effect of dilutive stock options and
warrants - based on the treasury stock
method using average market price -- 155 174
--------- --------- ---------
Common and common equivalents shares 5,369 5,477 5,292
========= ========= =========
Net income (loss) $ (10,071) $ 7,925 $ 7,068
========= ========= =========
Per share amount:
Primary:
Net income (1.88) 1.45 1.34
Fully diluted:
Net income (1.88) 1.45 1.34
</TABLE>
<PAGE> 156
EXHIBIT 21.1
MIDLAND FINANCIAL GROUP, INC.
LIST OF SUBSIDIARIES
DECEMBER 31, 1995
Midland Financial Group, Inc. (TN)
Midland Risk Insurance Company (TN)
Specialty Risk Insurance Company (TN)
Agents Financial Services - Tennessee, Inc.
Midland Financial Services, Inc. (LA)
Midland Financial Services - California, Inc.
Midland Financial Services - Texas, Inc.
Agents Financial Services - Arizona, Inc.
Agents Financial Services - Pacific N.W., Inc. (Oregon)
Agents Financial Services - Illinois, Inc.
Delta Claims Services, Inc. (TN)
Midland Risk Services, Inc. (TN)
Midland Risk Services of Louisiana, Inc.
Midland Risk Services - Arizona, Inc.
Midland Risk Services - Texas, Inc.
Midland Risk Insurance Services - California, Inc.
Midland Risk Services - Illinois, Inc.
Midland Risk Services - Pacific N.W., Inc. (Oregon)
Midland Risk Services-Tennessee, Inc.
AutoSurance of America, Inc. (TN)
Midland Risk Services - Nevada, Inc.
Midland Surety Group, L.L.C. (TN)
<PAGE> 157
EXHIBIT 23.1
ACCOUNTANTS' CONSENT
The Board of Directors
Midland Financial Group, Inc.:
We consent to incorporation by reference in the Registration Statement on Form
S-8 for the 1992 Long-Term Incentive Plan and the Registration Statement on Form
S-8 for the 1989 Incentive Stock Option Plan of Midland Financial Group, Inc. of
our report dated March 22, 1996, except as to note 12, which is dated May 31,
1996, relating to the consolidated balance sheets of Midland Financial Group,
Inc. and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of income (loss), changes in stockholder's equity, and
cash flows for each of the years in the three-year period ended December 31,
1995, which report appears in the 1995 annual report on Form 10-K/A of Midland
Financial Group, Inc.
As discussed in note 1 to the consolidated financial statements, the Company
adopted the provisions of Statement of Accounting Standards No. 115, Accounting
for Certain Investments in Debt and Equity Securities, in 1994.
KPMG Peat Marwick LLP
Memphis, Tennessee
January 13, 1997
<PAGE> 158
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q/A2
Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the quarter ended Commission file number 0-20754
September 30, 1996
MIDLAND FINANCIAL GROUP, INC.
(Exact name of registrant as specified in
its charter)
Tennessee 62-1104818
(State of Incorporation) (I.R.S. Employer Identification No.)
825 Crossover Lane, Suite 112
Memphis, Tennessee 38117
(address of principal executive offices) (Zip Code)
Registrants telephone number including area code: (901) 680-9100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X Yes No
------ ------
As of November 13, 1996 there were 5,550,198 shares of Common Stock
outstanding.
1
<PAGE> 159
Part I
Item 1. Financial Statements
MIDLAND FINANCIAL GROUP, INC.
CONSOLIDATED CONDENSED
BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
(Unaudited)
ASSETS September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Cash and short term investments $ 1,014 $ 12,479
Investments held for resale 151,652 162,324
-------- --------
152,666 174,803
Agent and direct bill receivables 32,372 39,741
Finance contracts receivable 227 365
Reinsurance recoverable 37,059 17,819
Prepaid reinsurance premium 30,690 21,207
Accrued interest receivable 2,073 2,296
Deferred policy acq. costs 8,420 9,617
Furniture, equip, fixtures, net 3,562 3,398
Intangibles, net 2,621 571
Notes receivable 2,432 2,158
Subsidiary investments 324 293
Income taxes recoverable 8,589 9,227
Other assets 4,209 2,036
-------- --------
Total Assets $285,244 $283,531
======== ========
LIABILITIES
Unpaid losses and loss adjustment expense $115,235 $104,516
Unearned premiums and fees 74,502 82,473
Due to reinsurers 18,951 7,946
Notes payable 23,000 27,000
Accrued premium taxes and other expenses 6,634 12,751
-------- --------
Total Liabilities 238,322 234,686
-------- --------
EQUITY
Common stock 41,623 39,420
Additional paid-in capital 1,887 1,887
Retained earnings 3,308 5,796
Unrealized appreciation on equity securities 104 1,742
-------- --------
Total Equity 46,922 48,845
-------- --------
Total Liabilities and Equity $285,244 $283,531
======== ========
</TABLE>
2
<PAGE> 160
MIDLAND FINANCIAL GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
(as restated)
<S> <C> <C> <C> <C>
Gross premiums written $ 42,907 $57,761 $146,668 $164,420
-------- ------- -------- --------
Net premiums written $ 14,049 $34,327 $ 90,494 $138,408
-------- ------- -------- --------
Income:
Premiums earned $ 29,919 $48,983 $107,948 $132,848
Policy fees 2,618 2,998 8,948 7,755
Investment income 2,317 2,998 6,811 7,815
Net realized investment gains (losses) (84) 302 363 308
Other income 17 40 57 156
-------- ------- -------- --------
34,787 55,321 124,127 148,882
-------- ------- -------- --------
Expenses:
Losses & loss adjustment exp. 29,257 46,421 97,297 108,381
Policy acquisition costs 7,166 15,134 26,116 36,156
Operating expenses 1,387 2,388 4,771 4,973
Interest 527 576 1,738 1,356
Amort. of intangible assets 290 35 364 103
-------- ------- -------- --------
38,627 64,554 130,286 150,969
-------- ------- -------- --------
Income (loss) before provision for
income taxes and equity interest (3,840) (9,233) (6,159) (2,087)
Income tax provision (benefit) (2,088) (3,585) (3,662) (1,966)
-------- ------- -------- --------
Income (loss) before equity interests (1,752) (5,648) (2,497) (121)
Equity interests 25 (75) 10 (199)
-------- ------- -------- --------
Net income (loss) $ (1,727) $(5,723) $ (2,487) $ (320)
-------- ------- -------- --------
Net income (loss) per common share $ (.31) $ (1.05) $ (.45) $ (.06)
======== ======= ======== ========
Weighted average common shares 5,547 5,471 5,547 5,458
outstanding ======== ======= ======== ========
</TABLE>
3
<PAGE> 161
MIDLAND FINANCIAL GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net cash flows from operating activities $ (6,204) $ 9,289 $(15,807) $ 30,674
-------- -------- -------- --------
Cash flows investing activities:
Sales of investments 31,808 16,462 69,442 18,050
Purchase of investments (20,864) (22,210) (61,949) (39,873)
Other 194 (631) 528 (952)
-------- -------- -------- --------
Net cash used by investing activities 11,138 (6,379) 8,021 (22,775)
Cash flows from financing activities:
Exercise of warrants and options -0- -0- -0- 153
Bank credit facility transactions (3,000) (1,000) (4,000) (12,000)
Other 889 (269) 321 (1,134)
-------- -------- -------- --------
Net cash provided (used) by (2,111) (1,269) (3,679) (12,981)
-------- -------- -------- --------
financing activity and options
Cash, beginning of period (1,809) 22,473 12,479 29,196
-------- -------- -------- --------
Cash, end of period $ 1,014 $ 24,114 $ 1,014 $ 24,114
======== ======== ======== ========
</TABLE>
4
<PAGE> 162
MIDLAND FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying unaudited consolidated financial statements have been
prepared in accordance with the accounting policies in effect as of
December 31, 1995, as set forth in the annual consolidated financial
statements of Midland Financial Group, Inc. (the "Company"), of such date.
In the opinion of Management, all adjustments necessary for a fair
presentation of the consolidated financial statements have been included.
Certain 1995 amounts have been reclassified to conform with the 1996
presentation. The results of operations for the three-month and
nine-month periods ended September 30, 1996, are not necessarily
indicative of the results to be expected for the full year.
The computations of earnings per share are based upon the weighted
average number of common shares outstanding each period adjusted for the
assumed exercise of outstanding dilutive stock options using the treasury
stock method.
2. Subsequent Events
On November 6, 1996, the Company entered an Agreement and Plan of Merger
with The Progressive Corporation ("Progressive") Under the agreement,
Progressive will acquire all of the Company's outstanding stock at a
price of $9.00 per share in cash. The transaction is expected to be
completed during the first quarter of 1997, subject to regulatory
approval.
In January 1997, the Company determined that its Quarterly Reports on Form
10-Q for the quarters ended March 31, June 30, and September 30, 1996,
should be amended to reflect the inadvertent omission of certain loss data
from the actuarial analysis performed as of March 31, and June 30, 1996,
aggregating $3.3 million of incurred commercial automobile liability
losses and loss adjustment expenses. The Company had recorded an increase
of $6 million to its reserves in its initial report of financial results
for the quarter ended September 30, 1996. The accompanying unaudited
consolidated financial statements for the quarter ended September 30,
1996, have been revised to reflect a reduction of incurred losses and loss
adjustment expenses of $3.3 million, representing the total which now has
been included in the quarter ended March 31, 1996 and the six months ended
June 30, 1996. Results for the nine months ended September 30, 1996, are
unchanged. The effect of this restatement on net income and per share
amounts for each of the three quarters ended March 31, June 30, and
September 30, 1996, as previously reported is:
<TABLE>
<CAPTION>
1996 Quarter ended
-----------------------------------------
March 31 June 30 September 30
-------- ------- ------------
(000's)
<S> <C> <C> <C>
Net income as previously reported $ 528 $ 890 $(3,905)
Adjustment (2,178) -0- 2,178
------- ----- -------
Net income as adjusted $(1,650) $ 890 $(1,727)
------- ----- -------
Per share amounts:
Net income as previously reported $ .10 $ .16 $ (.70)
Adjustment (.39) .00 .39
------- ----- -------
Net income as adjusted $ (.29) $ .16 $ (.31)
------- ----- -------
</TABLE>
At September 30, 1996, the Company was in default of certain financial
covenants under its bank credit facility. The lender has requested to be
paid in full at March 31, 1997. Due to the current dividend restrictions
on the Company's insurance subsidiaries, the Company will be unable to
meet its 1997 debt service requirements without receiving special
regulatory approval to dividend capital out of its insurance subsidiaries
to the Company. Management anticipates that the Progressive transaction
will be consummated and the debt paid prior to March 31, 1997.
5
<PAGE> 163
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Management's Discussion and Analysis of Financial Condition and Results
of Operations as of September 30, 1996, has been revised to reflect the
effect of the restatement discussed in Note 2 to the accompanying
unaudited consolidated financial statements.
Changes in Financial Condition September 30, 1996 compared to December 31,
1995.
The operating cash requirements of the Company primarily relate to the
payment of claims, policy acquisition costs and operating expenses. Due
to the nature of risks the Company insures, the Company's liabilities can
be estimated. The liabilities generally develop and are resolved over a
period of less than three years. Therefore, the Company generally has a
predictable schedule of cash needs. The Company manages its investment
activities to maintain adequate liquidity for operating purposes and to
protect its policyholders and stockholders (i.e., "matching" of liquidity
and cash requirements). The Company generally invests in investment
grade securities and has a policy of not acquiring real estate
investments. Historically, the Company has not experienced any
"mismatches" related to liquidity management and none are anticipated.
The Company's objective is to maintain a premiums-to-surplus ratio within
the industry standard maximum of 3:1. For the quarter and nine months
ended September 30, 1996, the premiums-to-surplus ratios were 1.0:1 and
2.2:1, respectively, compared to 1.9:1 and for 2.6:1 the same periods of
1995.
The Company's permanent credit facility was increased to $30 million in
December 1994, with the increase being utilized to expand underwriting
capacity during 1995. At September 30, 1995, the Company defaulted on
certain financial covenants contained in the related loan agreement.
This default was not cured prior to December 31, 1995. The loan
agreement was amended, including revised financial covenants, effective
March 1, 1996. The Company was not in compliance with certain revised
financial covenants at September 30, 1996. The Company anticipates full
payment of the credit facility balance and termination of the facility in
connection with the closing of the Progressive acquisition transaction.
Results of Operations for the quarter, as restated, and nine-months ended
September 30, 1996, compared to the quarter and nine-months ended
September 30, 1995.
The following discussion has been revised to describe more fully the
status of the Company's commercial automobile programs and certain
strategic changes made by the Company during the third quarter of 1996.
Gross premiums written for the quarter and nine-months ended September
30, 1996, were 26% and 11% less, respectively, than for the same periods
of 1995 due to deliberate changes made in underwriting guidelines and
elimination of certain of the Company's programs. This is in line with
management's stated goals for 1996.
Net premiums written for the quarter and nine-months ended September 30,
1996, were 59% and 35% less, respectively, than the same periods of the
prior year due to the personal auto 30% quota share reinsurance in-force
in the first half of 1996 and not in the same period of 1995. In
addition, the Company entered into a new reinsurance agreement effective
July 1, 1996, whereby the Company's net retention of in-force, new and
renewal commercial business has been ceded, thus, effectively eliminating
the Company from the commercial market.
Earned premiums decreased for the quarter and nine-months ended September
30, 1996, compared to those same periods of 1995 due to the decrease in
premiums written.
Fee income for the quarter compared to the same period of 1995 was lower
due to decreased premium volume. In contrast, fee income for the
nine-months ended September 30, 1996, was higher than for the same
periods of 1995 due to increases in amounts of fees charged in certain
programs and due to a larger percentage of the Company's in-force
business being direct billed during the period. Direct bill programs
complement policy fees with installment billing fees. The installment
fees track in-force premium more directly than premiums written.
In-force premium has declined at a slower pace than the decline in
premium written, thus, installment fee
6
<PAGE> 164
income has increased during 1996 and has offset the reduction in policy
fees, which bear a direct relationship to premium written.
Investment income decreased for the quarter and nine months ended
September 30, 1996, compared to the same periods of 1995 due to lower
invested assets for the periods.
Policy acquisition costs for the quarter and first nine months ended
September 30, 1996, decreased compared to the same periods of 1995 due to
the decrease in premium and the effects of ceding commission income. The
expense ratio for the quarter and first nine months of 1996 were to 24.7%
and 23.4% compared to 30.0% and 26.0% for the year earlier periods,
respectively.
Losses for the quarter ended September 30, 1996, were lower than losses
for the same period of 1995 due to the personal auto cession of 30% during
1996 and the 100% cession of commercial business for losses occurring
subsequent to June 30, 1996. The loss ratio, however, increased to 97.8%
from 94.8% for the quarters ended September 30, 1996, and 1995,
respectively, and up from 83.6% at June 30, 1996, due to the continued
effects of the in-force policies from unprofitable personal automobile
programs written in 1995 and due to loss development on discontinued
commercial automobile programs. The loss ratio for the first nine months
of 1996 was 90.1% compared to 81.6% for the same period of 1995 due to
the effects of the same.
As previously disclosed, the Company eliminated its full coverage
personal automobile program in California and tightened controls over full
coverage in Arizona in late 1995 after experiencing significant increases
in premium volume and a deterioration in results from these programs. A
number of the policies written in these programs remained in force into
1996 with expiration dates through October 31, 1996. The Company's loss
ratio continued to show the negative effects of these policies through
September 30, 1996.
Also, as the Company previously disclosed, it eliminated certain of its
commercial automobile programs in Texas and Illinois in 1995 and early
1996. The Company began writing commercial programs through its Texas
office in 1992, offering commercial automobile coverage (garage, business
auto, and local/intermediate radius truck), and commercial general
liability (monoline). The commercial programs were expanded to Illinois
in 1993, and Mississippi, Louisiana and Arkansas from 1992 through 1995,
offering primarily commercial automobile coverages for short to
intermediate-haul truck and small garage operators. In addition, the
Company began to offer general liability coverages to pest control
operators in 1995. Through its commercial programs, the Company offered
various loss limits, including up to $1 million per occurrence on certain
risks, but it limited its net exposure to lower limits ($250,000 to
$375,000 in various years) through the use of various "Excess of Loss"
reinsurance agreements. All these expansion programs except Illinois were
managed from the Company's Texas and Louisiana offices, including the
claims-handling, which was performed by a staff of in-house adjusters,
substantially in Texas. In 1994, the results on the Illinois trucking
business deteriorated, ultimately causing the Company to close its
Illinois office in 1995 and to cease to offer commercial coverages in
Illinois.
As the commercial marketplace became more price-competitive in 1995, the
Company began to experience an adverse trend in some of its Texas truck
programs, primarily related to logging risks it had written. Management
made a decision to cease offering this product in late 1995. Also in late
1995, due to the adverse development indicated in the reserves for certain
commercial losses and loss adjustment expenses and due to the changes
being made related to the commercial programs, the Company made a decision
to consolidate the underwriting of all the Company's commercial programs
into the Texas office and to terminate the relationships with certain of
its commercial agents effective in 1996.
7
<PAGE> 165
In early 1996, management retained a highly seasoned external
commercial claims specialist to work as a full-time staff claims
consultant to reevaluate outstanding case reserves and analyze the
claims-handling procedures employed by the Company's staff claims
adjusters. During the second and third quarters, as a result of the
recommendation of this staff claims consultant, the Company terminated
the engagement of approximately 20 external defense attorneys, who were
assisting the Company in handling certain claims. The staff claims
consultant believed litigation by external defense attorneys had resulted
in claims remaining open for longer periods of time at higher ultimate
settlement costs. He reviewed and reevaluated the reserves on the
related files during the second and third quarters, considering facts and
circumstances known through the date of his review, and recommended a
number of reserve increases to provide for the anticipated increases in
ultimate settlement costs as compared to the carried reserves. He also
recommended that the Company adopt a more aggressive approach to settling
commercial claims, which the Company did. This resulted in a significant
increase in file closures, and in incurred and paid loss transactions
during the third quarter.
Also, during the third quarter of 1996, certain other key events took
place. On July 17, 1996, the President and Chief Operating Officer of
the Company was killed in the crash of TWA Flight 800. In late July, the
Company and Danielson Holding Corporation terminated their merger plans.
Due to the death of its President, who was instrumental in the
development and expansion of the commercial programs, and due to the
recent adverse trends in certain of those programs, management made a
strategic decision to cease to retain risk on and ultimately cease to
offer any commercial products and to concentrate solely on personal
automobile products in the future. Management began to negotiate with a
number of reinsurers to attempt to locate a carrier to assume 100% of its
net retention on its commercial programs for approximately one year,
thereby providing continuing coverage for its insureds and allowing
sufficient time for a replacement issuing carrier to be located. These
negotiations were held during the third quarter of 1996 and were
completed in October 1996, but the agreement reached provided that the
assuming carrier would assume 100% of the Company's unearned premiums as
of June 30, 1996, and all losses occurring thereafter on all its
commercial programs.
To obtain additional assurance that it was taking the proper steps to
evaluate and control the losses on its commercial programs, the Company
requested the assistance of staff commercial claims auditors from its
personal auto quota-share reinsurer, which is also a major writer of
commercial business nationwide, to review its procedures and the steps it
had taken during the second and third quarters. This review resulted in
those auditors concurring with the conclusions reached and the steps
recommended and/or taken by the staff claims consultant in Texas.
8
<PAGE> 166
In preparing his analysis of September 30, 1996 reserves, the Company's
Chief Actuary isolated the development and emergence patterns he had
anticipated for the third quarter, which is a normal part of the loss
reserve review and estimation process. When these anticipated results
were compared to the actual patterns experienced during the quarter, the
actual incurred emergence on case incurred losses exceeded his estimate
by $1.3 million, or 42%, largely due to the steps taken in conjunction
with strategic and procedural changes made during the quarter. The
unaudited consolidated financial statements, as restated, reflect the
Chief Actuary's recommendation that the Company record an increase of
$2.7 million in its loss and loss adjustment expense reserves as of
September 30, 1996.
During 1995, the Company utilized catastrophe insurance futures and
options to help manage the Company's risk from catastrophic losses. All
contracts open at December 31, 1995 were closed in 1996 and the Company
has not utilized this program in 1996.
Liquidity and Capital Resources
As a result of the net loss for the quarter ended September 30, 1996,
the Company is in default of certain financial convenants under its bank
credit facility. The lender has requested to be paid in full at March
31, 1997. Due to the current dividend restrictions on the Company's
insurance subsidiaries, the Company will be unable to meet its 1997 debt
service requirements without receiving special regulatory approval to
dividend capital out of its insurance subsidiaries to the Company.
Management anticipates that the Progressive transaction described in Note
2 will be consummated and the debt paid prior to March 31, 1997.
9
<PAGE> 167
PART II
Item 1. Legal Proceedings
In August 1994, the Company and three of its wholly-owned subsidiaries
were named in a civil lawsuit on behalf of two Chapter 13 debtors and as
putative representatives of a plaintiffs' class challenging the validity
of the Chapter 13 automobile insurance program in Alabama. The
plaintiffs sought certification of a class, a declaration that the
insurance policies violate Alabama statutes, a permanent injunction
against further implementation of the Chapter 13 automobile insurance
program in Alabama, and reimbursement of premiums received by the Company
under the Chapter 13 automobile program in Alabama. The Company and its
subsidiaries denied the material allegations of the complaint and were
awarded Dismissal by Summary Judgment in August 1995. The plaintiff's
filed a motion for reconsideration, which was denied in October 1995.
The plaintiffs have appealed this determined and no decision has been
rendered to date. The lawsuit was filed in the United States District
Court for the Northern District of Alabama, Western Division, and is
presently pending in the United States Court of Appeals, Eleventh
Circuit.
In May 1995, the Company, one of its officers and one of its subsidiaries
were named in a wrongful termination lawsuit by a former employee. This
lawsuit is pending in the State of Illinois Circuit Court, Seventh
Judicial Circuit. The matter is in the discovery stages. Management of
the Company also believes that it had valid cause for the dismissal of
this employee and presently intends to vigorously defend the case.
Management of the Company also believes that the resolution of this
matter will not have a material impact on the Company's operations.
Item 2. Changes in Securities.
There were no changes in securities.
Item 3. Default by the Company upon its Senior Securities.
The Company has no senior securities.
Item 4. Submission of Matters to a Vote by Security Holders.
There were no matters submitted to a vote by security holders.
Item 5. Other Information.
Item 6a.
Exhibits and Reports in Form 8-K.
a) Exhibits required by item 601 of Regulations S-K.
11.1 Statement Regarding Computation of Net Income Per share.
27 Financial Data Schedule (SEC use only)
b) Reports on Form 8-K.
The Company did not file a report on Form 8-K during the quarter ended
September 30, 1996.
10
<PAGE> 168
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Midland Financial Group, Inc.
(Registrant)
February 3, 1997 /s/ Joseph W. McLeary
---------------------------------
By: Joseph W. McLeary
Chairman and CEO
February 3, 1997 /s/ Elena Barham
---------------------------------
By: Elena Barham
Senior Vice-President and
Chief Financial Officer
11
<PAGE> 169
EXHIBIT 11.1
MIDLAND FINANCIAL GROUP, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
(as restated)
<S> <C> <C> <C> <C>
Primary:
Average Shares outstanding 5,547 5,386 5,547 5,364
Net effect of dilutive stock options and
warrants - based on the treasury stock
method using average market price -0- 85 -0- 94
-------- ------- ------- ------
Common and common equivalent shares $ 5,547 $ 5,471 $ 5,547 $5,458
======== ======= ======= ======
Net income (loss) $ (1,727) $(5,723) $(2,487) $ (320)
======== ======= ======= ======
Fully diluted:
Average share outstanding 5,547 5,386 5,547 5,364
Net effect of dilutive stock options and
warrants - based on the treasury stock
method using average market price -0- 85 -0- 94
-------- ------- ------- ------
Common and common equivalent shares 5,547 5,471 5,547 5,458
======== ======= ======= ======
Net income (loss) $ (1,727) $(5,723) $(2,487) $ (320)
======== ======= ======= ======
Per share amount:
Primary: $ (.31) $ (1.05) $ (.45) $ (.06)
======== ======= ======= ======
Fully diluted: $ (.31) $ (1.05) $ (.45) $ (.06)
======== ======= ======= ======
</TABLE>
12
<PAGE> 1
FORM OF PROXY
MIDLAND FINANCIAL GROUP, INC.
REVOCABLE PROXY
(SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
MIDLAND FINANCIAL GROUP, INC. FOR A SPECIAL MEETING
OF SHAREHOLDERS TO BE HELD ON MARCH 7, 1997)
The undersigned hereby appoints Joseph W. McLeary and Elena Barham, and
either of them with full powers of substitution, as attorneys and proxies for
the undersigned, to represent and vote shares of Common Stock of Midland
Financial Group, Inc. ("Midland") standing in my name on the books and records
of Midland at the close of business on January 13, 1997 which the undersigned is
entitled to cast at the Special Meeting of Shareholders to be held at Midland's
offices at 825 Crossover Lane, Memphis, Tennessee 38117 on March 7, 1997 at 9:00
a.m., local time, and at any and all adjournments as follows:
Approval of the Agreement and Plan of Merger dated as of November 6, 1996 (the
"Merger Agreement") among Midland, The Progressive Corporation ("Progressive")
and TPC Acquisition Corporation ("Merger Sub") which provides for, among other
things, the proposed merger of Merger Sub, a Tennessee corporation, that is a
wholly-owned subsidiary of Progressive, with and into Midland (the "Merger")
with Midland to be the surviving corporation in the Merger and a wholly-owned
subsidiary of Progressive.
For Against Abstain
- --- ------- -------
________ ________ ________
NOTE: The Board of Directors is not aware of any other business that may come
before the meeting.
THIS PROXY WILL BE VOTED FOR THE PROPOSITION STATED IF NO CHOICE IS MADE HEREON.
Any holder of Midland Common Stock who has delivered a proxy may revoke it
any time before it is voted by attending the Special Meeting and voting in
person at the meeting or by giving notice of revocation in writing or submitting
a signed proxy card bearing either the same date but delivered at a later time
or a later date to Midland, at 825 Crossover Lane, Memphis, Tennessee 38117,
Attention: Secretary, provided such notice or proxy is actually received by
Midland before the vote of shareholders. Should the undersigned be present and
elect to vote at the Special Meeting or at any adjournment thereof and, after
notification to the Secretary of Midland at the Special Meeting of the
shareholder's decision to terminate this Proxy, then the power of said attorneys
and proxies shall be deemed terminated and of no further force and effect.
The undersigned acknowledges receipt of a Notice of Special Meeting called
for the 7th day of March, 1997 and the Proxy Statement dated February 7, 1997
prior to the execution of this Proxy.
______________________________
Print Name of Shareholder
______________________________
Signature of Shareholder
______________________________
Print Name of Shareholder
Date:_________________ ______________________________
Signature of Shareholder
(Please sign exactly as your name appears above. When signing as attorney,
executor, administrator, trustee or guardian, please give your full title. If
more than one trustee, all should sign. If shares are held jointly, each holder
should sign.)
