<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 21, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
HCC INSURANCE HOLDINGS, INC.
(Exact Name of Registrant as Specified in its Charter)
---------------------
<TABLE>
<S> <C> <C>
DELAWARE 76-0336636 6331
(State or other jurisdiction of (I.R.S. Employer Identification (Primary Standard Industrial
incorporation or organization) No.) Classification Code Number)
</TABLE>
13403 NORTHWEST FREEWAY
HOUSTON, TEXAS 77040-6094
(713) 690-7300
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
STEPHEN L. WAY
13403 NORTHWEST FREEWAY
HOUSTON, TEXAS 77040-6094
(713) 690-7300
(Name, address including zip code, and telephone number,
including area code, of agent for service)
---------------------
Copies to:
<TABLE>
<C> <C>
ARTHUR S. BERNER, ESQ. ROBERT W. SMITH, JR., ESQ.
WINSTEAD SECHREST & MINICK P.C. PIPER & MARBURY L.L.P.
910 TRAVIS, SUITE 1700 CHARLES CENTER SOUTH
HOUSTON, TEXAS 77002 36 SOUTH CHARLES STREET
BALTIMORE, MARYLAND 21201-3018
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective time of the Merger described in this
Registration Statement.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=======================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT PRICE(2) FEE(3)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock $1.00 par value........... 9,119,412 $23.00 $209,746,476 $63,560
=======================================================================================================================
</TABLE>
(1) This Registration Statement relates to common stock, $1.00 par value per
share, of the Registrant to be received by holders of shares of common
stock, $.10 par value per share, of AVEMCO Corporation, as described in the
enclosed Proxy Statement/Prospectus and includes shares to be issued upon
exercise of outstanding options to acquire AVEMCO common stock.
(2) Pursuant to Rule 457(c) and (f)(1), the aggregate offering price was
computed on the basis of the high and low price reported for the
Registrant's common stock on the New York Stock Exchange on April 14, 1997.
(3) Of this amount, $45,000 was previously paid by HCC Insurance Holdings, Inc.
upon the filing of its preliminary proxy statement relating to the proposed
merger, which was filed on March 7, 1997.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
HCC INSURANCE HOLDINGS, INC.
FORM S-4
CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
LOCATION IN PROXY
FORM S-4 ITEM NUMBER STATEMENT/PROSPECTUS
-------------------- --------------------
<S> <C> <C>
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus... Forepart of Registration Statement; Outside
Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus............................ Available Information; Documents
Incorporated by Reference; Table of
Contents
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information............ Summary; Risk Factors
4. Terms of the Transaction................... Summary; The Merger; Special Meetings of
Shareholders; Comparative Rights of
Shareholders
5. Pro Forma Financial Information............ Summary; Unaudited Pro Forma Combined
Financial Information
6. Material Contacts with the Company Being
Acquired................................. The Merger
7. Additional Information Required for
Reoffering by Persons and Parties Deemed
to Be Underwriters....................... Inapplicable
8. Interests of Named Experts and Counsel..... Summary; Opinions of Financial Advisors
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.............................. Inapplicable
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3
Registrants.............................. Selected Business and Financial Information
With Respect to HCCH; HCCH Consolidated
Financial Data; HCCH Management's
Discussion and Analysis of Financial
Condition and Results of Operations
11. Incorporation of Certain Information by
Reference................................ Documents Incorporated by Reference
12. Information with Respect to S-2 or S-3
Registrants.............................. Inapplicable
13. Incorporation of Certain Information by
Reference................................ Inapplicable
14. Information with Respect to Registrants
Other Than S-3 or S-2 Registrants........ Inapplicable
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
LOCATION IN PROXY
FORM S-4 ITEM NUMBER STATEMENT/PROSPECTUS
-------------------- --------------------
<S> <C> <C>
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information with Respect to S-3
Companies................................ Selected Business and Financial Information
With Respect to AVEMCO; AVEMCO Selected
Consolidated Financial Data; AVEMCO
Management's Discussion and Analysis of
Financial Condition and Results of
Operations
16. Information with Respect to S-2 or S-3
Companies................................ Inapplicable
17. Information with Respect to Companies Other
Than S-3 or S-2 Companies................ Inapplicable
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or
Authorization are to be Solicited........ Outside Front Cover Page; Documents
Incorporated by Reference; Summary;
Special Meetings of Shareholders; The
Merger; Security Ownership
19. Information if Proxies, Consents or
Authorizations are not to be Solicited,
or in an Exchange Offer.................. Inapplicable
</TABLE>
<PAGE> 4
HCC INSURANCE HOLDINGS, INC.
13403 NORTHWEST FREEWAY
HOUSTON, TEXAS 77040-6094
April 25, 1997
Dear Shareholder:
A Special Meeting of Shareholders (the "HCCH Meeting") of HCC Insurance
Holdings, Inc., a Delaware corporation ("HCCH"), will be held at 9:00 a.m.,
local time, on May 29, 1997 at HCCH's corporate headquarters, 13403 Northwest
Freeway, Houston, Texas 77040-6094.
At the HCCH Meeting, you will be asked to consider and vote upon a proposal
to approve the Agreement and Plan of Reorganization dated as of February 28,
1997 (the "Plan of Reorganization"), among HCCH, Merger Sub #4, Inc., a Delaware
corporation and a wholly owned subsidiary of HCCH ("Merger Sub"), and AVEMCO
Corporation, a Delaware corporation ("AVEMCO"). Under the Plan of
Reorganization, Merger Sub will be merged with and into AVEMCO (the "Merger"),
AVEMCO will be the surviving corporation of the Merger and continue as a wholly
owned subsidiary of HCCH, and the shareholders of AVEMCO will receive shares of
HCCH Common Stock in exchange for their shares of AVEMCO Common Stock on a one-
for-one basis (the "Exchange Ratio").
After careful consideration and the receipt of a written opinion from Smith
Barney Inc., HCCH's financial advisor, dated February 17, 1997 (which opinion
was subsequently confirmed by delivery of a written opinion dated the date of
this Proxy Statement/Prospectus), to the effect that as of the date of such
opinion and based upon and subject to certain matters stated therein, the
Exchange Ratio was fair from a financial point of view to HCCH, your Board of
Directors has approved the Plan of Reorganization and the transactions provided
for therein and has concluded that they are in the best interests of HCCH and
its shareholders. YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY RECOMMENDED THAT THE
SHAREHOLDERS OF HCCH APPROVE THE PLAN OF REORGANIZATION AND THE MERGER.
In the material accompanying this letter, you will find a Notice of Special
Meeting of Shareholders, a Proxy Statement/Prospectus relating to the actions to
be taken by HCCH shareholders at the HCCH Meeting, and a proxy. The Proxy
Statement/Prospectus more fully describes the Plan of Reorganization and the
proposed Merger and includes information about HCCH and AVEMCO.
All shareholders of HCCH are cordially invited to attend the HCCH Meeting
in person. However, whether or not you plan to attend the HCCH Meeting, PLEASE
COMPLETE, SIGN, DATE AND RETURN YOUR PROXY IN THE ENCLOSED ENVELOPE. If you
attend the HCCH Meeting, you may vote in person if you wish, even though you
have previously returned your proxy. It is important that your shares be
represented and voted at the HCCH Meeting.
Sincerely,
/s/ Stephen L. Way
--------------------------------------
Stephen L. Way
Chairman of the Board
and Chief Executive Officer
<PAGE> 5
HCC INSURANCE HOLDINGS, INC.
13403 NORTHWEST FREEWAY
HOUSTON, TEXAS 77040-6094
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 29, 1997
------------------------
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (the "HCCH
Meeting") of HCC Insurance Holdings, Inc., a Delaware corporation ("HCCH"), will
be held at 9:00 a.m., local time, on May 29, 1997, at HCCH's corporate
headquarters, 13403 Northwest Freeway, Houston, Texas 77040-6094 for the
following purposes:
1. To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Reorganization dated as of February 28, 1997 (the
"Plan of Reorganization") among HCCH, Merger Sub #4, Inc., a wholly owned
subsidiary of HCCH ("Merger Sub"), and AVEMCO Corporation ("AVEMCO"). Under
the Plan of Reorganization: (a) Merger Sub will be merged with and into
AVEMCO with AVEMCO being the surviving corporation and a wholly owned
subsidiary of HCCH (the "Merger"); (b) each outstanding share of Common
Stock of AVEMCO, par value $.10 per share (the "AVEMCO Common Stock")
outstanding immediately before the Merger, will be converted into one share
of Common Stock of HCCH, par value $1.00 per share (the "HCCH Common
Stock"); (c) the shareholders of AVEMCO will receive shares of HCCH Common
Stock equal to the number of shares of AVEMCO Common Stock they hold and
(d) each outstanding option to acquire shares of AVEMCO Common Stock will
be converted into an option to acquire an equal number of shares of HCCH
Common Stock. If at any time before the closing of the Merger the average
closing price per share of the HCCH Common Stock, as calculated by dividing
by ten the sum of the closing sale prices per share reported on the New
York Stock Exchange for each of the ten consecutive trading days preceding
the date of any such determination, is less than $23.00, AVEMCO has the
right to terminate the Plan of Reorganization by notifying HCCH within 72
hours of the date on which any such average closing price is below $23.00.
Failure to notify HCCH waives such right of termination with respect to any
such ten-day period, but not with respect to any other ten-day period.
Because each outstanding share of AVEMCO Common Stock will be exchanged for
one share of HCCH Common Stock, and there are no fractional shares of
AVEMCO Common Stock presently outstanding, no fractional shares of HCCH
Common Stock will be issued pursuant to the Merger. Based on the 9,119,412
shares, excluding treasury shares but including outstanding options, of
AVEMCO Common Stock outstanding as of April 24, 1997 (the "HCCH Record
Date") and assuming all outstanding options are exercised, the holders of
AVEMCO Common Stock would receive 9,119,412 shares of HCCH Common Stock,
representing approximately 20.1% of the shares of HCCH Common Stock
outstanding immediately after consummation of the Merger.
2. To transact such other business as may properly come before the
HCCH Meeting or any adjournments or postponements thereof.
The Merger is more fully described in, and the Plan of Reorganization in
its entirety is annexed to, the attached Proxy Statement/Prospectus.
Only shareholders of record of HCCH Common Stock at the close of business
on the HCCH Record Date are entitled to notice of, and to vote at, the HCCH
Meeting or any adjournments or postponements thereof. Approval of the Plan of
Reorganization and the Merger require the affirmative vote of the holders of a
majority of the shares of HCCH Common Stock present in person or by proxy at the
HCCH Meeting as long as at such HCCH Meeting holders of at least 50% of the
outstanding shares entitled to vote with respect to the Merger are present in
person or by proxy. The directors and executive officers of HCCH, who
beneficially
<PAGE> 6
owned 11,141,466 shares of HCCH Common Stock on the HCCH Record Date or
approximately 30.8% in the aggregate of all shares of HCCH Common Stock
outstanding on the HCCH Record Date, have indicated that they intend to vote all
of their shares in favor of such approval and adoption.
THE HCCH BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE IN FAVOR OF THE
APPROVAL AND ADOPTION OF THE PLAN OF REORGANIZATION AND THE MERGER.
TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE HCCH MEETING, YOU ARE URGED TO
COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE POSTAGE
PAID ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE HCCH MEETING IN
PERSON. YOUR PROXY CAN BE WITHDRAWN BY YOU AT ANY TIME BEFORE IT IS VOTED. IF
YOU ATTEND THE MEETING, YOU MAY VOTE IN PERSON IF YOU WISH TO DO SO, EVEN IF YOU
HAVE PREVIOUSLY SENT IN YOUR PROXY.
By Order of The Board of Directors
/s/ Frank J. Bramanti
--------------------------------------
Frank J. Bramanti
Secretary
Houston, Texas
April 25, 1997
<PAGE> 7
AVEMCO CORPORATION
FREDERICK MUNICIPAL AIRPORT, 411 AVIATION WAY
FREDERICK, MARYLAND 21701
April 30, 1997
Dear Shareholder:
A Special Meeting of Shareholders (the "AVEMCO Meeting") of AVEMCO
Corporation, a Delaware corporation ("AVEMCO"), will be held at 10:00 a.m.,
local time, on May 29, 1997 at AVEMCO's corporate headquarters, Frederick
Municipal Airport, 411 Aviation Way, Frederick, Maryland 21701.
At the AVEMCO Meeting, you will be asked to consider and vote upon a
proposal to approve the Agreement and Plan of Reorganization dated as of
February 28, 1997 (the "Plan of Reorganization"), among AVEMCO, HCC Insurance
Holdings, Inc., a Delaware corporation ("HCCH"), and Merger Sub #4, Inc., a
Delaware corporation and a wholly owned subsidiary of HCCH ("Merger Sub"). Under
the Plan of Reorganization, Merger Sub will be merged with and into AVEMCO (the
"Merger"), AVEMCO will be the surviving corporation of the Merger and continue
as a wholly owned subsidiary of HCCH, and the shareholders of AVEMCO will
receive shares of HCCH Common Stock in exchange for their shares of AVEMCO
Common Stock on a one-for-one basis (the "Exchange Ratio").
After careful consideration and the receipt of a written opinion from Alex.
Brown & Sons Incorporated, AVEMCO's financial advisor dated February 24, 1997
(which opinion was subsequently confirmed by delivery of a written opinion dated
the date of this Proxy Statement/Prospectus) to the effect that as of the date
of such opinion and based upon and subject to certain matters stated therein,
the Exchange Ratio is fair to the AVEMCO shareholders from a financial point of
view, your Board of Directors has approved the Plan of Reorganization and the
transactions provided for therein and has concluded that they are in the best
interests of AVEMCO and its shareholders. YOUR BOARD OF DIRECTORS HAS
UNANIMOUSLY RECOMMENDED THAT THE SHAREHOLDERS OF AVEMCO APPROVE THE PLAN OF
REORGANIZATION AND THE MERGER.
In the material accompanying this letter, you will find a Notice of Special
Meeting of Shareholders, a Proxy Statement/Prospectus relating to the actions to
be taken by AVEMCO shareholders at the AVEMCO Meeting, and a proxy. The Proxy
Statement/Prospectus more fully describes the Plan of Reorganization and the
proposed Merger and includes information about AVEMCO and HCCH.
All shareholders of AVEMCO are cordially invited to attend the AVEMCO
Meeting in person. However, whether or not you plan to attend the AVEMCO
Meeting, PLEASE COMPLETE, SIGN, DATE AND RETURN YOUR PROXY IN THE ENCLOSED
ENVELOPE. If you attend the AVEMCO Meeting, you may vote in person if you wish,
even though you have previously returned your proxy. It is important that your
shares be represented and voted at the AVEMCO Meeting.
Sincerely,
/s/ William P. Condon
--------------------------------------
William P. Condon
Chairman of the Board
/s/ John F. Shettle, Jr.
--------------------------------------
John F. Shettle, Jr.
President and Chief Executive Officer
<PAGE> 8
AVEMCO CORPORATION
FREDERICK MUNICIPAL AIRPORT, 411 AVIATION WAY
FREDERICK, MARYLAND 21701
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 29, 1997
------------------------
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (the "AVEMCO
Meeting") of AVEMCO Corporation, a Delaware corporation ("AVEMCO"), will be held
at 10:00 a.m., local time, on May 29, 1997, at AVEMCO's corporate headquarters,
Frederick Municipal Airport, 411 Aviation Way, Frederick, Maryland 21701 for the
following purposes:
1. To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Reorganization dated as of February 28, 1997 (the
"Plan of Reorganization") among AVEMCO, HCC Insurance Holdings, Inc., a
Delaware corporation ("HCCH"), and Merger Sub #4, Inc., a wholly owned
subsidiary of HCCH ("Merger Sub"). Under the Plan of Reorganization: (a)
Merger Sub will be merged with and into AVEMCO with AVEMCO being the
surviving corporation and a wholly owned subsidiary of HCCH (the "Merger");
(b) each outstanding share of Common Stock of AVEMCO, par value $.10 per
share (the "AVEMCO Common Stock") outstanding immediately prior to the
Merger, will be converted into one share of Common Stock of HCCH, par value
$1.00 per share (the "HCCH Common Stock"); (c) the shareholders of AVEMCO
will receive shares of HCCH Common Stock equal to the number of shares of
AVEMCO Common Stock they hold and (d) each outstanding option to acquire
shares of AVEMCO Common Stock will be converted into an option to acquire
an equal number of shares of HCCH Common Stock. If at any time before the
closing of the Merger the average closing price per share of the HCCH
Common Stock, as calculated by dividing by ten the sum of the closing sales
prices per share reported on the New York Stock Exchange for each of the
ten consecutive trading days preceding the date of any such determination,
is less than $23.00, AVEMCO has the right to terminate the Plan of
Reorganization by notifying HCCH within 72 hours of the date on which any
such average closing price is below $23.00. Failure to so notify HCCH
waives such right of termination with respect to any such ten-day period,
but not with respect to any other ten-day period. Because each outstanding
share of AVEMCO Common Stock will be exchanged for one share of HCCH Common
Stock and there are no fractional shares of AVEMCO Common Stock presently
outstanding, no fractional shares of HCCH Common Stock will be issued
pursuant to the Merger. Based on the 9,119,412 shares, excluding treasury
shares but including outstanding options, of AVEMCO Common Stock
outstanding as of April 28, 1997 (the "AVEMCO Record Date") and assuming
all outstanding options are exercised, the holders of AVEMCO Common Stock
would receive 9,119,412 shares of HCCH Common Stock, representing
approximately 20.1% of the shares of HCCH Common Stock outstanding
immediately after consummation of the Merger.
2. To transact such other business as may properly come before the
AVEMCO Meeting or any adjournments or postponements thereof.
The Merger is more fully described in, and the Plan of Reorganization in
its entirety is annexed to, the attached Proxy Statement/Prospectus.
Only shareholders of record of AVEMCO Common Stock at the close of business
on the AVEMCO Record Date are entitled to notice of, and to vote at, the AVEMCO
Meeting or any adjournments or postponements thereof. Approval of the Plan of
Reorganization and the Merger requires the affirmative vote of the holders of a
majority of the outstanding shares of AVEMCO Common Stock. The directors and
executive officers of AVEMCO, who beneficially owned 1,600,237 shares of AVEMCO
Common Stock on the AVEMCO Record Date (which includes 255,250 shares subject to
outstanding stock options exercisable
<PAGE> 9
within 60 days of the AVEMCO Record Date including 855,500 shares of AVEMCO
Common Stock owned directly or indirectly by Markel Corporation, a publicly held
corporation, beneficial ownership of which shares is disclaimed by Steven A.
Markel, a director of AVEMCO and Vice Chairman of Markel Corporation) or
approximately 18.5% in the aggregate of all shares of AVEMCO Common Stock
outstanding on the AVEMCO Record Date, have indicated that they intend to vote
all of their shares in favor of such approval and adoption.
THE AVEMCO BOARD OF DIRECTORS BELIEVES THE MERGER IS IN THE BEST INTERESTS OF
AVEMCO'S SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE IN FAVOR OF THE
APPROVAL AND ADOPTION OF THE PLAN OF REORGANIZATION AND THE MERGER.
TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE AVEMCO MEETING, YOU ARE URGED
TO COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE
POSTAGE PAID ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE AVEMCO
MEETING IN PERSON. YOUR PROXY CAN BE WITHDRAWN BY YOU AT ANY TIME BEFORE IT IS
VOTED. IF YOU ATTEND THE MEETING, YOU MAY VOTE IN PERSON IF YOU WISH TO DO SO,
EVEN IF YOU HAVE PREVIOUSLY SENT IN YOUR PROXY.
SHAREHOLDERS SHOULD NOT DELIVER ANY STOCK CERTIFICATES WITH THEIR PROXY
CARDS.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Thomas H. Chero
--------------------------------------
Thomas H. Chero
Secretary
Frederick, Maryland
April 30, 1997
<PAGE> 10
<TABLE>
<S> <C>
HCC INSURANCE HOLDINGS, INC. AVEMCO CORPORATION
13403 NORTHWEST FREEWAY FREDERICK MUNICIPAL AIRPORT,
HOUSTON, TEXAS 77040-6094 411 AVIATION WAY
FREDERICK, MARYLAND 21701
------------------------ ------------------------
PROXY STATEMENT/PROSPECTUS PROXY STATEMENT
------------------------ ------------------------
9,119,412 SHARES OF COMMON STOCK
SPECIAL MEETING OF SHAREHOLDERS
SPECIAL MEETING OF SHAREHOLDERS MAY 29, 1997
MAY 29, 1997
</TABLE>
------------------------
THE MATTERS SET FORTH BELOW ARE DISCUSSED IN DETAIL IN THIS PROXY
STATEMENT/PROSPECTUS. THE PROPOSED MERGER IS A COMPLEX TRANSACTION. SHAREHOLDERS
ARE STRONGLY URGED TO READ AND CONSIDER CAREFULLY THIS PROXY
STATEMENT/PROSPECTUS IN ITS ENTIRETY, PARTICULARLY THE MATTERS REFERRED TO UNDER
"RISK FACTORS" BEGINNING ON PAGE 22 HEREOF.
------------------------
THE SECURITIES TO BE ISSUED IN THE MERGER HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/ PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
This joint Proxy Statement/Prospectus (the "Proxy Statement/Prospectus") is
being furnished to the shareholders of HCC Insurance Holdings, Inc., a Delaware
corporation ("HCCH"), in connection with the solicitation of proxies by the HCCH
Board of Directors (the "HCCH Board") for use at the Special Meeting of
Shareholders of HCCH (the "HCCH Meeting") to be held at 9:00 a.m., local time,
on May 29, 1997, at HCCH's corporate headquarters, 13403 Northwest Freeway,
Houston, Texas 77040-6094 (and at any adjournments or postponements of the HCCH
Meeting) and to the shareholders of AVEMCO Corporation, a Delaware corporation
("AVEMCO"), in connection with the solicitation of proxies by the AVEMCO Board
of Directors (the "AVEMCO Board") for use at the Special Meeting of Shareholders
of AVEMCO (the "AVEMCO Meeting") to be held at 10:00 a.m., local time, on May
29, 1997, at AVEMCO's corporate headquarters, Frederick Municipal Airport, 411
Aviation Way, Frederick, Maryland 21701 (and at any adjournments or
postponements of the AVEMCO Meeting). At such meetings, the shareholders of HCCH
and the shareholders of AVEMCO will be asked to approve the Plan of
Reorganization, the Merger and the transactions to be consummated pursuant
thereto.
This Proxy Statement/Prospectus also constitutes the prospectus of HCCH for
use in connection with the offer and issuance of shares of common stock of HCCH,
par value $1.00 per share (the "HCCH Common Stock"), pursuant to the Agreement
and Plan of Reorganization dated as of February 28, 1997 (the "Plan of
Reorganization") among HCCH, Merger Sub #4, Inc., a Delaware corporation and a
wholly owned subsidiary of HCCH ("Merger Sub"), and AVEMCO. A copy of the Plan
of Reorganization is attached hereto as Annex A. As a result of the Merger,
Merger Sub will disappear as a separate corporate entity, AVEMCO will continue
as the surviving corporation and the business of AVEMCO will
(Continued on next page)
The date of this Proxy Statement/Prospectus is April 30, 1997.
<PAGE> 11
(Continued from previous page)
continue as part of HCCH in the form of a wholly owned subsidiary of HCCH, each
then outstanding share of common stock, par value $1.00 per share, of Merger Sub
will be converted into one share of common stock, par value $.10 per share, of
AVEMCO (the "AVEMCO Common Stock"), each share, excluding treasury shares, of
AVEMCO Common Stock outstanding immediately prior to the Merger will be
converted into the right to receive one share of HCCH Common Stock and each
outstanding option to acquire shares of AVEMCO Common Stock will be converted
into an option to acquire an equal number of shares of HCCH Common Stock. If at
any time before the closing of the Merger the average closing price per share of
the HCCH Common Stock, as calculated by dividing by ten the sum of the closing
sales prices per share reported on the New York Stock Exchange (the "NYSE") for
each of the ten consecutive trading days preceding the date of any such
determination is less than $23.00, AVEMCO has the right to terminate the Plan of
Reorganization by notifying HCCH within 72 hours of the date on which any such
average closing price is below $23.00. Failure to so notify HCCH waives such
right of termination with respect to any such ten-day period, but not with
respect to any other ten-day period. Because each outstanding share of AVEMCO
Common Stock will be exchanged for one share of HCCH Common Stock and there are
no fractional shares of AVEMCO Common Stock presently outstanding, no fractional
shares of HCCH Common Stock will be issued pursuant to the Merger. Based on the
9,119,412 shares, excluding treasury shares but including outstanding options,
of AVEMCO Common Stock outstanding on April 28, 1997 (the "AVEMCO Record Date")
and assuming all outstanding options are exercised, holders of AVEMCO Common
Stock would receive 9,119,412 shares of HCCH Common Stock, representing
approximately 20.1% of the shares of HCCH Common Stock outstanding immediately
after consummation of the Merger.
On the AVEMCO Record Date, the closing sale price per share of HCCH Common
Stock on the NYSE was $[ ] and the closing sale price per share of
AVEMCO Common Stock on the NYSE was $[ ].
This Proxy Statement/Prospectus and the accompanying form of proxy are
first being mailed to shareholders of HCCH and AVEMCO on or about April 30,
1997.
<PAGE> 12
NO PERSON HAS BEEN AUTHORIZED BY HCCH OR AVEMCO TO GIVE ANY INFORMATION OR
TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS IN
CONNECTION WITH THE SOLICITATION OF PROXIES OR THE OFFERING OF SECURITIES MADE
HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY HCCH OR AVEMCO. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY THE SECURITIES OFFERED BY THIS PROXY STATEMENT/PROSPECTUS OR A
SOLICITATION OF A PROXY IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT
WOULD BE UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY
DISTRIBUTION OF THE SECURITIES TO WHICH THIS PROXY STATEMENT/PROSPECTUS RELATES
SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE INFORMATION CONTAINED HEREIN SINCE THE DATE HEREOF.
THE INFORMATION CONTAINED (OR INCORPORATED BY REFERENCE) HEREIN WITH
RESPECT TO HCCH AND ITS SUBSIDIARIES HAS BEEN PROVIDED BY HCCH. THE INFORMATION
CONTAINED (OR INCORPORATED BY REFERENCE) HEREIN WITH RESPECT TO AVEMCO AND ITS
SUBSIDIARIES HAS BEEN PROVIDED BY AVEMCO.
TO THE EXTENT THAT FORWARD-LOOKING STATEMENTS APPEAR OR ARE DESCRIBED IN
THIS PROXY STATEMENT/PROSPECTUS, ARE INCORPORATED BY REFERENCE HEREIN, OR ARE
MADE IN CONNECTION WITH THE OPINION OF THE FINANCIAL ADVISOR TO THE HCCH BOARD
OR THE FINANCIAL ADVISOR TO THE AVEMCO BOARD AND REFERRED TO HEREIN, THEY ARE
MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995. INVESTORS ARE CAUTIONED THAT ALL FORWARD-LOOKING STATEMENTS
INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE
ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY DIFFERENT FROM ANY
FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH
FORWARD - LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES INCLUDE, WITHOUT
LIMITATION, UNCERTAINTY AS TO HCCH'S AND AVEMCO'S FUTURE PROFITABILITY, RISKS
RELATING TO DEPENDENCE UPON MATERIAL CONTRACTS, ABILITY TO CEDE REINSURANCE
RISK, ADEQUACY OF LOSS RESERVES, DEPENDENCE UPON KEY PERSONNEL, ABILITY TO
INTEGRATE THE OPERATIONS OF HCCH AND AVEMCO AND ACHIEVE EXPECTED SYNERGIES,
REGULATORY AND LICENSING REQUIREMENTS, RISKS OF FOREIGN OPERATIONS, AS WELL AS
GENERAL MARKET CONDITIONS AND COMPETITION. PLEASE REFER TO THE SECURITIES AND
EXCHANGE COMMISSION FILINGS OF HCCH AND AVEMCO INCORPORATED BY REFERENCE HEREIN,
COPIES OF WHICH ARE AVAILABLE FROM HCCH OR AVEMCO WITHOUT CHARGE, FOR FURTHER
INFORMATION. SEE "RISK FACTORS."
AVAILABLE INFORMATION
HCCH and AVEMCO are each subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Securities and Exchange Commission (the "SEC"). These materials may be
inspected and copied at the public reference facilities maintained by the SEC at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's
regional offices at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511 and 7 World Trade Center, 13th Floor, New York, New
York 10048. Copies of these materials may also be obtained from the SEC at
prescribed rates by writing to the Public Reference Section of the SEC, 450
Fifth Street, N.W., Washington, D.C. 20549. The SEC also maintains a World Wide
Web site that contains reports, proxy statements, and other information
regarding companies (including HCCH and AVEMCO) that file electronically with
the SEC (http://www.sec.gov).
2
<PAGE> 13
The shares of HCCH Common Stock and AVEMCO Common Stock are listed on the NYSE
and the periodic reports, proxy statements and other information filed by HCCH
and AVEMCO with the SEC may therefore also be inspected at the offices of the
NYSE, 20 Broad Street, New York, New York 10005.
Under the rules and regulations of the SEC, the issuance of shares of HCCH
Common Stock pursuant to the Plan of Reorganization and the Merger constitutes
an offering of the HCCH Common Stock. Accordingly, HCCH has filed with the SEC a
Registration Statement on Form S-4 under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to such offering (the "Registration
Statement"). This Proxy Statement/Prospectus constitutes the prospectus of HCCH
that is filed as part of such Registration Statement.
3
<PAGE> 14
DOCUMENTS INCORPORATED BY REFERENCE
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES BY REFERENCE DOCUMENTS
RELATING TO HCCH AND AVEMCO WHICH ARE NOT PRESENTED HEREIN OR DELIVERED
HEREWITH. DOCUMENTS RELATING TO HCCH OR AVEMCO, RESPECTIVELY (OTHER THAN
EXHIBITS TO SUCH DOCUMENTS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED
BY REFERENCE) ARE AVAILABLE TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER OF
HCCH COMMON STOCK OR AVEMCO COMMON STOCK, TO WHOM THIS PROXY
STATEMENT/PROSPECTUS IS DELIVERED, ON WRITTEN OR ORAL REQUEST, WITHOUT CHARGE,
FROM, WITH RESPECT TO HCCH, HCC INSURANCE HOLDINGS, INC., 13403 NORTHWEST
FREEWAY, HOUSTON, TEXAS 77040, ATTN: FRANK J. BRAMANTI, SECRETARY, TELEPHONE:
(713) 690-7300 OR, WITH RESPECT TO AVEMCO, AVEMCO CORPORATION, FREDERICK
MUNICIPAL AIRPORT, 411 AVIATION WAY, FREDERICK, MARYLAND 21701, ATTN: THOMAS H.
CHERO, SECRETARY, TELEPHONE: (301) 694-5700. IN ORDER TO ENSURE TIMELY DELIVERY
OF THE DOCUMENTS, ANY SUCH REQUEST SHOULD BE MADE BY MAY 23, 1997. Copies of
documents that are requested will be sent by first-class mail, postage paid,
within one business day after the receipt of such request.
The following HCCH documents filed with the SEC are incorporated by
reference herein:
1. Annual Report on Form 10-K for the year ended December 31, 1996 (File
No. 1-13790) (the "HCCH 1996 10-K").
2. The portions of the Proxy Statement for the annual meeting of
shareholders to be held on May 22, 1997 that have been incorporated by
reference in the HCCH 1996 10-K.
3. Current reports on Form 8-K filed on January 21, 1997 and March 6, 1997.
4. The description of the HCCH Common Stock contained in the Registration
Statement on Form 8-A dated October 27, 1992.
The following AVEMCO documents filed with the SEC are incorporated by
reference herein:
1. Annual Report on Form 10-K for the year ended December 31, 1996 (File
No. 1-6271) (the "AVEMCO 1996 10-K").
2. Current reports on Form 8-K filed January 22, 1997 and March 6, 1997.
All documents filed by HCCH and AVEMCO pursuant to Sections 13(a), 13(c),
14 and 15(d) of the Exchange Act after the date hereof and before the date of
the HCCH Meeting and the AVEMCO Meeting shall be deemed to be incorporated by
reference herein and shall be a part hereof from the date of filing of such
documents. Any statement contained in this Proxy Statement/Prospectus or 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 which
also is or is deemed to be incorporated by reference herein) modifies or
supersedes such statement. Any statements that are modified or superseded shall
not be deemed to constitute a part hereof except as so modified or superseded.
This Proxy Statement/Prospectus does not contain all of the information
contained in the Registration Statement, certain portions of which are omitted
as permitted by the rules and regulations of the SEC. For further information
with respect to HCCH and the HCCH Common Stock, reference is made to the
Registration Statement, including the exhibits thereto, which may be inspected,
at the addresses set forth above, at the NYSE or at the SEC's offices, without
charge, or copies of which may be obtained from the SEC upon payment of the
prescribed fees. Statements contained in this Proxy Statement/Prospectus as to
the contents of any document filed as an exhibit to the Registration Statement
are not necessarily complete, and in each instance reference is hereby made to
the copy of such document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference.
4
<PAGE> 15
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION....................................... 2
DOCUMENTS INCORPORATED BY REFERENCE......................... 3
SUMMARY..................................................... 7
The Companies............................................. 7
HCCH Summary Financial Data............................... 9
AVEMCO Summary Financial Data............................. 10
HCCH and AVEMCO Unaudited Selected Pro Forma Combined
Financial Data......................................... 11
The Special Meetings...................................... 12
Risk Factors.............................................. 13
The Merger................................................ 13
Reasons for the Merger.................................... 17
Recommendations of HCCH's and AVEMCO's Boards of
Directors.............................................. 17
Opinions of Financial Advisors............................ 17
Certain Federal Income Tax Consequences................... 18
Accounting Treatment...................................... 18
Resale of HCCH Common Stock............................... 18
Appraisal and Dissenters' Rights.......................... 18
Regulatory Approvals...................................... 18
Related Agreements........................................ 19
Merger Expenses and Fees and Other Costs.................. 19
Comparative Market Prices................................. 19
RISK FACTORS................................................ 22
Uncertainties Relating to Effects of the Merger........... 22
Risks Relating to HCCH and AVEMCO......................... 23
Forward-Looking Statements................................ 27
SPECIAL MEETINGS OF SHAREHOLDERS............................ 29
The HCCH Meeting.......................................... 29
The AVEMCO Meeting........................................ 30
THE MERGER.................................................. 31
Background of the Merger.................................. 31
General................................................... 34
Effects of the Merger; Conversion of Shares............... 34
Exchange of Shares........................................ 35
Reasons for the Merger.................................... 35
Interests of Certain Persons in the Merger................ 38
Opinions of Financial Advisors............................ 39
Regulatory Approvals...................................... 48
Resale of HCCH Common Stock............................... 49
Affiliates' Agreements.................................... 49
Stock Options............................................. 50
Certain Terms of the Plan of Reorganization............... 50
Certain Federal Income Tax Matters........................ 52
Accounting Treatment...................................... 54
Appraisal and Dissenters' Rights.......................... 54
Merger Expense and Fees and Other Costs................... 54
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION.......... 54
Unaudited Pro Forma Combined Balance Sheet................ 55
Unaudited Pro Forma Combined Statements of Earnings....... 56
Notes to Unaudited Pro Forma Combined Financial
Information............................................ 58
SELECTED BUSINESS AND FINANCIAL INFORMATION WITH RESPECT TO
HCCH...................................................... 59
Business of HCCH.......................................... 59
Management of HCCH........................................ 60
HCCH SELECTED CONSOLIDATED FINANCIAL DATA................... 61
HCCH MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 63
</TABLE>
5
<PAGE> 16
<TABLE>
<S> <C>
SELECTED BUSINESS AND FINANCIAL INFORMATION WITH RESPECT TO AVEMCO......................................... 69
Business of AVEMCO....................................................................................... 69
Management of AVEMCO..................................................................................... 71
AVEMCO SELECTED CONSOLIDATED FINANCIAL DATA................................................................ 72
AVEMCO MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............... 73
SECURITY OWNERSHIP......................................................................................... 80
HCCH After the Merger.................................................................................... 80
Principal Shareholders of HCCH........................................................................... 80
Principal Shareholders of AVEMCO......................................................................... 81
DESCRIPTION OF HCCH CAPITAL STOCK.......................................................................... 82
General.................................................................................................. 82
Delaware's Anti-Takeover Law............................................................................. 82
Transfer Agent and Registrar............................................................................. 82
Listing.................................................................................................. 82
COMPARATIVE RIGHTS OF SHAREHOLDERS......................................................................... 82
Special Vote Required for Certain Combinations........................................................... 83
Vote Required to Amend Certificate of Incorporation and Bylaws........................................... 84
Removal of Directors..................................................................................... 84
Shareholder Consent in Lieu of Meeting................................................................... 84
Director Qualification and Number........................................................................ 84
Power to Call Special Meetings of Shareholders........................................................... 85
Classified Board of Directors............................................................................ 85
LEGAL MATTERS.............................................................................................. 85
SHAREHOLDER PROPOSALS...................................................................................... 85
INDEPENDENT ACCOUNTANTS.................................................................................... 85
EXPERTS.................................................................................................... 85
OTHER MATTERS.............................................................................................. 86
GLOSSARY OF SELECTED TERMS................................................................................. 87
INDEX TO FINANCIAL STATEMENTS OF HCCH AND AVEMCO........................................................... F-1
HCCH Financial Statements................................................................................ F-2
AVEMCO Financial Statements.............................................................................. F-31
APPENDIX A: AGREEMENT AND PLAN OF REORGANIZATION........................................................... A-1
APPENDIX B: OPINION OF SMITH BARNEY INC.................................................................... B-1
APPENDIX C: OPINION OF ALEX. BROWN & SONS INCORPORATED..................................................... C-1
APPENDIX D: HCCH RESTATED CERTIFICATE OF INCORPORATION..................................................... D-1
APPENDIX E: HCCH BYLAWS.................................................................................... E-1
</TABLE>
6
<PAGE> 17
SUMMARY
The following is a brief summary of certain information contained elsewhere
in this Proxy Statement/Prospectus. The summary does not contain a complete
description of the terms of the Plan of Reorganization or the Merger and is
qualified in its entirety by reference to the full text of this Proxy
Statement/Prospectus and the Appendices hereto. Shareholders of HCCH and
shareholders of AVEMCO are urged to read this Proxy Statement/Prospectus and the
Appendices in their entirety. All information contained in this Proxy
Statement/Prospectus relating to HCCH and Merger Sub has been supplied by HCCH,
and all information relating to AVEMCO has been supplied by AVEMCO. For
definitions of certain terms used herein, see "Glossary of Selected Terms." All
share and per share data relating to HCCH set forth in this Proxy
Statement/Prospectus reflects the effect of a 3-for-2 split of HCCH Common Stock
on March 31, 1994 and a further 5-for-2 split on April 30, 1996.
THE COMPANIES
HCCH. HCC Insurance Holdings, Inc. and its subsidiaries (collectively,
"HCCH") provide specialized property and casualty insurance to commercial
customers, underwritten on both a direct and a reinsurance basis, and, to a
lesser extent, insurance agency services. HCCH's principal insurance company
subsidiary is Houston Casualty Company, which operates in both domestic and
international markets. HCCH's principal insurance agency subsidiary is LDG
Management Company Incorporated ("LDG"). HCCH's underwriting activities are
focused on providing aviation, marine, offshore energy, property and accident
and health insurance on a worldwide basis, as well as international reinsurance
on these same lines of business. HCCH also specializes in marketing and
servicing complicated, high value, structured insurance and reinsurance programs
placed on behalf of domestic and foreign clients which cover large, ocean marine
fleets; complex, multinational energy and industrial businesses; international
aviation operations; large, international property accounts and a variety of
accident and health related risks. HCCH derives substantially the same amount of
its business from domestic as from international operations. HCCH operates
primarily on a surplus lines or non-admitted basis and is licensed in Texas and
Oklahoma.
HCCH's operating philosophy is to maximize underwriting profit, both for
itself and for the insurance and reinsurance companies for which it provides
underwriting management, marketing and related services, while preserving the
integrity of shareholders' equity. HCCH concentrates its underwriting in
selected, narrowly defined lines of business in which it believes there is a
substantial opportunity to achieve underwriting profits. In addition to acting
as a reinsurance underwriting manager, HCCH purchases a substantial amount of
reinsurance to limit its net loss from both individual and catastrophic risks.
HCCH believes its operational flexibility, experienced underwriting personnel
and access to, and expertise in, the reinsurance marketplace enable HCCH to
implement its strategies of emphasizing more profitable lines of business during
periods of increased premium rates, de-emphasizing less profitable lines of
business during periods of severe competition and offering reinsurance capacity
to meet market opportunities, together with providing quality underwriting,
management decision-making and support and resources for the development of new
reinsurance products.
At December 31, 1996, HCCH had approximately 331 employees. HCCH's
principal executive offices are located at 13403 Northwest Freeway, Houston,
Texas 77040-6094, and its telephone number is (713) 690-7300.
AVEMCO. AVEMCO Corporation ("AVEMCO") and its subsidiaries (collectively,
the "AVEMCO Group") provide specialized property and casualty insurance products
and services, principally involving aviation. Non-aviation specialty lines
include lenders single interest, short-term health and pleasure marine.
Insurance products are distributed on a direct basis nationally and in Canada
(except Quebec) and through agency and brokerage networks nationwide. The AVEMCO
Group's insurance services businesses offer AVEMCO opportunities to generate
additional specialty insurance premiums by providing claims management and
related subrogation and salvage services, short-term health and travel insurance
programs, administration and availability of short-term health programs
primarily for foreign students resident in the United States, worldwide
multilingual emergency assistance services for individuals who become ill or are
7
<PAGE> 18
injured while travelling abroad and computer software and related products and
services for property and casualty insurance companies in the United States.
At December 31, 1996, the AVEMCO Group had approximately 482 employees.
AVEMCO's principal executive offices are located at Frederick Municipal Airport,
411 Aviation Way, Frederick, Maryland 21701, and its telephone number is (301)
694-5700.
Merger Sub. Merger Sub was incorporated in Delaware in 1996. Merger Sub has
minimal assets and no business and has carried on no activities that are not
directly related to its formation and its execution of the Plan of
Reorganization. The mailing address of Merger Sub is 13403 Northwest Freeway,
Houston, Texas 77040-6094 and its telephone number is (713) 690-7300.
8
<PAGE> 19
HCCH SUMMARY FINANCIAL DATA(1)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Set forth below are summary historical financial data of HCCH. The
information as of and for each of the years in the five-year period ended
December 31, 1996 is derived from HCCH's historical audited consolidated
financial statements. The following data should be read in conjunction with the
Consolidated Financial Statements and Notes thereto of HCCH included elsewhere
in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1996 1995 1994(2) 1993 1992
--------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Gross written premium................. $ 230,755 $ 238,958 $ 192,878 $ 123,650 $ 74,942
Net written premium................... 96,776 98,786 59,694 38,556 25,102
Net earned premium.................... 93,314 80,011 46,834 32,663 24,483
Fee and commission income............. 38,462 32,887 28,456 24,073 16,998
Net investment income................. 15,372 13,250 9,533 5,454 2,814
Total revenue......................... 152,245 127,209 85,505 63,139 44,312
Loss and LAE.......................... 51,242 49,769 29,588 21,210 16,834
Net earnings.......................... $ 29,298 $ 24,337 $ 15,268 $ 12,688 5,290
========= ========= ========= =========
Increase in redemption value of
redeemable common stock(3).......... (1,124)
--------
Net earnings applicable to
nonredeemable common stock(3)....... $ 4,166
========
Primary earnings per share applicable
to nonredeemable common stock(3).... $ 0.81 $ 0.75 $ 0.55 $ 0.53 $ 0.28
========= ========= ========= ========= ========
Dividends per share................... $ 0.06
=========
PRO FORMA INFORMATION:(4)
Net earnings........................ $ 43,655
=========
Earnings per share.................. $ 1.21
=========
OPERATING RATIOS:(5)
Loss ratio............................ 56.4% 63.4% 64.6% 66.7% 66.2%
Expense ratio......................... 15.6 11.5 10.2 14.4 21.7
--------- --------- --------- --------- --------
Combined ratio........................ 72.0% 74.9% 74.8% 81.1% 87.9%
========= ========= ========= ========= ========
Industry average...................... 105.9% 106.4% 108.4% 106.9% 115.7%
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
1996 1995 1994(2) 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total investments..................... $320,260 $305,287 $211,881 $172,913 $ 78,755
Reinsurance recoverables.............. 123,181 103,408 99,462 73,057 62,089
Total assets.......................... 745,779 681,676 549,490 352,506 213,905
Loss and LAE payable.................. 185,822 158,451 129,755 98,399 81,997
Total debt............................ 16,500 16,661 44,908 28,944 3,673
Total shareholders' equity............ 240,690 195,459 114,374 93,451 43,168
Net tangible book value per
share(6)............................ $ 6.41 $ 5.33 $ 3.50 $ 3.50 $ 2.01
Book value per share(6)............... $ 6.71 $ 5.65 $ 3.89 $ 3.50 $ 2.01
</TABLE>
- ---------------
(1) On May 24, 1996, HCCH acquired 100% of the outstanding common stock of LDG.
This business combination has been accounted for as a pooling-of-interests
and, accordingly, the consolidated financial data shown in this table has
been restated to include the accounts and operations of LDG for all periods
presented. On November 27, 1996, HCCH acquired 100% of the outstanding
shares of NASRA. This combination has been accounted for as a
pooling-of-interests. However, HCCH's consolidated financial statements have
not been restated due to immateriality.
(2) Effective October 1, 1994, HCCH acquired 100% of the stock of IMG and MEIB.
Both acquisitions were accounted for using the purchase method. Therefore,
the results of operations from both companies are included in the
consolidated statements of earnings beginning October 1, 1994 and assets and
liabilities of IMG and MEIB have been included in the consolidated balance
sheets beginning October 1, 1994.
(3) In a 1987 private placement, HCCH sold shares of redeemable common stock,
which incorporated a redemption obligation requiring HCCH to repurchase such
shares at a specified multiple of the then current book value. Prior to its
October, 1992 initial public offering, HCCH executed an agreement with the
holders of the redeemable common stock, whereby the redemption obligation
would terminate upon the effective date of an initial public offering.
During the period in which the redemption obligation was in force, HCCH was
required to reduce its earnings by an amount equal to the increase in the
redemption value of the redeemable common stock and concurrently increase
the book value of the redeemable common stock by a like amount. On October
28, 1992, the effective date of HCCH's initial public offering, the
redemption obligation terminated.
(4) Prior to its combination with HCCH, LDG was an S Corporation, and thus
exempt from Federal income tax. The pro forma amounts shown include the
following adjustments relating to the merger of HCCH and LDG: a) to
eliminate the non-recurring compensatory stock grant and expenses related to
the merger, and b) to reflect appropriate federal income tax expense on
LDG's earnings for the period LDG was an S Corporation.
(5) Calculated for HCCH's insurance company subsidiaries and the property and
casualty insurance industry on a SAP basis. The source of the "industry
average" is A.M. Best Company ("A.M. Best").
(6) Book value per share is calculated by dividing shares outstanding into total
shareholders' equity. Net tangible book value per share uses total
shareholders' equity less goodwill as the numerator.
9
<PAGE> 20
AVEMCO SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Set forth below are summary historical financial data of AVEMCO. The
information as of and for each of the years in the five-year period ended
December 31, 1996 is derived from AVEMCO's audited consolidated financial
statements. The following data should be read in conjunction with the
Consolidated Financial Statements and Notes thereto of AVEMCO included elsewhere
in, or incorporated by reference into, this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Gross written premium................. $106,965 $100,148 $ 90,652 $ 82,255 $ 79,460
Net written premium................... 92,246 85,540 73,450 62,456 57,560
Net earned premium.................... 86,170 80,458 75,518 62,702 57,385
Net investment income................. 8,223 8,498 8,245 9,004 9,218
Fee and commission income............. 8,819 7,046 6,418 5,909 6,145
Total revenue......................... 127,890 113,204 104,590 103,901 86,923
Loss and LAE.......................... 62,866 55,605 46,310 41,502 36,783
Net earnings(1)....................... $ 12,288 $ 7,918 $ 10,833 $ 15,572 $ 9,603
======== ======== ======== ======== ========
Primary earnings per share............ $ 1.45 $ 0.90 $ 1.20 $ 1.41 $ 0.82
======== ======== ======== ======== ========
OPERATING RATIOS:(2)
Loss ratio............................ 73.1% 69.4% 61.2% 66.2% 64.6%
Expense ratio......................... 23.0 25.5 28.6 29.4 30.8
-------- -------- -------- -------- --------
Combined ratio........................ 96.1% 94.9% 89.8% 95.6% 95.4%
======== ======== ======== ======== ========
Industry average...................... 105.9% 106.4% 108.4% 106.9% 115.7%
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total investments(3).................. $149,238 $149,544 $136,378 $139,384 $151,013
Reinsurance recoverables.............. 9,503 14,292 16,903 23,887 33,818
Total assets(3)....................... 217,666 213,802 201,350 210,693 231,621
Loss and LAE payable.................. 43,227 42,305 41,202 45,779 47,506
Total debt............................ 56,667 54,967 54,600 54,500 39,000
Total liabilities..................... 157,094 152,043 145,740 156,763 142,406
Total shareholders' equity............ 60,572 61,759 55,610 53,930 89,215
Net tangible book value per
share(3)(4)......................... 7.09 6.87 5.99 5.81 7.67
Book value per share(3)(4)............ $ 7.33 $ 7.14 $ 6.28 $ 5.92 $ 7.76
</TABLE>
- ---------------
(1) 1993 includes cumulative effect of the adoption of SFAS No. 109, "Accounting
for Income Taxes."
(2) Calculated for AVEMCO insurance company subsidiaries and the property and
casualty industry on a SAP basis. The source of the "industry average" is
A.M. Best.
(3) Certain investments since January 1, 1994 are presented on a different basis
from December 31, 1993 and prior to the January, 1994 adoption of SFAS No.
115 "Accounting for Certain Investments in Debt and Equity Securities." SFAS
No. 115 prohibits restatement of prior years' financial statements.
(4) Book value per share is calculated by dividing shares outstanding into total
shareholders' equity. Net tangible book value per share uses total
shareholders' equity less intangible assets from acquisitions as the
numerator.
10
<PAGE> 21
HCCH AND AVEMCO UNAUDITED SELECTED PRO FORMA COMBINED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table is based on the assumption that all issued and
outstanding shares, excluding treasury shares, of AVEMCO are converted into
shares of HCCH Common Stock on a one-for-one basis. The Merger is reflected
under the pooling-of-interests method of accounting and pro forma information is
derived accordingly. The pro forma information is presented for illustrative
purposes only and is not necessarily indicative of operating results or
financial position that would have occurred if the Merger had been consummated,
nor is it necessarily indicative of future operating results or financial
position. See "Unaudited Pro Forma Combined Financial Information."
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
PRO FORMA COMBINED STATEMENT OF EARNINGS DATA:
Revenue
Net earned premium........................................ $179,484 $160,469 $122,352
Fee and commission income................................. 43,312 36,347 30,250
Net investment income..................................... 23,595 21,748 17,778
Computer products and services............................ 9,913 10,188 9,185
Net realized investment gain.............................. 8,341 1,636 434
Realized gain on subsidiary sale.......................... 3,307 -- --
Other income.............................................. 8,214 6,439 5,472
-------- -------- --------
Total revenue....................................... 276,166 236,827 185,471
Expense
Loss and LAE.............................................. 114,108 105,374 75,898
Operating expense:
Policy acquisition costs................................ 48,024 42,488 35,234
Compensation expense.................................... 37,102 43,110 38,142
Other operating expense................................. 25,985 25,843 20,897
Cost of computer hardware sold.......................... 1,442 1,961 1,032
Ceding commissions...................................... (34,237) (30,814) (24,834)
-------- -------- --------
Net operating expense............................... 78,316 82,588 70,471
Compensatory stock grant and merger related expenses(1)... 26,160 -- --
Interest expense.......................................... 4,993 6,471 5,697
-------- -------- --------
Total expense....................................... 223,577 194,433 152,066
-------- -------- --------
Earnings before income tax provision................ 52,589 42,394 33,405
Income tax provision...................................... 11,003 10,139 7,304
-------- -------- --------
Net earnings........................................ $ 41,586 $ 32,255 $ 26,101
======== ======== ========
PRO FORMA EARNINGS PER SHARE DATA:
Earnings per share.......................................... $ 0.94 $ 0.78 $ 0.71
======== ======== ========
Weighted average shares outstanding......................... 44,443 41,513 36,929
======== ======== ========
ADDITIONAL PRO FORMA INFORMATION(3)
Net earnings.............................................. $ 43,655
======== ======== ========
Earnings per share........................................ $ 1.21
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
PRO FORMA COMBINED BALANCE SHEET DATA:
Total investments......................................... $469,498
Reinsurance recoverables.................................. 132,684
Premium and other receivables............................. 168,717
Ceded unearned premium.................................... 71,758
Total assets.............................................. 964,044
Loss and LAE payable...................................... 229,049
Reinsurance balances payable.............................. 45,449
Unearned premium.......................................... 151,959
Premium and claims payable................................ 123,118
Total debt................................................ 73,167
Total shareholders' equity................................ 294,262
Net tangible book value per share(2)...................... $ 6.38
Book value per share(2)................................... $ 6.67
</TABLE>
- ---------------
(1) In connection with LDG's reorganization and merger with a subsidiary of
HCCH, certain nonrecurring expenses were incurred during the first six
months of 1996. Of the nonrecurring expenses, $24.0 million was related to
the compensatory grant of LDG stock to certain key employees by LDG's
majority shareholder immediately prior to the combination.
(2) Book value per share is calculated by dividing pro forma shares outstanding,
which excludes treasury shares, into pro forma total shareholders' equity.
Net tangible book value per share uses total shareholders' equity less
goodwill and intangible assets from acquisitions as the numerator.
(3) On May 24, 1996, HCCH issued 6,250,000 shares of its common stock to acquire
all of the outstanding common stock of LDG. This business combination has
been accounted for as a pooling-of-interests and, accordingly, HCCH's
financial statements have been restated to include the accounts and
operations of LDG for all periods presented. Prior to the combination, LDG
had been an S Corporation, and thus exempt from federal income tax. The pro
forma amounts shown include the following adjustments relating to HCCH's
acquisition of LDG: a) to eliminate the non-recurring compensatory stock
grant and expenses related to the merger, and b) to reflect appropriate
federal income tax expense on LDG's earnings for the period LDG was an S
Corporation.
11
<PAGE> 22
THE SPECIAL MEETINGS
HCCH Meeting. The HCCH Meeting will be held on May 29, 1997, at 9:00 a.m.,
local time, at HCCH's corporate headquarters, 13403 Northwest Freeway, Houston,
Texas 77040-6094.
AVEMCO Meeting. The AVEMCO Meeting will be held on May 29, 1997 at 10:00
a.m., local time, at AVEMCO's corporate headquarters, Frederick Municipal
Airport, 411 Aviation Way, Frederick, Maryland 21701.
Purposes of HCCH Meeting and AVEMCO Meeting. Shareholders of record of
HCCH as of the close of business on April 24, 1997 (the "HCCH Record Date") with
respect to the HCCH Meeting and shareholders of record of AVEMCO as of the close
of business on April 28, 1997 (the "AVEMCO Record Date") with respect to the
AVEMCO Meeting will be asked to consider and vote upon a proposal to approve and
adopt the Plan of Reorganization and the Merger. Under the Plan of
Reorganization, (i) Merger Sub will be merged with and into AVEMCO; (ii) AVEMCO
will be the surviving corporation of such Merger and become a wholly owned
subsidiary of HCCH; (iii) the shareholders of AVEMCO will receive shares of HCCH
Common Stock on a one-for-one basis in exchange for their shares of AVEMCO
Common Stock and (iv) each outstanding option to acquire shares of AVEMCO Common
Stock will be converted into an option to acquire an equal number of shares of
HCCH Common Stock. A copy of the Plan of Reorganization is attached hereto as
Appendix "A" and is incorporated by reference herein.
Record Date; Shares Entitled to Vote. Only shareholders of record of each
of HCCH Common Stock and AVEMCO Common Stock on the HCCH Record Date and the
AVEMCO Record Date, respectively, are entitled to notice of and to vote at the
HCCH Meeting and the AVEMCO Meeting, respectively. At the close of business on
the HCCH Record Date, there were outstanding and entitled to vote 36,169,185
shares of HCCH Common Stock, each of which will be entitled to one vote, and on
the AVEMCO Record Date there were outstanding and entitled to vote 8,403,787
shares of AVEMCO Common Stock, each of which will be entitled to one vote.
HCCH Votes Required. Delaware law does not require the shareholders of
HCCH to vote with respect to the Plan of Reorganization or the Merger. Pursuant
to the rules and regulations of the NYSE, however, approval and adoption of the
Plan of Reorganization and the Merger require the affirmative vote of the
holders of a majority of the shares of HCCH Common Stock present in person or by
proxy at a meeting at which holders of at least 50% of the outstanding shares
entitled to vote with respect to the Merger are present in person or by proxy.
The directors and executive officers of HCCH have indicated that they intend to
vote all shares of HCCH Common Stock owned or controlled by them in favor of
such approval and adoption. On the HCCH Record Date, such directors and
executive officers owned or controlled 11,141,466 shares or approximately 30.8%
in the aggregate of the outstanding shares of HCCH Common Stock. See "The
Merger -- Affiliates' Agreements."
AVEMCO Votes Required. Pursuant to the requirements of Delaware law,
approval and adoption of the Plan of Reorganization and the Merger requires the
affirmative vote of the holders of a majority of the shares of AVEMCO Common
Stock outstanding and entitled to vote. The directors and executive officers of
AVEMCO have indicated that they intend to vote all shares of AVEMCO Common Stock
owned or controlled by them in favor of such approval and adoption. On the
AVEMCO Record Date, such directors and executive officers owned or controlled
1,600,237 shares or approximately 18.5% in the aggregate of the outstanding
shares of AVEMCO Common Stock (including 855,500 shares of AVEMCO Common Stock
owned directly or indirectly by Markel Corporation, a publicly held corporation,
beneficial ownership of which shares is disclaimed by Steven A. Markel, a
director of AVEMCO and Vice Chairman of Markel Corporation). See "The
Merger -- Affiliates' Agreements" and "-- Interests of Certain Persons in the
Merger."
Quorum; Abstentions; Broker Non-Votes. With respect to both HCCH and
AVEMCO, a majority of the outstanding shares thereof, represented in person or
by proxy, will constitute a quorum. Abstentions and broker non-votes are each
included in the determination of the number of shares present and voting for
purposes of determining the presence of a quorum. A proxy submitted by a
shareholder may indicate that all
12
<PAGE> 23
or a portion of the shares represented by such proxy are not being voted by such
shareholder with respect to the approval of the Plan of Reorganization and the
Merger. This may occur, for example, when a broker is not permitted to vote
shares held in street name on certain matters in the absence of instructions
from the beneficial owner of the shares. The shares subject to any such proxy
which are not being voted with respect to the Merger (the "Nonvoted Shares")
will count for purposes of determining the presence of a quorum. Shares voted to
abstain on the approval of the Plan of Reorganization and the Merger
("Abstentions") will not be considered Nonvoted Shares. Because, with respect to
HCCH, approval of the Plan of Reorganization and the Merger requires only the
affirmative vote of holders of a majority of the shares of HCCH Common Stock
present in person or by proxy at the HCCH Meeting as long as there is present in
person or by proxy at such meeting holders of at least 50% of the outstanding
shares entitled to vote with respect to the Plan of Reorganization and the
Merger, Nonvoted Shares will not affect approval thereof by the shareholders of
HCCH. Because, with respect to AVEMCO, approval of the Plan of Reorganization
and the Merger requires the affirmative vote of a majority of the outstanding
shares, Nonvoted Shares will have the same effect as a vote AGAINST the
proposal. With respect to both HCCH and AVEMCO, Abstentions will have the same
effect as a vote AGAINST the proposal.
RISK FACTORS
A number of factors, including without limitation the effects of
integration of the operation of HCCH and AVEMCO, natural disasters, volatility
of the insurance industry, inflation, competition and governmental regulation,
may have an impact on the Merger and the performance of HCCH and the surviving
corporation after the Merger has been consummated. See "Risk Factors."
THE MERGER
Effects of the Merger; Conversion of Shares. The Merger will be
consummated promptly after shareholder approval by the HCCH and AVEMCO
shareholders, receipt of required insurance regulatory and other governmental
approvals and the satisfaction or waiver of the other conditions to consummation
of the Merger. The Merger will become effective at such time as the Certificate
of Merger is filed with the Secretary of State of the State of Delaware (the
"Effective Time"). The date on which the Effective Time occurs is referred to
herein as the "Effective Date." As a result of the Merger, Merger Sub will
disappear as a separate corporate entity, the business of AVEMCO will continue
as part of HCCH in the form of a wholly owned subsidiary of HCCH, the
outstanding shares of Common Stock of Merger Sub will be converted into an equal
number of shares of AVEMCO Common Stock, each share of AVEMCO Common Stock,
excluding treasury shares, outstanding immediately prior to the Merger will be
converted into the right to receive one share of HCCH Common Stock and each
outstanding option to acquire shares of AVEMCO Common Stock will be converted
into an option to acquire an equal number of shares of HCCH Common Stock. If at
any time before the closing of the Merger the average closing price per share of
the HCCH Common Stock, as calculated by dividing by ten the sum of the closing
sales prices per share reported on the NYSE for each of the ten consecutive
trading days preceding the date of any such determination, is less than $23.00,
AVEMCO has the right to terminate the Plan of Reorganization by notifying HCCH
within 72 hours of the date on which any average closing price is below $23.00.
Failure to so notify HCCH waives such right of termination with respect to any
such ten-day period, but not with respect to any other ten-day period. Because
each outstanding share of AVEMCO Common Stock will be exchanged for one share of
HCCH Common Stock and there are no fractional shares of AVEMCO Common Stock
presently outstanding, no fractional shares of HCCH Common Stock will be issued
pursuant to the Merger. Based on the 9,119,412 shares, excluding treasury shares
but including outstanding options, of AVEMCO Common Stock outstanding on the
AVEMCO Record Date and assuming all outstanding options are exercised, holders
of AVEMCO Common Stock would receive 9,119,412 shares of HCCH Common Stock,
representing approximately 20.1% of the shares of HCCH Common Stock outstanding
immediately after consummation of the Merger. See "The Merger -- Interests of
Certain Persons in the Merger." Under Delaware law, holders of HCCH Common Stock
and AVEMCO Common Stock are not entitled to appraisal or dissenters' rights with
respect to the Merger. See "The Merger -- Appraisal and Dissenters' Rights."
13
<PAGE> 24
Representations and Covenants. Under the Plan of Reorganization, HCCH and
Merger Sub on the one hand and AVEMCO on the other hand have made a number of
representations and warranties regarding their respective capital structures,
material agreements, governmental authorizations, corporate existence, disclosed
materials, operations, insurance regulatory matters, non-contravention with
existing obligations or agreements, properties, financial conditions and other
matters, including their authority to enter into the Plan of Reorganization and
to consummate the Merger. In addition, HCCH and AVEMCO have each agreed that it
will maintain its business and not take certain actions outside the ordinary
course without the other party's consent. HCCH and AVEMCO have also each
covenanted, among other things, that they will provide the other party access to
certain financial and operational information, maintain the confidentiality of
certain information, and cooperate with respect to required governmental and
other filings. AVEMCO also has agreed that it will not solicit, initiate or,
except under certain circumstances, discuss any acquisition proposal received
from any party other than HCCH concerning a merger or other business combination
involving AVEMCO or any of its subsidiaries. See "The Merger -- No
Solicitations; Termination Fee" and "-- Certain Terms of the Plan of
Reorganization."
Conditions to the Merger. Consummation of the transactions contemplated by
the Plan of Reorganization is subject to the fulfillment or satisfaction, and/or
waiver by the parties, on and as of the Effective Date, of a number of
conditions (each of which are fully described in the Plan of Reorganization)
including without limitation: (i) the representations and warranties of each of
the parties contained in the Plan of Reorganization being true and accurate in
all material respects; (ii) each of the parties having performed and complied in
all material respects with all of the covenants, agreements and obligations of
such party contained in the Plan of Reorganization; (iii) except as otherwise
disclosed, there having occurred no event or circumstance resulting in a
Material Adverse Effect (as defined in the Plan of Reorganization) with respect
to AVEMCO or HCCH since the date of the Plan of Reorganization; (iv) HCCH having
received all required Affiliates' Agreements (as defined in the Plan of
Reorganization) (see "-- Related Agreements" below); (v) all necessary
governmental and third party consents having been received; (vi) HCCH and AVEMCO
having each filed its annual report on Form 10-K, including financial statements
for the fiscal year ended December 31, 1996 containing an unqualified opinion
from its independent auditors; (vii) HCCH and AVEMCO having each received a
written opinion of its counsel that the Merger will constitute a tax-free
reorganization; (viii) each party having received a written opinion from counsel
to the other party, in an agreed upon form; (ix) Smith Barney Inc. ("Smith
Barney") not having withdrawn its opinion that the Exchange Ratio is fair to
HCCH from a financial point of view; (x) Alex. Brown & Sons Incorporated ("Alex.
Brown") not having withdrawn its opinion that the Exchange Ratio is fair to the
shareholders of AVEMCO from a financial point of view; (xi) each party's
shareholders having duly approved the transactions contemplated under the Plan
of Reorganization; (xii) the Registration Statement having become effective
under the Securities Act and not being the subject of any stop order or
proceedings seeking a stop order; (xiii) HCCH and AVEMCO having received letters
from KPMG Peat Marwick LLP that AVEMCO qualifies as an entity that may be a
party to a business combination for which the pooling-of-interests method of
accounting would be available; (xiv) HCCH and AVEMCO having received letters
from Coopers & Lybrand L.L.P. stating that the business combination to be
effected by the Merger will qualify as a pooling-of-interests transaction; (xv)
any and all Governmental Authorizations or waivers or exemptions therefrom
having been obtained; (xvi) receipt by HCCH of all regulatory approvals of
insurance regulatory authorities with respect to acquisition of control of the
insurer subsidiaries of AVEMCO; (xvii) the shares of HCCH Common Stock to be
issued in the Merger having been approved for listing on the NYSE; (xviii) no
action having been commenced or threatened seeking to prevent or to question the
legality or validity of the Merger; (xix) the Plan of Reorganization not having
been terminated pursuant to the terms thereof; and (xx) the expiration or early
termination of the applicable waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"). See "The
Merger -- Certain Terms of the Plan of Reorganization."
Amendment or Waiver. At any time before or after approval of the Plan of
Reorganization and Merger by the shareholders of AVEMCO and HCCH, the respective
Boards of Directors of HCCH and AVEMCO may amend the Plan of Reorganization;
provided, however, that after approval by the shareholders of AVEMCO of the
matters presented to them in connection with the Merger, the Board of Directors
of
14
<PAGE> 25
AVEMCO may not agree to any amendment which (1) alters or changes the amount or
kind of shares, securities, cash, property and/or rights to be received in
exchange for, or on conversion of, all or any of the shares of any class or
series of stock of AVEMCO or (2) alters or changes any of the terms and
conditions of the Plan of Reorganization if such alteration or change would
adversely affect the holders of any class or series of stock of AVEMCO. Delaware
law does not require the shareholders of HCCH to vote with respect to the Plan
of Reorganization and the Merger. Therefore, the Board of Directors of HCCH may
agree to amend the Plan of Reorganization at any time without any action on the
part of the shareholders of HCCH, subject to the rules and regulations of the
NYSE.
HCCH and AVEMCO, by action taken or authorized by their respective Boards
of Directors, may (1) extend the time for performance of the obligations or
other acts of other parties under the Plan of Reorganization, (2) waive
inaccuracies in the representations or warranties contained in the Plan of
Reorganization, and (3) waive compliance with any agreements or conditions
contained in the Plan of Reorganization (other than the effectiveness of the
Registration Statement, the mailing of the Joint Proxy Statement to the
shareholders of HCCH and AVEMCO, the approval of the shares of HCCH Common Stock
to be issued pursuant to the Merger and the shares issuable under the AVEMCO
Option Plans for listing on the NYSE, the required approval by the shareholders
of HCCH and AVEMCO, the receipt of required insurance regulatory approvals, and
the expiration of the waiting period under the HSR Act). With respect to any
proposed waiver of an agreement or condition which may not be made by the
respective Boards of Directors of HCCH or AVEMCO under (1), (2), or (3) of the
preceding sentence or which by law requires the approval of the shareholders of
HCCH or AVEMCO, the affected shareholders would be resolicited in accordance
with the rules promulgated under the Exchange Act governing the solicitation of
proxies in compliance with such rules.
Indemnification. The Plan of Reorganization provides that HCCH will
indemnify and hold harmless each person who was an officer or director of AVEMCO
or was serving as an officer or director of any member of the AVEMCO Group (as
defined in the Plan of Reorganization) from and against all damages,
liabilities, judgments and claims or arising from his or her capacity as such
officer or director, including any such damages, liabilities, judgments or
claims arising out of or relating to the Plan of Reorganization, in each case to
the full extent permitted by law. In addition, HCCH has agreed to keep in effect
and to guarantee performance of the indemnification provisions contained in the
Certificate of Incorporation or bylaws of AVEMCO (or the respective member of
the AVEMCO Group) as they were in effect on the date of execution of the Plan of
Reorganization so as not to adversely affect the rights of such persons with
respect to service in such capacity before the Effective Time. Further, HCCH has
agreed to maintain insurance with respect to such indemnification in an amount
of $10,000,000 for a period of six years following the Effective Time. Such
persons who remain as officers and directors of the surviving corporation after
the Effective Time shall be indemnified for actions or omissions after the
Effective Time to the same extent as officers and directors of the HCCH Group
are indemnified. See "The Merger -- Certain Terms of the Plan of
Reorganization."
No Solicitation; Termination Fee. The Plan of Reorganization prohibits
AVEMCO and any other member of the AVEMCO Group from, directly or indirectly,
soliciting or encouraging the initiation or submission of any inquiries,
proposals or other offers regarding any acquisition, merger, takeover bid, sale
of all or substantially all of its assets or 20% or more of the capital stock of
AVEMCO. The Plan of Reorganization provides that if the AVEMCO Board decides
after considering the advice of outside counsel and financial advisors that it
would be inconsistent with its fiduciary responsibilities to not approve or
recommend another transaction (a "Superior Proposal") in lieu of the Merger and
therefore withdraws or modifies its recommendation that the Plan of
Reorganization be adopted, AVEMCO may not enter into any agreement for such
other transaction until it has notified HCCH of the terms of such other
transaction and HCCH does not within five days propose additional terms (which,
if equal to the terms of such other transaction, must be accepted by AVEMCO),
and then may enter into such other agreement only if the Plan of Reorganization
is terminated and a termination fee of $7.5 million (the "Termination Fee"),
plus reasonable expenses, is paid to HCCH. If either party terminates the Plan
of Reorganization because such party's shareholders did not approve the Plan of
Reorganization at its meeting of shareholders, such party is obligated to pay
$3.75 million
15
<PAGE> 26
plus reasonable expenses to the other party. See "The Merger -- Certain Terms of
the Plan of Reorganization."
Termination. In addition to AVEMCO's termination rights if the average
closing price per share of the HCCH Common Stock for ten consecutive trading
days at any time before the closing date is less than $23.00 (as calculated
pursuant to the Plan of Reorganization), the Plan of Reorganization may be
terminated at any time prior to the Effective Time whether before or after the
approval by the shareholders of AVEMCO or HCCH: (i) by mutual consent of the
Boards of Directors of HCCH, Merger Sub and AVEMCO; (ii) by HCCH or AVEMCO if
the other party has materially breached a representation, warranty or covenant
contained in the Plan of Reorganization and such breach has not been cured
within 15 days after written notice thereof; (iii) by HCCH or AVEMCO if the
conditions to Closing set forth in the Plan of Reorganization have not been met
or waived by August 31, 1997 or the Merger shall not have occurred on or before
August 31, 1997; provided that the right to terminate the Plan of Reorganization
pursuant to this clause (iii) would not be available to any party who is in
willful and material violation of any of its representations, warranties or
covenants under the Plan of Reorganization; (iv) by HCCH or AVEMCO, if, at the
HCCH Meeting or the AVEMCO Meeting (including any adjournment or postponement
thereof), the requisite vote of shareholders of HCCH or AVEMCO, as applicable,
has not been obtained; (v) by AVEMCO, if the AVEMCO Board has received and
accepts a Superior Proposal; and (vi) by either party, if any governmental
authority shall have issued any order, decree or ruling or taken any action
permanently enjoining or otherwise prohibiting the Merger and such order,
decree, ruling or action shall have become final and non-appealable. If the Plan
of Reorganization is terminated, for a period of two years no member of the HCCH
Group or the AVEMCO Group is permitted, except as set forth below, to acquire
shares of or exercise influence over any member of the other group. If AVEMCO
terminates the Plan of Reorganization in connection with the receipt of a
Superior Proposal, no member of the HCCH Group is subject to such restrictions.
If either party terminates the Plan of Reorganization because the other party
has willfully and intentionally failed to satisfy conditions to the Merger
within its control to satisfy, the party terminating the Plan of Reorganization
is not subject to any restrictions on its ability or the ability of members of
its group or affiliates thereof to acquire shares of the other party or any
member of its group or affiliates thereof. See "The Merger -- Certain Terms of
the Plan of Reorganization."
Interests of Certain Persons in the Merger. Certain officers and directors
of AVEMCO have an interest in the transaction contemplated by the Plan of
Reorganization arising from options held by them to purchase AVEMCO Common
Stock. At the Effective Time, each outstanding option to acquire shares of
AVEMCO Common Stock will be converted into an option to acquire an equal number
of shares of HCCH Common Stock. Under the terms of existing AVEMCO stock option
plans, each of such options will, in connection with the Merger, become
immediately exercisable without any further vesting requirement. In addition,
certain executive officers of AVEMCO have entered into consulting arrangements
and/or will receive other payments or grants of options to acquire HCCH Common
Stock in connection with the consummation of the Merger and/or their continuing
employment with HCCH and AVEMCO. In connection with obligations under his
existing employment agreement, William P. Condon, Chairman of the Board of
AVEMCO, will receive a maximum of $800,000, representing payments of or for pro
rata salary from April 1, 1997 through December 31, 1997, an agreed-upon bonus
for his services to AVEMCO in 1997 and a two-year agreement not to compete,
which two year period terminates as of January 1, 2000. In addition, Mr. Condon
will receive $120,000 in connection with a two year consulting agreement. AVEMCO
has also agreed to transfer certain association-based marine and travel related
credit card programs and related items to Mr. Condon. Because such programs are
in the concept stage and AVEMCO has incurred minimal expenses relating to the
development of the programs to date, AVEMCO believes that the programs have only
nominal value, if any, at this time. Mr. John F. Shettle will continue as
President and Chief Executive Officer of AVEMCO after the Merger and will
receive a grant of options to purchase 30,000 shares of HCCH Common Stock, the
exercise price of which will be at the fair market value on the date of grant,
vesting in three equal installments over a three year period. If Mr. Shettle's
employment is terminated by either party on or before January 1, 1998, Mr.
Shettle may, upon termination of his employment and at his option, serve for two
years as a consultant to HCCH and AVEMCO for a consideration of $200,000 per
annum, subject to an agreement not to compete with HCCH or AVEMCO for such two
year period. Mr. John R. Yuska, Senior Vice President
16
<PAGE> 27
and Chief Financial Officer of AVEMCO, and Mr. Thomas H. Chero, Senior Vice
President-Legal of AVEMCO, will, at their option, each continue to serve as a
consultant to HCCH and AVEMCO for a two year period following the Merger for a
consideration of $169,000 and $112,000 per annum, respectively, and have each
agreed not to compete with HCCH or AVEMCO during such period. See "The Merger --
Interests of Certain Persons in the Merger."
REASONS FOR THE MERGER
The HCCH Board and the AVEMCO Board have identified potential benefits of
the Merger that they believe will lead to a more successful company after the
Merger. These benefits include greater potential growth from the synergistic
effects of the Merger, increased operating efficiency from consolidation of
certain operations and opportunities for economies of scale and enhanced
liquidity from greater market capitalization, among others. See "The
Merger -- Reasons for the Merger."
RECOMMENDATIONS OF HCCH'S AND AVEMCO'S BOARDS OF DIRECTORS
HCCH Board. The HCCH Board has unanimously approved the Plan of
Reorganization and has unanimously determined that the Merger is in the best
interests of HCCH and its shareholders. The primary factors considered and
relied upon by the HCCH Board in reaching its recommendation are described in
"The Merger -- Reasons for the Merger." THE HCCH BOARD HAS UNANIMOUSLY
RECOMMENDED A VOTE FOR APPROVAL AND ADOPTION OF THE PLAN OF REORGANIZATION BY
THE HCCH SHAREHOLDERS.
AVEMCO Board. The AVEMCO Board believes the Merger is in the best
interests of AVEMCO and its shareholders and has unanimously approved the Plan
of Reorganization. The primary factors considered and relied upon by the AVEMCO
Board in reaching its recommendation are described in "The Merger -- Reasons for
the Merger." For a description of interests of certain persons in the Merger,
including certain officers and members of the AVEMCO Board, see "The
Merger -- Interests of Certain Persons in the Merger." THE AVEMCO BOARD HAS
UNANIMOUSLY RECOMMENDED A VOTE FOR APPROVAL AND ADOPTION OF THE PLAN OF
REORGANIZATION BY THE SHAREHOLDERS OF AVEMCO.
OPINIONS OF FINANCIAL ADVISORS
Smith Barney. Smith Barney, financial advisor to HCCH, has delivered to
the Board of Directors of HCCH a written opinion dated February 17, 1997 (which
opinion was subsequently confirmed by delivery of a written opinion dated the
date of this Proxy Statement/Prospectus to the effect that, as of the date of
such opinion and based upon and subject to certain matters stated therein, the
Exchange Ratio was fair, from a financial point of view, to HCCH. The full text
of the written opinion of Smith Barney dated the date of this Proxy
Statement/Prospectus, which sets forth the assumptions made, matters considered
and limitations on the review undertaken, is attached as Appendix "B" to this
Proxy Statement/Prospectus and should be read carefully in its entirety. Smith
Barney's opinion is directed to the Board of Directors of HCCH and relates only
to the fairness of the Exchange Ratio from a financial point of view to HCCH,
does not address any other aspect of the Merger or related transactions and does
not constitute a recommendation to any shareholder as to how such shareholder
should vote at the HCCH Special Meeting. See "The Merger -- Opinions of
Financial Advisors."
Alex. Brown. Alex. Brown, financial advisor to AVEMCO in connection with
the Merger, delivered to the Board of Directors of AVEMCO its written opinion,
dated February 24, 1997 (which opinion was subsequently confirmed by delivery of
a written opinion dated the date of this Proxy Statement/Prospectus), to the
effect that, as of the dates thereof, the Exchange Ratio is fair to the
shareholders of AVEMCO from a financial point of view. The full text of Alex.
Brown's written opinion dated the date of this Proxy Statement/Prospectus, which
sets forth, among other things, assumptions made, matters considered and
limitations on the review undertaken, is attached as Appendix "C". AVEMCO
shareholders are urged to read the Alex. Brown opinion in its entirety. Alex.
Brown's opinion was prepared for the use of the Board of Directors of AVEMCO and
does not constitute a recommendation to any shareholder as to how such
shareholder should vote. See "The Merger -- Opinions of Financial Advisors."
17
<PAGE> 28
As is customary with respect to the compensation payable to financial
advisors in transactions similar to the Merger, a significant portion of the
fees payable to Smith Barney and Alex. Brown in connection with the Merger will
be payable only upon consummation of the Merger.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Merger is intended to be treated as a tax-free reorganization for
federal income tax purposes, so that no gain or loss will be recognized by the
shareholders of AVEMCO on the exchange of AVEMCO Common Stock for HCCH Common
Stock. The Plan of Reorganization does not require the parties to obtain a
ruling from the Internal Revenue Service as to the tax consequences of the
Merger. As a condition to the closing of the Merger, each party will receive an
opinion from its legal counsel to the effect that the Merger will be treated as
a tax-free reorganization for federal income tax purposes. Shareholders of
AVEMCO are urged to consult their own tax advisors regarding the tax
consequences to individuals of the Merger and any related transaction. See "The
Merger -- Certain Federal Income Tax Matters."
ACCOUNTING TREATMENT
The Merger will be treated as a pooling-of-interests for accounting and
financial reporting purposes. The consummation of the Merger is conditioned upon
the receipt by each of HCCH and AVEMCO of a letter from KPMG Peat Marwick LLP,
stating that AVEMCO qualifies as an entity that may be a party to a business
combination for which the pooling-of-interests method of accounting would be
available and of a letter from Coopers & Lybrand L.L.P. stating that the
business combination to be effected by the Merger will qualify as a
pooling-of-interests transaction. See "The Merger -- Accounting Treatment" and
" -- Certain Terms of the Plan of Reorganization -- Conditions."
RESALE OF HCCH COMMON STOCK
The shares of Common Stock of HCCH offered to AVEMCO shareholders by this
Proxy Statement/ Prospectus have been registered under the Securities Act.
AVEMCO shareholders who are not also "affiliates" of AVEMCO or HCCH may
therefore trade them freely and without restriction. Certain restrictions apply
to the resale of shares of HCCH Common Stock offered hereby which are received
by "affiliates" of AVEMCO or HCCH. See "The Merger -- Resale of HCCH Common
Stock."
APPRAISAL AND DISSENTERS' RIGHTS
Under Delaware law, HCCH shareholders and AVEMCO shareholders are not
entitled to appraisal or dissenters' rights with respect to the proposed Merger.
See "The Merger -- Appraisal and Dissenters' Rights."
REGULATORY APPROVALS
Antitrust. Under the HSR Act, the Merger cannot be consummated until
notifications and certain information have been furnished to the Federal Trade
Commission ("FTC") and the Antitrust Division of the Department of Justice (the
"Antitrust Division") and specified waiting period requirements have been
satisfied. In March, 1997, HCCH and AVEMCO each filed notification and report
forms under the HSR Act with the FTC and the Antitrust Division. Each company
requested early termination of the waiting period by the FTC. On March 17, 1997,
the FTC granted early termination of the waiting period. In addition, certain
states in which HCCH and AVEMCO operate may investigate the competitive impact
of the Merger in such states. See "The Merger -- Regulatory
Approvals -- Antitrust" and "-- Insurance Regulatory Approvals."
Insurance Regulatory Approvals. Before the Merger may be consummated, HCCH
will be required to obtain approval of the Merger from the insurance regulatory
authorities of California, Maryland and Missouri. See "The Merger -- Regulatory
Approvals -- Insurance Regulatory Approvals."
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<PAGE> 29
RELATED AGREEMENTS
Affiliates' Agreements. To help ensure that the Merger will be accounted
for as a pooling-of-interests, persons deemed to be affiliates of AVEMCO (the
"AVEMCO Affiliates") and persons deemed to be affiliates of HCCH (the "HCCH
Affiliates") have agreed not to dispose of their shares of AVEMCO or HCCH Common
Stock during the 30-day period prior to the Effective Date of the Merger and any
shares of HCCH Common Stock held subsequent to the Merger until HCCH publicly
releases its first report of financial information that includes the combined
financial statements of AVEMCO and HCCH for a period of at least 30 days of
combined operations. See "The Merger -- Certain Federal Income Tax Matters" and
"The Merger -- Accounting Treatment."
MERGER EXPENSES AND FEES AND OTHER COSTS
Whether or not the Merger is consummated, each party will bear its own
costs and expense in connection with the Plan of Reorganization and the
transactions provided for therein. HCCH's expenses in connection with the Plan
of Reorganization are expected to be approximately $2.5 million and AVEMCO's
expenses in connection therewith are expected to be approximately $2.7 million.
These expenses include fees for financial advisors, legal counsel, independent
auditors and printing charges.
COMPARATIVE MARKET PRICES
The HCCH Common Stock commenced trading on the National Market of the
National Association of Securities Dealers, Inc. Automated Quotation System
("Nasdaq-NMS") concurrently with its initial public offering on October 28, 1992
under the symbol "HCCH." Prior to October 28, 1992, there was no public market
for the HCCH Common Stock. In June, 1995, the HCCH Common Stock was approved for
listing on the NYSE under the symbol "HCC." Trading on the NYSE commenced on
June 20, 1995, at which time trading on the Nasdaq-NMS ceased. As of the HCCH
Record Date, there were 130 shareholders of record of the HCCH Common Stock.
HCCH estimates there are in excess of 5,000 beneficial owners of shares of HCCH
Common Stock as of the HCCH Record Date.
AVEMCO Common Stock is traded on the NYSE under the symbol "AVE." As of the
AVEMCO Record Date, there were 1,744 shareholders of record of the AVEMCO Common
Stock. AVEMCO estimates that there are in excess of 3,500 beneficial owners of
shares of AVEMCO Common Stock as of the AVEMCO Record Date.
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<PAGE> 30
The following table sets forth the range of high and low bid information
reported on the Nasdaq-NMS for HCCH Common Stock for the periods indicated below
prior to listing on the NYSE, and the high and low closing prices on the NYSE
since such listing, the high and low closing sale prices of the AVEMCO Common
Stock as reported on the NYSE and the amount of cash dividends per share
declared on the outstanding HCCH Common Stock and the AVEMCO Common Stock for
the periods indicated.
<TABLE>
<CAPTION>
HCCH AVEMCO
------------------------ -----------------------
HIGH LOW DIVIDEND HIGH LOW DIVIDEND
---- --- -------- ---- --- --------
<S> <C> <C> <C> <C> <C> <C>
1994
First Quarter.............................. $ 8 1/8 $ 6 1/4 -- $ 20 1/4 $14 1/2 $.11
Second Quarter............................. 8 3/8 6 -- 16 1/2 13 7/8 .11
Third Quarter.............................. 8 7/8 7 1/2 -- 16 3/8 13 3/4 .11
Fourth Quarter............................. 8 1/2 7 3/8 -- 17 3/8 13 3/8 .11
1995
First Quarter.............................. $ 10 1/4 $ 7 7/8 -- $ 17 5/8 $14 5/8 $.11
Second Quarter............................. 11 8 3/4 -- 18 1/4 16 1/2 .11
Third Quarter.............................. 13 3/4 10 1/8 -- 18 15 5/8 .12
Fourth Quarter............................. 15 1/4 12 1/4 -- 17 1/2 15 3/4 .12
1996
First Quarter.............................. $ 23 1/4 $14 1/2 -- $ 16 $14 5/8 $.12
Second Quarter............................. 25 1/2 19 1/8 .02 16 11 3/4 .12
Third Quarter.............................. 32 3/4 22 1/8 .02 16 1/2 13 5/8 .12
Fourth Quarter............................. 29 1/4 23 1/8 .02 16 1/8 15 .12
1997
First Quarter.............................. $ 29 1/2 $22 1/2 .03 $ 26 3/4 $15 7/8 --
Second Quarter (through April 17, 1997).... 24 7/8 21 1/2 -- 24 1/8 20 3/4 --
</TABLE>
HCCH began paying dividends in the second quarter of 1996. The HCCH Board
may review HCCH's dividend policy from time to time, and any determination with
respect thereto will be made in light of regulatory and other conditions then
existing, including HCCH's earnings, financial condition, capital requirements,
loan covenants, and other related factors.
AVEMCO paid cash dividends to its shareholders of $.44 per share in 1994,
$.46 per share in 1995 and $.48 per share in 1996. In the past, the payment of
cash dividends was dependent on AVEMCO's earnings levels, capital requirements,
financial condition and other factors deemed relevant by the AVEMCO Board.
AVEMCO has covenanted in the Plan of Reorganization not to declare another
dividend with a record date before June 1, 1997 and not to declare any such
dividend with a record date after such date if this Proxy Statement/Prospectus
has been distributed to its shareholders before June 1, 1997.
On January 16, 1997, the last trading day before the date that HCCH and
AVEMCO announced the proposed Merger, the closing sale price for a share of HCCH
Common Stock on the NYSE was $28.625 and the closing sale price for a share of
AVEMCO Common Stock on the NYSE was $19.375. No assurance can be given as to the
market price of HCCH Common Stock or AVEMCO Common Stock at the Effective Time.
Comparative Per Share Data. Set forth below are earnings from continuing
operations, cash dividends declared and book value per common share data of HCCH
and AVEMCO on both historical and pro forma combined bases. Pro forma combined
earnings from continuing operations per share and book value per share are
derived from the pro forma combined information presented elsewhere herein,
which gives effect to the Merger under the pooling-of-interests accounting
method and after certain adjustments necessary to conform the basis of
presentation of the HCCH and AVEMCO information. Pro forma combined cash
dividends declared per share reflects HCCH's cash dividends declared in the
periods indicated. The per share data for the pro forma combined basis is
calculated using the outstanding shares of HCCH Common Stock adjusted to
20
<PAGE> 31
include the shares of AVEMCO Common Stock outstanding as of the end of the
periods presented. The information set forth below should be read in conjunction
with the respective audited consolidated financial statements and unaudited
condensed consolidated financial statements of HCCH and AVEMCO included
elsewhere in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
HCCH -- Historical:
Earnings from continuing operations(2).................... $..81 $ .75 $ .55
Cash dividends declared................................... .06 -- --
Book value(2)............................................. 6.71 5.65 3.89
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
AVEMCO -- Historical:
Earnings from continuing operations....................... $1.45 $ .90 $1.20
Cash dividends declared................................... .48 .46 .44
Book value................................................ 7.33 7.14 6.28
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Pro Forma Combined(1):
Earnings from continuing operations....................... $ .94 $ .78 $ .71
Cash dividends declared................................... .06 -- --
Book value................................................ 6.67 5.95 4.44
</TABLE>
- ---------------
(1) Equivalent pro forma combined data per share of AVEMCO Common Stock equals
the pro forma combined numbers for the shares of HCCH Common Stock, based on
the Exchange Ratio of one-for-one.
(2) In April, 1996, HCCH's Board of Directors declared a five-for-two stock
split in the form of a 150% stock dividend on HCCH's Common Stock.
Adjustments have been made to 1995 and 1994 amounts to present them on a
consistent basis.
COMPARATIVE RIGHTS OF SHAREHOLDERS
As a result of the Merger, shares of AVEMCO Common Stock will be converted
into the right to receive shares of HCCH Common Stock. There are differences
between the rights of AVEMCO shareholders and the rights of HCCH shareholders
resulting from differences between the governing instruments of AVEMCO and HCCH.
For a discussion of certain differences between the rights of AVEMCO
shareholders and the rights of HCCH shareholders, see "Comparative Rights of
Shareholders."
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<PAGE> 32
RISK FACTORS
Each HCCH and AVEMCO shareholder should carefully consider and evaluate the
following factors before voting on the proposed Plan of Reorganization and
Merger.
UNCERTAINTIES RELATING TO EFFECTS OF THE MERGER
Integration of Operations. The managements of HCCH and AVEMCO have entered
into the Plan of Reorganization with the expectation that the Merger will result
in beneficial synergistic effects for the combined company. See "The
Merger -- Reasons for the Merger." Achieving the anticipated benefits of the
Merger will depend in significant part upon whether the integration of the two
companies' businesses is achieved in a timely, efficient and effective manner,
and there can be no assurance that this will occur. The integration of the two
organizations will require the dedication of management resources which may
temporarily distract them from attention to the day-to-day business of the
combined company. The difficulties of integration may be increased by the
necessity of coordinating geographically separated organizations and integrating
personnel with disparate business backgrounds. The process of combining the
companies may cause an interruption of, or a loss of momentum in, the activities
of either or both of the companies' businesses and may materially adversely
affect the revenue and results of operations of the combined company, at least
in the near term. Furthermore, the process of combining the companies could have
a material adverse effect on employee morale and on the ability of the combined
company to retain key management and customers, underwriting, and sales and
marketing personnel who are critical to the combined company's future
operations. On the date the Plan of Reorganization was signed, William P. Condon
announced his resignation as Chief Executive Officer of AVEMCO and, pursuant to
agreements with HCCH, he, together with John Yuska, Chief Financial Officer of
AVEMCO and Thomas H. Chero, Secretary and Senior Vice President of AVEMCO,
respectively, have entered into agreements whereby they will each cease to be
full-time employees of AVEMCO shortly after the Merger is consummated. Although
each of these individuals is expected to be available to consult for HCCH after
consummation of the Merger, the loss of these, and possibly other, key employees
could result in a material loss of business to the combined companies. HCCH has
acquired a number of companies within the last year and a half, and each
additional acquisition may intensify the impact of the foregoing factors.
Non-Recurring Charges. HCCH estimates that it will incur direct
transaction costs of approximately $2.5 million associated with the Merger.
These amounts are preliminary estimates only and therefore subject to change. In
addition, AVEMCO will record transaction costs of approximately $2.7 million
associated with the Merger, which will be reflected in HCCH's financial
statements as a result of the pooling-of-interests accounting treatment if the
Merger is consummated. These expenses include fees for financial advisors, legal
counsel, independent auditors and printing charges. There can be no assurance
that HCCH will not incur additional charges in subsequent quarters to reflect
costs associated with the Merger. See "The Merger -- Merger Expense and Fees and
Other Costs" and "Unaudited Pro Forma Combined Financial Information."
Additional Shares to be Issued by HCCH; Shares Eligible for Future
Sale. Based on the 9,119,412 shares, excluding treasury shares but including
outstanding options, of AVEMCO Common Stock outstanding as of AVEMCO Record Date
and assuming all outstanding options are exercised, HCCH would issue 9,119,412
shares of HCCH Common Stock in the Merger. On the AVEMCO Record Date there were
8,403,787 shares outstanding and options to acquire 715,625 shares of AVEMCO
Common Stock. In general, the shares issued for outstanding shares of AVEMCO
Common Stock will be freely tradeable upon the issuance of certain financial
information regarding the combined companies following the Merger. At the time
of the Merger, substantially all shares of outstanding HCCH Common Stock will be
eligible for sale in the public market subject in certain cases to volume and
other limitations. An additional 3,945,417 shares subject to outstanding options
and shares reserved for issuance under HCCH's stock option plans have been
registered for sale with the Commission. The sale of any of the foregoing shares
may cause substantial fluctuations in the price of HCCH Common Stock over short
periods of time. Moreover, sales of substantial amounts of HCCH Common Stock
(including shares issued upon the exercise of outstanding options) in the public
market could materially adversely affect the market price of the HCCH Common
Stock, thereby making it more difficult for HCCH to sell equity securities or
equity-related securities in the future at a time and price that HCCH
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<PAGE> 33
deems advantageous. Furthermore, HCCH may increase its capital base and repay
debt through a future equity offering.
RISKS RELATING TO HCCH AND AVEMCO
Natural Disasters. A significant portion of HCCH's and AVEMCO's business
is providing property and casualty insurance and reinsurance and acting as
underwriting manager for medical and accident and health insurance and
reinsurance facilities. Their profitability is, therefore, susceptible to losses
caused by earthquakes, windstorms, floods and other severe weather conditions or
natural disasters. In recent years, natural disasters such as Hurricane Andrew,
earthquakes in California and Japan, and windstorms in Europe have resulted in
significant losses to the property and casualty insurance industry. HCCH's
results of operations and cash flows have not been significantly adversely
affected by such natural disasters but there can be no assurances that future
natural disasters will not have a material adverse effect on HCCH's or AVEMCO's
results of operations.
Cyclical Nature of the Industry. A significant portion of HCCH's and
AVEMCO's gross written premium ("GWP") is derived from the property and casualty
insurance industry, which has historically been cyclical. These cycles are
characterized by periods of excess capital and significant competition in policy
pricing, terms and conditions, followed by periods of capital shortages,
typically resulting from adverse loss experience, which leads to decreased
competition, higher premium rates and stricter underwriting standards. The
unpredictability of the property and casualty insurance industry may contribute
to significant fluctuations in underwriting results and net earnings from
quarter to quarter and from year to year. HCCH's and AVEMCO's business is also
affected by industry conditions in the insurance and reinsurance areas, which
historically have been subject to significant volatility in demand, supply and
price. Insurance companies generally purchase reinsurance in order, among other
things, to manage their exposures on insured risks, maintain acceptable
financial ratios and protect their underwriting results from the effects of
catastrophic events. The propensity of insurers to purchase, as well as the
propensity of reinsurers to supply, reinsurance is affected by a variety of
factors, including the level of surplus capacity in the insurance and
reinsurance markets, prevailing premium rates for insurance and reinsurance,
underwriting experience, regulatory considerations, changes in the investment
environment and general economic conditions and business trends. Because HCCH
both purchases reinsurance and manages reinsurance arrangements for others, it
can be significantly affected by these factors. To the extent that these factors
influence the need for and availability and price of reinsurance, they may also
affect the amount of reinsurance underwriting management and intermediary
revenue received by HCCH. When reinsurance premium rates rise, the revenue
associated with a particular amount of coverage placed may increase. HCCH's
ability to earn increased revenue in such a situation may, however, be limited
if insurers purchase less reinsurance or if the supply of certain reinsurance
coverage is curtailed. Conversely, declining prices for reinsurance would
generally reduce such revenue, but could also reduce HCCH's cost of reinsurance
to the extent it purchases reinsurance. In any event, changes in the reinsurance
market could adversely affect HCCH or AVEMCO.
Volatility of Aviation Insurance. AVEMCO's business as a direct writer of
aviation insurance has historically been subject to significant volatility in
demand, supply and price. In the agency distribution of aviation insurance,
market share is highly fragmented, and AVEMCO competes against numerous managing
general agencies, independent agencies, pools, syndicates and insurance
companies. In addition, the substantial decline in production in new general
aviation aircraft provides AVEMCO fewer units for which it can compete to
insure. Because of delays in learning of and settling claims, insurance may be
sold at inadequate rates for a period of time, exacerbating price competition
for those units which are available to insure. AVEMCO's other specialty
insurance lines, including lenders' single interest, short-term health and
pleasure marine lines, are highly competitive, and in those areas AVEMCO
competes with many specialty insurance companies, as well as multi-line
insurance companies, many of which have more experience, larger volumes of
business and greater financial resources than the resources of AVEMCO.
Reinsurance Considerations. HCCH's property and casualty insurance
business is partially dependent upon its ability to cede significant amounts of
the risk insured by HCCH. HCCH also provides reinsurance and retrocessions for
certain underwriting facilities with various reinsurers. The operation of such
underwriting
23
<PAGE> 34
facilities of HCCH is dependent, in part, on obtaining sufficient reinsurance or
retrocessional protection for the insurers and reinsurers participating in the
various facilities. The amount, availability and cost of reinsurance or
retrocessional protection are subject to prevailing market conditions beyond the
control of HCCH, and may affect the level of business and profitability of HCCH,
as well as the level of business assumed by the facilities and the profitability
thereof. HCCH and the facilities it manages are also subject to credit risk with
respect to the reinsurers to which business has been ceded, since the ceding of
risk to reinsurers does not relieve the participating insurers or reinsurers
under the facilities of their liability to their insureds or reinsureds. No
assurances can be given as to HCCH's ability to maintain its current reinsurance
or retrocessional protection facilities, which generally are subject to annual
renewal. If HCCH were unable to maintain such facilities upon their expiration,
either its net exposures would increase, or, if it were unwilling to bear such
increase in net exposures, HCCH would be required to reduce the level of its
underwriting commitments. HCCH's management agreements for the reinsurance
facilities for which it serves as a reinsurance underwriting manager generally
provide for termination without cause upon written notice periods, usually 90 to
120 days, or under certain circumstances, immediately; if certain of these
agreements were terminated, HCCH could be materially adversely affected.
Adequacy of Loss Reserves. Applicable insurance laws require HCCH and
AVEMCO to maintain reserves to cover their estimated ultimate liability for loss
and loss adjustment expense ("LAE") with respect to reported and incurred but
not reported claims as of the end of each accounting period. At any given time,
these reserves are based on estimates of what HCCH or AVEMCO expects the
ultimate settlement and administration of claims will cost, assuming the facts
and circumstances then known, predictions of future events, estimates of future
trends in claims severity and other variable, subjective factors. The profit
commission revenue of HCCH on its underwriting management activities is
partially paid in advance of final settlement of all claims and, accordingly, is
based upon similar estimates. No assurances can be given that such estimates
will accurately reflect actual losses incurred by HCCH and AVEMCO or actual
profit commissions earned by HCCH, and any deviation from such estimates and
loss reserves or adjustment to such estimates and reserves may materially
adversely affect their respective results of operations reported in any given
period.
Medical Stop-Loss Business. HCCH's medical stop-loss business is highly
competitive and involves a diversified field of participants from small start-up
operations to large, well-established organizations. While the medical stop-loss
business has been historically competitive, during the past several years there
has been significant growth in the number of medical stop-loss insurance
underwriters. HCCH faces intense and growing pressure from fully-insured plans,
HMOs, Point of Service plans, large well established direct insurers and
competing underwriting managers providing medical stop-loss products similar to
those offered by HCCH to employer sponsored self-insured health plans.
Historically, most employer sponsored self-insured health plans indemnify
healthcare providers on a fee-for-service basis with little or no managed-care
elements. The current trend toward managed-care plan designs and, more
specifically, fully-insured plans, HMOs and Point of Service plans, has had an
adverse impact on the number of self-insured plans which has in turn reduced the
sales opportunities for the medical stop-loss products that HCCH underwrites.
HCCH's insurance underwriting management with respect to medical stop-loss
insurance products (and, to a much lesser extent, group life insurance products)
is accomplished in its capacity as an insurance underwriting manager of First
Allmerica Financial Life Insurance Company ("First Allmerica"). The management
fees and profit commissions from these areas, together with related HCCH revenue
generated by such programs for HCCH's reinsurance intermediary operations and
for affiliated reinsurance facilities under HCCH underwriting management,
represents 12% of HCCH's total revenue for 1996. The agreement with First
Allmerica may be terminated by either party on December 31 of any year by giving
at least twelve months prior written notice and can also be terminated
immediately upon notice in the event of breach of the agreement or certain other
stated events or transfer of control. Any such termination could have a material
adverse effect on HCCH, and there can, therefore, be no assurance that current
levels of revenue will be maintained in the future. HCCH's medical stop-loss
business is also subject to regulatory and legislative changes. Many states are
seeking to implement their own healthcare legislation. Many of these state
initiatives have focused on small group health plans (50 employees or less),
which HCCH believes currently account for over 10% of HCCH's medical stop-loss
premiums. Other state efforts include attempts to regulate self-insured plans
directly or indirectly by
24
<PAGE> 35
regulating companies providing stop-loss coverage. In September, 1995, the
National Association of Insurance Commissioners (the "NAIC") passed a draft
model law that seeks indirectly to regulate self-insured plans by imposing
conditions on medical stop-loss policies issued to employer-sponsored
self-insured health plans that could limit the ability of employers to
self-insure their health plans. Furthermore, some states have applied to the
federal government to be exempt from the preemptive provisions of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"). Such exemption
would permit states to regulate self-insured plans. Regulation of self-insured
plans, whether directly or indirectly, could make self-insurance significantly
less attractive to employers. No assurances can be given that any such reduced
medical stop-loss opportunities and the other factors described herein will not
have a material adverse effect on HCCH.
Impact of Inflation and Changes in Interest Rates. A significant portion
of HCCH's revenue is related to healthcare insurance and reinsurance products
which are subject to the effects of the underlying inflation of medical costs.
Such inflation in the costs of healthcare tends to generate increases in
premiums for medical stop-loss coverage, resulting in greater revenue, but also
higher claim payments. Inflation may have a negative impact on insurance and
reinsurance operations by causing higher claim settlements than may originally
have been estimated without an immediate increase in premiums to a level
necessary to maintain profit margins being possible. No express provision for
inflation is made, although trends are considered when setting underwriting
terms and claim reserves for purposes of determining revenue from underwriting
profit commissions. Such reserves are subject to a continuing review process to
assess their adequacy and are adjusted as deemed appropriate. In addition, the
market value of the investments held by HCCH and AVEMCO varies depending on
economic and market conditions and interest rates, which are highly sensitive to
the policies of governmental and regulatory authorities. Any significant change
in interest rates could therefore have a material effect on the market value of
the companies' investments.
ERISA. ERISA governs the relationships between certain benefit plans and
the "fiduciaries" of those plans. In general, ERISA is designed to protect the
ultimate beneficiaries of the plans from wrongdoing by the fiduciaries. ERISA
provides that a person is a "fiduciary" of a plan to the extent that such person
has discretionary authority in the administration of the plan or with respect to
the plan's assets. The employers who are the customers of HCCH in the medical
stop-loss area are fiduciaries of the plans that they sponsor, but there can
also be other fiduciaries of a plan. ERISA imposes various express obligations
on fiduciaries. These include avoiding transactions in which the fiduciary would
have a conflict of interest with the plan and certain transactions between the
plan and parties in interest to the plan. Generally, a "party in interest" with
respect to a plan includes a fiduciary of the plan and persons that provide
services to the plan. Violations of ERISA by fiduciaries can result in the
rescission of any affected agreements and the imposition of substantial civil
penalties on fiduciaries and parties in interest. The application of ERISA to
the operations of HCCH and its customers is an evolving area of law and is
subject to ongoing regulatory and judicial interpretations of ERISA. HCCH
attempts to minimize the applicability of ERISA to its business and further
attempts to ensure both that its practices are not inconsistent with ERISA and
that it will not be deemed to be a "fiduciary." There can, however, be no
assurance that courts, the Department of Labor, or other regulatory bodies will
not take positions contrary to the present or future interpretations or
practices of HCCH. Any such contrary positions could require changes to the
business practices of HCCH or result in HCCH incurring the risk of liabilities
as described above and could have a material adverse effect on HCCH. Similarly,
there can be no assurances that future statutory changes to ERISA will not
materially adversely affect the business of HCCH.
Competition. The insurance business is generally highly competitive and
the aviation insurance industry, in which AVEMCO is primarily involved, is even
more intensely competitive. HCCH and AVEMCO face competition from domestic and
foreign insurers, some of whom are larger and have greater financial, marketing
and management resources than HCCH and AVEMCO. HCCH's and AVEMCO's profitability
is affected by many other factors, including rate competition, severity and
frequency of claims, interest rates, state regulations, court decisions, the
judicial climate and general business conditions, all of which are outside the
control of HCCH and AVEMCO. HCCH's medical stop-loss business involves a
diversified field of participants from small start-up operations to large,
well-established organizations. While the medical stop-loss business has been
historically competitive, during the past several years there has been
25
<PAGE> 36
significant growth in the number of medical stop-loss insurance underwriters.
HCCH also faces intense and growing pressure from alternatives to employer
sponsored self-insured health plans, such as fully-insured plans, HMOs and Point
of Service plans, as well as from large well established direct insurers and
competing underwriting managers providing similar medical stop-loss products to
those offered by HCCH to employer sponsored self-insured health plans.
Competition in the reinsurance marketplace is primarily due to an increase in
the number of reinsurers participating in the market as well as a tendency by
reinsureds to retain a greater percentage of their own risk. HCCH competes with
other reinsurance underwriting managers and domestic and international
reinsurance companies. HCCH's results of operations may also be affected by the
competition for reinsurance business between broker reinsurance markets and
direct reinsurance writers. HCCH also competes with many reinsurance
intermediaries in the broker reinsurance market, some of which are affiliated
with primary insurance brokers with substantial financial resources. In each of
the above business areas, a significant number of HCCH's and AVEMCO's
competitors have financial resources, employees, facilities, market recognition,
marketing, management, experience, and other resources substantially greater
than those of HCCH and AVEMCO.
Regulation and Licensing. HCCH and AVEMCO are subject to governmental
regulation in each of the states in which they conduct business. Such regulation
is vested in state agencies, which have broad supervisory, regulatory and
administrative powers to deal with all aspects of the business of HCCH and
AVEMCO, including licenses, rates, policy forms, capital adequacy, payment of
dividends, security deposits, methods of accounting, investments, form and
content of financial statements, reserves for unpaid loss and LAE, reinsurance,
standards of solvency, periodic examinations and annual and other report
filings. A change in such laws and regulations may adversely affect the revenues
and expenses of HCCH and AVEMCO. In general, state agencies are primarily
concerned with the protection of policyholders rather than shareholders. In
addition, legislation is pending or being contemplated which could have a
material adverse effect on HCCH and AVEMCO. In recent years state legislatures
have considered or enacted laws that alter and, in many cases, increase state
authority to regulate insurance companies and insurance holding company systems.
In addition, the NAIC and state insurance regulators, as part of the NAIC's
state insurance department accreditation program, have re-examined existing laws
and regulations, specifically focusing on insurance company investments, issues
relating to the solvency of insurance companies, licensing and market conduct
issues, interpretations of existing laws, the development of new laws, and the
definition of extraordinary dividends. In addition, Congress and certain federal
agencies have conducted investigations of the current condition of the insurance
industry in the United States to determine whether to impose federal regulation
of insurers and reinsurers. From time to time, Congress and certain states have
considered various legislative proposals which would provide for governmental
earthquake insurance coverage. Legislation has also from time to time been
introduced in Congress that could result in the federal government's assuming
some role in the regulation of the insurance industry, but none is currently
pending. Neither HCCH nor AVEMCO knows at this time the extent to which such
federal or state legislative or regulatory initiatives will be adopted, and no
assurance can be given that they would not have a material adverse effect on
HCCH's or AVEMCO's business. The operations of HCCH, AVEMCO and their respective
affiliates are also subject to state insurance laws and regulations requiring
the licensing of insurance agents, brokers, reinsurance intermediaries,
reinsurance underwriting managers, and managing general agents and regulating
certain aspects of their business. These laws and regulations are intended
primarily for the protection of policyholders, rather than shareholders of the
licensed entities, and may include requirements for certain provisions in
contracts entered into between HCCH, AVEMCO and various insurers or reinsurers,
certain record keeping and reporting requirements, advertising and business
practice rules, and other matters. The businesses of HCCH and AVEMCO depend on
obtaining and maintaining licenses and approvals pursuant to which they operate,
as well as compliance with pertinent regulations. There can be no assurance
given that HCCH or AVEMCO has all such required licenses, approvals or complying
contracts or that such licenses, approvals or complying contracts can always be
obtained or continued. In all jurisdictions, the applicable laws and regulations
are subject to amendment or interpretation by regulatory authorities, and the
possibility exists that HCCH or AVEMCO may be precluded or temporarily suspended
from carrying on some or all of its activities in a given jurisdiction. Such
preclusion or suspension could have a materially adverse effect on the business
and results of operations of HCCH and AVEMCO.
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Holding Company Structure and Dividends. Both AVEMCO and HCCH are defined,
for purposes of state laws, as "insurance holding companies" and they are
dependent upon the ability of their insurer subsidiaries to pay dividends to
them (or to the intermediate parents within the holding company structure of
which they are a part) to meet their obligations and cover their expenses.
Insurance companies are limited by law to the payment of dividends out of
surplus earnings above a specified level, generally the greater of ten percent
of the insurer's surplus as regards its policyholders or the prior year's
investment income (Texas) or, under certain conditions, the prior year's
statutory net income (Maryland). Dividends in excess of those thresholds are
"extraordinary dividends" and subject to prior regulatory approval. In the past,
the NAIC has encouraged various state insurance regulatory authorities and
legislatures to promote the adoption of standards for approval of dividends that
would exceed the lesser of the surplus/earnings (investment income) tests, which
would reduce the "extraordinary dividend" threshold and increase the frequency
of regulatory approval for the payment of dividends by insurers.
Foreign Operations. Approximately 59% of HCCH's 1996 GWP was for insureds
located outside the United States. As such, it is subject to regulations in the
countries in which it operates, as well as United States restrictions on doing
business in certain countries, and other regulations relating to foreign
operations. International operations are subject to various risks not present in
domestic operations such as fluctuations in currency exchange rates,
nationalization or expropriation of assets, import/export controls, political
instability, limitations on foreign investment, restrictions on the ability to
convert currency, and the additional expense and risks inherent in conducting
operations in geographically distant locations, with customers speaking
different languages and having different cultural approaches to the conduct of
business. There can be no assurance that the business of HCCH will not be
materially adversely affected by these factors in the future.
Factors Affecting Market Price of HCCH Common Stock and AVEMCO Common
Stock; Fixed Exchange Ratio. Since the market prices of HCCH Common Stock and
AVEMCO Common Stock are subject to fluctuation, the market value of the shares
of HCCH Common Stock that the holders of AVEMCO Common Stock will receive in the
Merger may increase or decrease before and after the Merger. The Exchange Ratio
in the Merger is fixed at one-for-one and will not be adjusted in the event of
any increase or decrease in the price of either HCCH Common Stock or AVEMCO
Common Stock. There can be no assurance that before or after the Effective Time,
such shares of HCCH Common Stock will maintain or equal the prices at which such
shares have traded in the past. The prices at which HCCH Common Stock trades
after the Merger may be influenced by many factors including, among others, the
liquidity of the market for HCCH Common Stock, investor and market analyst
perceptions of HCCH and the industry in which it operates, the combined
operating results of HCCH and AVEMCO, HCCH's dividend policy, and general
economic and market conditions.
FORWARD-LOOKING STATEMENTS
This Proxy Statement/Prospectus contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act and are subject to the safe harbors created thereby. These
statements include the plans and objectives of management for future operations,
including plans and objectives relating to the development of HCCH's business in
the domestic and international property and casualty markets and as an insurance
underwriting manager and a reinsurance underwriting manager and intermediary and
the future operation of AVEMCO's business as a provider of specialty property
and casualty insurance products and services, principally involving aviation.
All forward-looking statements involve risks and uncertainty, including, without
limitation, risks relating to dependence on material contracts, ability to cede
reinsurance risk, adequacy of loss reserves, dependence upon key personnel,
ability to integrate the operations of HCCH and AVEMCO and achieve expected
synergies, regulatory and licensing requirements, risks of foreign operations
and general market conditions and competition. The forward-looking statements
included herein are based on current expectations that involve numerous risks
and uncertainties as set forth herein, the failure of any one of which could
materially adversely affect the operations of HCCH and AVEMCO. HCCH's and
AVEMCO's plans and objectives are also based on the assumptions that competitive
conditions within the property and casualty, accident and health and aviation
insurance business, and market conditions and competitive conditions within
AVEMCO's business areas, will
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not change materially or adversely and that there will be no material adverse
change in HCCH's and AVEMCO's operations or business. Assumptions relating to
the foregoing involve judgments with respect, among other things, to future
economic, competitive and market conditions and future business decisions, all
of which are difficult or impossible to predict accurately and many of which are
beyond the control of HCCH and AVEMCO. Although HCCH and AVEMCO believe that the
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could be inaccurate and there can, therefore, be no assurance that
the forward-looking statements included in this Proxy Statement/Prospectus will
prove to be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by HCCH, AVEMCO or any other person
that the objectives and plans of HCCH and AVEMCO will be achieved.
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SPECIAL MEETINGS OF SHAREHOLDERS
THE HCCH MEETING
Date, Time and Place of Meeting. The HCCH Meeting will be held at 9:00
a.m., local time, on May 29, 1997 at HCCH's corporate headquarters, 13403
Northwest Freeway, Houston, Texas 77040-6094.
Record Date and Outstanding Shares. Only shareholders of record of HCCH
Common Stock at the close of business on the HCCH Record Date are entitled to
notice of and to vote at the HCCH Meeting. As of the close of business on the
HCCH Record Date, there were 36,169,185 shares of HCCH Common Stock outstanding
and entitled to vote, held of record by 130 shareholders. Each HCCH shareholder
is entitled to one vote for each share of HCCH Common Stock held as of the HCCH
Record Date.
Voting and Revocation of Proxies. The HCCH proxy accompanying this Proxy
Statement/Prospectus is solicited on behalf of the HCCH Board for use at the
HCCH Meeting. Shareholders of HCCH are requested to complete, date and sign the
accompanying proxy and promptly return it in the enclosed envelope or otherwise
mail it to HCCH. All properly executed proxies received by HCCH before the vote
at the HCCH Meeting that are not revoked will be voted at the HCCH Meeting in
accordance with the instructions indicated on the proxies or, if no direction is
indicated, to approve and adopt the Plan of Reorganization and the Merger. The
persons designated in the proxy will have discretion to vote with respect to
procedural matters. An HCCH shareholder who has given a proxy may revoke it at
any time before it is voted at the HCCH Meeting, by (i) delivering to the
Secretary of HCCH (by any means, including facsimile) a written notice, bearing
a date later than the date of the proxy, stating that the proxy is revoked, (ii)
signing and so delivering a proxy relating to the same shares and bearing a
later date, or (iii) attending the HCCH Meeting and voting in person (although
attendance at the HCCH Meeting will not, by itself, revoke a proxy). Please
note, however, that if a shareholder's shares are held of record by a broker,
bank or other nominee and that shareholder wishes to vote at the HCCH Meeting,
the shareholder must bring to the HCCH Meeting a letter from the broker, bank or
other nominee confirming such shareholder's beneficial ownership of the shares.
Vote Required. Delaware law does not require the shareholders of HCCH to
vote with respect to the Plan of Reorganization or the Merger. Pursuant to the
rules and regulations of the NYSE, however, which require shareholders' approval
of any transaction which will result in the issuance of HCCH Common Stock equal
to or in excess of 20% of the number of shares of HCCH Common Stock outstanding
before the issuance of such stock, approval and adoption of the Plan of
Reorganization and the Merger require the affirmative vote of the holders of a
majority of the outstanding shares of HCCH Common Stock present in person or by
proxy at a meeting at which votes are cast by holders of at least 50% of the
outstanding shares entitled to vote with respect to the Merger are present in
person or by proxy. The directors and executive officers of HCCH have indicated
that they intend to vote all shares of HCCH Common Stock owned or controlled by
them for approval of the Plan of Reorganization and the Merger. On the HCCH
Record Date, such directors and executive officers owned or controlled
approximately 11,141,466 shares or 30.8 in the aggregate of the then outstanding
shares of HCCH Common Stock.
Quorum; Abstentions; Broker Non-Votes. The presence at the HCCH Meeting,
in person or by properly executed proxy, of holders of record of a majority of
the shares of the HCCH Common Stock outstanding as of the HCCH Record Date will
constitute a quorum for the transaction of business at the HCCH Meeting.
Abstentions and broker non-votes are each included in the determination of the
number of shares present and voting for purposes of determining the presence of
a quorum. Each is tabulated separately. A proxy submitted by a shareholder may
indicate that all or a portion of the shares represented by such proxy are not
being voted by such shareholder with respect to a particular matter. This may
occur, for example, when a broker is not permitted to vote stock held in street
name on certain matters in the absence of instructions from the beneficial owner
of the stock. The shares subject to any such proxy that are not being voted (the
"Nonvoted Shares") will be treated as shares not present and entitled to vote on
such matter, although such shares may be considered present and entitled to vote
for other purposes and will count for purposes of determining the presence of a
quorum. Nonvoted Shares will count for purposes of determining the presence of a
quorum, but, because approval of the Plan of Reorganization by the HCCH
shareholders requires only the affirmative vote of holders of a majority of the
shares of HCCH Common Stock present in person or by proxy at the HCCH
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Meeting as long as at such meeting holders of at least 50% of the outstanding
shares entitled to vote with respect to the Merger are present in person or by
proxy, Nonvoted Shares will not have the effect of a vote against the Merger.
Abstentions will not be considered Nonvoted Shares and will have the same effect
as a vote AGAINST the Plan of Reorganization and the Merger. It is not expected
that matters other than the Plan of Reorganization will come before the HCCH
Meeting; however, if other matters are properly presented, the persons named as
proxies will have authority to vote in accordance with their judgment on any
other such matter, including, without limitation, any proposal to adjourn or
postpone the HCCH Meeting. If a proxy is returned which specifies a vote against
the Plan of Reorganization, such discretionary authority will not be used to
adjourn the HCCH Meeting in order to solicit additional votes in favor of the
Plan of Reorganization.
Solicitation of Proxies and Expense. The cost of soliciting proxies from
holders of the HCCH Common Stock will be borne by HCCH. Copies of solicitation
material may be furnished to brokers, custodians, nominees and other fiduciaries
for forwarding to beneficial owners of shares of HCCH Common Stock, and normal
handling charges may be paid for such forwarding service. Solicitation of
proxies may be made by mail, personal interview, telephone and facsimile by
officers and other management employees of HCCH, who will receive no additional
compensation for their services.
THE AVEMCO MEETING
Date, Time and Place of Meeting. The AVEMCO Meeting will be held at 10:00
a.m., local time, on May 29, 1997 at AVEMCO's corporate headquarters, Frederick
Municipal Airport, 411 Aviation Way, Frederick, Maryland 21701.
Record Date and Outstanding Shares. Only shareholders of record of AVEMCO
Common Stock at the close of business on the AVEMCO Record Date are entitled to
notice of and to vote at the AVEMCO Meeting. As of the close of business on the
AVEMCO Record Date, there were 8,403,787 shares, excluding treasury shares, of
AVEMCO Common Stock outstanding and entitled to vote, held of record by 1,744
shareholders. Each AVEMCO shareholder is entitled to one vote for each share of
AVEMCO Common Stock held as of the AVEMCO Record Date.
Voting of Proxies. The AVEMCO proxy accompanying this Proxy
Statement/Prospectus is solicited on behalf of the AVEMCO Board for use at the
AVEMCO Meeting. Shareholders of AVEMCO are requested to complete, date and sign
the accompanying proxy and promptly return it in the enclosed envelope or
otherwise mail it to AVEMCO. All properly executed proxies received by AVEMCO
before the vote at the AVEMCO Meeting that are not revoked will be voted at the
AVEMCO Meeting in accordance with the instructions indicated on the proxies or,
if no direction is indicated, to approve and adopt the Plan of Reorganization
and the Merger. An AVEMCO shareholder who has given a proxy may revoke it at any
time before it is voted at the AVEMCO Meeting, by (i) delivering to the
Secretary of AVEMCO (by any means, including facsimile) a written notice,
bearing a date later than the date of the proxy, stating that the proxy is
revoked, (ii) signing and so delivering a proxy relating to the same shares and
bearing a later date, or (iii) attending the AVEMCO Meeting and voting in person
(although attendance at the AVEMCO Meeting will not, by itself, revoke a proxy).
Please note, however, that if a shareholder's shares are held of record by a
broker, bank or other nominee and that shareholder wishes to vote at the AVEMCO
Meeting, the shareholder must bring to the AVEMCO Meeting a letter from the
broker, bank or other nominee confirming that shareholder's beneficial ownership
of the shares.
Vote Required. Pursuant to Delaware law, approval and adoption of the Plan
of Reorganization and the Merger require the affirmative vote of the holders of
a majority of the shares of AVEMCO Common Stock outstanding and entitled to
vote. The directors and executive officers of AVEMCO have indicated that they
intend to vote all shares of AVEMCO Common Stock owned or controlled by them for
approval and adoption of the Plan of Reorganization and the Merger. On the
AVEMCO Record Date, such directors and executive officers owned or controlled
approximately 1,600,237 shares (including 855,500 shares owned directly or
indirectly by Markel Corporation, a publicly held corporation in which Steven A.
Markel, a director of AVEMCO, is Vice Chairman) or 18.5% in the aggregate of the
then outstanding shares of AVEMCO
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Common Stock. In addition, there are approximately 297,500 shares of AVEMCO
Common Stock in the AVEMCO Profit Sharing Plan. Members of management serve as
the trustees of the Profit Sharing Plan. Such trustees have indicated that they
intend to vote all shares held in the Profit Sharing Plan for approval and
adoption of the Plan of Reorganization and the Merger.
Quorum; Abstentions; Broker Non-Votes. The presence at the AVEMCO Meeting,
in person or by properly executed proxy, of holders of record of a majority of
the shares of the AVEMCO Common Stock outstanding as of the AVEMCO Record Date
will constitute a quorum for the transaction of business at the AVEMCO Meeting.
Approval of the proposal to adopt the Plan of Reorganization and the Merger
requires the affirmative vote of a majority of the votes which the holders of
the outstanding AVEMCO Common Stock are entitled to cast. Thus, Nonvoted Shares
as well as Abstentions with respect to the proposal to adopt the Plan of
Reorganization and the Merger have the same effect as votes AGAINST such
proposal. It is not expected that matters other than the Plan of Reorganization
will come before the AVEMCO Meeting; however, if other matters are properly
presented, the persons named as proxies will have authority to vote in
accordance with their judgment or any other such matter, including, without
limitation, any proposal to adjourn or postpone the AVEMCO Meeting. If a proxy
is returned which specifies a vote against the Plan of Reorganization, such
discretionary authority will not be used to adjourn the AVEMCO Meeting in order
to solicit additional votes in favor of the Plan of Reorganization.
Solicitation of Proxies and Expense. The cost of soliciting proxies from
holders of the AVEMCO Common Stock will be borne by AVEMCO. Copies of
solicitation material may be furnished to brokers, custodians, nominees and
other fiduciaries for forwarding to beneficial owners of shares of AVEMCO Common
Stock, and normal handling charges may be paid for such forwarding service.
Solicitation of proxies may be made by mail, personal interview, telephone and
facsimile by officers and other management employees of AVEMCO, who will receive
no additional compensation for their services.
THE MERGER
BACKGROUND OF THE MERGER
During the past several years, HCCH developed the view that its continued
success would be enhanced by its ability to offer additional services and
products in the property and casualty and related insurance businesses and to
offer such products and services on a wider geographical basis. In June 1996 Mr.
Stephen L. Way, Chairman of the Board and Chief Executive Officer of HCCH,
contacted Smith Barney to discuss HCCH's interest in a potential combination of
HCCH and AVEMCO. HCCH spent several days in late July 1996 evaluating certain
publicly available financial and operational information regarding AVEMCO for
purposes of confirming its interest, during which time HCCH also had several
discussions with Smith Barney concerning, among other things, the general terms
of an offer and strategy for approaching AVEMCO.
Smith Barney arranged for a meeting between Mr. Way and William P. Condon,
Chairman of the Board and Chief Executive Officer of AVEMCO, on August 6, 1996
at which Messrs. Way and Condon discussed the general benefits of a potential
business combination. Subsequently, HCCH's financial advisors participated in
the discussions with HCCH and AVEMCO. It was determined that a business
combination would only be feasible if it qualified as a tax-free reorganization
and HCCH concluded that the transaction could go forward only if it could be
accounted for as a pooling-of-interests.
On October 1, 1996, Mr. Way sent Mr. Condon a letter outlining the basis of
a possible transaction and describing the potential benefits to AVEMCO's
shareholders of a combination with HCCH. The letter proposed that HCCH issue its
common stock in a pooling-of-interests transaction for 100% of AVEMCO's
outstanding shares (based upon 8.3 million outstanding shares) that would have
assured AVEMCO shareholders of receiving value in the range of $20.00 to $22.00
per share, based on the average closing price of HCCH Common Stock during the
twenty consecutive days ending five business days before AVEMCO's shareholder
vote to approve the transaction. Based on the trading prices of AVEMCO and HCCH
at the time of the initial offer letter, the offer from HCCH represented an
exchange ratio of approximately .8 shares of HCCH stock for each share of
AVEMCO.
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Mr. Condon advised the directors of AVEMCO of the letter and a meeting of
an ad hoc committee of AVEMCO directors consisting of William Condon, H. Lowell
Davis, Paul J. Hanna, Arnold H. Johnson, Thomas J. Schwab and John F. Shettle,
Jr. was held on October 7, 1996 to discuss information obtained to date on HCCH.
This information included HCCH's history, a summary of its operations and detail
on the proposed transaction.
On October 23, 1996, Messrs. Condon and Way met in Boston, MA. Discussions
included AVEMCO's and HCCH's operational and product overlaps, the general
aviation insurance market, AVEMCO's existing stock repurchase program and the
need for the parties to enter into a confidentiality agreement if Merger
discussions were to proceed.
On October 31, 1996, the Board of Directors of AVEMCO at a regular meeting
discussed the proposal from HCCH. AVEMCO's outside legal counsel reviewed with
the AVEMCO Board its fiduciary duties with respect to the proposal made by HCCH.
The Board designated a committee consisting of Messrs. Condon and Davis and
Steven A. Markel and Rachel B. Trinder to address the proposal from HCCH and
authorized the designated committee to proceed with discussions with HCCH and to
retain an investment banker to represent AVEMCO. On November 13, 1996, the
designated committee met to discuss the hiring of an investment banker, the
involvement of the Company's independent auditors with respect to the
pooling-of-interests issues and to review the terms set forth in HCCH's October
1, 1996 preliminary proposal. Based on its review of available information, the
committee preliminarily concluded that the $20.00 to $22.00 price was on the low
side of what it felt could be the value of AVEMCO's stock. The committee was
advised that a meeting of HCCH and AVEMCO had been scheduled for November 18,
1996. Based primarily on the relatively high price-to-book and price-to-earnings
multiples of the HCCH stock, the volatility of HCCH's stock, the committee
authorized AVEMCO's representatives to propose a transaction with a fixed
exchange ratio in the range of 1.0 to 1.1 shares of HCCH stock to 1.0 share of
AVEMCO stock. The committee also considered it appropriate that AVEMCO obtain
downside protection against an HCCH stock price decline prior to consummation of
any transaction.
On November 14, 1996, HCCH and AVEMCO signed a joint Confidentiality
Agreement permitting the further exchange of information between the parties,
restricting the purchase of stock of the other party and limiting certain other
activities.
On November 18, 1996, Mr. Way and Mr. Frank J. Bramanti, Executive Vice
President and Chief Financial Officer of HCCH arranged a meeting in Frederick,
Maryland (site of AVEMCO's home office) to discuss possible terms under which a
business combination would be attractive to both sides particularly with regard
to pricing. AVEMCO was represented at this meeting by Mr. Condon and Mr. Steven
A. Markel, a director of AVEMCO. John Shettle, Jr. and John Yuska, AVEMCO's
President and Chief Financial Officer, respectively, also attended a portion of
the meeting. AVEMCO representatives explored the concept of a fixed exchange
ratio of 1.0 to 1.1 shares of HCCH stock to 1.0 shares of AVEMCO stock. No
agreement was reached at this meeting as to the economic terms of the proposed
merger.
On November 19, 1996, a meeting of the AVEMCO Board was held to update the
Board on the prior day's meeting. The Board determined that an investment banker
should be engaged by the Board to assist the Board with developing the terms of
any transaction with HCCH and consideration of alternative transactions.
Following extensive consideration of three investment banking candidates, on
December 2, 1996, the committee met to approve the selection of Alex. Brown as
the investment banker to the Company. On December 6, 1996, an agreement was
entered into between AVEMCO and Alex. Brown.
On December 19, 1996, AVEMCO's position as set forth at the November 18,
1996 meeting was presented to the HCCH Board. Mr. Way advised the HCCH Board of
the preliminary discussions held with AVEMCO as of such date, and sought the
HCCH Board's authority for Mr. Way, as Chief Executive Officer of HCCH, to make
a proposal to AVEMCO to acquire AVEMCO in a stock for stock merger that would
qualify as a tax free reorganization as well as qualifying for
pooling-of-interests accounting treatment. The HCCH Board authorized HCCH's
management to proceed with the proposed merger and seek to negotiate agreeable
terms for a proposed merger with AVEMCO, including one at a fixed exchange ratio
and with downside protection against an HCCH price decline prior to consummation
of a merger.
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Additionally, during the months of November and December, numerous
telephone conversations were held between Messrs. Condon, Way, Markel and
representatives of Smith Barney to further discuss the economic terms of a
proposed transaction. These conversations primarily addressed tax and accounting
issues relating to a pooling-of-interests and the negotiation of an acceptable
exchange ratio between what was initially offered by HCCH on October 1, 1996 and
what AVEMCO had presented to HCCH in the meeting of November 18, 1996.
On January 6, 1997, the AVEMCO Board held a special meeting to review and
discuss the possible merger between AVEMCO and HCCH. Outside legal counsel for
AVEMCO again reviewed with the AVEMCO Board its fiduciary duties with respect to
the proposed transaction. In addition, Alex. Brown, having been retained on
December 6, 1996 as AVEMCO's financial advisor with respect to the proposed
transaction, provided a presentation to the AVEMCO Board including an overview
of AVEMCO and HCCH, alternative approaches to valuing AVEMCO, a review of HCCH's
proposal and various alternatives to the HCCH offer. Alternatives reviewed by
Alex. Brown and the Board included remaining independent, entering into
negotiations with HCCH and exploring potential business combinations with other
parties. The Board, after reviewing the alternatives in conjunction with
AVEMCO's five-year business projection, which had been presented to the Board,
determined that achieving the level of shareholder value potentially available
in a merger with HCCH as an independent entity in the near term would be
difficult. Accordingly, the Board instructed the designated committee headed by
Messrs. Condon and Markel to enter into merger discussions with HCCH based upon
a fixed exchange ratio greater than .9 shares of HCCH stock to 1.0 shares of
AVEMCO stock. Among other factors, the Board viewed a potential combination with
HCCH as the best opportunity for enhancing AVEMCO's strategic position within
the aviation and health insurance markets. Benefits from the transaction
included the opportunity for cost savings, the potential to combine operations
with other divisions of HCCH, the enhanced ability of the combined entity to
acquire additional strategic partners and the potential to expand
internationally based on HCCH's strength in international operations.
Immediately thereafter, Mr. Condon contacted Mr. Way, who also spoke with
Mr. Markel, to apprise him of the AVEMCO Board's January 6, 1997 decision and to
schedule a meeting between representatives of the two companies.
On January 8, 1997, AVEMCO's designated committee met to discuss Mr.
Condon's and Mr. Markel's update to Mr. Way and to schedule a meeting the
following week between the parties.
On January 13 and 14, 1997, representatives of HCCH (Messrs. Way and
Bramanti), representatives of AVEMCO (Messrs. Condon and Markel), and certain of
HCCH's and AVEMCO's advisors met in Baltimore, Maryland to review certain issues
associated with the proposed business combination and related agreements.
Negotiations continued for several days as the parties attempted to reach
agreement on an acceptable exchange ratio and certain other material terms for
the transaction. On January 17, 1997, the parties reached an agreement in
principle with respect to certain key issues, including with respect to the
Exchange Ratio, that had not previously been resolved. As a result, HCCH and
AVEMCO issued a joint press release announcing the agreement in principle and
the determination to proceed with drafting definitive agreements and resolving
other conditions relating to the proposed business combination. The parties
agreed that consideration of employment and/or severance arrangements for AVEMCO
officers and employees would be deferred.
Further detailed due diligence investigations were conducted by HCCH and
AVEMCO and their respective accounting, legal and financial advisors during the
weeks following the January 17, 1997 announcement as the parties met to draft
and negotiate a final definitive agreement. The final terms and conditions
contained in the definitive agreement were also negotiated during this period.
On February 17, 1997, the HCCH Board held a special meeting to consider the
proposed Plan of Reorganization and the Merger. At such meeting, Mr. Way,
together with HCCH's financial and legal advisors, reviewed with the HCCH Board
the results of their due diligence investigations and the terms of the proposed
Plan of Reorganization and the Merger. Legal counsel for HCCH also reviewed with
the HCCH Board its fiduciary duties with respect to the proposed transaction. In
addition, Smith Barney delivered to the HCCH Board its oral opinion (which
opinion was subsequently confirmed by delivery of written opinions dated
February 17, 1997 and the date of this Proxy Statement/Prospectus) to the effect
that, as of such date
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and based upon and subject to certain matters stated in such opinion, the
proposed Exchange Ratio was fair, from a financial point of view, to HCCH, and
reviewed for the HCCH Board the financial analyses performed by Smith Barney in
connection with such opinion. See " -- Opinions of Financial Advisors -- HCCH."
After discussions, the HCCH Board unanimously approved the Plan of
Reorganization and the Merger with such changes as management might deem
necessary and authorized HCCH to enter into the Plan of Reorganization, to call
a special meeting of shareholders, and to recommend the Plan of Reorganization
and the Merger to the HCCH shareholders.
On February 24, 1997, the AVEMCO Board held a special meeting to consider
the proposed Plan of Reorganization and the Merger. At such meeting, Mr. Condon,
together with AVEMCO's financial and legal advisors, reviewed with the AVEMCO
Board the results of their due diligence investigations and the terms of the
proposed Plan of Reorganization and the Merger. In addition, Alex. Brown
delivered to the AVEMCO Board its oral opinion (which opinion was subsequently
confirmed by delivery of a written opinion dated February 24, 1997) that, as of
such date and based upon and subject to certain matters stated in such opinion,
the Exchange Ratio was fair, from a financial point of view, to the shareholders
of AVEMCO. See "-- Opinion of Financial Advisors." After discussions, the AVEMCO
Board unanimously approved the Plan of Reorganization and the Merger with such
changes as management might deem necessary and authorized AVEMCO to enter into
the Plan of Reorganization.
Following further negotiations on certain terms of the Plan of
Reorganization, on February 28, 1997, Mr. Way on behalf of HCCH and the Merger
Sub and Mr. Condon, on behalf of AVEMCO, executed the Plan of Reorganization.
GENERAL
The discussion in this Proxy Statement/Prospectus of the Merger and the
description of the principal terms of the Plan of Reorganization are subject to
and qualified in their entirety by reference to the Plan of Reorganization, a
copy of which is attached to this Proxy Statement/Prospectus as Appendix "A,"
and is incorporated herein by reference.
EFFECTS OF THE MERGER; CONVERSION OF SHARES
The Merger will be consummated promptly after shareholder approval by the
shareholders of HCCH and AVEMCO, the receipt of required regulatory approvals
and the satisfaction or waiver of the other conditions to consummation of the
Merger. Under the Plan of Reorganization, Merger Sub will be merged with and
into AVEMCO, AVEMCO will be the surviving corporation of such Merger, the
shareholders of AVEMCO will receive shares of HCCH Common Stock in exchange for
their shares of AVEMCO Common Stock and, as a result, AVEMCO will become a
wholly owned subsidiary of HCCH. Merger Sub will disappear as a separate
corporate entity, the business of AVEMCO will continue as part of HCCH, the
outstanding shares of Common Stock of Merger Sub will be converted into an equal
number of shares of AVEMCO Common Stock and each share of AVEMCO Common Stock
outstanding just before the consummation of the Merger will be converted into
the right to receive a share of HCCH Common Stock. Each outstanding option to
acquire shares of AVEMCO Common Stock will be converted into an option to
acquire an equal number of shares of HCCH Common Stock. Because each outstanding
share of AVEMCO Common Stock will be exchanged for one share of HCCH Common
Stock and there are no fractional shares of AVEMCO Common Stock presently
outstanding, no fractional shares of HCCH Common Stock will be issued pursuant
to the Merger. Under Delaware law, holders of AVEMCO Common Stock and HCCH
Common Stock are not entitled to appraisal or dissenters' rights with respect to
the Merger. See "The Merger -- Appraisal and Dissenters' Rights."
Upon consummation of the Merger, all the executive officers and directors
of HCCH will remain in their current positions. All of the shareholders of
AVEMCO will become shareholders of HCCH (as described below), and their rights
will be governed by HCCH's Certificate of Incorporation and Bylaws, attached
hereto as Appendix "D" and Appendix "E," respectively.
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EXCHANGE OF SHARES
After the Effective Time, each record holder at the Effective Time of a
certificate or certificates theretofore representing shares of issued and
outstanding AVEMCO Common Stock will be entitled, upon the surrender of such
certificate or certificates to KeyCorp. Shareholder Services, Inc. (the
"Exchange Agent"), promptly to receive in exchange therefor a certificate or
certificates representing the number of whole shares of HCCH Common Stock into
which the shares of AVEMCO Common Stock previously represented by the
certificate or certificates so surrendered shall have been automatically
converted. From and after the Effective Time, until surrendered, each
certificate theretofore representing shares of AVEMCO Common Stock will be
deemed for all corporate purposes, other than payment of dividends, to evidence
the ownership of the number of whole shares of HCCH Common Stock into which such
shares of AVEMCO Common Stock shall have been converted. Unless and until such
certificates shall be so surrendered, the holder of such certificates will not
be entitled to receive payment of any dividends on such shares of HCCH Common
Stock payable to the holders thereof after the Effective Time. Upon the
surrender of certificates previously representing shares of AVEMCO Common Stock,
the holder thereof will receive certificates representing the number of whole
shares of HCCH Common Stock to which such holder shall be entitled and the
amount of any dividends or other distributions that shall have been payable to
holders of record of HCCH Common Stock on or after the Effective Time with
respect to such shares of HCCH Common Stock, without interest. Any dividends
payable to holders of record of HCCH Common Stock as of any record date prior to
the Effective Time will not be payable to holders of certificates previously
representing AVEMCO Common Stock.
Because each share of AVEMCO Common Stock will be exchanged for one share
of HCCH Common Stock, and there are no fractional shares of AVEMCO Common Stock
presently outstanding, no fractional shares of HCCH Common Stock will be issued
pursuant to the Merger.
SHAREHOLDERS SHOULD NOT DELIVER ANY STOCK CERTIFICATES WITH THEIR PROXY
CARDS. YOU WILL BE NOTIFIED BY THE TRANSFER AGENT WHEN TO SUBMIT YOUR
CERTIFICATES, IF THE TRANSACTION IS CLOSED.
REASONS FOR THE MERGER
Joint Reasons for the Merger. Each of the HCCH Board and the AVEMCO Board
unanimously recommends that the shareholders of the respective companies vote
FOR the approval and adoption of the Plan of Reorganization and the Merger, for
the reasons set forth below.
The HCCH Board and the AVEMCO Board have identified a number of potential
mutual benefits of the Merger that they believe will contribute to the success
of the combined company. The Board of Directors of each Company was able to
review the reasons for the Merger in order to determine that the Merger was in
the best interests of its respective company and shareholders, without
quantifying the bases for the Merger. These potential benefits include: (i) the
principal businesses of each company are complementary, and synergistic effects
of the Merger are expected by each Board of Directors to result in a positive
impact on the potential for growth of each company's business in the long term;
(ii) the HCCH Board and the AVEMCO Board believe that increased operating
efficiency can be expected from the consolidation of certain operations in the
combined company, with opportunities for economies of scale, particularly in
terms of the integration of office facilities, information systems and support
functions and the combined purchasing power of the two companies; and (iii) the
Merger is expected to benefit both companies' expansion efforts and (iv) market
capitalization of the combined company will be larger than either company's
prior market capitalization, providing the HCCH and AVEMCO shareholders with
enhanced liquidity. The respective Boards of Directors believe that the
synergies of the Merger include the ability of a larger and more geographically
diverse organization to appeal to a larger and more geographically dispersed
customer base, to more easily attract and retain highly qualified management and
employees because larger and more diverse and complex operations result in a
larger number and greater variety of management positions, thus affording more
opportunity for employee advancement, and to strengthen the management and
operations of each company by taking advantage of skills and experience of each
company that are not shared by the other. In addition, the Boards of Directors
believe that over time the combined organization will be able to consolidate
certain
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accounting, procurement and management functions and as a significantly larger
organization will be able to obtain economies of scale in purchasing, marketing
and capital formation. Because these factors do not operate independently of
each other and in fact may have a significant beneficial impact as a group
rather than independently and were thus considered together for their
anticipated beneficial impact on the combined operations over a period of time
following consummation of the Merger, the respective Boards of Directors did not
quantify or assign a relative weight to each factor independently. Moreover, a
discussion of the risks that such factors may not have the anticipated
beneficial impact may be found in "Risk Factors -- Integration of Operations."
HCCH's Reasons for the Merger. The HCCH Board believes that the following
are additional reasons for shareholders of HCCH to vote FOR approval and
adoption of the Plan of Reorganization and the Merger: (i) synergism between the
businesses of the two companies is expected to result in increased underwriting
capabilities and expansion opportunities for HCCH, particularly in the aviation
arena; (ii) the Merger provides HCCH with a direct line of business that
management believes fits well with HCCH's operating philosophies; (iii) AVEMCO
has a history of operating profitability; (iv) the complementary geographic
locations of the HCCH and AVEMCO operations should provide opportunity for
profitable growth due to synergies, and HCCH would acquire a strong market
position in new markets; (v) the Merger would better position HCCH to deal with
uncertainties which may face the industry in the competitive property and
casualty business; (vi) based on the relative revenue of both companies and the
Exchange Ratio and assuming certain synergies are achieved,the Merger should be
anti-dilutive to current shareholders of HCCH and (vii) the oral opinion of
Smith Barney delivered to the HCCH Board on February 17, 1997, the date of the
HCCH Board meeting held to evaluate the proposed transaction (which opinion was
subsequently confirmed by delivery of written opinions dated February 17, 1997
and the date of this Proxy Statement/Prospectus), to the effect that, as of such
date and based upon and subject to certain matters stated in such opinion, the
Exchange Ratio was fair, from a financial point of view, to HCCH.
In reaching its decision to approve the Plan of Reorganization, the HCCH
Board considered the following material factors: (i) an analysis of the
financial performance, operations, assets, business condition and business
prospects of AVEMCO, including its projected performance through 1998, (ii) a
review of pro forma projections of the combined entity, (iii) the recent and
historical performance of the HCCH Common Stock and the AVEMCO Common Stock,
(iv) certain historical and prospective financial information of AVEMCO, (v) an
analysis of recent acquisitions in the insurance industry, (vi) a review of the
background and experience of the AVEMCO management team and (vii) the terms of
the Plan of Reorganization. Before taking action on the Plan of Reorganization,
the HCCH Board received presentations from, and reviewed the terms and
conditions of the Plan of Reorganization with, HCCH's management, legal,
financial and tax advisors.
The HCCH Board also considered the following potentially negative factors
in its deliberations concerning the Merger: (i) the charges typically expected
to be incurred in connection with the Merger, primarily in the quarter during
which consummation of the Merger occurs, (ii) the risk that the market price of
the HCCH Common Stock might be adversely affected by the public announcement of
the Merger, (iii) the risks involved in the integration of the two companies,
(iv) the risk that the anticipated benefits of the Merger might not be fully
realized, (v) the risks associated with the possibility of material adverse
changes to AVEMCO's business and (vi) the possibility that the Merger might not
be consummated and the corresponding potential adverse effect of such a result
on the market price of the HCCH Common Stock. In the view of the HCCH Board
these considerations were not sufficient, either individually or collectively,
to outweigh the potential advantages of the Merger.
In view of the wide variety of factors, both positive and negative,
considered by the HCCH Board and the different weight attributed by individual
members of the HCCH Board to different factors, the HCCH Board did not find it
practicable to quantify or otherwise assign relative weights to the specific
factors considered. Moreover, individual members of the HCCH Board may have
given different weight to different factors. The HCCH Board viewed its position
and recommendations as being based upon the totality of information presented to
and considered by it.
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AVEMCO's Reasons for the Merger. The AVEMCO Board believes that the
following are additional reasons for the shareholders of AVEMCO to vote FOR
approval and adoption of the Plan of Reorganization and the Merger: (i) the
AVEMCO Board believes that AVEMCO's business could substantially benefit from
combined operations with HCCH, particularly with respect to international
expansion; (ii) the belief that the Merger offers the opportunity to create a
combined company with greater financial resources and flexibility, competitive
strengths, and business opportunities than would be possible for AVEMCO alone;
(iii) the enhanced position of the combined company to succeed in the changing
property and casualty insurance business; (iv) the ability of the combined
company to compete more effectively amid the ongoing consolidation of property
and casualty insurance companies; (v) recent trading prices for HCCH Common
Stock; and (vi) the Merger provides a strategic alternative to remaining an
independent company or effecting a business combination with one or more other
parties.
In evaluating the fairness of the proposed merger consideration to the
AVEMCO shareholders, the AVEMCO Board consulted with management and Alex. Brown
regarding HCCH's business and with management, legal counsel, tax advisors and
Alex. Brown regarding the terms and provisions of the Plan of Reorganization.
The AVEMCO Board considered a number of factors, many of the detailed analyses
of which were prepared by Alex. Brown, in reaching its conclusions, including:
(i) an analysis of the financial performance, operations, assets, business
condition and business prospects of HCCH and AVEMCO, including each of HCCH's
and AVEMCO's projected performance through 1998 and 2001, respectively, (ii) a
review of pro forma projections of the combined entity, (iii) HCCH's history
over the past several years of increases in financial performance, including
earnings per share, (iv) the premium offered with respect to the AVEMCO Common
Stock in the proposed Merger in comparison to comparable transactions, (v) the
benefits of a proposed tax-free reorganization structure, (vi) the greater
liquidity provided by a larger combined entity, (vii) the historical performance
of the HCCH Common Stock and the AVEMCO Common Stock and various current and
historical valuation multiples of the two companies, (viii) an analysis of the
background and experience of HCCH's management team; (ix) the failure of any
alternative proposals or inquiries to be presented after the announcement of the
agreement in principle with HCCH on January 17, 1997, (x) the ability of the
Merger to qualify as a tax-free reorganization; and (xi) the opinion of Alex.
Brown, as financial advisor to AVEMCO, that the Exchange Ratio was fair from a
financial point of view to the holders of AVEMCO Common Stock.
The AVEMCO Board also considered the following potentially negative factors
in its deliberations concerning the Merger: (i) the loss of control over the
future operations of AVEMCO following consummation of the Merger, (ii) the risks
associated with the possibility of material adverse changes to HCCH's business,
(iii) the risk, before or following consummation of the Merger, that the trading
price of the HCCH Common Stock could drop below its level at the time the Merger
was negotiated, (iv) the potential repercussions on the trading price of the
AVEMCO Common Stock if the Merger were not consummated, (v) the effect on
employees and management of the transaction and the change of control, and (vi)
the volatility of the HCCH stock. In the view of the AVEMCO Board these
considerations were not sufficient, either individually or collectively, to
outweigh the potential advantages of the Merger.
The AVEMCO Board also considered the terms of the Plan of Reorganization,
including provisions that permit the AVEMCO Board, consistent with the exercise
of its fiduciary duties and subject to certain conditions, to respond to
inquiries regarding other potential business combination transactions, to
provide information to, and negotiate with, third parties making an unsolicited
proposal to acquire AVEMCO in such a transaction and to terminate the Plan of
Reorganization if the AVEMCO Board determines to recommend as alternative
business combination as a Superior Proposal (as defined in "-- No Solicitation
of Transactions; Termination Fee" below). In that regard, the AVEMCO Board noted
that the Plan of Reorganization provides that if the Plan of Reorganization is
terminated as a result of a Superior Proposal, AVEMCO will be obligated to pay
HCCH a Termination Fee in the amount of $7.5 million plus its reasonable
expenses. The AVEMCO Board did not view the Termination Fee provision of the
Plan of Reorganization as unreasonably impeding any interested third party from
proposing a Superior Proposal. The Board was advised that certain directors and
officers of AVEMCO had interests in the Merger that may be deemed to be in
addition to their interests solely as shareholders of AVEMCO. Full disclosure of
these interests was made in connection with
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the Board's consideration of the transaction. The consulting agreements between
HCCH and Messrs. Shettle, Yuska, Chero and Condon were negotiated after the
letter of intent was announced and the exchange ratio was negotiated and were
negotiated directly with HCCH and not with AVEMCO. Accordingly, in making the
decision to recommend the Merger, the Board did not consider it necessary to
adopt any other mechanisms to resolve any potential conflicts of interest. See
"The Merger -- Interests of Certain Persons in the Merger."
In view of the wide variety of factors, both positive and negative,
considered by the AVEMCO Board and the different weight attributed by individual
members of the AVEMCO Board to different factors, the AVEMCO Board did not find
it practicable to quantify or otherwise attempt to assign relative weights to
the specific factors considered. The AVEMCO Board viewed its position and
recommendations as being based upon the totality of the information presented to
and considered by it.
The AVEMCO Board believes that the terms of the Plan of Reorganization are
fair to and in the best interests of AVEMCO and its shareholders. While the
foregoing discussion of the information and factors considered by the AVEMCO
Board is not intended to be exhaustive all material information and factors
considered by the AVEMCO Board have been described.
Board Recommendations. THE HCCH BOARD HAS DETERMINED THAT THE MERGER IS IN
THE BEST INTERESTS OF HCCH AND ITS SHAREHOLDERS AND HAS UNANIMOUSLY RECOMMENDED
A VOTE FOR APPROVAL AND ADOPTION OF THE PLAN OF REORGANIZATION AND THE MERGER.
THE AVEMCO BOARD HAS DETERMINED THAT THE MERGER IS IN THE BEST INTERESTS OF
AVEMCO AND ITS SHAREHOLDERS AND HAS UNANIMOUSLY RECOMMENDED A VOTE FOR APPROVAL
AND ADOPTION OF THE PLAN OF REORGANIZATION AND THE MERGER.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain directors and officers of AVEMCO have interests in the Merger that
may be deemed to be in addition to their interests solely as stockholders of
AVEMCO. These interests are described in detail in the following paragraph. Full
disclosure of these interests was made in connection with the Board's
consideration of the transaction. The consulting agreements between HCCH and
Messrs. Shettle, Yuska, Chero and Condon were negotiated after the letter of
intent was announced and the exchange ratio was negotiated and were negotiated
directly with HCCH and not with AVEMCO. Accordingly, in making the decision to
recommend the Merger, the Board did not consider it necessary to adopt any other
mechanisms to resolve any potential conflicts of interest. At the time of
execution of the Plan of Reorganization, there were approximately 743,698 shares
of AVEMCO Common Stock subject to unexercised stock options previously granted
to officers, directors and employees of AVEMCO. Each outstanding option to
acquire shares of AVEMCO Common Stock will be converted into an option to
acquire an equal number of shares of HCCH Common Stock. Under the terms of
AVEMCO existing stock option plans, each of such options will, in connection
with the Merger, become immediately exercisable without any further vesting
requirement. In connection with the Merger, William P. Condon, Chairman of the
Board of AVEMCO, will remain an employee at nominal compensation as of the
Effective Time and will continue as such until the later of the date the AVEMCO
pension plan is terminated or five days following the time that HCCH has
reported on thirty days of joint operation of HCCH and AVEMCO. At the Effective
Time of the Merger, Mr. Condon will retire as Chairman of the AVEMCO Board, but
will remain a director of AVEMCO Insurance Company. In connection with
obligations under Mr. Condon's existing employment contract, Mr. Condon will
receive a maximum of $800,000, representing payments of or for pro rata salary
from April 1, 1997 through December 31, 1997, an agreed-upon bonus for his
services to AVEMCO in 1997 and a two-year agreement not to compete, which two
year period terminates as of January 1, 2000. In addition, Mr. Condon will
receive $120,000 in connection with a two year consulting agreement. AVEMCO has
also agreed to transfer certain programs currently in the concept stage, which
do not involve any of AVEMCO's current business activities, and related items to
Mr. Condon, subject to the agreement not to compete and a first right of refusal
with respect to insurance products related to such programs. Such programs
relate to association-based marine and travel related credit card programs and
related items. Because such programs are in the concept stage and AVEMCO has
incurred minimal expenses relating to the development of the programs to date,
AVEMCO believes that such programs have only nominal value, if any, at this
time. Mr. John F. Shettle, Jr. will continue
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as President and Chief Executive Officer of AVEMCO and will become Chairman of
the Board and Chief Executive Officer of AVEMCO Insurance Company. In connection
with such employment, Mr. Shettle will receive a grant of options to purchase
30,000 shares of HCCH Common Stock, the exercise price of which will be at the
fair market value on the date of grant, vesting in three equal installments over
a three-year period. The exercise price of Mr. Shettle's options has not yet
been determined, but is expected to approximate the market value on the date of
grant. If Mr. Shettle's employment is terminated by either party on or before
January 1, 1998, Mr. Shettle may, upon termination of his employment and at his
option, serve for two years as a consultant to HCCH and AVEMCO for a
consideration of $200,000 per annum, subject to an agreement not to compete with
HCCH or AVEMCO for such two-year period. As of the Effective Time of the Merger,
Mr. John R. Yuska will remain an employee at nominal compensation and will
continue as such until the later of the date the AVEMCO pension plan is
terminated or five days following the time that HCCH has reported on thirty days
of joint operation of HCCH and AVEMCO. Mr. Yuska may, upon termination of his
employment and at his option, serve for two years as a consultant to HCCH and
AVEMCO for a consideration of $169,000 per annum, subject to an agreement not to
compete with HCCH or AVEMCO for such two-year period. Mr. Thomas H. Chero will
remain an employee at nominal compensation as of the Effective Time and will
continue as such until the later of the date the AVEMCO pension plan is
terminated or five days following the time that HCCH has reported on thirty days
of joint operation of HCCH and AVEMCO. Mr. Chero may, upon termination of his
employment and at his option, serve for two years as a consultant to HCCH and
AVEMCO for a consideration of $112,000 per annum, subject to an agreement not to
compete with HCCH or AVEMCO for such two-year period. If Messrs. Shettle, Yuska
or Chero elect not to serve as a consultant, such individual will not be subject
to an agreement not to compete. The termination of employment of each Messrs.
Condon, Yuska, Chero and Shettle will be considered to be by mutual agreement of
the parties.
OPINIONS OF FINANCIAL ADVISORS
Smith Barney. Smith Barney was retained by HCCH to act as its financial
advisor in connection with the Merger. In connection with such engagement, HCCH
requested that Smith Barney evaluate the fairness, from a financial point of
view, to HCCH of the Exchange Ratio. On February 17, 1997, at a meeting of the
Board of Directors of HCCH held to evaluate the proposed Merger, Smith Barney
delivered an oral opinion (subsequently confirmed by delivery of a written
opinion dated February 17, 1997) to the Board of Directors of HCCH to the effect
that, as of the date of such opinion and based upon and subject to certain
matters stated therein, the Exchange Ratio was fair, from a financial point of
view, to HCCH. Smith Barney has confirmed its opinion dated February 17, 1997 by
delivery of a written opinion dated the date of this Proxy Statement/Prospectus.
In connection with its opinion dated the date of this Proxy
Statement/Prospectus, Smith Barney updated certain of the analyses performed in
connection with its opinion delivered on February 17, 1997 and reviewed the
assumptions on which such analyses were based and the factors considered in
connection therewith.
In arriving at its opinion, Smith Barney reviewed the Plan of
Reorganization and, in connection with its opinion dated the date of this Proxy
Statement/Prospectus, reviewed this Proxy Statement/Prospectus, and held
discussions with certain senior officers, directors and other representatives
and advisors of HCCH and certain senior officers and other representatives and
advisors of AVEMCO concerning the businesses, operations and prospects of HCCH
and AVEMCO. Smith Barney examined certain publicly available business and
financial information relating to HCCH and AVEMCO as well as certain financial
forecasts and other information and data for HCCH and AVEMCO which were provided
to, or otherwise discussed with, Smith Barney by the respective managements of
HCCH and AVEMCO, including information relating to certain strategic
implications and operational benefits anticipated to result from the Merger.
Smith Barney reviewed the financial terms of the Merger as set forth in the Plan
of Reorganization in relation to, among other things: current and historical
market prices and trading volumes of HCCH Common Stock and AVEMCO Common Stock;
the historical and projected earnings and other operating data of HCCH and
AVEMCO; and the capitalization and financial condition of HCCH and AVEMCO. Smith
Barney also considered, to the extent publicly available, the financial terms of
certain other similar transactions recently effected which Smith Barney
considered relevant in evaluating the Merger and analyzed certain financial,
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stock market and other publicly available information relating to the businesses
of other companies whose operations Smith Barney considered relevant in
evaluating those of HCCH and AVEMCO. Smith Barney also evaluated the potential
pro forma financial impact of the Merger on HCCH. In addition to the foregoing,
Smith Barney conducted such other analyses and examinations and considered such
other financial, economic and market criteria as Smith Barney deemed appropriate
in arriving at its opinion. Smith Barney noted that its opinion was necessarily
based upon information available, and financial, stock market and other
conditions and circumstances existing and disclosed, to Smith Barney as of the
date of its opinion.
In rendering its opinion, Smith Barney assumed and relied, without
independent verification, upon the accuracy and completeness of all financial
and other information and data publicly available or furnished to or otherwise
reviewed by or discussed with Smith Barney. With respect to financial forecasts
and other information and data furnished to or otherwise reviewed by or
discussed with Smith Barney, the managements of HCCH and AVEMCO advised Smith
Barney that such forecasts and other information and data were reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the managements of HCCH and AVEMCO as to the future financial
performance of HCCH and AVEMCO and the strategic implications and operational
benefits anticipated to result from the Merger. Smith Barney assumed, with the
consent of the Board of Directors of HCCH, that the Merger will be treated as a
pooling-of-interests in accordance with generally accepted accounting principles
and as a tax-free reorganization for federal income tax purposes. Smith Barney's
opinion, as set forth therein, relates to the relative values of HCCH and
AVEMCO. Smith Barney did not express any opinion as to what the value of the
HCCH Common Stock actually will be when issued pursuant to the Merger or the
price at which the HCCH Common Stock will trade subsequent to the Merger. Smith
Barney did not make and, with the exception of certain reserve reports relating
to AVEMCO, was not provided with an independent evaluation or appraisal of the
assets, liabilities (contingent or otherwise) or reserves of HCCH or AVEMCO nor
did Smith Barney make any physical inspection of the properties or assets of
HCCH or AVEMCO. Smith Barney was not requested to consider, and Smith Barney's
opinion does not address, the relative merits of the Merger as compared to any
alternative business strategies that might exist for HCCH or the effect of any
other transaction in which HCCH might engage. Although Smith Barney evaluated
the Exchange Ratio from a financial point of view, Smith Barney was not asked to
and did not recommend the specific consideration payable in the Merger, which
was determined through negotiation between HCCH and AVEMCO. No other limitations
were imposed by HCCH on Smith Barney with respect to the investigations made or
procedures followed by Smith Barney in rendering its opinion.
THE FULL TEXT OF THE WRITTEN OPINION OF SMITH BARNEY DATED THE DATE OF THIS
PROXY STATEMENT/PROSPECTUS, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS
CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED HERETO AS
APPENDIX "B" AND IS INCORPORATED HEREIN BY REFERENCE. HOLDERS OF HCCH COMMON
STOCK ARE URGED TO READ THIS OPINION CAREFULLY IN ITS ENTIRETY. SMITH BARNEY'S
OPINION IS DIRECTED TO THE BOARD OF DIRECTORS OF HCCH AND RELATES ONLY TO THE
FAIRNESS OF THE EXCHANGE RATIO FROM A FINANCIAL POINT OF VIEW TO HCCH, DOES NOT
ADDRESS ANY OTHER ASPECT OF THE MERGER OR RELATED TRANSACTIONS AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD
VOTE AT THE HCCH SPECIAL MEETING. THE SUMMARY OF THE OPINION OF SMITH BARNEY SET
FORTH IN THIS PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In preparing its opinion to the Board of Directors of HCCH, Smith Barney
performed a variety of financial and comparative analyses, including those
described below performed by Smith Barney in connection with its opinion dated
February 17, 1997. The summary of such analyses does not purport to be a
complete description of the analyses underlying Smith Barney's opinion. The
preparation of a fairness opinion is a complex analytic process involving
various determinations as to the most appropriate and relevant methods of
financial analyses and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. Smith Barney believes that its analyses must be considered
as a whole and that selecting portions of its analyses and factors, without
considering all analyses and factors, could create a misleading or incomplete
view of the processes underlying such analyses and its opinion. In its analyses,
Smith Barney made numerous assumptions with respect to HCCH, AVEMCO, industry
performance, general business, economic, market and financial conditions and
other matters, many of
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which are beyond the control of HCCH and AVEMCO. The estimates contained in such
analyses and the valuation ranges resulting from any particular analysis are not
necessarily indicative of actual values or predictive of future results or
values, which may be significantly more or less favorable than those suggested
by such analyses. In addition, analyses relating to the value of businesses or
securities do not purport to be appraisals or to reflect the prices at which
businesses or securities actually may be sold. Accordingly, such analyses and
estimates are inherently subject to substantial uncertainty. Smith Barney's
opinion and financial analyses were only one of many factors considered by the
HCCH Board in its evaluation of the Merger and should not be viewed as
determinative of the views of the HCCH Board or management with respect to the
Exchange Ratio or the proposed Merger.
The following is a summary of the material financial analyses performed by
Smith Barney in connection with its written opinion dated February 17, 1997:
Selected Company Analysis. Using publicly available information, Smith
Barney analyzed, among other things, the market values and trading multiples of
HCCH, AVEMCO and five selected publicly traded companies in the insurance
industry, consisting of: The Allstate Corporation, The Hartford Steam Boiler
Inspection and Insurance Company, Mercury General Corporation, Progressive
Corporation, and 20th Century Industries (collectively, the "Selected
Companies"). Smith Barney compared, among other things, market values of the
Selected Companies as multiples of, among other things, estimated calendar 1997
and estimated calendar 1998 net operating income computed in accordance with
generally accepted accounting principles ("GAAP"), and estimated GAAP book value
as of December 31, 1996, and adjusted market values (equity market value, plus
total debt and the book value of preferred stock) as a multiple of, among other
things, calendar year 1995 statutory surplus. Smith Barney also compared the
relationship between the price to book value multiples and projected return on
average equity ("ROE") of the Selected Companies with that of AVEMCO. Net income
projections for the Selected Companies were based on estimates of selected
investment banking firms and net income projections for HCCH and AVEMCO were
based on internal estimates of the managements of HCCH and AVEMCO. All multiples
were based on closing stock prices as of February 14, 1997. Applying a range of
selected multiples for the Selected Companies of estimated calendar 1997 and
1998 GAAP net operating income, estimated GAAP book value as of December 31,
1996, and calendar year 1995 statutory surplus of 13.9x to 15.3x, 12.5x to
13.4x, 2.61x to 3.22x and 3.36x to 4.39x, respectively, to corresponding
financial data of AVEMCO resulted in equity reference ranges for AVEMCO of
approximately $20.24 to $24.16 per share (on a primary basis and without taking
into account an equity control premium) and approximately $24.44 to $28.87 per
share (on a fully diluted basis, after applying a 25% equity control premium).
Based on the relationship of the price to book value multiples and projected ROE
of the Selected Companies and after applying an equity control premium of 25%,
the implied equity value for AVEMCO was approximately $27.28 per share on a
fully diluted basis. Based on a closing stock price of HCCH Common Stock on
February 14, 1997, the Exchange Ratio equated to an implied equity value for
AVEMCO of approximately $27.25 per share.
Selected Merger and Acquisition Transactions Analysis. Using publicly
available information, Smith Barney analyzed the purchase price and implied
transaction multiples paid in eight selected transactions in the insurance
industry, consisting of (acquiror/target): Berkshire Hathaway Inc./GEICO
Corporation, USF&G Corporation/Victoria Financial Corporation, American Premier
Underwriters, Inc./American Financial Corporation, Integon Corporation/Bankers
and Shippers Insurance Company, Guardian Royal Exchange plc/ America Ambassador
Casualty Company (Allianz Holding A.G.), Capsure Holdings Corporation/Surewest
Financial Corp., Jupiter Industries, Inc./Integon Corporation, and B.A.T.
Industries plc/Farmers Group, Inc. (collectively, the "Selected Transactions").
Smith Barney compared the purchase prices in such transactions as multiples of,
among other things, one-year forward GAAP net income and latest reported GAAP
book value, and transaction values as a multiple of latest year-end statutory
surplus. All multiples for the Selected Transactions were based on information
available at the time of announcement of the transaction. Applying a range of
selected multiples for the Selected Transactions of one-year forward GAAP net
income, latest reported GAAP book value and latest year-end statutory surplus of
14.7x to 18.5x, 2.2x to 3.4x and 2.2x to 4.2x, respectively, to corresponding
financial data for AVEMCO resulted in an average equity reference range for
AVEMCO of approximately $19.14 to $28.95 per share on a fully diluted basis, as
compared to the equity
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value implied by the Exchange Ratio of approximately $27.25 per share based on a
closing stock price of HCCH Common Stock on February 14, 1997.
No company, transaction or business used as a comparison in the "Selected
Company Analysis" or "Selected Merger and Acquisition Transactions Analysis" is
identical to HCCH, AVEMCO or the Merger. Accordingly, an analysis of the results
of the foregoing is not entirely mathematical; rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics and other factors that could affect the acquisition, public
trading or other values of the Selected Companies, Selected Transactions or the
business segment, company or transaction to which they are being compared.
Contribution Analysis. Smith Barney analyzed the respective contributions
of HCCH and AVEMCO to the estimated net earned premiums and net operating income
of the combined company for fiscal years 1996 and 1997, and to the estimated
earnings before interest, taxes, depreciation and amortization ("EBITDA") of the
combined company for fiscal 1996, based on internal estimates of the managements
of HCCH and AVEMCO. This analysis indicated that (i) in fiscal year 1996, HCCH
would contribute approximately 52.3% of net earned premiums, 75.9% of EBITDA and
83.0% of net operating income, and AVEMCO would contribute approximately 47.7%
of net earned premiums, 24.1% of EBITDA and 17.0% of net operating income, of
the combined company and (ii) in fiscal year 1997, HCCH would contribute
approximately 46.9% of net earned premiums and 80.1% of net operating income,
and AVEMCO would contribute approximately 53.1% of net earned premiums and 19.9%
of net operating income, of the combined company. Immediately following
consummation of the Merger, shareholders of HCCH and AVEMCO would own
approximately 80.9% and 19.1%, respectively, of the combined company.
Discounted Cash Flow Analysis. Smith Barney performed a discounted cash
flow analysis of the projected free cash flow of AVEMCO for fiscal years 1997
through 2001, based on internal estimates of the management of AVEMCO, as
adjusted by the management of HCCH. The range of the estimated terminal value
for AVEMCO at the end of the five-year period was calculated by applying
terminal multiples ranging from 13.0x to 15.0x to AVEMCO's projected 2002 net
income, representing AVEMCO's estimated value beyond the year 2001. The net
income terminal value of AVEMCO was discounted to present value using discount
rates ranging from 10% to 14%, with particular focus on a discount rate of 12%.
Utilizing a discount rate of 12%, this analysis resulted in an equity reference
range for AVEMCO of approximately $29.23 to $33.49 per share, as compared to the
equity value implied by the Exchange Ratio of approximately $27.25 per share
based on a closing stock price of HCCH Common Stock on February 14, 1997.
Pro Forma Merger Analysis. Smith Barney analyzed certain pro forma effects
resulting from the Merger, including, among other things, the impact of the
Merger on the projected earnings per share ("EPS") of HCCH for the fiscal years
ending 1997 and 1998, based on internal estimates of the management of HCCH and
internal estimates of the management of AVEMCO, as adjusted by the management of
HCCH. The results of the pro forma merger analysis suggested that the Merger
could be accretive to HCCH's EPS in each of the fiscal years analyzed. The
actual results achieved by the combined company may vary from projected results
and the variations may be material.
Other Factors and Comparative Analyses. In rendering its opinion, Smith
Barney considered certain other factors and conducted certain other comparative
analyses, including, among other things, a review of (i) the historical and
projected financial results of HCCH and AVEMCO; (ii) the history of trading
prices and volume for HCCH Common Stock and AVEMCO Common Stock and the
relationship between movements of such common stock; (iii) premiums paid in
selected stock-for-stock transactions in the insurance industry; and (iv) the
pro forma ownership of the combined company.
Pursuant to the terms of Smith Barney's engagement, HCCH has agreed to pay
Smith Barney for its services in connection with the Merger an aggregate
financial advisory fee of $1.75 million, a substantial portion of which is
payable only if the Merger is consummated. HCCH has also agreed to reimburse
Smith Barney for reasonable travel and other reasonable out-of-pocket expenses
incurred by Smith Barney in performing its services, including the reasonable
fees and expenses of its legal counsel, and to indemnify Smith Barney and
related persons against certain liabilities, including liabilities under the
federal securities laws, arising out of Smith Barney's engagement.
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Smith Barney has advised HCCH that, in the ordinary course of business,
Smith Barney and its affiliates may actively trade or hold the securities of
HCCH and AVEMCO for their own account or for the account of customers and,
accordingly, may at any time hold a long or short position in such securities.
Smith Barney has in the past provided certain investment banking services to
HCCH unrelated to the proposed Merger, for which services Smith Barney has
received compensation. In addition, Smith Barney and its affiliates (including
Travelers Group Inc. and its affiliates) may maintain relationships with HCCH
and AVEMCO.
Smith Barney is a nationally recognized investment banking firm and was
selected by HCCH based on Smith Barney's experience, expertise and familiarity
with HCCH and its business. Smith Barney regularly engages in the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, competitive bids, secondary distributions of listed
and unlisted securities, private placements and valuations for estate, corporate
and other purposes.
Alex. Brown.
AVEMCO retained Alex. Brown on December 6, 1996 to act as AVEMCO's
financial advisor in connection with the Merger, including rendering its opinion
to the Board of Directors of AVEMCO as to the fairness, from a financial point
of view, of the Exchange Ratio to AVEMCO's common shareholders.
At the February 24, 1997 meeting of the AVEMCO Board of Directors,
representatives of Alex. Brown made a presentation with respect to the Merger
and rendered to the Board its oral opinion (subsequently confirmed in writing as
of the same date), that, as of such date, and subject to the assumptions made,
matters considered and limitations set forth in such opinion and summarized
below, the Exchange Ratio was fair, from a financial point of view, to AVEMCO's
shareholders. No limitations were imposed by the Board upon Alex. Brown with
respect to the investigations made or procedures followed by it in rendering its
opinion.
THE FULL TEXT OF ALEX. BROWN'S WRITTEN OPINION DATED THE DATE OF THIS PROXY
STATEMENT/PROSPECTUS (THE "ALEX. BROWN OPINION"), WHICH SETS FORTH, AMONG OTHER
THINGS, ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW
UNDERTAKEN, IS ATTACHED HERETO AS APPENDIX "C" AND IS INCORPORATED HEREIN BY
REFERENCE. AVEMCO COMMON SHAREHOLDERS ARE URGED TO READ THE ALEX. BROWN OPINION
IN ITS ENTIRETY. THE ALEX. BROWN OPINION IS DIRECTED TO THE BOARD, ADDRESSES
ONLY THE FAIRNESS OF THE EXCHANGE RATIO TO AVEMCO'S SHAREHOLDERS FROM A
FINANCIAL POINT OF VIEW AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY AVEMCO
SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE AT THE AVEMCO MEETING. THE
ALEX. BROWN OPINION WAS RENDERED TO THE AVEMCO BOARD FOR ITS CONSIDERATION IN
DETERMINING WHETHER TO APPROVE THE PLAN OF REORGANIZATION. THE DISCUSSION OF THE
ALEX. BROWN OPINION IN THIS PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE ALEX. BROWN OPINION.
In connection with the Alex. Brown Opinion, Alex. Brown reviewed certain
publicly available financial information and other information concerning AVEMCO
and HCCH and certain internal analyses and other information furnished to it by
AVEMCO and HCCH. Alex. Brown also held discussions with the members of the
senior management of AVEMCO and HCCH regarding the businesses and prospects of
their respective companies and the joint prospects of a combined company. In
addition, Alex. Brown (i) reviewed the reported prices and trading activity for
the common stock of both AVEMCO and HCCH, (ii) compared certain financial and
stock market information for AVEMCO and HCCH with similar information for
selected companies whose securities are publicly traded, (iii) reviewed the
financial terms of selected recent business combinations which it deemed
relevant in whole or in part, (iv) reviewed the terms of the Plan of
Reorganization, and (v) performed such other studies and analyses and considered
such other factors as it deemed appropriate.
In conducting its review and arriving at its opinion, Alex. Brown assumed
and relied upon, without independent verification, the accuracy, completeness
and fairness of the information furnished to or otherwise reviewed by or
discussed with it for purposes of rendering its opinion. With respect to the
financial projections of AVEMCO and HCCH and other information relating to the
prospects of AVEMCO and HCCH provided to Alex. Brown by each company, Alex.
Brown assumed that such projections and other information were reasonably
prepared and reflected the best currently available judgments and estimates of
the respective managements of the AVEMCO and HCCH as to the likely future
financial performances of their respective
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companies. The financial projections of AVEMCO and HCCH that were provided to
Alex. Brown were utilized and relied upon by Alex. Brown in the Contribution
Analysis, Discounted Cash Flow Analysis and the Pro Forma Earnings Analysis
summarized below. Alex. Brown assumes no responsibility for the accuracy of such
financial projections. Alex. Brown assumed, with the consent of AVEMCO, that the
Merger will qualify for pooling-of-interests accounting treatment and as a
tax-free transaction for federal income tax purposes. With respect to all legal
matters relating to AVEMCO and HCCH, Alex. Brown relied on the advice of legal
counsel to AVEMCO. Alex. Brown did not make and it was not provided with an
independent evaluation or appraisal of the assets of AVEMCO and HCCH, nor has
Alex. Brown been furnished with any such evaluations or appraisals, except for
certain reserve reports relating to AVEMCO. Alex. Brown assumes no
responsibility for the accuracy of such reports. The Alex. Brown Opinion is
based on market, economic and other conditions as they existed and could be
evaluated as of the date of the opinion letter.
In arriving at its opinion, Alex. Brown was not authorized to solicit, and
did not solicit, interest from any party with respect to the acquisition of
AVEMCO or any of its assets.
The following is a summary of the analyses performed and factors considered
by Alex. Brown in connection with the rendering the Alex. Brown Opinion.
Historical Financial Position. In rendering its opinion, Alex. Brown
reviewed and analyzed the historical and current financial condition of AVEMCO
and HCCH which included (i) an assessment of AVEMCO's and HCCH's recent GAAP and
statutory financial statements; (ii) an analysis of AVEMCO's and HCCH's revenue
and operating earnings growth trends; and (iii) an assessment of AVEMCO's and
HCCH's capitalization, insurance underwriting performance and return on equity.
Historical Stock Price Performance. Alex. Brown's analysis of the price
performance of AVEMCO and HCCH consisted of an historical analysis of closing
prices and trading volumes for January 1, 1994 to February 21, 1997.
Additionally, Alex. Brown reviewed an historical analysis of AVEMCO and HCCH's
indexed price performance relative to the Standard & Poor's Composite Index of
500 stocks (the "S&P 500") and to selected companies. For AVEMCO, the selected
companies included Frontier Insurance Group, Inc., GAINSCO, Inc., Markel
Corporation, The Navigators Group, Inc., NYMAGIC Inc., RLI Corporation and Vesta
Insurance Group, Inc. (the "Selected Insurers"). For HCCH, the selected
companies included the Selected Insurers and The Hartford Steam Boiler
Inspection and Insurance Company, Meadowbrook Insurance Group, Inc., Mutual Risk
Management Ltd, and W.R. Berkley Corporation (collectively, the "Selected
Companies"). For the period January 1, 1994 through January 16, 1997, this
analysis indicated an average closing price per share for the AVEMCO common
stock of $15.90 per share, a high closing price per share of $20.00, a low
closing price per share of $12.13 and an average daily trading volume of 9,353
shares. Alex. Brown noted that, on a relative basis, AVEMCO underperformed the
S&P 500 and the Selected Insurers over this period. This analysis reflects the
period prior to the issuance, prior to the opening of the market on January 17,
1997, of a joint press release by AVEMCO and HCCH stating that they had signed a
letter of intent to merge in a stock for stock transaction (the "Press
Release"). Alex. Brown also noted that 30 days prior and one day prior to the
Press Release, the closing prices per share for AVEMCO's common stock were
$15.00 and $19.375, respectively. For the period subsequent to the Press
Release, this analysis indicated an average closing price per share for the
AVEMCO common stock of $25.43 per share, a high closing price per share of
$26.75, a low closing price per share of $24.50 and an average daily trading
volume of 87,888 shares. For the period January 1, 1994 through February 21,
1997, this analysis indicated an average closing price per share for the HCCH
common stock of $14.83 per share, a high closing price per share of $32.25, a
low closing price per share of $6.50 and an average daily trading volume of
74,320 shares. Alex. Brown noted that, on a relative basis, HCCH outperformed
the S&P 500 and the Selected Companies over this period. Alex. Brown also noted
that for the period prior to the Press Release the HCCH common stock
significantly outperformed the AVEMCO common stock. This information was
presented to give the AVEMCO Board background information regarding the
respective stock prices of AVEMCO and HCCH over the periods indicated.
Analysis of Selected Publicly Traded Companies. This analysis examines a
company's valuation in the public market as compared to the valuation in the
public market of other selected publicly traded companies.
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Alex. Brown compared certain financial information (based on the commonly used
valuation measurements described below) relating to AVEMCO and HCCH to certain
corresponding information from the Selected Insurers and Selected Companies,
respectively. Such financial information included, among other things, (i)
common equity market valuation; (ii) capitalization ratios; (iii) operating
performance; (iv) ratios of common equity market prices per share ("Equity
Value") to operating earnings (defined as income from continuing operations
minus realized investment gains, tax effected at 35%) per share ("EPS") and (v)
ratios of Equity Value to book value per share. The financial information used
in connection with the multiples provided below with respect to AVEMCO, HCCH,
the Selected Insurers and the Selected Companies was based on the latest
reported twelve month period as derived from publicly available information and
on estimated EPS for calendar years 1996 (to the extent actual 1996 data was not
available) and 1997 (as reported by the Institutional Brokers Estimate System
("I/B/E/S")). Alex. Brown reviewed valuation measurements for AVEMCO based on
the closing price on January 16, 1997 prior to the Press Release of $19.375 per
share (the "Announcement Price") and the closing price on February 21, 1997 of
$24.625 per share (the "Recent Price"). Alex. Brown noted that the multiple of
Equity Value to 1996 EPS was 20.5x for AVEMCO based on the Announcement Price
and 26.0x for AVEMCO based on the Recent Price compared to a range of 9.4x to
22.8x, with a mean of 14.4x, for the Selected Insurers; the multiple of Equity
Value to 1997 EPS was 12.6x for AVEMCO based on the Announcement Price and 16.0x
for AVEMCO based on the Recent Price compared to a range of 8.6x to 15.9x, with
a mean of 12.0x, for the Selected Insurers; and the multiple of Equity Value to
book value per share was 2.6x for AVEMCO based on the Announcement Price and
3.4x for AVEMCO based on the Recent Price compared to a range of 1.1x to 2.4x,
with a mean of 1.8x, for the Selected Insurers. As a result of the foregoing
procedures, Alex. Brown noted that the multiples for AVEMCO based on the
Announcement Price were within the range of the multiples for the Selected
Insurers, except for Equity Value to book value which was above the range, and
that the multiples for AVEMCO based on the Recent Price were higher than the
range of multiples for the Selected Insurers. The 1996 EPS for AVEMCO was $0.95
and the I/B/E/S EPS estimates, as of February 23, 1997, for the calendar year
1997 for AVEMCO was $1.54. Alex. Brown reviewed valuation measurements for HCCH
based on the closing price on February 21, 1997 of $26.375 per share. Alex.
Brown noted that the multiple of Equity Value to 1996 EPS was 23.5x for HCCH
compared to a range of 9.4x to 22.8x, with a mean of 15.3x, for the Selected
Companies; the multiple of Equity Value to 1997 EPS was 19.0x for HCCH compared
to a range of 8.6x to 15.9x, with a mean of 12.6x, for the Selected Companies;
and the multiple of Equity Value to book value per share was 3.9x for HCCH
compared to a range of 1.1x to 3.2x, with a mean of 2.0x, for the Selected
Companies. Additionally Alex. Brown noted that the estimated five year EPS
growth rate, based on I/B/E/S, for HCCH was 22.5% compared to a range of 11.0%
to 18.8% and a mean of 15.2% for the Selected Companies. As a result of the
foregoing procedures, Alex. Brown noted that the multiples and estimated growth
rate for HCCH were higher than the range of the multiples for the Selected
Companies. The 1996 EPS for HCCH was $1.12 and the I/B/E/S EPS estimates, as of
February 23, 1997, for the calendar year 1997 for HCCH was $1.39.
Analysis of Selected Precedent Transactions. Alex. Brown reviewed the
financial terms, to the extent publicly available, of 14 proposed, pending or
completed mergers and acquisitions since January 1992 in the property-casualty
insurance and reinsurance industry (the "Selected Transactions"). Alex. Brown
calculated various financial multiples and the premiums over market value based
on certain publicly available information for each of the Selected Transactions
and compared them to corresponding financial multiples and the premiums over
market for the Merger, based on the Exchange Ratio. The 14 transactions
reviewed, in reverse chronological order of public announcement, were
(acquiree/acquiror/announcement date): National Re Corporation/General Re
Corporation/June 1996, Homestead Insurance Company/Castle Harlan, Inc./October
1995, Milwaukee Insurance Group/Unitrin, Inc./June 1995, Viking Insurance
Holdings/Guaranty National Corp./April 1995, Re Capital Reinsurance Corp/Zurich
Reinsurance Centre Holdings/January 1995, Victoria Financial Corporation/USF&G
Corporation/December 1994, Constitution Re Corporation/Exor Group/December 1994,
Bankers & Shippers Insurance Co./Integon Corporation/July 1994, Armco Inc./Vik
Brothers Insurance Inc/January 1994, Federal Kemper Insurance Company/Anthem
Property & Casualty Holdings, Inc./November 1993, American Ambassador Casualty
Co./Guardian Royal Exchange plc/November 1993, Economy Fire & Casualty Co./St
Paul Companies/July 1993, Underwriters
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Reinsurance Co./Alleghany Corporation/July 1993, and Chartwell Re Corp./Wand
Partners/January 1992. These transactions involved the acquisition of
property-casualty insurance and reinsurance companies. Alex. Brown noted that
the multiple of the equity purchase price (defined as fully diluted shares
outstanding times the HCCH per share stock price times the Exchange Ratio) to
latest twelve months GAAP operating income was 27.8x for the Merger versus a
range of 11.0x to 30.6x, with a mean of 18.5x, for the Selected Transactions,
that the multiple of the equity purchase price to December 31, 1996 GAAP book
value was 3.6x for the Merger versus a range of 1.1x to 2.5x, with a mean of
1.5x for the Selected Transactions. Alex. Brown further noted that the multiple
of equity purchase price to 1996 statutory operating income was 30.0x for the
Merger versus a range of 8.9x to 24.4x, with a mean of 16.5x, for the Selected
Transactions, that the multiple of equity purchase price to December 31, 1996
statutory book value was 3.0x for the Merger versus a range of 0.8x to 2.5x,
with a mean of 1.6x for the Selected Transactions. Additionally, Alex. Brown
noted that the multiple of the equity purchase price plus outstanding debt to
statutory operating earnings was 37.5x for the Merger compared to a range of
10.1x to 24.5x , with a mean of 17.6x for the Selected Transactions. Alex. Brown
also noted that the Selected Transactions were effected at a range of the
premium to their per share market price one month prior to announcement and to
the market price one day prior to announcement of 48% to 82%, with a mean of
67%, and 45% to 63%, with a mean of 52%, respectively. Only four transactions
included in the Selected Transaction were publicly traded companies prior to the
announcement of their respective transactions. These premiums compare to one
month and one day transaction premiums of 76% and 36%, respectively, for the
Merger (based on the per share market price $15.00 one month prior to and
$19.375 one day prior to the January 17, 1997 announcement of the proposed
AVEMCO and HCCH transaction). All multiples for the Selected Transactions were
based on public information available at the time of announcement of such
transaction, without taking into account differing market and other conditions
during the five-year period during which the Selected Transactions occurred. The
per share value used in the calculation of the transaction multiples for the
Merger was based on the per share value of HCCH on February 21, 1997 ($26.375
per share) multiplied by the Exchange Ratio.
Historical Exchange Ratio Analysis. Alex. Brown reviewed and analyzed the
historical ratio of the daily per share market closing prices of AVEMCO Common
Stock divided by the corresponding prices of the HCCH Common Stock over the
one-year, 180-day, 90-day and 30-day periods prior to and as of January 16, 1997
(the last business day prior to announcement of the transaction). Such average
exchange ratios for the aforementioned time periods and as of such date were
0.65, 0.59, 0.59, 0.62 and 0.68, respectively. Alex. Brown then calculated the
respective premiums over such average daily exchange ratios represented by the
Exchange Ratio, which for the same time periods and as of such date were 55.4%,
70.4%, 70.3%, 60.9% and 47.7%, respectively.
Contribution Analysis. Alex. Brown analyzed the relative contributions of
AVEMCO and HCCH, as compared to AVEMCO's relative ownership of approximately 19%
of the outstanding stock of the combined company, to the pro forma income
statement of the combined company, based on managements' projections for their
respective companies. This analysis showed that on a pro forma combined basis
(excluding (i) the effect of any synergies that may be realized as a result of
the Merger, and (ii) non-recurring expenses relating to the Merger), based on
the twelve-month period ended December 31, 1996 for AVEMCO and for HCCH, AVEMCO
and HCCH would account for approximately 45.7% and 54.3% respectively, of the
combined company's pro forma revenue, approximately 48.0% and 52.0%,
respectively, of the combined company's pro forma premiums, approximately 22.0%
and 78.0%, respectively, of the combined company's pro forma net income,
approximately 16.7% and 83.3% respectively, of the combined company's pro forma
operating income and approximately 20.1% and 79.9% respectively, of the combined
company's pro forma shareholders' equity. Based on management projections for
1997, AVEMCO and HCCH would account for approximately 19.9% and 80.1%
respectively of the combined company's 1997 operating income.
Discounted Cash Flow Analysis. Alex. Brown performed a discounted cash
flow analysis for AVEMCO. The discounted cash flow approach values a business
based on the current value of the future cash flow that the business will
generate plus the estimated value of the business at some future date. To
establish a current value under this approach, future cash flow must be
estimated and an appropriate discount rate determined. Alex. Brown used
estimates of projected financial performance for AVEMCO for the years 1997
through 2001
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prepared by management of AVEMCO (the "Base Case") and three variations based on
combinations of lower 1997 operating earnings and slower operating earnings
growth than the Base Case. Alex. Brown aggregated the present value of the cash
flows through the year 2001 with the present value of a range of terminal
values. Alex. Brown discounted these cash flows at discount rates ranging from
14% to 15%. The terminal value was computed based on projected operating
earnings in calendar year 2001 and a range of terminal multiples of 16x and 19x.
Alex. Brown arrived at such discount rates based on its judgment of the
estimated weighted average cost of equity of AVEMCO and arrived at such terminal
values based on its review of the trading characteristics of the common stock of
the Selected Insurers and the transaction multiples for the Selected
Transactions. This analysis indicated a range of values of $28.68 to $35.01 per
share using the Base Case. A variation of the Base Case which assumed AVEMCO
achieved its 1997 operating earnings projection and subsequent operating
earnings growth of 10% per year through the year 2001 resulted in a range of
values of $20.39 to $24.80 per share. A second variation of the Base Case which
assumed AVEMCO achieved its 1997 operating earnings projection and subsequent
operating earnings growth of 15% per year through the year 2001 resulted in a
range of values of $24.12 to $29.38 per share. A third variation of the Base
Case which assumed 1997 operating earnings were 20% less than the Base Case and
subsequent operating earnings growth of 15% per year through the year 2001
resulted in a value range of $19.39 to $23.61 per share. Alex. Brown noted that
the operating earnings growth rate in the Base Case exceeded the historical
operating earnings growth rate achieved by AVEMCO over the last five years.
Additionally, Alex. Brown noted that in recent years AVEMCO's operating earnings
were less than internal financial projections prepared at the time and were less
than initial estimates for earnings as reported by I/B/E/S.
Pro Forma Combined Earnings Analysis. Alex. Brown analyzed certain pro
forma effects of the Merger. Based on such analysis, Alex. Brown computed the
resulting accretion to HCCH's EPS estimate for 1997, pursuant to the Merger
before taking into account any potential cost savings and other synergies that
AVEMCO and HCCH could achieve if the Merger were consummated and before
non-recurring costs relating to the Merger. Alex. Brown noted that before taking
into account any potential cost savings and other synergies and before certain
non-recurring costs relating to the Merger, the Merger would be approximately 3%
accretive to HCCH's estimated EPS for 1997. Alex. Brown also computed the pro
forma book value per share as of December 31, 1996. Alex. Brown noted that
before taking into account any potential cost savings and other synergies and
before certain non-recurring costs relating to the Merger, the Merger would be
approximately 1% accretive to the HCCH's book value per share as of December 31,
1996. Alex. Brown noted that potential synergies and costs savings which may be
realized by the combined company could increase the accretion to earnings.
Discussions with the management of each company suggested that some synergies
would be available. There can be no assurance that the combined company will be
able to realize savings and synergies following the Merger.
Relevant Market and Economic Factors. In rendering its opinion, Alex.
Brown considered, among other factors, the condition of the U.S. stock markets,
particularly in the insurance sector, and the current level of economic
activity.
No company used in the analysis of selected publicly traded companies nor
any transaction used in the analysis of selected precedent transactions
summarized above is identical to AVEMCO, HCCH or the Merger. Accordingly, such
analyses must take into account differences in the financial and operating
characteristics of the Selected Insurers, the Selected Companies and the
Selected Transactions and other factors that would affect the public trading
value and acquisition value of the Selected Insurers, the Selected Companies and
the Selected Transactions, respectively.
While the foregoing summary describes the analyses and factors that Alex.
Brown deemed material in its presentation to the AVEMCO Board of Directors, it
is not a comprehensive description of all analyses and factors considered by
Alex. Brown. The preparation of a fairness opinion is a complex process
involving various determinations as to the most appropriate and relevant methods
of financial analysis and the applications of these methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. Alex. Brown believes that its analyses must be considered
as a whole and that selecting portions of its analyses and of the factors
considered by it, without considering all analyses and factors, would create an
incomplete view of the evaluation process underlying the Alex. Brown Opinion. In
performing its
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analyses, Alex. Brown considered general economic, market and financial
conditions and other matters, many of which are beyond the control of AVEMCO and
HCCH. The analyses performed by Alex. Brown are not necessarily indicative of
actual values or future results, which may be significantly more or less
favorable than those suggested by such analyses. Accordingly, such analyses and
estimates are inherently subject to substantial uncertainty. Additionally,
analyses relating to the value of a business do not purport to be appraisals or
to reflect the prices at which the business actually may be sold. Furthermore,
no opinion is being expressed as to the prices at which shares of HCCH Common
Stock may trade at any future time.
Pursuant to a letter agreement dated December 6, 1996 between AVEMCO and
Alex. Brown, Alex. Brown received a retainer fee of $100,000, a fee of $350,000
payable at the time of delivering its opinion and will, but only if the Merger
is consummated, receive an additional fee of approximately $1.43 million upon
consummation of the Merger. In addition, AVEMCO has agreed to reimburse Alex.
Brown for its reasonable out-of-pocket expenses incurred in connection with
rendering financial advisory services, including fees and disbursements of its
legal counsel. AVEMCO has agreed to indemnify Alex. Brown and its directors,
officers, agents, employees and controlling persons, for certain costs,
expenses, losses, claims, damages and liabilities, including those under the
federal securities laws, related to or arising out of its rendering of services
under its engagement as financial advisor.
The Board of Directors of AVEMCO retained Alex. Brown to act as its advisor
based upon Alex. Brown's qualifications, reputation, experience and expertise.
Alex. Brown, as customary part of its investment banking business, is engaged in
the valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwriting, private placements and valuations for
estate, corporate and other purposes. Alex. Brown regularly publishes research
reports regarding the insurance industry and the businesses and securities of
publicly traded companies in the insurance industry. Alex. Brown may actively
trade the securities of both AVEMCO and HCCH 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.
REGULATORY APPROVALS
Antitrust. Under the HSR Act, and the rules promulgated thereunder by the
FTC, the Merger cannot be consummated until notifications have been given and
certain information has been furnished to the FTC and the Antitrust Division and
specified waiting period requirements have been satisfied. HCCH and AVEMCO have
each filed notification and report forms under the HSR Act with the FTC and the
Antitrust Division in March, 1997. HCCH and AVEMCO each requested early
termination of the waiting period. On March 17, 1997, the FTC granted HCCH's and
AVEMCO's request for early termination of the waiting period. Despite such early
termination and expiration of the respective waiting periods, at any time before
or after consummation of the Merger, the Antitrust Division or the FTC could
take such action under the antitrust laws as it deems necessary or desirable in
the public interest, including seeking to enjoin the consummation of the Merger
or seeking divestiture of substantial assets of HCCH or AVEMCO. At any time
before or after the Effective Time, and notwithstanding that the HSR Act waiting
period has expired, any state could take such action under the antitrust laws as
it deems necessary or desirable. Such action could include seeking to enjoin the
consummation of the Merger or seeking divestiture of AVEMCO or businesses of
HCCH or AVEMCO by HCCH. Private parties may also seek to take legal action under
the antitrust laws under certain circumstances.
Insurance Regulatory Approvals. The insurance holding company acts adopted
in various states generally provide that no person may acquire "control" of an
"insurer" domiciled in that state unless the change of control is first approved
by the insurance regulatory authority in that state. "Control" means the
possession, direct or indirect, of the power to direct or cause the direction of
the management or policies of a person, whether by the ownership of voting
securities, or through management contracts. "Control" is presumed to exist if,
after the acquisition, the acquiring person will own, with power to vote,
directly or indirectly, ten percent or more of the voting securities of an
insurer. An insurance "holding company" is any person who directly or indirectly
controls an insurer; a "controlled insurer" is an insurer controlled directly or
indirectly by a holding company.
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Some states, such as California, have adopted standards for subjecting
insurers that are not legally domiciled in those states to these approval
requirements if the foreign insurer is "commercially domiciled" in the state by
reason of the fact that it has written more business in that state than in the
state of its legal domicile over a three-year period, and the amount of business
written in the "commercial domicile" state exceeds a certain percentage of its
business written throughout the United States.
AVEMCO is an insurance holding company that controls insurers domiciled in
Maryland and Missouri, one of which is also "commercially domiciled" in
California. The Merger will constitute a change in "control" of the controlled
insurers that are part of the AVEMCO holding company system. Therefore, before
the Merger may be consummated, HCCH and AVEMCO will have to obtain the approval
of the change of control of these controlled insurers from the insurance
regulatory authorities in Maryland, Missouri and California. Approval is
obtained by filing an information statement with the insurance regulatory
authorities in each state, which includes information about the proposed
transaction by which control is intended to be acquired; financial information
about the acquiring person; the background, experience and reputation of the
management of the acquiring person; and the plans the acquiring person has for
the controlled insurers being acquired. Required information statements (Form A)
were filed with insurance regulatory authorities in Maryland, Missouri and
California on or about March 7, 1997. Generally, insurance regulatory
authorities must act within 60 days of receipt of a complete information
statement, or the change of control may be deemed approved. If additional
information is required, the 60-day period may be extended. No assurance can be
given that additional information will not be required, that the period to act
with respect to such information will not be extended or that such change in
control will be approved. The insurance holding company regulatory approval
process could delay or prevent consummation of the Merger.
Some state insurance holding company acts also require pre-acquisition
notification of the acquisition of insurers which, while not domiciled in such
states, are authorized to do business in such states. The acquisition cannot be
completed until the expiration of a 30-day waiting period, unless terminated
earlier by the insurance regulatory authority in such state. The pre-acquisition
notification is required to contain market share information demonstrating the
competitive impact of the acquisition of control on the insurance markets in
such state. There are a number of exemptions from the pre-acquisition
notification requirement if the acquisition would not result in an increase in
market share in any lines of business. Because AVEMCO and HCCH do not directly
compete in any lines of business in the United States, it does not appear that
the filing of pre-acquisition notifications will be required in any states other
than Maryland.
New York Stock Exchange. The HCCH Common Stock and the AVEMCO Common Stock
are listed on the NYSE. The obligations of HCCH and AVEMCO to consummate the
Merger are subject to the condition that the HCCH Common Stock to be issued to
AVEMCO shareholders in connection with the Merger, including shares issuable
upon exercise of outstanding and unexercised options to acquire AVEMCO Common
Stock, shall have been approved for listing on the NYSE, subject only to
official notice of issuance.
RESALE OF HCCH COMMON STOCK
The shares of Common Stock of HCCH offered by this Proxy
Statement/Prospectus have been registered under the Securities Act, thereby
allowing AVEMCO shareholders who are not "affiliates" of AVEMCO or HCCH (as
defined under the Securities Act, but generally including directors, certain
executive officers and 10% or more shareholders of AVEMCO or HCCH) to trade them
freely and without restriction.
AFFILIATES' AGREEMENTS
To help ensure that the Merger will be accounted for as a
pooling-of-interests, the AVEMCO Affiliates, as well as the HCCH Affiliates,
have agreed not to dispose of their shares of AVEMCO Common Stock during the
30-day period before the Effective Date of the Merger and of their shares of
HCCH Common Stock received in the Merger, and the HCCH Affiliates have similarly
agreed not to dispose of their shares of HCCH Common Stock, until HCCH publicly
releases its first report of financial statements that include the combined
financial statements of AVEMCO and HCCH for a period of at least 30 days of
combined operations. See " -- Certain Federal Income Tax Matters" and
" -- Accounting Treatment."
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STOCK OPTIONS
Under the terms of the AVEMCO stock option plan, all outstanding and
unexercised options to purchase shares of the Common Stock of AVEMCO (each, an
"Outstanding Option") become immediately exercisable in connection with the
consummation of the Merger without any further vesting requirement, and shall be
converted into an option (each, an "Exchange Option") to purchase an equal
number of shares of Common Stock of HCCH at the same exercise price. The
Exchange Option shall otherwise have the same duration and other terms as the
Outstanding Option. Adjustments to any Outstanding Options which are "incentive
stock options" under Section 422 of the Code shall be effected in a manner
consistent with Section 424(a) of the Code.
CERTAIN TERMS OF THE PLAN OF REORGANIZATION
Indemnification Obligations. The Plan of Reorganization provides that HCCH
will indemnify and hold harmless each person who was an officer or director of
AVEMCO or was serving as an officer or director of any member of the AVEMCO
Group (as defined in the Plan of Reorganization) from and against all damages,
liabilities, judgments and claims or arising from his or her capacity as such
officer or director, including any such damages, liabilities, judgments or
claims arising out of or relating to the Plan of Reorganization, in each case to
the full extent permitted by law. In addition, HCCH has agreed to keep in effect
and to guarantee performance of the indemnification provisions contained in the
Certificate of Incorporation or bylaws of AVEMCO (or the respective member of
the AVEMCO Group) as they were in effect on the date of execution of the Plan of
Reorganization so as not to adversely affect the rights of such persons with
respect to service in such capacity before the Effective Time. Further, HCCH has
agreed to maintain insurance with respect to such indemnification in an amount
of $10,000,000 for a period of six years following the Effective Time. Such
persons who remain as officers and directors of the surviving corporation after
the Effective Time shall be indemnified for actions or omissions after the
Effective Time to the same extent as officers and directors of the HCCH Group
are indemnified.
Representations and Covenants. Under the Plan of Reorganization, HCCH and
Merger Sub, on the one hand, and AVEMCO, on the other hand, have made a number
of representations and warranties regarding their respective capital structures,
material agreements, governmental authorizations, corporate existence, disclosed
materials, operations, insurance regulatory matters, non-contravention with
existing obligations or agreements, properties, financial conditions and other
matters, including their authority to enter into the Plan of Reorganization and
to consummate the Merger. In addition, HCCH and AVEMCO have each agreed to
maintain its business and that it will not take certain actions outside the
ordinary course without the other party's consent. HCCH and AVEMCO have also
each covenanted, among other things, that they will provide the other party
access to certain financial and operational information, maintain the
confidentiality of certain information, cooperate with respect to required
governmental and other filings, refrain from acquiring stock of the other party
upon termination of the Plan of Reorganization in certain circumstances, and
obtain letters from independent public accountants with respect to the
accounting treatment of the Merger. AVEMCO also has agreed that it will not
solicit, initiate or, except under certain circumstances, discuss any
acquisition proposal received from any party other than HCCH, concerning a
merger or other business combination involving AVEMCO or any other member of the
AVEMCO Group.
Conditions to the Merger. Consummation of the transactions contemplated by
the Plan of Reorganization is subject to the fulfillment or satisfaction, and/or
waiver, by the parties, on and as of the Effective Date, of a number of
conditions (each of which are fully described in the Plan of Reorganization),
including without limitation: (i) the representations and warranties of each of
the parties contained in the Plan of Reorganization being true and accurate in
all material respects; (ii) each of the parties having performed and complied in
all material respects with all of the covenants, agreements and obligations of
such party contained in the Plan of Reorganization; (iii) except as otherwise
disclosed, there not having occurred any event or circumstance resulting in a
Material Adverse Effect (as defined in the Plan of Reorganization) with respect
to AVEMCO or HCCH since the date of the Plan of Reorganization; (iv) HCCH having
received all required Affiliates' Agreements (as defined in the Plan of
Reorganization); (v) all necessary governmental and third party consents having
been received; (vi) the Average Market Price of the HCCH Common Stock not having
fallen
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below the Minimum Acceptable Price (as defined in the Plan of Reorganization);
(vii) HCCH and AVEMCO having each filed its annual report on Form 10-K including
financial statements for the fiscal year ended December 31, 1996 containing an
unqualified opinion from its independent auditors; (viii) HCCH and AVEMCO having
each received a written opinion of its counsel that the Merger will constitute a
tax-free reorganization; (ix) each party having received a written opinion from
counsel to the other party, in an agreed upon form; (x) Smith Barney not having
withdrawn its opinion that the Exchange Ratio is fair to HCCH from a financial
point of view; (xi) Alex. Brown not having withdrawn its opinion that the
Exchange Ratio is fair to the shareholders of AVEMCO from a financial point of
view; (xii) each party's shareholders having duly approved the transactions
contemplated under the Plan of Reorganization; (xiii) the Registration Statement
having become effective under the Securities Act and not being the subject of
any stop order or proceedings seeking a stop order; (xiv) HCCH and AVEMCO having
received letters from KPMG Peat Marwick LLP stating that AVEMCO qualifies as an
entity that may be party to a business combination for which the
pooling-of-interests method of accounting would be available; (xv) HCCH and
AVEMCO having received letters from Coopers & Lybrand L.L.P. stating that the
business combination to be effected by the Merger will qualify as a
pooling-of-interests transaction; (xvi) receipt of all regulatory approvals of
insurance regulatory authorities with respect to acquisition of control of
AVEMCO; (xvii) the absence of any pending or threatened suit, action or
proceeding seeking to restrain, prevent or change the transactions contemplated
in the Plan of Reorganization; (xviii) any and all Governmental Authorizations
or waivers or exemptions therefrom having been obtained; (xix) the expiration or
early termination of applicable waiting periods under the HSR Act; and (xx)
neither party having taken any action to prevent or materially delay the Merger.
Amendment or Waiver. At any time before or after approval of the Plan of
Reorganization and the Merger by the shareholders of HCCH and AVEMCO, to the
extent legally allowed, HCCH or AVEMCO, without approval of such shareholders,
may waive compliance with any of the agreements or conditions (other than the
effectiveness of the Registration Statement, receipt of required insurance
regulatory approvals, or the expiration or termination of any waiting period
under the HSR Act, which cannot be waived) contained in the Plan of
Reorganization or amend the Plan of Reorganization in any respect except that
following approval by the shareholders of HCCH and/or AVEMCO there shall be no
amendment or changes to the terms without the further approval by the
shareholders of HCCH and/or AVEMCO, as applicable, if such amendment or change
would by law require resolicitation of one or both such shareholder groups or if
such resolicitation would otherwise be deemed appropriate by HCCH or AVEMCO
after consultation with their respective legal counsel. Delaware law does not
require HCCH to resolicit its shareholders upon any amendment or change to the
Plan or Reorganization, although HCCH intends to resolicit if the financial
terms of the Merger are materially changed.
No Solicitation; Termination Fee. The Plan of Reorganization prohibits
AVEMCO and any other member of the AVEMCO Group from, directly or indirectly,
through any officer, directors, employee, representative or agent, soliciting or
encouraging the initiation or submission of any inquiries, proposals or offers
regarding any acquisition, merger, takeover bid, sale of all or substantially
all of the assets of or 20% or more of the capital stock of AVEMCO.
If the AVEMCO Board, after duly considering advice of outside counsel and
financial advisors, determines in good faith that it would be inconsistent with
its fiduciary responsibilities to not approve or recommend (and in connection
therewith withdraw or modify its approval or recommendation of the Plan of
Reorganization and the transaction contemplated thereby) a Superior Proposal (as
defined below), then, notwithstanding any such approval or recommendation (i)
AVEMCO may not enter into any agreement with respect to the Superior Proposal
and (ii) any other obligation of AVEMCO under the Plan of Reorganization shall
not be affected until it has notified HCCH of the terms of such other
transaction and HCCH does not within five days propose additional terms (which,
if equal to the Superior Proposal, must be accepted by AVEMCO), and then may
enter into such other agreement only if the Plan of Reorganization is terminated
in accordance with its terms before or simultaneously with the grant of such
approval or the making of such recommendation and AVEMCO, within six business
days following such termination, pays HCCH the Termination Fee of $7.5 million,
plus reasonable expenses. If either party terminates the Plan of Reorganization
because such party has not obtained approval thereof by such party's
shareholders, such party is obligated to pay a Termination Fee to the other
party
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of $3.75 million, plus reasonable expenses. A "Superior Proposal" is defined to
mean an unsolicited bona fide proposal made by a third party to acquire AVEMCO
pursuant to a tender or exchange offer, a merger, a sale of all or substantially
all of its assets or other proposal that the AVEMCO Board determines in its good
faith judgment to be more favorable to the holders of AVEMCO Common Stock than
the transactions contemplated by the Plan of Reorganization, after considering
advice of its professional advisors.
Termination. AVEMCO is entitled to terminate the Plan of Reorganization if
at any time before the closing of the Merger the average closing price per share
of the HCCH Common Stock, as calculated by dividing by ten the sum of the
closing sale prices per share reported on the NYSE for each of the ten
consecutive trading days preceding the date of any such determination, is less
than $23.00 by notifying HCCH of such termination within 72 hours of the date on
which any such average closing price is below $23.00. Failure to so notify HCCH
waives such right of termination with respect to any such ten-day period, but
not with respect to any other ten-day period (which may include days from the
prior ten-day period). In addition, the Plan of Reorganization may be terminated
at any time before the Effective Time whether before or after the approval by
the shareholders of AVEMCO or HCCH: (i) by mutual consent of the Boards of
Directors of HCCH and AVEMCO; (ii) by either party if the other party has
materially breached a representation, warranty or covenant contained in the Plan
of Reorganization and such breach has not been cured within 15 days after
written notice thereof; (iii) by HCCH or AVEMCO if the conditions to Closing set
forth in the Plan of Reorganization have not been met or waived by August 31,
1997 or the Merger shall not have occurred on or before August 31, 1997;
provided that the right to terminate the Plan of Reorganization pursuant to this
clause (iii) would not be available to any party who has willfully and
materially breached its representations, warranties or covenants; (iv) by HCCH
or AVEMCO, if, at the HCCH Meeting or the AVEMCO Meeting (including any
adjournment or postponement thereof), the requisite vote of shareholders of HCCH
or AVEMCO has not been obtained; and (v) by either party, if any governmental
authority shall have issued an order, decree or ruling or taken any other action
permanently enjoining or otherwise prohibiting the Merger and such order,
decree, ruling or other action shall have become final and non-appealable. If
the Plan of Reorganization is terminated, no member of the HCCH Group or the
AVEMCO Group is for a period of two years permitted, except as set forth below,
to acquire shares of or influence over any member of the other group. If AVEMCO
terminates the Plan of Reorganization in connection with the receipt of a
Superior Proposal, no member of the HCCH Group is subject to such restrictions.
If either party terminates the Plan of Reorganization because the other party
has willfully and intentionally failed to satisfy conditions to the Merger
within its control to satisfy, the party terminating the Plan of Reorganization
for such reason is not subject to any restrictions on its ability or the ability
of members of its group or affiliates thereof to acquire shares of the other
party or any member of its group or affiliates thereof.
If the Plan of Reorganization is terminated by either HCCH or AVEMCO as
permitted therein, the Plan of Reorganization will become void and there will be
no liability on the part of HCCH or AVEMCO or their respective officers or
directors, other than the obligation to pay the Termination Fee and reasonable
expenses in the circumstances described above, the liability of any party for
any willful and intentional breach of its obligations under the Plan of
Reorganization and the obligation to maintain confidentiality, and, subject to
certain exceptions, restrictions on the right of a party to acquire stock of the
other party. See "The Merger -- No Solicitation; Termination Fee."
Employee Matters. HCCH has agreed that all employees of AVEMCO who remain
employed after the Effective Date shall, immediately following the Effective
Date and subject to eligibility and other employee benefit plan requirements, be
entitled to receive the same benefits which other employees of HCCH are entitled
to receive and shall be entitled to participate in HCCH's employee benefit
plans.
CERTAIN FEDERAL INCOME TAX MATTERS
The following discussion summarizes certain material Federal income tax
considerations of the Merger that are generally applicable to holders of AVEMCO
Common Stock. This discussion is based on currently existing provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), existing and proposed
Treasury Regulations promulgated thereunder, and current administrative rulings
and court decisions, all of which are subject to change. Any such change, which
may or may not be retroactive, could alter the tax
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consequences to HCCH, AVEMCO, or the shareholders of AVEMCO as described herein
and adversely impact HCCH, AVEMCO, or the shareholders of AVEMCO.
The shareholders of AVEMCO should be aware that this discussion does not
deal with all Federal income tax considerations that may be relevant to
particular shareholders of AVEMCO in light of their particular circumstances,
such as shareholders who are dealers in securities, shareholders who are subject
to the alternative minimum tax provisions of the Code, foreign persons,
tax-exempt entities, insurance companies, financial institutions and
shareholders who acquired their shares in compensatory transactions. In
addition, the following discussion does not address the tax consequences of the
Merger under foreign, state, or local tax laws or the tax consequences of
transactions effectuated prior to or after the Merger (whether or not such
transactions are in connection with the Merger), including, without limitation,
transactions in which shares of AVEMCO Common Stock are acquired or in which
shares of HCCH Common Stock are disposed. Accordingly, SHAREHOLDERS OF AVEMCO
ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC CONSEQUENCES OF
THE MERGER AND ANY RELATED TRANSACTIONS, INCLUDING THE APPLICABLE FEDERAL,
STATE, LOCAL, AND FOREIGN TAX CONSEQUENCES TO THEM OF THE MERGER AND ANY RELATED
TRANSACTIONS IN THEIR PARTICULAR CIRCUMSTANCES.
The Merger has been structured with the intent that it be treated as a
reorganization for Federal income tax purposes so that no gain or loss will be
recognized by the AVEMCO shareholders upon consummation of the Merger.
Consummation of the Merger is conditioned upon, among other things, the receipt
by HCCH of a written tax opinion of Winstead Sechrest & Minick P.C., HCCH's
counsel and receipt by AVEMCO of a written tax opinion of Piper & Marbury
L.L.P., AVEMCO's counsel. The opinions, each of which will be dated as of the
date of this Proxy Statement/Prospectus, will be substantially to the effect
that, on the basis of facts and assumptions set forth in the opinions and on
certain representations made by the managements of HCCH and AVEMCO,
respectively:
(a) The Merger will constitute a reorganization in accordance with
Section 368(a) of the Code;
(b) No gain or loss will be recognized by the AVEMCO shareholders upon
their receipt of HCCH Common Stock in exchange for their AVEMCO Common
Stock;
(c) The tax basis of the HCCH Common Stock to be received (and
fractional share interests deemed received) by the AVEMCO shareholders in
the Merger will be the same as the tax basis of such shareholders in the
AVEMCO Common Stock exchanged for such HCCH Common Stock;
(d) The holding period for purposes of establishing short or long-term
gain or loss of the HCCH Common Stock to be received by the AVEMCO
shareholders in the Merger will include the period during which the
recipient held the AVEMCO Common Stock exchanged for the HCCH Common Stock,
if such AVEMCO Common Stock was held as a capital asset as of the Effective
Time; and
(e) Neither HCCH nor AVEMCO will recognize income, gain, or loss as a
result of the Merger.
Each opinion will be confirmed at the effective time of the Merger.
As indicated above, each opinion will be based on certain assumptions and
on representations by the managements of HCCH and AVEMCO. Neither opinion can be
relied upon if any such assumption or representation is, or later becomes,
inaccurate.
No ruling from the Internal Revenue Service concerning the tax consequences
of the Merger has been requested, and this opinion will not be binding upon the
Internal Revenue Service or the courts. If the Merger is consummated, and it is
later determined that the Merger did not qualify as a reorganization under the
Code, the AVEMCO shareholders would recognize taxable gain or loss in the Merger
equal to the difference between the fair market value of the HCCH Common Stock
they received and their tax basis in the AVEMCO Common Stock.
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ACCOUNTING TREATMENT
The Merger is intended to qualify as a pooling-of-interests for accounting
purposes. Under this method of accounting, the assets and liabilities of HCCH
and AVEMCO will be combined based on the respective carrying values of the
accounts in the historical financial statements of each entity. Results of
operations of the combined company will include income of HCCH and AVEMCO for
the entire fiscal period in which the combination occurs and the historical
results of operations of the separate companies for fiscal years prior to the
Merger will be combined and reported as the results of operations of the
combined company.
Consummation of the Merger is conditioned upon the receipt by HCCH of a
letter from Coopers & Lybrand L.L.P., to the effect that the Merger will be
treated as a pooling-of-interests for accounting purposes. See "The
Merger -- Certain Terms of the Plan of Reorganization -- Conditions." Certain
events, including certain transactions with respect to HCCH Common Stock or
AVEMCO Common Stock by affiliates of HCCH or AVEMCO, respectively, may prevent
the Merger from qualifying as a pooling-of-interests for accounting and
financial reporting purposes. To support the treatment of the Merger as a
pooling-of-interests, the executive officers and directors of AVEMCO along with
certain of its shareholders and the executive officers and directors of HCCH
have entered into agreements imposing certain resale limitations on their stock.
See "The Merger -- Affiliates' Agreements."
APPRAISAL AND DISSENTERS' RIGHTS
Under Delaware law, appraisal rights are not available to HCCH shareholders
or AVEMCO shareholders with respect to the Merger or other transactions
contemplated by the Plan of Reorganization.
MERGER EXPENSE AND FEES AND OTHER COSTS
Under the Plan of Reorganization, whether or not the Merger is consummated,
each party will bear its own costs and expense in connection with the Merger and
the transactions provided for therein. HCCH expense in connection with the
Merger is expected to be approximately $2.5 million. AVEMCO expense in
connection with the Merger is expected to be approximately $2.7 million. These
expenses include fees for financial advisors, legal counsel, independent
auditors and printing charges.
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined financial information (the
"Unaudited Pro Forma Information") is presented to reflect the estimated impact
on the historical Consolidated Financial Statements of HCCH of the Merger and
the issuance of 8,403,787 shares of HCCH Common Stock in connection therewith.
The Merger will be accounted for as a pooling-of-interests.
The Unaudited Pro Forma Combined Statements of Earnings for each of the
three years in the period ended December 31, 1996 assume that the Merger had
been consummated at the beginning of the earliest period presented. The
Unaudited Pro Forma Combined Balance Sheet as of December 31, 1996 assumes that
the Merger had been consummated on December 31, 1996.
The Unaudited Pro Forma Information gives effect only to the
reclassifications and adjustments set forth in the accompanying Notes to
Unaudited Pro Forma Combined Financial Information. The Unaudited Pro Forma
Information is not necessarily indicative of the results of operations or the
financial position which would have occurred had the Merger been consummated at
the beginning of the earliest period presented, nor is it necessarily indicative
of HCCH's future results of operations or financial position.
These statements have been prepared from the Consolidated Financial
Statements of HCCH and AVEMCO and should be read in conjunction with the related
notes. Such statements and related notes are located herein beginning at page
F-1. See "HCC Insurance Holdings, Inc. and Subsidiaries' Consolidated Financial
Statements" and "AVEMCO and Subsidiaries' Consolidated Financial Statements."
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HCCH
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
-------------------- ---------------------------
HCCH AVEMCO ADJUSTMENTS COMBINED
-------- -------- ----------- --------
<S> <C> <C> <C> <C>
ASSETS
Investments:
Securities available for sale:
Fixed income securities, at market.... $264,727 $112,828 $ $377,555
Marketable equity securities, at
market.............................. 2,433 10,817 13,250
Short-term investments, at cost.......... 53,100 25,593 78,693
-------- -------- -------- --------
Total investments................ 320,260 149,238 469,498
Cash....................................... 3,212 5,959 9,171
Restricted cash and cash investments....... 44,363 -- 44,363
Reinsurance recoverables................... 123,181 9,503 132,684
Premium, claims and other receivables...... 139,109 29,608 168,717
Ceded unearned premium..................... 65,845 5,913 71,758
Deferred policy acquisition costs.......... 16,843 6,071 1,252(3) 24,166
Property and equipment, net................ 9,135 7,886 17,021
Deferred income tax........................ 11,524 -- (653)(8) 10,871
Other assets, net.......................... 12,307 3,488 15,795
-------- -------- -------- --------
Total assets..................... $745,779 $217,666 $ 599 $964,044
======== ======== ======== ========
LIABILITIES
Loss and loss adjustment expense payable... $185,822 $ 43,227 $ $229,049
Reinsurance balances payable............... 43,900 1,549 45,449
Unearned premium........................... 114,758 37,201 151,959
Deferred ceding commissions................ 15,418 -- 1,252(3) 16,670
Premium and claims payable................. 119,524 -- 3,594(7) 123,118
Notes payable.............................. 16,500 56,667 73,167
Accounts payable and accrued liabilities... 9,167 18,450 7,000(5) 30,370
(3,594)(7)
653(8)
-------- -------- -------- --------
Total liabilities................ 505,089 157,094 7,599 669,782
SHAREHOLDERS' EQUITY
Common stock............................... 35,851 1,157 10,409(4) 44,115
(3,302)(6)
Additional paid-in capital................. 131,240 19,140 (10,409)(4) 137,478
(2,493)(6)
Retained earnings.......................... 72,169 94,843 (7,000)(5) 109,137
(50,875)(6)
Unrealized investment gain, net............ 1,303 2,320 3,623
Foreign currency translation adjustment.... 127 (218) (91)
Common stock in treasury................... -- (56,670) 56,670(6) --
-------- -------- -------- --------
Total shareholders' equity....... 240,690 60,572 (7,000) 294,262
-------- -------- -------- --------
Total liabilities and
shareholders' equity........... $745,779 $217,666 $ 599 $964,044
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma combined
financial information.
55
<PAGE> 66
HCCH
UNAUDITED PRO FORMA COMBINED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------------------------------- --------------------------------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
------------------- ----------------------- ------------------ -----------------------
HCCH AVEMCO ADJUSTMENTS COMBINED HCCH AVEMCO ADJUSTMENTS COMBINED
-------- -------- ----------- -------- -------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Net earned premium................. $ 93,314 $86,170 $ $179,484 $ 80,011 $80,458 $ $160,469
Fee and commission income.......... 38,462 8,819 (3,969)(2) 43,312 32,887 7,046 (3,586)(2) 36,347
Net investment income.............. 15,372 8,223 23,595 13,250 8,498 21,748
Computer products and services..... -- 9,913 9,913 -- 10,188 10,188
Net realized investment gain....... 5,097 3,244 8,341 1,061 575 1,636
Realized gain on subsidiary sale... -- 3,307 3,307 -- -- --
Other revenue...................... -- 8,214 8,214 -- 6,439 6,439
-------- -------- -------- -------- -------- ------- -------- --------
Total revenue.................. 152,245 127,890 (3,969) 276,166 127,209 113,204 (3,586) 236,827
EXPENSE
Loss and loss adjustment expense... 51,242 62,866 114,108 49,769 55,605 105,374
Operating expense:
Selling, general and
administrative expenses........ -- 36,701 (36,701)(1) -- -- 35,799 (35,799)(1) --
Policy acquisition costs......... 34,110 7,092 6,822(1) 48,024 29,748 6,513 6,227(1) 42,488
Compensation expense............. 20,353 -- 16,749(1) 37,102 26,790 -- 16,320(1) 43,110
Other operating expense.......... 12,855 -- 13,130(1) 25,985 12,591 -- 13,252(1) 25,843
Cost of computer hardware sold... -- 1,442 1,442 -- 1,961 1,961
Ceding commissions............... (30,268) -- (3,969)(2) (34,237) (27,228) -- (3,586)(2) (30,814)
-------- -------- -------- -------- -------- ------- -------- --------
Net operating expense.......... 37,050 45,235 (3,969) 78,316 41,901 44,273 (3,586) 82,588
Compensatory stock grant and merger
related expenses................. 26,160 -- 26,160 -- -- --
Interest expense................... 1,166 3,827 4,993 2,247 4,224 6,471
-------- -------- -------- -------- -------- ------- -------- --------
Total expense.................. 115,618 111,928 (3,969) 223,577 93,917 104,102 (3,586) 194,433
-------- -------- -------- -------- -------- ------- -------- --------
Earnings before income tax
provision.................... 36,627 15,962 52,589 33,292 9,102 42,394
Income tax provision............... 7,329 3,674 11,003 8,955 1,184 10,139
-------- -------- -------- -------- -------- ------- -------- --------
Net earnings................... $ 29,298 $12,288 $ -- $41,586 $ 24,337 $7,918 $ -- $ 32,255
======== ======== ======== ======== ======== ======= ======== ========
EARNINGS PER SHARE DATA
Earnings per share................. $ 0.81 $ 1.45 $ 0.94 $ 0.75 $ 0.90 $ 0.78
======== ======== ======== ======== ======= ========
Weighted average shares
outstanding...................... 35,965 8,478 44,443 32,667 8,846 41,513
======== ======== ======== ======== ======= ========
Additional pro forma information(9)
Net earnings..................... $ 43,655 $12,288 $55,943
======== ======== ========
Earnings per share............... $ 1.21 $ 1.45 $ 1.26
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma combined
financial information.
56
<PAGE> 67
HCCH
UNAUDITED PRO FORMA COMBINED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA) -- CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1994
--------------------------------------------
HISTORICAL PRO FORMA
------------------ -----------------------
HCCH AVEMCO ADJUSTMENTS COMBINED
-------- ------- ----------- --------
<S> <C> <C> <C> <C>
REVENUE
Net earned premium................................. $ 46,834 $75,518 $ $122,352
Fee and commission income.......................... 28,456 6,418 (4,624)(2) 30,250
Net investment income.............................. 9,533 8,245 17,778
Computer products and services..................... -- 9,185 9,185
Net realized investment gain (loss)................ 682 (248) 434
Other revenue...................................... -- 5,472 5,472
-------- ------- -------- --------
Total revenue................................. 85,505 104,590 (4,624) 185,471
EXPENSE
Loss and loss adjustment expense................... 29,588 46,310 75,898
Operating expense:
Selling, general and administrative expenses..... -- 32,825 (32,825)(1) --
Policy acquisition costs......................... 21,729 7,159 6,346(1) 35,234
Compensation expense............................. 23,900 -- 14,242(1) 38,142
Other operating expense.......................... 8,660 -- 12,237(1) 20,897
Cost of computer hardware sold................... -- 1,032 1,032
Ceding commissions............................... (20,210) -- (4,624)(2) (24,834)
-------- ------- -------- --------
Net operating expense......................... 34,079 41,016 (4,624) 70,471
Interest expense................................... 1,972 3,725 5,697
-------- ------- -------- --------
Total expense................................. 65,639 91,051 (4,624) 152,066
-------- ------- -------- --------
Earnings before income tax provision.......... 19,866 13,539 33,405
Income tax provision............................... 4,598 2,706 7,304
-------- ------- -------- --------
Net Earnings.................................. $ 15,268 $10,833 $ -- $ 26,101
======== ======= ======== ========
EARNINGS PER SHARE DATA
Earnings per share................................. $ 0.55 $ 1.20 $ 0.71
======== ======= ========
Weighted average shares outstanding................ 27,910 9,019 36,929
======== ======= ========
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma combined
financial information.
57
<PAGE> 68
HCCH
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
BASIS OF PRESENTATION
The Unaudited Pro Forma Combined Statements of Earnings reflect HCCH's
results of operations for each of the three years in the period ended December
31, 1996 on a pro forma basis assuming the Merger had been consummated at the
beginning of the earliest period presented. The Unaudited Pro Forma Consolidated
Balance Sheet as of December 31, 1996 assumes that the Merger had been
consummated on that date.
HCCH's management believes that the assumptions used in preparing the
Unaudited Pro Forma Information provide a reasonable basis for presenting all of
the significant effects of the Merger, that the pro forma adjustments give
appropriate effect to those assumptions and that the pro forma adjustments are
properly applied in the Unaudited Pro Forma Information.
The unaudited pro forma combined statements of earnings exclude the
non-recurring items discussed in note (5) below which will be recorded by HCCH
and AVEMCO in connection with the Merger.
PRO FORMA ADJUSTMENTS
Statements of Earnings:
(1) To reclassify AVEMCO's compensation, other operating and policy
acquisition costs from selling, general and administrative expense to
conform to HCCH's accounting classification.
(2) To reclassify AVEMCO's ceding commission from commission income to
conform to HCCH's accounting classification.
Balance Sheet:
(3) To reclassify AVEMCO's deferred ceding commissions from deferred
policy acquisition costs to conform to HCCH's accounting classification.
(4) To adjust AVEMCO's Common Stock at $.10 par value to be consistent
with HCCH's Common Stock at $1.00 par value.
(5) To record a one-time charge covering the costs of the Merger. Such
charge, which is currently estimated to be approximately $7.0 million,
represents the direct costs of the Merger and includes the fees of the
financial advisors, legal counsel, independent auditors, printing charges
and other non-recurring items. As this is a non-recurring item, the
adjustment has been charged directly to shareholders' equity in the
Unaudited Pro Forma Combined Balance Sheet.
(6) To record retirement of AVEMCO's treasury stock.
(7) To reclassify AVEMCO's premium and claims payable from accounts
payable to conform to HCCH's accounting classification.
(8) To reclassify AVEMCO's deferred Federal income tax from accounts
payable to conform to HCCH's accounting classification.
ADDITIONAL PRO FORMA INFORMATION
(9) On May 24, 1996, HCCH issued 6,250,000 shares of its common stock
to acquire all of the outstanding common stock of LDG. This business
combination has been accounted for as a pooling-of-interests and,
accordingly, HCCH's financial statements have been restated to include the
accounts and operations of LDG for all periods presented. Prior to the
combination, LDG had been an S Corporation, and thus exempt from federal
income tax. The pro forma amounts shown include the following adjustments
relating to HCCH's acquisition of LDG: a) to eliminate the non-recurring
compensatory stock grant and expenses related to the merger, and b) to
reflect appropriate federal income tax expense on LDG's earnings for the
period LDG was an S Corporation.
58
<PAGE> 69
SELECTED BUSINESS AND FINANCIAL INFORMATION
WITH RESPECT TO HCCH
BUSINESS OF HCCH
Overview.
HCCH, through its subsidiaries, provides specialized property and casualty
insurance to commercial customers, underwritten on both a direct and reinsurance
basis, and, to a lesser extent, insurance agency services. HCCH's principal
insurance company subsidiaries are Houston Casualty Company ("HCC") and
Trafalgar Insurance Company ("TIC") in Houston, Texas and IMG Insurance Company
Ltd. ("IMG") in Amman, Jordan. HCCH's principal agency subsidiaries are LDG
Management Company, Incorporated ("LDG") in Wakefield, Massachusetts; HCC
Underwriters, A Texas Corporation ("HCCU") in Houston, Texas; North American
Special Risk Associates, Inc. ("NASRA") in Northbrook, Illinois and Middle East
Insurance Brokers, Ltd. ("MEIB") in Amman, Jordan.
HCCH's underwriting activities are focused on providing aviation, marine,
offshore energy, property and accident and health insurance on a worldwide basis
and international reinsurance on these same lines of business. HCCH also
specializes in marketing and servicing complicated, high value, structured
insurance and reinsurance programs placed on behalf of domestic and foreign
clients which cover large, ocean marine fleets; complex, multinational, energy
and industrial businesses; international aviation operations; large
international property accounts; and a variety of accident and health related
risks. HCCH derives substantially the same amount of its business domestically
and internationally. HCCH operates primarily on a surplus lines or a non-
admitted basis and is licensed in Texas and Oklahoma.
Since its founding in 1974, HCCH and its predecessor companies have been
consistently profitable, generally reporting annual increases in gross written
premium ("GWP"), net written premium ("NWP") and total revenue. During the
period 1992 through 1996, HCCH had an average combined ratio of 78.1% versus the
less favorable 108.7% recorded by the U.S. property and casualty insurance
industry overall. During the same period, HCCH's GWP increased from $75.1
million to $230.8 million, an increase of 207% and net earnings increased from
$5.3 million to $29.3 million, an increase of 454%.
HCC and TIC are rated "A"(Excellent) by A.M. Best and HCC is rated "Aq" by
S&P. An A.M. Best or S&P rating is intended to provide an independent opinion of
an insurer's ability to meet its obligations to policyholders and should not be
considered an investment recommendation.
Strategy. HCCH's operating philosophy is to maximize underwriting profit
while preserving the integrity of shareholders' equity. HCCH concentrates its
underwriting in selected, narrowly defined lines of business in which it
believes there is a substantial opportunity to achieve underwriting profits.
HCCH primarily underwrites first party, physical damage coverages and lines of
business which have relatively short lead times between the occurrence of an
insured event and the reporting of claims to HCCH. With respect to the
underwriting management, marketing and related services, HCCH seeks to offer
quality underwriting, decision-making support and reinsurance capacity and
financial and other resources to take advantage of market opportunities for the
development of new products.
The property and casualty insurance underwriting business has historically
been cyclical (though not seasonal). Within the overall cycle of the industry,
particular lines of business experience their own cycles. These cycles are
characterized by periods of excess capital and significant competition in policy
pricing, terms and conditions, followed by periods of capital shortages,
typically resulting from adverse loss experience, which leads to decreased
competition, higher premium rates, and stricter underwriting standards.
The position of a particular line of business in its respective
underwriting cycle depends on prevailing premium rates, availability and cost of
reinsurance, and other market conditions. HCCH considers each of these factors
in determining when to increase or decrease premium volume in each line. With
this approach, HCCH focuses on increasing net earnings rather than premium
volume or market share.
HCCH purchases a substantial amount of reinsurance to limit its net loss
from both individual and catastrophic risks. The degree to which HCCH reinsures
varies by, among other things, the particular risks inherent in the policies
underwritten.
59
<PAGE> 70
HCCH believes its operational flexibility, experienced underwriting
personnel and access to, and expertise in, the reinsurance marketplace enables
HCCH to implement its strategy of emphasizing more profitable lines of business
during periods of increased premium rates, and de-emphasizing less profitable
lines of business during periods of severe competition.
For a more detailed description of the business of HCCH, reference is made
to "Item 1. Business" in the HCCH 1996 10-K, which is incorporated herein by
reference.
For information with respect to the impact of competition on activities
conducted by HCCH, see "Risk Factors -- Cyclical Nature of the Industry,"
" -- Reinsurance Considerations," " -- Medical Stop-Loss Business" and
" -- Competition."
Recent Acquisitions. On January 24, 1997, HCCH acquired all of the
occupational accident business of TRM International, Inc. and its subsidiaries.
In January 1997, HCCH announced it had agreed to acquire Interworld, Inc. Group
which specializes in underwriting general aviation risks throughout the United
States, with special emphasis on private and corporate aircraft and small to
medium-size airports and commercial operators. Each of these acquisitions will
expand and strengthen HCCH's existing lines of business.
Properties of HCCH. For a detailed description of the properties of HCCH,
reference is made to "Item 2. Properties" in the HCCH 1996 10-K, which is
incorporated herein by reference.
Government Regulation. The operations of HCCH and its affiliates are
subject to state insurance laws and regulations requiring the licensing of
insurance agents, brokers, reinsurance intermediaries, reinsurance underwriting
managers, and managing general agents and regulating certain aspects of their
business. These laws and regulations are intended primarily for the protection
of policyholders, rather than shareholders of the licensed entities, and may
include requirements for certain provisions in contracts entered into between
HCCH and various insurers or reinsurers, certain record keeping and reporting
requirements, advertising and business practice rules, and other matters. HCCH's
business depends on obtaining and maintaining licenses and approvals pursuant to
which it operates, as well as compliance with pertinent regulations. In addition
to the regulatory supervision of the insurance subsidiaries of HCCH, HCCH is
subject to regulation under the Texas Insurance Holding Company System
Regulatory Act, which contains certain reporting requirements including
registration and the filing of annual reports. In such registration and annual
reports HCCH is required to provide current information regarding its capital
structure, general financial condition, ownership, management and the identity
of each member of its insurance holding company system. HCCH is also required in
such registration and annual reports to disclose certain agreements and
transactions between HCCH and its affiliates, which must satisfy certain
standards set forth in the Texas Insurance Code. There can be no assurance given
that HCCH has all such required licenses, approvals or complying contracts or
that such licenses, approvals or complying contracts can always be obtained or
continued. In all jurisdictions, the applicable laws and regulations are subject
to amendment or interpretation by regulatory authorities. Generally, such
authorities are vested with relatively broad discretion to grant, renew and
revoke licenses and approvals, and to implement regulations, and licenses may be
denied or revoked for various reasons, including the violation of such
regulations, conviction of crimes and the like. In some instances, HCCH follows
practices based on its interpretations, or those that it believes may be
generally followed by the industry, which may be different from the requirements
or interpretations of regulatory authorities. Accordingly, the possibility
exists that HCCH may be precluded or temporarily suspended from carrying on some
or all of its activities or otherwise penalized in a given jurisdiction. Such
preclusion or suspension could have a materially adverse effect on the business
and results of operations of HCCH.
MANAGEMENT OF HCCH
For information regarding the names, ages, positions and business
backgrounds of the executive officers and directors of HCCH as well as
information regarding executive compensation, security ownership of management
and certain relationships and related transactions, reference is made to Items
10, 11, 12 and 13 of the 1996 10-K (which incorporates by reference portions of
HCCH's Proxy Statement relating to its Annual Meeting of Shareholders), which
are incorporated herein by reference.
60
<PAGE> 71
HCCH SELECTED CONSOLIDATED FINANCIAL DATA(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected consolidated financial data set forth below have been derived
from the Consolidated Financial Statements of HCCH. All information contained
herein should be read in conjunction with the Consolidated Financial Statements
and the Notes thereto and "HCCH Management's Discussion and Analysis" included
elsewhere in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1996 1995 1994(2) 1993 1992
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Revenue
Net earned premium..................... $ 93,314 $ 80,011 $ 46,834 $ 32,663 $24,483
Fee and commission income.............. 38,462 32,887 28,456 24,073 16,998
Net investment income.................. 15,372 13,250 9,533 5,454 2,814
Net realized investment gain........... 5,097 1,061 682 949 17
-------- -------- -------- -------- -------
Total revenue..................... 152,245 127,209 85,505 63,139 44,312
Expense
Loss and LAE........................... 51,242 49,769 29,588 21,210 16,834
Operating expense
Policy acquisition costs............ 34,110 29,748 21,729 12,747 9,238
Compensation expense................ 20,353 26,790 23,900 16,258 13,330
Other operating expense............. 12,855 12,591 8,660 7,261 4,191
Ceding commissions.................. (30,268) (27,228) (20,210) (11,166) (6,276)
-------- -------- -------- -------- -------
Net operating expense............. 37,050 41,901 34,079 25,100 20,483
Compensatory stock grant and merger
related expenses.................... 26,160 -- -- -- --
Interest expense 1,166 2,247 1,972 1,175 607
-------- -------- -------- -------- -------
Total expense..................... 115,618 93,917 65,639 47,485 37,924
-------- -------- -------- -------- -------
Earnings before income tax
provision......................... 36,627 33,292 19,866 15,654 6,388
Income tax provision................... 7,329 8,955 4,598 2,966 1,098
-------- -------- -------- -------- -------
Net earnings........................ $ 29,298 $ 24,337 $ 15,268 $ 12,688 5,290
======== ======== ======== ========
Increase in redemption value of
redeemable common stock(3)............. (1,124)
-------
Net earnings applicable to
nonredeemable common stock.......... $ 4,166
=======
EARNINGS PER SHARE DATA:
PRIMARY:
Earnings per share applicable to
nonredeemable common stock(4)....... $ 0.81 $ 0.75 $ 0.55 $ 0.53 $ 0.28
======== ======== ======== ======== =======
Weighted average shares
outstanding(4)...................... 35,965 32,667 27,910 23,999 14,863
======== ======== ======== ======== =======
FULLY DILUTED:
Earnings per share applicable to
nonredeemable common stock(4)..... $ 0.81 $ 0.74 $ 0.55 $ 0.52 $ 0.27
======== ======== ======== ======== =======
Weighted average shares
outstanding(4).................... 35,986 32,804 27,998 24,199 15,260
======== ======== ======== ======== =======
Cash dividends declared per share... $ 0.06
========
PRO FORMA INFORMATION:(5)
Net earnings........................ $ 43,655
========
Earnings per share.................. $ 1.21
========
</TABLE>
61
<PAGE> 72
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1996 1995 1994(2) 1993 1992
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(5):
Total investments................... $320,260 $305,287 $211,881 $172,913 $78,755
Reinsurance recoverables............ 123,181 103,408 99,462 73,057 62,089
Premium, claims and other
receivables....................... 139,109 130,384 113,704 54,781 46,517
Ceded unearned premium.............. 65,845 73,282 60,671 26,177 9,830
Total assets........................ 745,779 681,676 549,490 352,506 213,905
Loss and LAE payable................ 185,822 158,451 129,755 98,399 81,997
Unearned premium.................... 114,758 118,732 87,346 37,382 15,142
Total debt.......................... 16,500 16,661 44,908 28,944 3,673
Shareholders' equity................ 240,690 195,459 114,374 93,451 43,168
Net tangible book value per
share(4)(6)....................... $ 6.41 $ 5.33 $ 3.50 $ 3.50 $ 2.01
Book value per share(4)(6).......... $ 6.71 $ 5.65 $ 3.89 $ 3.50 $ 2.01
</TABLE>
- ---------------
(1) On May 24, 1996, HCCH acquired 100% of the outstanding common stock of LDG.
This business combination has been accounted for as a pooling-of-interests
and, accordingly, the consolidated financial data shown in this table has
been restated to include the accounts and operations of LDG for all periods
presented. On November 27, 1996, HCCH acquired 100% of the outstanding
shares of NASRA. This combination has been accounted for as a
pooling-of-interests. However, HCCH's consolidated financial statements
have not been restated due to immateriality.
(2) Effective October 1, 1994, HCCH acquired 100% of the stock of IMG and MEIB.
Both acquisitions were accounted for using the purchase method. Therefore,
the results of operations from both companies are included in the
consolidated statements of earnings beginning October 1, 1994 and assets
and liabilities of IMG and MEIB have been included in the consolidated
balance sheets beginning October 1, 1994.
(3) In a 1987 private placement, HCCH sold shares of redeemable common stock,
which incorporated a redemption obligation requiring HCCH to repurchase
such shares at a specified multiple of the then current book value. Prior
to its October 28, 1992 initial public offering, HCCH executed an agreement
with the holders of the redeemable common stock whereby the redemption
obligation would terminate upon the effective date of the initial public
offering. During the period in which the redemption obligation was in
force, HCCH was required to reduce its earnings by an amount equal to the
increase in the redemption value of the redeemable common stock and
concurrently increase the book value of the redeemable common stock by a
like amount. On October 28, 1992, the effective date of HCCH's initial
public offering, the redemption obligation terminated.
(4) These amounts have been adjusted to reflect the effects of the
three-for-two stock split payable as a 50% stock dividend to shareholders
of record March 15, 1994, and the five-for-two stock split payable as a
150% stock dividend to shareholders of record April 30, 1996.
(5) Prior to its combination with HCCH, LDG was an S Corporation, and thus
exempt from federal income tax. The pro forma amounts shown include the
following adjustments relating to the merger of HCCH and LDG: a) to
eliminate the non-recurring compensatory stock grant and expenses related
to the merger, and b) to reflect appropriate federal income tax expense on
LDG's earnings for the period LDG was an S Corporation.
(6) Book value per share is calculated by dividing shares outstanding into
total shareholders' equity. Net tangible book value per share uses total
shareholders' equity less goodwill as the numerator.
62
<PAGE> 73
HCCH
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
HCCH's primary sources of revenue are earned premium and investment income
derived from its insurance operations, and fee and commission income from its
insurance agency operations. HCCH's core underwriting activities involve
providing aviation, marine, offshore energy, property, and accident and health
insurance, which is underwritten on both a direct and a reinsurance basis. HCCH
concentrates on first party, physical damage coverages and lines of business
which have relatively short lead times between the occurrence of an insured
event and the reporting of claims to HCCH. HCCH also selectively underwrites a
small amount of excess treaty reinsurance. HCCH's agencies market and service
medical stop-loss, occupational accident and excess coverage insurance products
plus large complicated insurance and reinsurance programs on behalf of
multinational clients. They also place reinsurance for HCCH's insurance
operations and other insurance companies.
During recent years, HCCH has substantially increased its capital and
surplus through the issuance of equity securities, incurrence of debt, and
earnings, thereby enabling it to increase its underwriting capacity. HCCH has
utilized this additional capital by increasing underwriting activity across many
of its core lines of business, emphasizing lines of business and individual
opportunities with the most favorable underwriting characteristics at a
particular point in time. In each line of business, HCCH also cedes premiums
through the purchase of reinsurance in types and amounts appropriate to the line
of business, market conditions and HCCH's desired net risk retention profile.
Accordingly, HCCH has substantially increased both its GWP and NWP, although
with different relative increases in each line of business. In addition, because
HCCH's operating expense and loss and LAE have not increased as quickly as its
premium volume, HCCH has been able to substantially expand its operating
margins.
RESULTS OF OPERATIONS
The following table sets forth certain premium revenue information for the
periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Direct.......................................... $ 84,166 $ 111,466 $ 97,585
Reinsurance assumed............................. 146,589 127,492 95,293
--------- --------- ---------
Gross written premium......................... 230,755 238,958 192,878
Reinsurance ceded............................... (133,979) (140,172) (133,184)
--------- --------- ---------
Net written premium........................... 96,776 98,786 59,694
Increase in unearned premium.................... (3,462) (18,775) (12,860)
--------- --------- ---------
Net earned premium............................ $ 93,314 $ 80,011 $ 46,834
========= ========= =========
</TABLE>
63
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The following table sets forth the relationships of certain income
statement items as a percent of total revenue for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Net earned premium...................................... 61.3% 62.9% 54.8%
Fee and commission income............................... 25.3 25.9 33.3
All other income........................................ 13.4 11.2 11.9
----- ----- -----
Total revenue......................................... 100.0 100.0 100.0
Loss and LAE............................................ 33.7 39.1 34.6
Net operating expense................................... 24.3 32.9 39.9
All other expense....................................... 17.9 1.8 2.3
----- ----- -----
Earnings before taxes................................. 24.1 26.2 23.2
Income taxes............................................ 4.9 7.1 5.3
----- ----- -----
Net earnings.......................................... 19.2% 19.1% 17.9%
===== ===== =====
</TABLE>
Year ended December 31, 1996 versus year ended December 31, 1995
Total revenue during 1996 increased 20% to $152.2 million from $127.2
million in 1995. 1996 GWP decreased to $230.8 million from $239.0 million in
1995, while 1996 NWP decreased from $98.8 million to $96.8 million. The decrease
in written premium was a result of increased competition in the offshore energy
business that has driven rates below acceptable levels, as well as the softening
in marine rates and, more recently, property rates. Net earned premium in 1996
increased from $80.0 million to $93.3 million, reflecting the large increase in
written premium during 1995.
Fee and commission (non-risk bearing) income in 1996 increased 17% to $38.5
million from $32.9 million in 1995, reflecting increased agency activities. Net
investment income increased 16% to $15.4 million in 1996 from $13.3 million in
1995 reflecting a higher level of investment assets.
Realized investment gains from sales of marketable equity securities were
$5.3 million during 1996 compared to $1.1 million during 1995. Realized
investment losses from dispositions of fixed income securities were $201,000
during 1996, compared to losses of $11,000 during 1995. During 1996, HCCH
liquidated most of its equity security portfolio and redeployed those investment
assets into fixed income securities.
Loss and LAE increased $1.5 million in 1996, to $51.2 million, reflecting
the overall increase in business. During 1996, HCCH had net loss and LAE
redundancy of $3.8 million relating to prior year losses compared to a
redundancy of $1.6 million in 1995. However, during 1996, HCCH had gross loss
and LAE deficiency of $45.8 million. The gross deficiency comes from two primary
sources. The first source is the development of claims on individual policies,
several of which were large, which were substantially reinsured. These losses
were either reported late or reserves were increased as subsequent information
became available. Although the gross development on these losses is large,
approximately $34.5 million, because these policies were substantially
reinsured, there is no material effect on a net basis. The second source is the
run-off of the London market excess of loss ("spiral") business which HCCH
ceased writing in 1991. This development, which amounted to $11.3 million in
1996, is due to the delay in reporting of catastrophe losses by the London
market, coupled with the unprecedented number of catastrophes and subsequent
insurance company insolvencies. As HCCH did not have enough representative
years' underwriting experience upon which to base a more accurate estimate,
significant gross development has been experienced. However, this business is
substantially reinsured, so there is no material effect on a net basis. HCCH
believes that additional developments would be contained within the substantial
reinsurance protection available, thereby not having a material effect on HCCH's
current operations or shareholders' equity. HCCH continues to believe it has
materially provided for all net incurred losses.
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<PAGE> 75
Compensation expense decreased $6.4 million or 24% in 1996, to $20.4
million due primarily to a $7.6 million reduction in compensation to LDG's
previous principal shareholders. HCCH does not expect this downward trend to
continue.
Interest expense during 1996 decreased 48% to $1.2 million from $2.2
million during 1995 due to the reduced level of indebtedness as a portion of the
proceeds of a June, 1995, public offering of Common Stock which was used to
retire debt.
Income tax expense decreased to $7.3 million in 1996, compared to $9.0
million in 1995. The decrease in income tax expense was a result of a deferred
tax benefit of $9.6 million which was recorded in connection with the
compensatory stock grant to certain LDG employees. Also, as an S corporation,
LDG was exempt from Federal income taxes through May 21, 1996. Had LDG been
subject to Federal income taxes for both years, additional income tax expense of
$2.3 million and $722,000 would have been recorded during the years ended
December 31, 1996 and 1995, respectively.
Net earnings increased 20% to $29.3 million in 1996 from $24.3 million in
1995. Included in these amounts were merger related expenses of $2.1 million and
a non-recurring compensation expense of $14.4 million (net of a $9.6 million tax
benefit) recorded by LDG in connection with a compensatory stock grant from
LDG's majority shareholder to certain key employees prior to HCCH's May, 1996,
acquisition of LDG. The compensation expense was a non-cash item however, $9.6
million of actual cash tax savings will be recognized. Earnings per share
increased 8% to $0.81 in 1996 from $0.75 in 1995. Excluding the non-recurring
compensation charge and the merger related expenses, net earnings in 1996 would
have been $43.7 million, an increase of 56% over comparable 1995 amounts and
earnings per share would have been $1.21, a 41% increase over comparable 1995
amounts. The non-recurring compensation expense also caused the net loss for the
agency segment during 1996.
HCCH's insurance company subsidiaries' statutory combined ratio was 72.0%
for 1996 compared to 74.9% in 1995. HCCH's combined ratio remains significantly
better than the industry average.
Year Ended December 31, 1995 Versus Year Ended December 31, 1994
Total revenue during 1995 increased 49% to $127.2 million from $85.5
million in 1994. GWP increased 24% to $239.0 million from $192.9 million in
1994, while 1995 NWP increased 65% from $59.7 million to $98.8 million.
Accordingly, net earned premium in 1995 increased 71% from $46.8 million to
$80.0 million. These increases were due to substantial new business, rate
increases on some renewals, particularly property and aviation, and increased
retentions.
Fee and commission (non-risk bearing) income in 1995 increased 16% to $32.9
million from $28.5 million in 1994, reflecting increased agency activities. Net
investment income increased 39% to $13.3 million in 1995 from $9.5 million in
1994 reflecting a substantially higher level of investment assets due to
increased operating cash flow and the deployment of the proceeds from a public
offering of HCCH's Common Stock.
Realized investment gains from sales of marketable equity securities were
$1.1 million during 1995 compared to $775,000 during 1994. Realized investment
losses from sales of fixed income securities were $11,000 during 1995, compared
to losses of $89,000 during 1994.
Loss and LAE increased $20.2 million in 1995, to $49.8 million, reflecting
the overall increase in business written. During 1995, HCCH had net loss and LAE
redundancy of $1.6 million relating to prior year losses compared to a
deficiency of $717,000 in 1994. However, during 1995, HCCH had gross loss and
LAE deficiency of $18.4 million. The gross deficiency comes from two primary
sources. The first source is the development of claims on individual policies,
some of which were large, which were substantially reinsured. These losses were
either reported late or reserves were increased as subsequent information became
available. Although the gross development on these losses was approximately $8.6
million, because these policies were substantially reinsured, there is no
material effect on a net basis. The second source is the run-off of the London
market excess of loss ("spiral") business HCCH ceased writing in 1991. This
development, which amounted to $9.8 million in 1995, is due to the delay in
reporting of catastrophe losses by the London market, coupled with the
unprecedented number of catastrophes and subsequent insurance company
insolvencies. As
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<PAGE> 76
HCCH did not have enough representative years' underwriting experience to base a
more accurate estimate on, significant gross development has been experienced.
However, this business is substantially reinsured, so there is no material
effect on a net basis. HCCH believes that additional developments would be
contained within the substantial reinsurance protection available, thereby not
having a material effect on HCCH's current operations or shareholders' equity.
HCCH continues to believe it has materially provided for all net incurred
losses.
Interest expense during 1995 increased 14% to $2.2 million from $2.0
million during 1994 due to the increased level of indebtedness during the first
six months of 1995, which was incurred during late 1994 to fund the acquisitions
of IMG and MEIB.
Net earnings increased 59% to $24.3 million from $15.3 million in 1994.
This increase was principally a result of more efficient and continued
profitable underwriting plus higher investment income and fee and commission
income.
Earnings per share in 1995 increased 36% to $0.75 from $0.55 in 1994. This
reflects the 59% increase in net earnings partially offset by the 17% increase
in weighted average shares outstanding as a result of HCCH's 1994 acquisitions
and 1995 public stock offering.
HCCH's insurance company subsidiaries' statutory combined ratio was 74.9%
for 1995 compared to 74.8% in 1994. HCCH's combined ratio remains significantly
better than the industry average.
LIQUIDITY AND CAPITAL RESOURCES
HCCH completed an initial public offering of 1,437,500 shares (pre-splits)
of Common Stock during October, 1992 and secondary public offerings of 1,254,200
shares (pre-splits) of Common Stock in September, 1993 and 2,012,500 shares
(pre-split) of Common Stock in June, 1995. The offerings dramatically improved
the capital resources of HCCH. The net proceeds of the offerings have been used
to reduce HCCH's indebtedness and to contribute capital to the insurance company
subsidiaries. HCC now has more than $150 million in policyholders' surplus and
IMG has more than $59 million. This additional capital enables both HCC and IMG
to write significantly more premium income. The initial public offering also
resulted in the termination of all redemption rights previously held by certain
shareholders.
HCCH receives substantial cash from premiums and reinsurance recoverables,
and, to a lesser extent, investment income, proceeds from sales and redemptions
of investment assets and fee and commission income. The principal cash outflows
are for the payment of claims, payment of premiums to reinsurers, purchase of
investments, debt service, LAE, policy acquisition costs, operating expense,
income and other taxes and dividends.
During 1996, HCC renewed its existing credit facility which provides for a
$12 million bank line of credit for the issuance of letters of credit and for
short-term borrowings at the prime rate of interest. This line is collateralized
by securities with a market value equal to 125% of the total sum of the letters
of credit issued and cash advances outstanding. This facility matures on April
30, 1997. As of December 31, 1996, letters of credit in the amount of $4.6
million were issued on behalf of the HCC to collateralize certain reinsurance
obligations, however no cash advances were outstanding under this line and,
therefore, $7.4 million is available for short-term borrowings under this
facility.
In January, 1997, HCCH obtained an additional bank line of credit for $10.0
million. This credit facility provides for short-term borrowings and matures
April 30, 1998. Interest is payable quarterly at either (i) variable at the
banks prime rate; or (ii) fixed at the London Interbank Offering Rate ("LIBOR")
plus 1 1/2%, at the option of HCCH. The line of credit is collateralized by a
pledge of all capital stock of HCC. This new line of credit improves HCCH's
short-term liquidity.
On September 14, 1993, HCCH borrowed $29.25 million from a bank. HCCH used
the proceeds to retire previous indebtedness and make a $10.0 million capital
contribution to HCC. The principal terms of the note, which matures on October
1, 1998 are (i) quarterly principal repayments of $1.5 million, increasing to
$1.75 million; (ii) interest at the prime lending rate; (iii) collateralization
by a pledge of all capital stock of
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<PAGE> 77
HCC and substantially all of the common stock of IMG; and (iv) certain
restrictive terms and conditions including restrictions on certain transactions
in HCCH's Common Stock or the capital stock of HCC and IMG and the maintenance
of required financial ratios. During February, 1994, the note was amended by
fixing the interest rate at 6.5% until February 7, 1997. Thereafter, the rate
reverts to the prime lending rate or LIBOR plus 2.25%, at HCCH's option.
Additionally, the loan agreement prohibits the payment of dividends by HCCH
without the bank's approval. During 1995, HCCH prepaid the first two
installments of $1.5 million due in 1996. The bank deferred the second two
installments due in 1996 until maturity. HCCH paid the first 1997 quarterly
payment of $1.5 million in January, 1997.
HCCH maintains a substantial level of cash and liquid short-term
investments which are used to meet anticipated payment obligations. As of
December 31, 1996, HCCH had cash and short-term investments of approximately
$56.3 million. HCCH's consolidated investment portfolio of $320.3 million as of
December 31, 1996, is available to provide additional liquidity and cash for
operations.
Property and casualty insurance companies domiciled in the State of Texas
are limited in the payment of dividends to its shareholders in any 12 month
period, without the prior written consent of the Commissioner of Insurance, to
the greater of net investment income or 10% of statutory policyholders' surplus.
HCC paid no dividends in 1996 to HCCH. During 1997, HCC's ordinary dividend
capacity will be approximately $15.1 million.
HCCH believes that its operating cash flows, short-term investments and the
bank lines of credit will provide sufficient sources of liquidity to meet its
anticipated needs for at least the next twelve months.
At December 31, 1996, HCCH had a net deferred tax asset of $11.5 million.
Due to HCCH's history of consistent earnings, strong operating cash flows,
expectations for the future and the ability to hold investments to maturity, it
is more likely than not that HCCH will be able to realize the benefit of its
deferred tax asset.
As of December 31, 1996, HCC's total adjusted capital was $150.7 million,
which is 1,332% of the NAIC authorized control level risk-based capital while
TIC's total adjusted capital was $27.6 million, which is 17,928% of the NAIC
authorized control level risk-based capital.
Industry and regulatory guidelines suggest that a property and casualty
insurer's annual statutory GWP should not exceed 900% of its statutory
policyholders' surplus and NWP should not exceed 300% of its statutory
policyholders' surplus. HCCH maintains a premium to surplus ratio significantly
lower than such guidelines, and for the year ended December 31, 1996, its annual
statutory GWP was 108.8% of its statutory policyholders' surplus and NWP was
45.6% of its statutory policyholders' surplus.
EFFECTS OF PENDING ACQUISITIONS
If and when the proposed Merger with AVEMCO is consummated, it is expected
that future results of operations will benefit from the addition of another
profitable member of the HCCH Group and that the combined company would have
greater access to the capital markets. Offsetting those benefits would be the
increased debt service requirements of AVEMCO's current indebtedness. If the
Merger is not consummated, certain fees to HCCH's investment advisor will not
have to be paid and under certain conditions either AVEMCO or HCCH could owe the
counterparty a termination fee. Assuming no termination fee, HCCH would expense
approximately $1.0 million in merger-related expenses if the Merger were not
consummated.
IMPACT OF INFLATION
HCCH's operations, like those of other property and casualty insurers, are
susceptible to the effects of inflation, as premiums are established before the
ultimate amounts of loss and LAE are known. Although management considers the
potential effects of inflation when setting premiums, for competitive reasons,
such premiums may not adequately compensate HCCH for the effects of inflation.
However, as the majority of HCCH's business is comprised of lines which have
short lead times between the occurrence of an insured event, reporting of the
claims to HCCH and the final settlement of the claims, the effects of inflation
are minimized.
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A significant portion of HCCH's revenue is related to healthcare insurance
and reinsurance products which are subject to the effects of the underlying
inflation of medical costs. Such inflation in the costs of healthcare tends to
generate increases in premiums for medical stop-loss coverage, resulting in
greater revenue, but also higher claim payments. Inflation may have a negative
impact on insurance and reinsurance operations by causing higher claim
settlements than may originally have been estimated without an immediate
increase in premiums to a level necessary to maintain profit margins being
possible. No express provision for inflation is made, although trends are
considered when setting underwriting terms and claim reserves for purposes of
determining revenue from underwriting profit commission. Such reserves are
subject to a continuing review process to assess their adequacy and are adjusted
as deemed appropriate. In addition, the market value of the investments held by
HCCH varies depending on economic and market conditions and interest rates,
which are highly sensitive to the policies of governmental and regulatory
authorities. Any significant change in interest rates could therefore have a
material adverse effect on the market value of HCCH's investments.
EXCHANGE RATE FLUCTUATIONS
HCCH underwrites risks which are denominated in a number of foreign
currencies. It establishes and maintains loss reserves with respect to these
policies in their respective currencies. These reserves are subject to exchange
rate fluctuations which can have an effect on HCCH's net earnings. HCCH's
principal area of exposure is with respect to fluctuation in the exchange rate
between the British Pound Sterling and the United States Dollar. For the years
ended December 31, 1996, 1995 and 1994, the gain (loss) from currency conversion
was ($181,000), ($209,000) and $203,000, respectively.
From time to time HCCH enters into foreign currency forward contracts as a
hedge against foreign currency fluctuations, primarily British Pound Sterling.
HCCH's balances denominated in foreign currency fluctuate as transactions are
recorded and settled. During 1996, the average Sterling liability, for
subsidiaries whose functional currency was the United States Dollar, was
approximately L907,000 ($1.6 million at the December 31, 1996, rate of exchange)
which was hedged by an average open forward contract balance of approximately
L460,000 ($785,000 at the December 31, 1996, rate of exchange). There was one
open foreign currency forward contract as of December 31, 1996, to purchase
L500,000 ($856,000 at the December 31, 1996, rate of exchange) with a maturity
of January, 1997. During January, 1997, HCCH entered into a foreign currency
forward contract totaling L500,000 ($856,000 at the December 31, 1996, rate of
exchange). HCCH expects to continue to limit its exposure to currency
fluctuations through the use of foreign currency forward contracts.
HCCH utilizes these foreign currency forward contracts strictly as a hedge
against existing exposure to foreign currency fluctuations and it does not do so
as any form of speculative or trading investment.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In February, 1997, the Financial Accounting Standards Board issued SFAS No.
128 "Earnings Per Share". SFAS No. 128 is effective for fiscal years ending
after December 15, 1997. Early application is not permitted. SFAS No. 128
modifies the denominator to be used in the earnings per share calculations, and
requires additional disclosures of the calculations. However, the statement will
have no effect on HCCH's net earnings, shareholders' equity or cash flows.
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SELECTED BUSINESS AND FINANCIAL INFORMATION
WITH RESPECT TO AVEMCO
BUSINESS OF AVEMCO
General. AVEMCO is an insurance holding company organized in 1959, that
coordinates the activities of its subsidiaries and provides them with
management, business planning, investment, human resource, marketing, and
financial services. The subsidiaries of AVEMCO are engaged in the business of
providing specialty property and casualty insurance products and services,
principally involving aviation. Non-aviation specialty lines include lenders
single interest, short-term health, and pleasure marine. Insurance products are
distributed on a direct basis nationally and in Canada (except Quebec), and
through agency and brokerage networks nationwide. AVEMCO and its subsidiaries
operate together as the AVEMCO Group. AVEMCO's principal executive offices are
located at Frederick Municipal Airport, 411 Aviation Way, Frederick, Maryland
21701, and its telephone number is (301) 694-5700.
Since its organization, AVEMCO and its predecessor companies have generally
achieved an underwriting profit (33 out of 36 years). AIC is rated "A+"
(Superior) by A.M. Best, and its policyholders' surplus position substantially
exceeded the minimum requirements as stipulated by insurance industry risk-based
capital regulations.
AVEMCO's principal insurance subsidiary is AVEMCO Insurance Company
("AIC"), a direct writer of aviation and pleasure marine business. AIC
underwrites various types of aviation insurance for owners and pilots of general
aviation aircraft, including commercial coverages for fixed base operators.
General aviation encompasses private business aircraft, air taxi services,
recreational flying, fixed-based operations and similar activities. It excludes
military and commercial airline operations. Other aviation-related commercial
insurance coverages are written for lending institutions and leasing companies
on both general aviation and commercial aviation equipment. AIC also serves as
the reinsurer for most of the business produced and managed by other members of
the AVEMCO Group. Other insurance company members of the AVEMCO Group include
U.S. Specialty Insurance Company, a wholly owned subsidiary of AIC, underwriter
of aviation, pleasure marine, and lenders single interest insurance through
independent agents and brokers, whose business is also reinsured by AIC. The
AVEMCO Group also controls National Insurance Underwriters ("NIU"), a reciprocal
insurance exchange through AVEMCO's ownership of Specialty Insurance
Underwriters, Inc. ("SIUI"), the attorney-in-fact for the exchange. NIU is
currently writing a limited amount of aviation and automobile insurance in a few
states. AIC also owned National Assurance Underwriters, Inc. ("NAUI"), an
insurer that was sold in August 1996, but whose business (aviation insurance)
was retained by AIC as part of the sale transaction.
Other insurance producers (non-insurers)in the AVEMCO Group include: (i)
Matterhorn Bank Programs, Inc., a wholly owned subsidiary of AVEMCO and its
wholly owned subsidiary, KFA, Inc., which are general agencies that market
blanket lenders single interest coverage for banks and other financial
institutions covering risks of physical loss or damage to the property securing
their installment loans (primarily automobiles) and other insurance products to
financial institutions, through independent agents and brokers. Matterhorn's
business is primarily written by U.S. Specialty Insurance Company; and (ii)
Brooks-Shettle Company, a wholly owned subsidiary of AVEMCO which is an
insurance and reinsurance broker specializing in short term health and travel
insurance programs on an international basis, as well as marine insurance within
the United States. The business and operations of Hinchcliff International, Inc.
("Hinchcliff"), acquired by AVEMCO in January 1996, and International Group
Services, Inc. ("IGS"), acquired by AVEMCO in December 1994, were merged into
Brooks-Shettle Company under which names Brooks-Shettle Company also continues
to do business. The business of both Hinchcliff and IGS includes short term
student health insurance. Much of Brooks-Shettle Company's business is reinsured
by AIC.
The AVEMCO Group's insurance operations are complemented by its insurance
service group operations which are largely focused in areas that offer AVEMCO
opportunities to generate additional specialty insurance premiums. Currently,
the Group's service operations are conducted by the following companies and
concentrated in the following areas: (i) Loss Management Services, Inc., a
wholly owned subsidiary of
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AVEMCO, provides claims management and related subrogation and salvage services
for the Group's insurers, as well as other insurance companies and financial
institutions; (ii) MEDEX Assistance Corporation, a wholly owned subsidiary of
AVEMCO, provides worldwide, multilingual emergency assistance services on a
24-hour basis for individuals who become sick or injured primarily while
traveling outside their home countries; and (iii) The Wheatley Group, Ltd., a
wholly owned subsidiary of AVEMCO, which provides computer products, software,
and related services for property and casualty insurance companies in the United
States.
Regulation. AVEMCO's insurance company subsidiaries are subject to
regulation and supervision of their operations in each of the jurisdictions
where they conduct business. Regulations vary from jurisdiction to jurisdiction,
but generally, they provide regulatory authorities with broad supervisory,
regulatory and administrative powers over such matters as licenses, standards of
solvency, premium rates, policy forms, investments, security deposits, methods
of accounting, form and content of financial statements, reserves for unpaid
losses and loss adjustment expenses, reinsurance, minimum capital and surplus
requirements, dividends and other distributions, periodic examinations and
annual and other report filings. In general, regulations exist for the
protection of policyholders rather than the shareholders. Congress has been
considering whether it is appropriate to modify or repeal the McCarran-Ferguson
Act, which grants to the states the responsibility for regulating the insurance
industry and provides limited exemption to the "business of insurance" from
federal anti-trust laws. Bills have been introduced in Congress from time to
time, but whether any changes in the current statute will be made, or the effect
of such changes, if any, cannot presently be determined.
In 1988, California voters passed an initiative known as Proposition 103.
The Proposition provides, among other things, that rates for most insurance
policies issued or renewed between November 8, 1988, and November 8, 1989, be
rolled back to the levels of November 8, 1987, and then reduced an additional
20%. In addition, rates for most California insurance policies issued or renewed
after November 8, 1989, are subject to prior approval by the California
Department of Insurance (the Department). The implementation of Proposition 103
by the Registrant's insurance subsidiaries, as well as other California licensed
insurers, was complicated by numerous legal challenges and uncertainties since
its passage. AVEMCO's insurance subsidiaries settled their outstanding
Proposition 103 matters with the California Department of Insurance during 1995.
AVEMCO and its affected subsidiaries had previously provided for a potential
rollback impact in prior years. Refund payments were made in 1996.
Competition. The property/casualty insurance industry is highly
competitive and many insurance companies offer the same specialty lines of
business as AVEMCO's subsidiaries. Insurance products are distributed on a
direct basis to policyholders and also through the agent/broker community. In
the direct writing of aviation insurance, historically, there have been few
insurers which act as direct writers. AVEMCO's principal subsidiary, AIC, is
currently the largest if measured by the number of insurance policies issued. In
the agency distribution of aviation insurance, market share is highly
fragmented, and AVEMCO competes against numerous managing general agencies,
independent agencies, and pools and syndicates. In recognition that the aviation
insurance sector has been engaged in an extremely competitive price environment,
AVEMCO has continued to emphasize rate discipline and has been unwilling to
write aviation business at what it considers inadequate rates. It also attempts
to compete on the basis of policy provisions, quality and timely service,
including accessible personnel, application turnaround, and expeditious claims
settlement. AVEMCO's other specialty insurance lines, including the lenders
single interest, short-term health and pleasure marine lines, are highly
competitive as its subsidiaries compete with many specialty insurers, as well as
multi-line insurance companies, many of which have more experience, larger
volumes of business, and greater financial resources than the resources of
AVEMCO and its subsidiaries. They compete primarily on the basis of both price
and service. For further information regarding the impact of competition on the
various businesses of AVEMCO, see "Risk Factors -- Risks Relating to HCCH and
AVEMCO -- Cyclical Nature of Industry," "-- Volatility of Aviation Insurance"
and "-- Competition."
Properties. AVEMCO's activities are carried out from its 40,000 square
foot headquarters, owned by AVEMCO and located adjacent to the Frederick
Municipal Airport in Frederick, Maryland. AVEMCO also owns and occupies a 48,200
square foot office building and storage complex in St. Peters, Missouri, and a
one-
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story building in Fort Worth, Texas, containing approximately 2,500 square feet.
AVEMCO leases approximately 64,000 square feet of office space at 20 other
locations throughout the United States, Canada, and the United Kingdom.
MANAGEMENT OF AVEMCO
For information regarding the names, ages, positions and business
backgrounds of the executive officers and directors of AVEMCO and information
regarding executive compensation, management's ownership of AVEMCO securities
and certain relationships and related transactions, reference is made to Items
10, 11, 12 and 13 of the AVEMCO 1996 10-K, which are incorporated herein by
reference.
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AVEMCO SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
Set forth below are summary historical financial data of AVEMCO. The
information as of and for each of the years in the five-year period ended
December 31, 1996 is derived from AVEMCO's Consolidated Financial Statements.
The following data should be read in conjunction with the Consolidated Financial
Statements and Notes thereto of AVEMCO included elsewhere in, or incorporated by
reference into, this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
REVENUES:
Premiums earned........................................ $ 86,170 $ 80,458 $ 75,518 $ 62,702 $ 57,385
Commissions............................................ 8,819 7,046 6,418 5,909 6,145
Net investment income.................................. 8,223 8,498 8,245 9,004 9,218
Computer products and services......................... 9,913 10,188 9,185 11,129 4,836
Realized gain (loss) on sale of investments............ 3,244 575 (248) 9,634 2,742
Realized gain on sale of subsidiary.................... 3,307 -- -- -- --
Other revenues......................................... 8,214 6,439 5,472 5,523 6,597
-------- -------- -------- -------- --------
Total revenues.................................. 127,890 113,204 104,590 103,901 86,923
-------- -------- -------- -------- --------
EXPENSES:
Losses and loss adjustment expenses.................... 62,866 55,605 46,310 41,502 36,783
Commissions............................................ 7,092 6,513 7,159 5,716 6,966
Other expenses......................................... 41,970 41,984 37,582 37,830 32,387
-------- -------- -------- -------- --------
Total expenses.................................. 111,928 104,102 91,051 85,048 76,136
-------- -------- -------- -------- --------
Earnings before income taxes........................... 15,962 9,102 13,539 18,853 10,787
-------- -------- -------- -------- --------
Net earnings(1).......................................... $ 12,288 $ 7,918 $ 10,833 $ 15,572 $ 9,603
======== ======== ======== ======== ========
PER SHARE DATA:
Net earnings(1)(2)..................................... $ 1.45 $ .90 $ 1.20 $ 1.41 $ .82
Dividends declared..................................... $ .48 $ .46 $ .44 $ .42 $ .40
Shareholders' equity per share(3)...................... $ 7.33 $ 7.14 $ 6.28 $ 5.92 $ 7.76
Weighted average number of common and common equivalent
shares................................................. 8,478 8,846 9,019 11,041 11,734
-------- -------- -------- -------- --------
OTHER FINANCIAL DATA:
Investments............................................ $149,238 $149,544 $136,378 $139,384 $151,013
Total Assets........................................... 217,666 $213,802 $201,350 $210,693 $231,621
Debt................................................... 56,667 $ 54,967 $ 54,600 $ 54,500 $ 39,000
Shareholders' equity................................... 60,572 $ 61,759 $ 55,610 $ 53,930 $ 89,215
-------- -------- -------- -------- --------
STATUTORY INSURANCE INDICATORS:(4)
Loss ratio............................................. 73.1% 69.4% 61.2% 66.2% 64.6%
Expense ratio.......................................... 23.0% 25.5% 28.6% 29.4% 30.8%
-------- -------- -------- -------- --------
Underwriting ratio.............................. 96.1% 94.9% 89.8% 95.6% 95.4%
-------- -------- -------- -------- --------
Ratio of net premiums written to surplus................. 1.19/1 1.15/1 1.00/1 .86/1 .74/1
Ratio of loss reserves to surplus........................ .46/1 .45/1 .43/1 .41/1 .35/1
Policyholders' surplus................................... $ 76,669 $ 73,808 $ 72,133 $ 72,833 $ 77,662
======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) 1993 includes cumulative effect of the adoption of FASB Statement No. 109,
"Accounting for Income Taxes" (see notes 1 and 6 to AVEMCO's Consolidated
Financial Statements included elsewhere herein).
(2) Based on weighted average number of common and common equivalent shares.
(3) Based on common shares outstanding.
(4) Includes AVEMCO Insurance Company and its subsidiaries.
72
<PAGE> 83
AVEMCO
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Year ended December 31, 1996 versus year ended December 31, 1995
1996 marks the sixth consecutive year that AVEMCO has grown its gross
premiums writing base. Gross premiums written for 1996 increased over 1995 as
follows:
<TABLE>
<CAPTION>
LINE OF BUSINESS 1996 1995
---------------- -------- --------
(IN THOUSANDS)
<S> <C> <C>
Aviation.................................................... $ 69,474 $ 69,076
Non-aviation................................................ 37,491 31,072
-------- --------
Gross Premiums Written...................................... $106,965 $100,148
======== ========
</TABLE>
Gross premiums written for the aviation line were $69.5 million in 1996
compared to $69.1 million in 1995. Included in 1995 gross premiums written,
however, were $4 million of non-recurring premiums associated with the January
1995 acquisition of the aviation business from Aviation Underwriting
Specialists. Excluding those non-recurring premiums, gross aviation premiums
written increased 7% over 1995 due to a combination of rate improvement and unit
growth.
Gross premiums written on the non-aviation insurance lines increased 21%
over 1995 to $37.5 million. Particularly noteworthy was the lenders single
interest production. This particular insurance product, managed by Matterhorn
Bank Programs, Inc., a consolidated subsidiary, protects a lender's retail
installment portfolio primarily against risk of physical loss of or damage to
property securing its installment loans should the borrower fail to maintain the
required insurance. Strong new business growth pushed 1996 lenders single
interest gross premiums written 38% to $22.9 million as compared to $16.6
million in 1995.
Gross premiums written for short-term health insurance programs were $10.2
million in 1996 compared to $10.9 million in 1995. The decline was principally
impacted by AVEMCO's decision to discontinue as a reinsurer of a trip-travel
program that represented $6.3 million of gross premiums written in 1995, when it
was unable to negotiate satisfactory renewal terms. That decline was largely
offset with increased participation in short-term health programs managed and
underwritten by AVEMCO's International Group Services division of Brooks-Shettle
Company, a consolidated subsidiary, and participation late in 1996 on short-term
programs managed and underwritten by its Hinchcliff International division.
Pleasure marine gross premiums written increased to $4.4 million in 1996
versus $3.5 million in 1995 through improved new business production by AVEMCO's
independent agency insurer, U.S. Specialty Insurance Company. AVEMCO is
continuing to develop this product gradually by stressing conservative
underwriting guidelines. In addition, AVEMCO continues to retain 100% of the
pleasure marine risks it writes, with the exception of reinsurance coverage for
catastrophic marine losses.
Net premiums written for all lines of business reflect the business
retained by AVEMCO after its reinsurance arrangements are considered. Net
premiums written increased over 1995 primarily because of the growth in the
lenders single interest business. 1996 earned premium revenues of $86.2 million
increased over 1995's $80.5 million, consistent with the increase in net
premiums written.
Commission revenues, consisting primarily of commissions received on
reinsurance ceded and commissions produced by agency operations, net of amounts
paid to their agents, increased to $8.8 million in 1996 as compared to $7.0
million in 1995. The increase is mainly attributed to commissions generated by
the Hinchcliff International division of Brooks-Shettle Company.
73
<PAGE> 84
Net investment income in 1996 was $8.2 million compared to $8.5 million in
1995. The slight decrease is principally attributed to a lower average invested
asset base during 1996. AVEMCO sold its common equity securities in 1996.
Computer product and service revenues generated by The Wheatley Group,
Ltd., a consolidated subsidiary, was $9.9 million in 1996, slightly behind
1995's $10.2 million. Hardware equipment sales declined by $800,000, while
Wheatley's core software revenues increased by $500,000. Hardware sales can vary
significantly from period to period.
Realized gains on the sale of investments were $3.2 million in 1996 as
compared to $600,000 in 1995. The majority of the 1996 gains arose from AVEMCO's
decision to sell its common equities.
AVEMCO sold a subsidiary, National Assurance Underwriters, Inc., during
1996, while retaining all that subsidiary's insurance business. The sale
generated a realized gain of $3.3 million.
Other revenues increased to $8.2 million in 1996 as compared to $6.4
million in 1995. $1.0 million of the increase is directly attributed to MEDEX
Assistance Corporation, a consolidated subsidiary that improved its revenue
performance by 30% over 1995.
From a claims perspective, the net loss ratio for 1996 was 73.0% compared
to 69.1% in 1995.
<TABLE>
<CAPTION>
NET LOSS RATIOS
----------------
LINE OF BUSINESS 1996 1995
---------------- ------ ------
<S> <C> <C>
Aviation.................................................... 76.1% 68.7%
Non-aviation................................................ 67.9% 70.0%
All Lines................................................... 73.0% 69.1%
</TABLE>
Net incurred losses and loss adjustment expenses were as follows:
<TABLE>
<CAPTION>
LINE OF BUSINESS 1996 1995
---------------- ------- -------
(IN THOUSANDS)
<S> <C> <C>
Aviation.................................................... $40,387 $36,575
Non-aviation................................................ 22,479 19,030
------- -------
Net Incurred Losses......................................... $62,866 $55,605
======= =======
</TABLE>
Net aviation incurred losses in 1996 increased over 1995, principally due
to increased physical damage claims activity on higher-valued aircraft. In
addition, earlier in 1996 there was a higher than usual increase in reported
small claims activity. Non-aviation losses in 1996 were $22.4 million compared
to $19.0 million in 1995 as an increase in lenders single interest insurance
claims commensurate with their new business growth was partially offset by
improved loss performance by the short-term health programs.
Incurred losses in 1996 were also affected by Hurricane Fran which struck
the eastern portion of the United States in September. This storm resulted in an
after-tax earnings reduction of $548,000 or $.07 per share. There were no
significant weather-related losses in 1995.
Commission expense, representing costs incurred to generate insurance
business through the assumed reinsurance and independent agency markets
increased to $7.1 million in 1996 as compared to $6.5 million in 1995. This
increase is consistent with the upward trend in reinsurance assumed production.
Lower variable interest rates combined with a lower level of bank
borrowings during 1996 decreased interest expense to $3.8 million in 1996 from
$4.2 million in 1995.
Selling, general, and administrative costs increased a modest 2.5% in 1996
as AVEMCO incurred additional operating costs from the recently acquired
Hinchcliff International, Inc. subsidiary while supporting increased revenue
activities in its other business units without a significant increase in
operating costs.
74
<PAGE> 85
Income tax expense increased in 1996 to $3.7 million as compared to $1.2
million in 1995, mainly as the result of the increased realized investment gains
and the realized gain on the sale of National Assurance Underwriters, Inc. Both
of these items were fully taxable.
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting for Stock-based Compensation." This Statement establishes
an alternative fair value-based method of accounting for all employee stock
compensation plans in addition to the intrinsic value-based method. AVEMCO has
elected to continue to use the intrinsic value method as permitted by the
Statement. AVEMCO has made the necessary disclosures as required by the
Statement in its Notes to Consolidated Statements.
Year ended December 31, 1995 versus year ended December 31, 1994
Gross premiums written for 1995 increased over 1994 as follows:
<TABLE>
<CAPTION>
LINE OF BUSINESS 1995 1994
---------------- ---- ----
(IN THOUSANDS)
<S> <C> <C>
Aviation................................................ $ 69,076 $56,812
Non-Aviation............................................ 31,072 33,840
-------- -------
Gross premiums written.................................. $100,148 $90,652
======== =======
Net premiums written.................................... $ 85,540 $73,450
======== =======
</TABLE>
Gross premiums written for aviation during 1995 increased by 22% over 1994.
That increase resulted principally from the purchase of the aviation business of
Aviation Underwriting Specialists (AUS) during the 1995 first quarter. In
addition, there was new business growth. While the rate situation in the
aviation insurance sector remained competitive, there was some improvement.
Market rates continued to rise during 1995, with more significant increases in
the areas of high-valued aircraft hulls and with pilots who are transitioning to
larger or more complex aircraft.
Gross premiums written on non-aviation lines were $31.1 million compared to
$33.8 million in 1994. The drop in premium was principally attributable to the
short-term health business, where there was a reduced level of participation in
one profitable short-term health program, along with the discontinuance of
another program that was not meeting AVEMCO's underwriting objectives. These
actions had the effect of reducing earned premium revenues when compared to
1994. AVEMCO plans to continue to build its participation in certain short-term
health programs managed by IGS, which it acquired in December of 1994. AVEMCO
also expects to begin participating late in 1996 on short-term health programs
managed by Hinchcliff International (Hinchcliff), a subsidiary acquired in
January 1996. IGS and Hinchcliff are third-party administrators and producers of
short-term health insurance programs, primarily covering foreign students who
temporarily reside in the United States while attending colleges and
universities.
Lenders single interest gross premium writings were $16.6 million for 1995
compared to $16.3 million written in 1994. This business principally covers
automobile loans and is thereby closely linked to automobile sales, which had a
downturn in 1995. Additionally, Matterhorn emphasizes rate discipline and will
not write business at what it believes to be an inadequate rate.
Pleasure marine gross premiums written for 1995 were $3.5 million, similar
to that of 1994. AVEMCO continues to emphasize movement away from coastal
exposures, given the frequency of weather-related events over the last several
years. AVEMCO continues to retain 100% of the pleasure marine business it writes
with the exception of reinsurance for catastrophic marine losses.
Net premiums written for all lines of business reflect the business
retained by AVEMCO after its reinsurance arrangements are considered. Net
premiums written increased over 1994 because of the growth in the aviation
business. Earned premium revenues of $80.5 million increased over 1994's $75.5
million, consistent with the increase in net premiums written.
Commission revenues increased to $7.0 million in 1995 as compared to $6.4
million in 1994, primarily as a result of the IGS acquisition.
75
<PAGE> 86
Net investment income of $8.5 million was slightly above 1994's $8.2
million, principally due to an increase in average invested assets.
Computer product and service revenues generated by The Wheatley Group,
Ltd., a consolidated subsidiary, amounted to $10.2 million compared to $9.2
million for 1994. The revenue increase is principally attributable to an
increase in hardware equipment sales.
Realized investment gains and/or losses for 1995 and 1994 were nominal.
From a claims standpoint, the net loss ratio for 1995 was 69.1% compared to
61.3% for 1994.
<TABLE>
<CAPTION>
NET LOSS RATIO
--------------
LINE OF BUSINESS 1995 1994
---------------- ----- -----
<S> <C> <C>
Aviation.................................................... 68.7% 62.8%
Non-Aviation................................................ 70.0% 59.2%
All lines................................................... 69.1% 61.3%
</TABLE>
Net incurred losses and loss adjustment expenses were as follows:
<TABLE>
<CAPTION>
LINE OF BUSINESS 1995 1994
---------------- ------- -------
(IN THOUSANDS)
<S> <C> <C>
Aviation................................................. $36,575 $27,460
Non-Aviation............................................. 19,030 18,850
------- -------
Net Incurred Losses...................................... $55,605 $46,310
======= =======
</TABLE>
Net incurred losses on aviation claims increased compared to 1994. Claim
activity on the growing book of higher-valued aircraft was a principal reason
for the increase. AVEMCO experienced a difficult third quarter from a claims
perspective. Historically, that quarter can be volatile since it is the peak
season for aircraft and watercraft use. AVEMCO incurred several large hull
claims during that period. AVEMCO did not experience an increase in claims
frequency or severity on the liability side. Another reason for the increase in
net incurred losses was due to the additional claim activity on the aviation
book of business acquired from AUS during the first quarter of 1995.
There were no significant weather-related losses during 1995 or 1994.
Additionally, AVEMCO did not incur significant losses associated with the
"Blizzard of 1996," which occurred shortly after the end of the year.
Commission expense, representing costs incurred to generate business
through the assumed reinsurance and agency markets, declined to $6.5 million in
1995, as compared to $7.2 million in 1994. This decrease is principally
attributable to the decline in premiums related to the short-term health plans.
Higher variable interest rates and a slightly higher level of bank
borrowings increased interest expense to $4.2 million in 1995 from $3.7 million
in 1994.
Selling, general, and administrative expenses for 1995 increased over the
prior year, primarily due to the acquisition of the AUS book of aviation
business, the acquisition of the IGS business and additional costs incurred with
the software business.
Income tax expense decreased to $1.2 million in 1995 from $2.7 million in
1994 as pre-tax earnings were predominantly comprised of non-taxable investment
income in relation to income from fully taxable sources, such as underwriting
and realized investment gains.
AVEMCO's two California-licensed insurers settled their outstanding
Proposition 103 matters with the California Department of Insurance during 1995.
AVEMCO had previously provided for a potential rollback impact in prior years.
Refund payments are expected to be made in 1996. See "Selected Business and
Financial Information With Respect to AVEMCO -- Business of
AVEMCO -- Regulation."
76
<PAGE> 87
In summary, increased claims activity in the aviation business and a
reduced level of participation in two short-term health programs were the
principal factors for the reduced level of earnings when compared to 1994.
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting for Stock-Based Compensation." This Statement establishes a
fair value-based method of accounting for all employee stock compensation plans.
AVEMCO has elected to continue to use the intrinsic value-based method of
accounting, as permitted by the Statement. AVEMCO has made the necessary
disclosures as required by the Statement in its Notes to consolidated financial
statements.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
AVEMCO's primary sources of operating funds are insurance premiums,
commissions, service fees and investment revenues. Primary uses of operating
funds are for claim payments to insureds, commissions, and other operating
expenses. Operating activities provided $5.8 million, $11.1 million, and $11.8
million of net cash flow in 1996, 1995, and 1994, respectively. Since the level
of operating cash flow is principally affected by premium production, paid loss
activity, the sale of investment securities, and reinsurance recoveries
received, operating cash flow could vary significantly from period to period.
Net operating cash flow of $5.8 million for 1996 was below that of 1995.
1996 operating cash flow was affected by the realized gains on the sale of
investments and the realized gain on the sale of a subsidiary, which were
excluded from operating activities and included in cash flow from investment
activities. In addition, 1996 operating cash flow was further impacted by
one-time refund payments of $2.4 million related to the settlement of California
Proposition 103 matters. AVEMCO's insurance subsidiaries had fully provided for
such refund amounts in prior years. Net operating cash flow for 1995 decreased
from that of 1994 primarily because of increased paid claims activity in 1995
and the effect of reinsurance recoverables received in 1994.
Capital expenditures for property and equipment additions were $700,000,
$1.9 million, and $700,000, in 1996, 1995, and 1994, respectively. 1996
additions were mainly computer equipment upgrades. 1995 expenditures consisted
primarily of costs associated with two subsidiary office relocations and assets
acquired through two acquisitions. 1994 additions were primarily comprised of
computer hardware upgrades. AVEMCO does not anticipate a significant level of
property and equipment capital expenditures during 1997. Other expenditures
include the 1994 $2.0 million acquisition of assets from International Group
Services, Inc., a third party administrator that specializes in short-term
health insurance programs. All expenditures were financed principally by
internally-generated funds.
At December 31, 1996, AVEMCO had $31.6 million in cash and short-term
investments. Additionally, $3.3 million of its fixed income portfolio is
scheduled to mature in 1997. A further source of short-term liquidity includes a
credit facility with a bank. $7.0 million is available under that commitment to
address short-term cash needs. AVEMCO's investment portfolio is highly liquid,
consisting principally of readily marketable securities. In developing its
investment strategy, AVEMCO establishes a level of cash and highly liquid short-
and intermediate-term securities which, combined with expected cash flow, is
believed adequate to meet anticipated payment obligations. While short-term
liquidity is considered adequate, long-term liquidity will be primarily
dependent upon premium production and paid loss activity.
Investments
AVEMCO's investment portfolio represents 69% of its total assets. AVEMCO
follows investment guidelines which, in addition to providing for an acceptable
after-tax return on its investments, are structured to preserve capital,
maintain sufficient liquidity to meet obligations, and maintain what is
considered an ample margin of capital and surplus to sustain planned writings of
insurance. At December 31, 1996, 76% of AVEMCO's investments were in fixed
income securities, 7% in equities, and 17% in short-term investments. AVEMCO's
only real estate investments are in its operating facilities. Fixed income
securities consist principally of high investment grade securities with an
average maturity of about eight years. AVEMCO does
77
<PAGE> 88
not use derivative instruments, such as mortgage derivatives, options and
structured notes, to leverage its investment portfolio.
At December 31, 1996, AVEMCO's $149.2 million investment portfolio
reflected after-tax appreciation of $2.3 million above its cost basis.
AVEMCO has classified its investments as available for sale. While AVEMCO
has the ability to hold its investments until maturity, these securities may be
sold prior to maturity in response to changing market and economic conditions or
to maximize after-tax returns.
AVEMCO had $3.2 million of realized investment gains in 1996 compared to a
nominal realized investment gain of $575,000 in 1995. Decisions to sell
securities are governed by considerations such as surplus exposure, tax
consequences and investment opportunities. As a result, realized investment
gains or losses can vary significantly from period to period. The majority of
the 1996 realized investment gains arose from AVEMCO's decision to liquidate its
common equity portfolio. Additional information regarding AVEMCO's investment
portfolio is detailed on pages F-33 and pages F-39 through F-41.
Loss Reserves
Historical experience, judgmental factors, adherence to a strategy of
targeting rate adequacy, continual monitoring of reserve levels, and paying
claims in a prompt fashion have all contributed to a favorable development of
loss reserves during the past several years. A historical perspective of
AVEMCO's loss reserve developments is included in Note 4 to the consolidated
financial statements on pages F-42 and F-43, and is incorporated herein.
The development of unpaid loss and loss adjustment expense refers to the
difference between original estimates for unpaid losses and loss adjustment
expenses and the re-evaluation of those estimates in subsequent years as loss
payments are made and open claims adjusted to reflect current information.
Redundant or favorable development occurs when original estimates are higher
than subsequently paid or adjusted.
During 1996, AVEMCO experienced overall favorable development of $3.3
million on gross unpaid losses and loss adjustment expenses. The 1996 favorable
development compares with favorable development of $2.5 million and $3.2 million
in 1995 and 1994, respectively.
AVEMCO experienced overall favorable development of $1.1 million on net
unpaid loss and loss adjustment expenses after deducting reinsurance
protections. This compares with favorable development of $1.1 million for 1995
and $2.9 million for 1994. The gross loss reserve development and net loss
reserve development can vary significantly, as the level of reinsurance carried
on any one risk is dependent upon several factors.
AVEMCO's insurance specialty businesses are mostly short-tail in nature,
meaning that claims are paid or settled in a relatively short time frame from
the time reported. Nonetheless, the nature of AVEMCO's principal insurance
specialty line, aviation, consists of low frequency, high severity claims, which
can result in significant changes in the development of unpaid losses and loss
adjustment expenses from period to period. The timing of salvage and subrogation
recoveries could likewise affect the loss reserve development.
AVEMCO did not experience any significant environmental claim activity
during 1996, 1995 or 1994, and currently anticipates that activity in the future
should not have a material adverse effect on the overall consolidated financial
position of AVEMCO.
Reinsurance
AVEMCO's specialty lines of business, particularly aviation and pleasure
marine, are volatile from both a rate and a claims perspective, leading to
potentially wide swings in underwriting results. Accordingly, AVEMCO is a party
to several reinsurance arrangements. These reinsurance arrangements are utilized
to assist in limiting maximum loss, provide greater diversification of risk,
reduce exposures on larger risks, and provide a level of protection from
catastrophic events. AVEMCO routinely reviews and adjusts its reinsurance
78
<PAGE> 89
strategy, taking into account the anticipated future direction of its business,
underwriting considerations such as rate and risk levels, conditions in the
reinsurance marketplace and the cost-benefit relationship expected to be derived
from such reinsurance arrangements. Most of the aviation business is covered
under a quota share/surplus share reinsurance arrangement. Facultative
reinsurance placements are also used, primarily on policies with limits larger
than are covered by treaty reinsurance. AVEMCO's retention on its aviation
business varies according to policy limits. The largest net aggregate amount
retained in any one risk is $1.6 million. AVEMCO currently retains all of the
pleasure marine business that it writes, subject to catastrophic reinsurance
protections. Under its catastrophe reinsurance, which also covers the aviation
business line, AVEMCO absorbs the first $2.5 million in losses, with catastrophe
reinsurance protection to $10.5 million. The lenders single interest and
short-term health business participate in proportional treaty reinsurance. For
1996, AVEMCO retained 86% of its premium production and ceded 14% to reinsurers
under its various reinsurance arrangements. Approximately 63% of the net amounts
recoverable from reinsurers at December 31, 1996, are attributable to
reinsurance arrangements with three reinsurers. No significant amounts
recoverable from reinsurers have been written off as uncollectible in the past
three years. Additional information regarding reinsurance is detailed in Note 9
to the consolidated financial statements on page F-47 and is incorporated herein
by reference.
Capital Resources
The annual dividends for 1996 and 1995 were $.48 per share and $.46 per
share, respectively, marking the twenty-first and twentieth years in which
AVEMCO has paid an increased dividend.
AVEMCO's common stock repurchase program reflects continued efforts to
effectively manage its capital base and enhance shareholder value. Its capital
needs vary from period to period recognizing the volatility in the underwriting
of its specialty insurance products. The aviation insurance industry continues
in the longest competitive cycle in its history. AVEMCO acquired 520,000 of its
common shares during 1996. Since inception of its stock repurchase program in
the 1987 fourth quarter through the end of 1996, AVEMCO has repurchased
6,727,380 shares of its stock at prices ranging from $9.75 to $22.00 per share.
AVEMCO utilized a combination of its revolving credit facility, a portion
of the proceeds from the sale of investments, and funds generated by its
subsidiaries operating activities to finance its capital management program.
Funds provided by AVEMCO's principal subsidiary, AVEMCO Insurance Company, were
paid through dividends. Regulatory restrictions on such dividends are detailed
in Note 10 of AVEMCO's consolidated financial statements.
AVEMCO's ability to support substantial future growth is reflected in its
insurance subsidiary's ratio of net premiums written to statutory policyholders'
surplus, a measure used by insurance regulators and analysts to evaluate
liquidity and capital resources. The insurance subsidiary's ratio is currently
1.19 to 1; a general maximum regulatory guideline is 3 to 1. The ratio of unpaid
losses and expenses to surplus was .46 to 1. 1996 marked the 22nd consecutive
year and the 33rd in 36 years in business where an underwriting profit was
achieved. AVEMCO currently is adequately capitalized to support future planned
activities. The insurance subsidiary continues its "A+" (Superior) rating from
A.M. Best. In addition, the insurance subsidiary's December 31, 1996,
policyholders' surplus position substantially exceeded the minimum requirements
as stipulated by insurance industry risk-based capital regulations.
79
<PAGE> 90
SECURITY OWNERSHIP
HCCH AFTER THE MERGER
At and after the Effective Time, by reason of the conversion of AVEMCO
Common Stock into HCCH Common Stock, the equity ownership of HCCH will be shared
by the persons who were holders of HCCH Common Stock and AVEMCO Common Stock
just before the Effective Time. Accordingly, the equity interest which each
holder of HCCH Common Stock or HCCH Common Stock holds in HCCH or AVEMCO, as the
case may be, just before the Effective Time will be converted into a smaller
percentage ownership interest in a larger company.
As a result of the Merger, immediately after the Effective Time the current
holders of HCCH Common Stock will hold 80.2% of the then outstanding shares of
HCCH Common Stock, and the current holders of AVEMCO Common Stock will hold
19.8% of the then outstanding shares of HCCH Common Stock, assuming the exercise
of all outstanding AVEMCO options and the exercise of all options to acquire
HCCH Common Stock that are currently exercisable or that become exercisable
within 60 days. The percentage of outstanding shares of HCCH Common Stock to be
beneficially owned by the current officers and directors of HCCH as a group will
be 26.0%, and the percentage of outstanding shares of HCCH Common Stock to be
beneficially owned by the current officers and directors of AVEMCO as a group
will be 3.6%, assuming the exercise of all outstanding options to acquire AVEMCO
Common Stock held by the AVEMCO officers and directors as a group and the
exercise of all options to acquire HCCH Common Stock currently exercisable or
exercisable within 60 days and in each case assuming that no other such options,
including options held by the other officer and director group, are exercised
and assuming an exchange ratio of one to one.
PRINCIPAL SHAREHOLDERS OF HCCH
The following table sets forth certain information regarding the beneficial
ownership of the HCCH Common Stock as of the Record Date by each person known by
HCCH to be the beneficial owner of more than five percent of the HCCH Common
Stock.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENT OF
BENEFICIAL COMMON STOCK
NAME AND ADDRESS OWNERSHIP OUTSTANDING
---------------- ------------ ------------
<S> <C> <C>
Stephen L. Way.............................................. 3,917,079(1) 10.79%
13403 Northwest Freeway
Houston, Texas 77040-6094
Stephen J. Lockwood......................................... 3,993,790(2) 11.04%
401 Edgewater Place, Suite 400
Wakefield, Massachusetts 01880
Putnam Investments, Inc..................................... 3,436,651(3) 9.6%
One Post Office Square
Boston, Massachusetts 02109
Pilgrim Baxter & Associates, Ltd............................ 2,624,900(4) 7.3%
11255 Drummers Lane, Suite 300
Wayne, Pennsylvania 19087
</TABLE>
- ---------------
(1) For Mr. Way, the amount includes options to acquire 131,767 shares which are
exercisable within 60 days of the HCCH Record Date, but does not include
options to acquire 643,233 shares which are not so exercisable.
(2) For Mr. Lockwood, the amount includes options to acquire 5,000 shares which
are exercisable within 60 days of the HCCH Record Date, but does not include
options to acquire 145,000 shares which are not so exercisable. The amount
also includes 93,200 shares owned of record by Lockwood, L.P., a family
limited partnership of which Mr. Lockwood is a general partner.
80
<PAGE> 91
(3) Putnam Investments, Inc., a wholly owned subsidiary of Marsh & McLennan
Companies, Inc., is a holding company which wholly owns two registered
investment advisers. Both subsidiaries have dispositive power over the
shares of HCCH Common Stock, with shared voting power over 532,578 shares of
HCCH Common Stock. Putnam Investments, Inc. disclaims beneficial ownership
of these shares. The foregoing information was obtained from a Schedule 13G
dated January 27, 1997, filed with the SEC by Putnam Investments, Inc.
(4) Pilgrim Baxter & Associates, Ltd. reported that it is an investment advisor
with sole dispositive power over 2,624,900 shares of HCCH Common Stock with
shared voting power over such shares. The foregoing information was obtained
from a Schedule 13G dated February 14, 1997, filed with the SEC by Pilgrim
Baxter & Associates, Ltd.
PRINCIPAL SHAREHOLDERS OF AVEMCO
The following table sets forth information based upon the records of AVEMCO
and filings with the Securities and Exchange Commission with respect to each
beneficial owner of more than 5% of AVEMCO's outstanding voting stock as of the
AVEMCO Record Date, 1997:
<TABLE>
<CAPTION>
AMOUNT AND
NAME AND ADDRESS NATURE OF PERCENT
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
------------------- -------------------- --------
<S> <C> <C>
Markel Corporation and Subsidiaries......................... 855,500(2) 10.2%
4551 Cox Road
Glen Allen, VA 23060
Vanguard/PRIMECAP Fund, Inc................................. 650,000(1) 7.8%
P.O. Box 2600
Valley Forge, PA 19482
David L. Babson & Co., Inc.................................. 580,650(3) 6.9%
One Memorial Drive
Cambridge, MA 02142
</TABLE>
- ---------------
(1) Vanguard/PRIMECAP Fund, Inc. reported that it has sole voting power and
shared dispositive power over 650,000 shares of Common Stock of AVEMCO.
(2) Markel Corporation reported that it has sole voting power and sole
dispositive power over 855,500 shares of Common Stock of AVEMCO through its
ownership and control of various subsidiaries of Markel Corporation which
hold the stock directly. Steven A. Markel, a director of AVEMCO, is Vice
Chairman of Markel Corporation. Mr. Markel disclaims beneficial ownership of
shares beneficially owned by Markel Corporation.
(3) David L. Babson & Co., Inc. reported that it is an investment advisor with
sole dispositive power over 580,650 shares of Common Stock of AVEMCO with
sole voting power over 385,350 of those shares and shared voting power over
the remaining 195,300 shares.
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DESCRIPTION OF HCCH CAPITAL STOCK
GENERAL
The authorized capital stock of HCCH consists of 100,000,000 shares of
Common Stock. As of the Record Date, there were issued and outstanding
36,169,185 shares of HCCH Common Stock, and options to purchase 3,260,142 shares
of HCCH Common Stock were outstanding.
The holders of outstanding shares of HCCH Common Stock are entitled to
receive dividends out of assets legally available therefor at such times and in
such amounts as the HCCH Board may from time to time determine. Each shareholder
is entitled to one vote for each share of HCCH Common Stock held on all matters
submitted to a vote of shareholders. Cumulative voting for the election of
directors is not provided for in the HCCH Certificate of Incorporation, which
means that the holders of a majority of the shares voted can elect all of the
directors then standing for election. The HCCH Common Stock is not entitled to
preemptive rights and is not subject to conversion or redemption. Upon
liquidation, dissolution or winding up of HCCH, the assets legally available for
distribution to shareholders are distributable ratably among the holders of the
HCCH Common Stock outstanding at that time after payment of other claims of
creditors. Each outstanding share of HCCH Common Stock is, and all shares of
HCCH Common Stock to be issued in the Merger will be, fully paid and
nonassessable.
DELAWARE'S ANTI-TAKEOVER LAW
HCCH is subject to the provisions of Section 203 of the Delaware GCL
("Section 203") regulating corporate takeovers. Section 203 prevents certain
Delaware corporations, including those whose securities are traded on the NYSE,
from engaging, under certain circumstances, in a "business combination" (which
includes a merger or sale of more than 10% of the corporation's assets) with any
"interested shareholder" (a shareholder who owns 15% or more of the
corporation's outstanding voting shares) for three years following the date that
such shareholder became an "interested shareholder." See "Comparative Rights of
Shareholders -- Special Vote Required for Certain Combinations." A Delaware
corporation may "opt out" of the Section 203 with an express provision in its
original certificate of incorporation or an express provision in its certificate
of incorporation or bylaws resulting from a shareholders' amendment approved by
at least a majority of the outstanding voting shares. HCCH has not "opted out"
of the provisions of Section 203.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for HCCH Common Stock is KeyCorp
Shareholder Services, Inc.
LISTING
HCCH Common Stock is listed on the NYSE under the trading symbol "HCC." The
obligations of HCCH and AVEMCO to consummate the Merger are subject to the
condition that the HCCH Common Stock to be issued to AVEMCO shareholders in
connection with the Merger, including shares issuable upon exercise of
outstanding and unexercised options to acquire AVEMCO Common Stock, shall have
been approved for listing on the NYSE, subject only to official notice of
issuance.
COMPARATIVE RIGHTS OF SHAREHOLDERS
The rights of holders of AVEMCO Common Stock are currently governed by
Delaware law, AVEMCO's Certificate of Incorporation, as amended, and AVEMCO's
Bylaws, as amended. Upon consummation of the Merger, holders of AVEMCO Common
Stock will become holders of HCCH Common Stock, and their rights as holders of
HCCH Common Stock will still be governed by Delaware law, but will then be
governed by HCCH's Restated Certificate of Incorporation, as amended, and HCCH's
Bylaws. Set forth below are the principal differences that could materially
affect the rights of the holders of AVEMCO Common Stock.
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<PAGE> 93
SPECIAL VOTE REQUIRED FOR CERTAIN COMBINATIONS
Section 203 of the Delaware General Corporation Law (the "DGCL") prohibits
a corporation from engaging in a "business combination" (as hereinafter defined)
with an "interested shareholder" (defined generally to mean a person who,
together with his affiliates, owns, or if the person is an affiliate of the
corporation did own within the last three years, 15% or more of the outstanding
voting stock of the corporation) for a period of three years after the date of
the transaction in which the person became an interested shareholder, unless (i)
prior to the date of the business combination, the board of directors of the
corporation approved the business combination or the transaction in which the
shareholder became an interested shareholder, (ii) as a result of the business
combination, the interested shareholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced or (iii) on
or subsequent to the date of the business combination, the board of directors
and the holders of at least 66 2/3% of the outstanding voting stock not owned by
the interested shareholder approve the business combination. The DGCL defines a
"business combination" generally as: (i) a merger or consolidation with the
interested shareholder or with any other corporation if the merger or
consolidation is caused by the interested shareholder, (ii) a sale or other
disposition to or with an interested shareholder of assets with an aggregate
market value greater than or equal to 10% or more of either the aggregate market
value of all assets of the corporation or the aggregate market value of all of
the outstanding stock of the corporation; (iii) with certain exceptions, any
transaction resulting in the issuance or transfer by the corporation or any
majority-owned subsidiary of any stock of the corporation or such subsidiary to
the interested shareholder; (iv) any transaction involving the corporation or a
majority-owned subsidiary that has the effect of increasing the proportionate
share of the stock of the corporation or any such subsidiary owned by the
interested shareholder; or (v) any receipt by the interested shareholder of the
benefit of any loans or other financial benefits provided by the corporation or
any majority-owned subsidiary.
Both HCCH and AVEMCO are governed by Section 203, but AVEMCO's Certificate
of Incorporation, as amended, contains provisions that establish more stringent
requirements than Section 203. Pursuant to these provisions, (a) any merger or
consolidation of AVEMCO or of any subsidiary thereof with or into any other
corporation; (b) any sale, lease, exchange or other disposition of all or any
substantial part of the assets of AVEMCO or of any subsidiary thereof to or with
any other corporation, person or other entity in a single transaction or a
series of related transactions; (c) any issuance or transfer by AVEMCO or by any
subsidiary thereof of any of its securities to any other corporation, person or
other entity in exchange for assets or securities or a combination thereof
(except assets or securities or a combination thereof so acquired in a single
transaction or a series of related transactions having an aggregate fair market
value of less than five percent of the total assets of AVEMCO); or (d) any
issuance or transfer by AVEMCO or by any subsidiary thereof of any of its
securities to any other corporation, person or other entity for cash, except
pursuant to an offering, or a distribution, made pro rata or substantially pro
rata to all of the holders of any class or classes of securities of AVEMCO or of
a subsidiary (a "Business Combination") requires the affirmative approval of
holders of shares of capital stock of AVEMCO entitled to cast
i) at least 75% of the votes at the time entitled to be cast generally in
the election of directors by all of the outstanding shares of all
classes of capital stock of AVEMCO, considered as one class, and
ii) at least a majority of the votes at the time entitled to be cast
generally in the election of directors by all of the outstanding shares
of all classes of capital stock of AVEMCO, considered as one class,
which are not beneficially owned by such other corporation, person or
other entity,
if, as of the record date for the determination of shareholders entitled to
notice thereof and to vote thereon, such other corporation, person or other
entity is the beneficial owner, directly or indirectly, of shares of capital
stock of AVEMCO entitled to cast 10% or more of the votes at the time entitled
to be cast generally in the election of directors by all of the outstanding
shares of all classes of capital stock of AVEMCO, considered as one class. These
provisions do not apply to any such transaction if the AVEMCO Board has approved
a memorandum of understanding with such other corporation, person or entity with
respect to and substantially consistent with such transaction before the time
such other corporation, person or other entity became a holder of shares
entitled to cast 10% or more of the votes entitled to be cast in the election of
directors or
83
<PAGE> 94
approved at any time before its consummation by resolution adopted by more than
two-thirds of all of the directors of AVEMCO not representing or being an
affiliate or associate of the entity.
VOTE REQUIRED TO AMEND CERTIFICATE OF INCORPORATION AND BYLAWS
Under the DGCL, an amendment to a corporation's certificate of
incorporation requires the affirmative vote of the holders of a majority of the
outstanding stock of the corporation entitled to vote thereon and a majority of
the outstanding stock of each class entitled to vote thereon as a class, unless
the corporation's certificate of incorporation provides for a higher percentage.
The DGCL also provides that the holders of a majority of the outstanding stock
of the corporation entitled to vote thereon may approve an agreement of merger
or consolidation or the dissolution of a corporation.
AVEMCO's Certificate of Incorporation, as amended, provides that the
affirmative vote of the holders of at least 75% of the outstanding stock
entitled to vote generally in the election of directors is required for
amendments to such Certificate of Incorporation relating to written consents of
shareholders and relating to the number, election and removal of directors.
Certain business combinations of AVEMCO require the affirmative vote of (a) at
least 75% of the outstanding stock entitled to vote generally in the election of
directors and (b) at least a majority of the outstanding stock entitled to vote
generally in the election of directors that are not held by such other
corporation, person or entity. See "-- Special Vote Required for Certain
Combinations." AVEMCO's Bylaws require the vote of holders of at least 75% of
the outstanding stock entitled to vote generally in the election of directors to
amend AVEMCO's Bylaws relating to the classification of the AVEMCO Board, the
number, terms, increase in the number and vacancy of directors.
HCCH's Bylaws provide that the affirmative vote or written consent of
holders of not less than 80% of the outstanding shares of common stock is
required for (a) certain conveyances of the corporation's assets, any merger or
consolidation, any dissolution or liquidation of the corporation or certain
issuances of stock or (b) the amendment or repeal of the bylaws relating to (1)
the items listed in (a), above, (2) outside directors and (3) amendments of the
Bylaws.
REMOVAL OF DIRECTORS
The DGCL and HCCH's Bylaws provide that directors of HCCH may be removed
with or without cause by the holders of a majority of the shares then entitled
to vote at an election of directors. AVEMCO's Certificate of Incorporation, as
amended, provides that, subject to the rights of the holders of any outstanding
shares of preferred stock, a director may be removed from office for cause upon
the affirmative vote of the holders of a majority of the outstanding stock
entitled to vote for the election of directors and without cause upon the
affirmative vote of the holders of at least 75% of the outstanding stock
entitled to vote for the election of directors.
SHAREHOLDER CONSENT IN LIEU OF MEETING
HCCH's Bylaws, as amended, reflect Section 228 of the DGCL providing that
any action that may be taken at an annual or special meeting may be taken
without a meeting by written consent of the holders of the minimum stock
otherwise required to take such action at a meeting of shareholders. AVEMCO's
Certificate of Incorporation, as amended, provides that any action required or
permitted to be taken by the shareholders must be taken at a duly called annual
or special meeting of the shareholders and may not be taken by written consent.
DIRECTOR QUALIFICATION AND NUMBER
The DGCL provides that the number of directors of a Delaware corporation
shall be fixed by, or in the manner provided in, the bylaws, unless such number
is changed by action of the majority of the directors. Under the DGCL, a
director need not be a shareholder to be qualified unless so required by the
charter or bylaws. AVEMCO's Certificate of Incorporation, as amended, provides
for the number of directors to be not less than three and HCCH's Bylaws provide
for the number of directors to be not less than seven nor more
84
<PAGE> 95
than 15. The HCCH Board is currently set at nine. AVEMCO's Certificate of
Incorporation, as amended, and HCCH's Bylaws provide that directors need not be
shareholders.
POWER TO CALL SPECIAL MEETINGS OF SHAREHOLDERS
Under the DGCL, special meetings of shareholders may be called by the board
of directors or by such person or persons as may be authorized by the
certificate of incorporation or by the bylaws. AVEMCO's Bylaws provide that
special meetings of shareholders may be called by the president and shall be
called by the president or secretary upon the written request of shareholders
owning a majority of the stock that is issued and outstanding and entitled to
vote. HCCH's Bylaws also permit special meetings of shareholders to be called by
the holders of a majority of the shares of HCCH Common Stock entitled to vote at
the meeting.
CLASSIFIED BOARD OF DIRECTORS
The AVEMCO Bylaws provide that directors are elected for three-year terms,
with approximately one-third of the AVEMCO Board standing for election each
year. The HCCH Bylaws do not provide for staggered terms of directors.
LEGAL MATTERS
The validity of the HCCH Common Stock to be issued in the Merger and
certain other matters will be passed upon for HCCH by Winstead Sechrest & Minick
P.C., Houston, Texas. Piper & Marbury L.L.P., Baltimore, Maryland, is acting as
counsel for AVEMCO in connection with certain legal matters relating to the Plan
of Reorganization, the Merger, and the transactions contemplated thereby.
Certain other matters will be passed upon for AVEMCO by Thomas H. Chero, Senior
Vice President of AVEMCO.
SHAREHOLDER PROPOSALS
HCCH currently anticipates holding its next annual meeting of shareholders
on May 22, 1997. Shareholder proposals intended to be presented at that meeting
had to have been received by HCCH by December 23, 1996 to be considered for
inclusion in the proxy statement and form of proxy relating to that meeting. No
such shareholder proposals were received. If the Merger is not consummated,
AVEMCO anticipates holding its next annual meeting of the shareholders on or
after May 29, 1997. Any shareholder proposal intended to have been presented at
the 1997 Annual Meeting of Shareholders and to be included in AVEMCO's proxy
statement and form of proxy relating to that meeting was required to have been
received by AVEMCO on or before November 12, 1996. No such proposals were
received.
INDEPENDENT ACCOUNTANTS
Representatives of Coopers & Lybrand L.L.P. are expected to be present at
the HCCH Meeting and representatives of KPMG Peat Marwick LLP are expected to be
present at the AVEMCO Meeting to respond to appropriate questions.
EXPERTS
The consolidated financial statements and financial statement schedules as
of December 31, 1996 and 1995 and for the three years in the period ended
December 31, 1996 of HCCH included in or incorporated by reference in this Proxy
Statement/Prospectus have been audited by Coopers & Lybrand L.L.P., independent
accountants, as set forth in their reports. In their reports, that firm states
that with respect to HCCH, its opinion is based, in part, on the report of
Tonneson & Company C.P.A.'s P.C., independent certified public accountants, with
respect to their audit of the combined financial statements of LDG for the year
ended December 31, 1994. The financial statements and financial statement
schedules referred to above have been included herein or incorporated by
reference herein in reliance upon the authority of those firms as experts in
accounting and auditing in giving said reports.
85
<PAGE> 96
The consolidated balance sheets of AVEMCO as of December 31, 1996 and 1995,
and the consolidated statements of earnings, changes in shareholders' equity and
cash flows and related schedules for each of the three years in the period ended
December 31, 1996, have been included in or incorporated by reference in this
Proxy Statement/Prospectus in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, and upon the authority of said firm as
experts in accounting and auditing. Such report refers to a change in the method
of accounting for investments in fixed maturities.
OTHER MATTERS
The HCCH Board and the AVEMCO Board know of no other matters other than
those discussed in this Proxy Statement/Prospectus which will be presented at
the respective Special Meetings; however, if any other matters are properly
brought before the respective Special Meetings, any proxy given pursuant to this
solicitation will be voted in accordance with the recommendations of the
management of HCCH and the management of AVEMCO, including without limitation,
any proposal to adjourn or postpone the respective Special Meetings. If a proxy
is returned which specifies a vote against the Plan of Reorganization, such
discretionary authority will not be used to adjourn a Special Meeting in order
to solicit additional votes in favor of the Plan of Reorganization.
86
<PAGE> 97
GLOSSARY OF SELECTED TERMS
Assume.......................... To accept from the primary insurer or
reinsurer all or a portion of the liability
underwritten by such primary insurer or
reinsurer.
Cede............................ To transfer to a reinsurer all or a portion
of the liability originally underwritten by
the primary insurer.
Combined ratio.................. A combination of the loss ratio and the
expense ratio, determined in accordance with
either SAP or GAAP.
Commission...................... Insurance and reinsurance agents and brokers
are usually compensated by being allowed to
retain a certain percentage of the premium
they produce. This allowance is known as
commission. In reinsurance, a ceding
commission is the allowance to a ceding
company by the reinsurer of a commission
large enough to reimburse the ceding company
for the commission paid to its agents, plus
taxes and its overhead. The amount of such
allowance frequently determines profit or
loss to the reinsurer.
Excess of loss reinsurance...... Reinsurance whereby the primary insurer cedes
liability, premium and loss on a
nonproportional basis above the primary
insurer's net retention of risk, which is
usually a dollar amount of loss, a loss
ratio, or a percentage.
Expense ratio................... Under SAP, the ratio of policy acquisition
costs and other underwriting expense, net of
miscellaneous income or loss, including
equity in earnings (loss) of subsidiaries, to
NWP. Net earned premium is used as the
denominator under GAAP because policy
acquisition costs are deferred and amortized
over the period of the policy.
Facultative reinsurance......... The separately negotiated reinsurance of all
or a portion of the coverage provided by a
single policy.
Generally accepted accounting
principles ("GAAP")............. Generally Accepted Accounting Principles as
defined by the American Institute of
Certified Public Accountants, the Financial
Accounting Standards Board, and other
recognized accounting literature in the
United States.
Gross written premium ("GWP")... The total of all premium received or to be
received for insurance underwritten and for
reinsurance assumed during a given period.
Incurred losses................. The total of all losses sustained by an
insurance or reinsurance company under a
policy or policies, whether paid or unpaid.
Incurred losses include a provision for
claims that have occurred but have not yet
been reported to the insurer or reinsurer.
Loss adjustment expense
("LAE")......................... The expense of settling claims, including
legal and other fees and the portion of
general expense allocated to claim settlement
costs.
Loss ratio...................... The ratio of incurred loss and loss
adjustment expense to net earned premium.
Loss reserves................... Liabilities established by insurers and
reinsurers to reflect the estimated cost of
claim payments and the related expense that
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<PAGE> 98
the insurer or reinsurer will ultimately be
required to pay in respect of policies it has
written.
Net earned premium.............. The portion of NWP during or prior to a given
period which is actually earned during such
period.
Net written premium ("NWP")..... The total of all premium received or to be
received for insurance underwritten and
reinsurance assumed during a given period
less the total premium paid or to be paid for
reinsurance ceded to others during such
period.
Policyholders' surplus.......... Total assets less total liabilities
determined in accordance with SAP.
Pool............................ An organization of insurers or reinsurers
through which particular types of risks are
underwritten with premiums, losses, and
expense shared in agreed upon ratios.
Primary insurer................. An insurance company that contracts with the
consumer to provide insurance coverage.
Proportional reinsurance........ All forms of reinsurance in which the
reinsurer shares a proportional part of the
original premiums and losses of the reinsured
(also known as pro rata reinsurance or quota
share reinsurance).
Reinsurance..................... A procedure whereby a primary insurer
transfers (cedes) a portion of its risk to a
reinsurer in consideration of a payment of
premium by the primary insurer to the
reinsurer for its assumption of such portion
of the risk. Reinsurance can be effected by a
treaty or facultatively. Reinsurance does not
legally discharge the primary insurer from
its liability with respect to its obligations
to the insured.
Reinsurance intermediary........ A reinsurance broker who negotiates contracts
of reinsurance on behalf of the reinsured,
usually with those reinsurers who recognize
brokers and pay them commissions on
reinsurance premiums ceded.
Retention....................... The amount or portion of risk which the
primary insurer retains for its own account.
Losses in excess of the retention level are
paid by the reinsurer. In proportional
treaties, the retention is usually a percent
of the original policy limit. In excess of
loss reinsurance, the retention is usually a
dollar amount of loss, a loss ratio, or a
percentage.
Retrocession.................... A reinsurance of reinsurance.
Statutory accounting principles
("SAP")......................... Rules and procedures prescribed or permitted
by state insurance regulatory authorities and
the National Association of Insurance
Commissioners. As used herein, statutory,
when used to describe a financial statement
item, means that the described item is
presented on a SAP basis. The principal
differences between SAP and GAAP, the method
by which HCCH and AVEMCO report their
financial results to their shareholders in
accordance with Commission requirements, are:
(i) under SAP, policy acquisition costs are
expensed as incurred and under GAAP such
costs are deferred and amortized to expense
as the related premium is earned; (ii)
deferred taxes are not provided under
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<PAGE> 99
SAP; (iii) certain assets which are
considered "non-admitted assets" are
eliminated from a balance sheet prepared in
accordance with SAP and included in a balance
sheet prepared in accordance with GAAP; (iv)
certain reserves are recognized under SAP but
not under GAAP; and (v) reinsurance balances
are recorded on a gross basis under GAAP and
on a net basis under SAP. All SAP data
presented herein by HCCH is as filed with the
Texas and Oklahoma Departments of Insurance.
All SAP data presented herein by AVEMCO is as
filed with the Maryland and Missouri
Departments of Insurance.
Stop-loss or excess coverage.... The insurance or reinsurance of losses over
and above an agreed-upon amount.
Surplus lines insurance......... Specialized property and casualty insurance
provided by a nonadmitted (unlicensed)
insurer and not available from a licensed
insurer.
Treaty reinsurance.............. The reinsurance of a specified type or
category of risks defined in a reinsurance
contract ("treaty") between the primary
insurer and reinsurer. Typically, the primary
insurer is obligated to offer and the
reinsurer is obligated to accept a specified
portion of all such type or category of risks
originally underwritten by the primary
insurer for a specified period.
Underwriting.................... The insurer's process of reviewing
applications submitted for insurance or
reinsurance coverage, deciding whether to
accept all or part of the coverage requested,
and determining the applicable rates, terms,
and conditions.
Underwriting expense............ The aggregate of policy acquisition costs,
including commissions, premium tax and the
portion of general and administrative expense
attributable to underwriting operations.
Unearned premium................ The portion of written premium representing
the unexpired policy term as of a certain
date.
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<PAGE> 100
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HCCH FINANCIAL STATEMENTS................................... F-2
Reports of Independent Accountants........................ F-3
Consolidated Balance Sheets............................... F-5
Consolidated Statements of Earnings....................... F-6
Consolidated Statements of Changes in Shareholders'
Equity................................................. F-7
Consolidated Statements of Cash Flows..................... F-8
Notes to Consolidated Financial Statements................ F-9
AVEMCO FINANCIAL STATEMENTS................................. F-31
Report of Independent Accountants......................... F-32
Consolidated Balance Sheets............................... F-33
Consolidated Statements of Income......................... F-34
Consolidated Statements of Changes in Shareholders'
Equity................................................. F-35
Consolidated Statements of Cash Flows..................... F-36
Notes to Consolidated Financial Statements................ F-37
</TABLE>
F-1
<PAGE> 101
HCCH FINANCIAL STATEMENTS
F-2
<PAGE> 102
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
HCC Insurance Holdings, Inc.
We have audited the accompanying consolidated balance sheets of HCC
Insurance Holdings, Inc. and Subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of earnings, changes in shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of HCC Insurance
Holdings, Inc.'s management. Our responsibility is to express an opinion on
these financial statements based on our audits. We did not audit the 1994
financial statements of LDG Management Company Incorporated and Affiliates,
which statements reflect total revenues constituting 30 percent and net earnings
constituting 12 percent of the related consolidated financial statement totals
for the year ended December 31, 1994. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to data included for LDG Management Company Incorporated and Affiliates
for 1994, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of HCC Insurance
Holdings, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Houston, Texas
March 27, 1997
F-3
<PAGE> 103
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
LDG Management Company Incorporated and Affiliates
Wakefield, Massachusetts
We have audited the combined statements of earnings, changes in
shareholders' equity, and cash flows of LDG Management Company Incorporated (an
S corporation) and Affiliates (S corporations) for the year ended December 31,
1994. These combined financial statements are the responsibility of the
Companies' management. Our responsibility is to express an opinion on these
combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined 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 audit provides a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined results of operations of LDG
Management Company Incorporated and Affiliates and their cash flows for the year
ended December 31, 1994, in conformity with generally accepted accounting
principles.
TONNESON & COMPANY C.P.A.'s P.C.
Wakefield, Massachusetts
April 6, 1995
F-4
<PAGE> 104
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Investments:
Securities available for sale:
Fixed income securities, at market (cost: 1996
$262,667,000; 1995 $231,807,000)..................... $264,727,000 $234,881,000
Marketable equity securities, at market (cost: 1996
$2,481,000; 1995 $10,097,000)........................ 2,433,000 13,812,000
Mortgage loans, at unpaid principal balance, net.......... -- 81,000
Short-term investments, at cost, which approximates
market................................................. 53,100,000 56,513,000
------------ ------------
Total investments................................. 320,260,000 305,287,000
Cash........................................................ 3,212,000 3,574,000
Restricted cash and cash investments........................ 44,363,000 23,495,000
Reinsurance recoverables.................................... 123,181,000 103,408,000
Premium, claims and other receivables....................... 139,109,000 130,384,000
Ceded unearned premium...................................... 65,845,000 73,282,000
Deferred policy acquisition costs........................... 16,843,000 16,431,000
Property and equipment, net................................. 9,135,000 9,440,000
Deferred income tax......................................... 11,524,000 2,921,000
Other assets, net........................................... 12,307,000 13,454,000
------------ ------------
Total assets...................................... $745,779,000 $681,676,000
============ ============
LIABILITIES
Loss and loss adjustment expense payable.................... $185,822,000 $158,451,000
Reinsurance balances payable................................ 43,900,000 68,463,000
Unearned premium............................................ 114,758,000 118,732,000
Deferred ceding commissions................................. 15,418,000 17,497,000
Premium and claims payable.................................. 119,524,000 96,122,000
Notes payable............................................... 16,500,000 16,661,000
Accounts payable and accrued liabilities.................... 9,167,000 10,291,000
------------ ------------
Total liabilities................................. 505,089,000 486,217,000
SHAREHOLDERS' EQUITY
Common Stock, $1.00 par value; 100,000,000 shares
authorized; (issued and outstanding: 1996 35,850,832
shares; 1995 13,838,802 shares)........................... 35,851,000 13,839,000
Additional paid-in capital.................................. 131,240,000 123,257,000
Retained earnings........................................... 72,169,000 53,950,000
Unrealized investment gain, net............................. 1,303,000 4,417,000
Foreign currency translation adjustment..................... 127,000 (4,000)
------------ ------------
Total shareholders' equity........................ 240,690,000 195,459,000
------------ ------------
Total liabilities and shareholders' equity........ $745,779,000 $681,676,000
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 105
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
REVENUE
Net earned premium................................. $ 93,314,000 $ 80,011,000 $ 46,834,000
Fee and commission income.......................... 38,462,000 32,887,000 28,456,000
Net investment income.............................. 15,372,000 13,250,000 9,533,000
Net realized investment gain....................... 5,097,000 1,061,000 682,000
------------ ------------ ------------
Total revenue............................ 152,245,000 127,209,000 85,505,000
EXPENSE
Loss and loss adjustment expense................... 51,242,000 49,769,000 29,588,000
Operating expense:
Policy acquisition costs......................... 34,110,000 29,748,000 21,729,000
Compensation expense............................. 20,353,000 26,790,000 23,900,000
Other operating expense.......................... 12,855,000 12,591,000 8,660,000
Ceding commissions............................... (30,268,000) (27,228,000) (20,210,000)
------------ ------------ ------------
Net operating expense.................... 37,050,000 41,901,000 34,079,000
Compensatory stock grant and merger related
expenses......................................... 26,160,000 -- --
Interest expense................................... 1,166,000 2,247,000 1,972,000
------------ ------------ ------------
Total expense............................ 115,618,000 93,917,000 65,639,000
------------ ------------ ------------
Earnings before income tax provision..... 36,627,000 33,292,000 19,866,000
Income tax provision............................... 7,329,000 8,955,000 4,598,000
------------ ------------ ------------
Net earnings............................. $ 29,298,000 $ 24,337,000 $ 15,268,000
============ ============ ============
EARNINGS PER SHARE DATA:
Earnings per share............................... $ 0.81 $ 0.75 $ 0.55
============ ============ ============
Weighted average shares outstanding.............. 35,965,000 32,667,000 27,910,000
============ ============ ============
PRO FORMA INFORMATION (SEE NOTE 2):
Net earnings..................................... $ 43,655,000
============
Earnings per share............................... $ 1.21
============
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE> 106
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
FOREIGN
ADDITIONAL UNREALIZED CURRENCY TOTAL
COMMON PAID-IN RETAINED INVESTMENT TRANSLATION SHAREHOLDERS'
STOCK CAPITAL EARNINGS GAIN (LOSS) ADJUSTMENT EQUITY
----------- ------------ ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AS OF DECEMBER 31, 1993............ $10,691,000 $ 61,721,000 $18,029,000 $ 3,035,000 $(25,000) $ 93,451,000
128,588 shares of Common Stock issued for
exercise of options, including tax
benefit of $659,000.................... 128,000 1,216,000 -- -- -- 1,344,000
947,619 shares of Common Stock issued to
acquire subsidiaries, net of 64,950
shares of Common Stock acquired as
treasury stock......................... 948,000 11,983,000 -- -- -- 12,931,000
Capital contributions to LDG prior to
merger................................. -- 313,000 -- -- -- 313,000
Net earnings............................. -- -- 15,268,000 -- -- 15,268,000
Dividends to shareholders of LDG prior to
merger................................. -- -- (1,855,000) -- -- (1,855,000)
Unrealized investment loss on fixed
income securities, net of deferred tax
benefit of $4,270,000.................. -- -- -- (8,017,000) -- (8,017,000)
Unrealized investment loss on marketable
equity securities, net of deferred tax
benefit of $148,000.................... -- -- -- (319,000) -- (319,000)
Sale of 64,950 shares of treasury
stock.................................. -- 1,247,000 -- -- -- 1,247,000
Other.................................... -- -- -- -- 11,000 11,000
----------- ------------ ----------- ----------- -------- ------------
BALANCE AS OF DECEMBER 31, 1994............ $11,767,000 $ 76,480,000 $31,442,000 $(5,301,000) $(14,000) $114,374,000
58,876 shares of Common Stock issued for
exercise of options, including tax
benefit of $252,000.................... 59,000 770,000 -- -- -- 829,000
2,012,500 shares of Common Stock issued
in public offering, net of costs....... 2,013,000 45,957,000 -- -- -- 47,970,000
Capital contribution to LDG prior to
merger................................. -- 50,000 -- -- -- 50,000
Net earnings............................. -- -- 24,337,000 -- -- 24,337,000
Dividends to shareholders of LDG prior to
merger................................. -- -- (1,829,000) -- -- (1,829,000)
Unrealized investment gain on fixed
income securities, net of deferred tax
charge of $4,293,000................... -- -- -- 7,973,000 -- 7,973,000
Unrealized investment gain on marketable
equity securities, net of deferred tax
charge of $934,000..................... -- -- -- 1,745,000 -- 1,745,000
Other.................................... -- -- -- -- 10,000 10,000
----------- ------------ ----------- ----------- -------- ------------
BALANCE AS OF DECEMBER 31, 1995............ $13,839,000 $123,257,000 $53,950,000 $ 4,417,000 $ (4,000) $195,459,000
20,758,172 shares of Common Stock issued
for 150% stock dividend (see note 1)... 20,758,000 (20,758,000) -- -- -- --
117,458 shares of Common Stock issued for
exercise of options, including tax
benefit of $366,000.................... 118,000 725,000 -- -- -- 843,000
Net earnings............................. -- -- 29,298,000 -- -- 29,298,000
Cash dividends declared, $0.06 per
share.................................. -- -- (2,104,000) -- -- (2,104,000)
Compensatory grant of LDG stock prior to
merger................................. -- 23,682,000 -- -- -- 23,682,000
Dividends to shareholders of LDG prior to
merger................................. -- -- (3,683,000) -- -- (3,683,000)
Capitalize undistributed earnings of LDG
upon conversion from S Corporation..... -- 3,840,000 (3,840,000) -- -- --
1,136,400 shares of Common Stock issued
for NASRA combination.................. 1,136,000 -- (1,452,000) -- -- (316,000)
Unrealized investment loss on fixed
income securities, net of deferred tax
benefit of $355,000.................... -- -- -- (659,000) -- (659,000)
Unrealized investment loss on marketable
equity securities, net of deferred tax
benefit of $1,307,000.................. -- -- -- (2,455,000) -- (2,455,000)
Other.................................... -- 494,000 -- -- 131,000 625,000
----------- ------------ ----------- ----------- -------- ------------
BALANCE AS OF DECEMBER 31, 1996............ $35,851,000 $131,240,000 $72,169,000 $ 1,303,000 $127,000 $240,690,000
=========== ============ =========== =========== ======== ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE> 107
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
------------ ------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings.................................... $ 29,298,000 $ 24,337,000 $ 15,268,000
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Change in reinsurance recoverables........... (19,773,000) (3,946,000) (25,233,000)
Change in premium, claims and other
receivables................................ (8,725,000) (16,680,000) (56,061,000)
Change in ceded unearned premium............. 7,437,000 (12,611,000) (34,926,000)
Change in deferred policy acquisition costs,
net........................................ (2,491,000) (419,000) 1,115,000
Change in deferred income tax, net of tax
effect of unrealized gain or loss.......... (6,941,000) (1,545,000) (1,181,000)
Change in loss and loss adjustment expense
payable.................................... 27,371,000 28,696,000 28,746,000
Change in reinsurance balances payable....... (24,563,000) 403,000 32,922,000
Change in unearned premium................... (3,974,000) 31,386,000 47,786,000
Change in premium and claims payable, net of
restricted cash............................ 2,534,000 7,577,000 21,258,000
Change in accounts payable and accrued
liabilities................................ (1,841,000) 4,027,000 645,000
Net realized investment gain................. (5,097,000) (1,061,000) (682,000)
Noncash compensation expense................. 24,176,000 -- --
Depreciation and amortization expense........ 2,318,000 1,700,000 1,284,000
Other, net................................... 3,126,000 767,000 328,000
------------ ------------- ------------
Cash provided by operating activities... 22,855,000 62,631,000 31,269,000
Cash flows from investing activities:
Sales of fixed income securities................ 3,465,000 21,388,000 24,002,000
Maturity or call of fixed income securities..... 8,285,000 8,162,000 25,000
Sales of equity securities...................... 18,211,000 9,458,000 9,104,000
Net cash (paid) received in combinations........ (1,753,000) -- 1,979,000
Cost of investments acquired.................... (48,807,000) (107,639,000) (73,738,000)
Purchases of property and equipment............. (1,724,000) (3,269,000) (1,438,000)
Other, net...................................... 81,000 1,229,000 826,000
------------ ------------- ------------
Cash used by investing activities....... (22,242,000) (70,671,000) (39,240,000)
Cash flows from financing activities:
Proceeds from notes payable..................... 250,000 -- 20,110,000
Sale of Common Stock, net of costs.............. 843,000 48,799,000 1,344,000
Sales of treasury stock......................... -- -- 1,247,000
Capital contributions to LDG.................... -- -- 313,000
Payments on notes payable....................... (411,000) (28,247,000) (4,146,000)
Dividends paid.................................. (5,070,000) (1,507,000) (1,855,000)
------------ ------------- ------------
Cash provided (used) by financing
activities............................ (4,388,000) 19,045,000 17,013,000
------------ ------------- ------------
Net change in cash and short-term
investments........................... (3,775,000) 11,005,000 9,042,000
Cash and short-term investments at
beginning of year..................... 60,087,000 49,082,000 40,040,000
------------ ------------- ------------
Cash and short-term investments at end
of year............................... $ 56,312,000 $ 60,087,000 $ 49,082,000
============ ============= ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-8
<PAGE> 108
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
HCC Insurance Holdings, Inc. and its subsidiaries (collectively, "the
Company" or "HCCH""), include domestic and foreign property and casualty
insurance companies and managing general agents, surplus lines insurance brokers
and wholesale insurance and reinsurance brokers. HCCH, through its subsidiaries,
provides specialized property and casualty insurance to commercial customers
worldwide, underwritten on both a direct and reinsurance basis, in the areas of
aviation, marine, property, offshore energy and accident and health. The
principal insurance company subsidiaries are Houston Casualty Company ("HCC")
and Trafalgar Insurance Company ("TIC") in Houston, Texas and IMG Insurance
Company Ltd. ("IMG") in Amman, Jordan. The agency subsidiaries provide
underwriting management and intermediary services for insurance and reinsurance
companies, primarily in the accident and health area, but also in the same lines
of business that the insurance subsidiaries operate. The principal agency
subsidiaries are LDG Management Company Incorporated ("LDG") in Wakefield,
Massachusetts, HCC Underwriters, A Texas Corporation ("HCCU") in Houston, Texas;
North American Special Risk Associates, Inc. ("NASRA") in Northbrook, Illinois
and Middle East Insurance Brokers, Ltd. ("MEIB") in Amman, Jordan.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. This affects amounts reported in the financial statements and the
disclosure of contingent assets and liabilities. Actual results could differ
from those estimates.
A description of the significant accounting and reporting policies utilized
by the Company in preparing the consolidated financial statements is as follows:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. The business combinations
with LDG and NASRA have been recorded as poolings-of-interests. The Company's
financial statements have been restated to include the accounts and operations
of LDG for all periods presented. The financial statements have not been
restated to include NASRA due to immateriality. (see note 2).
Investments
Fixed income securities and marketable equity securities are classified as
available for sale and are carried at quoted market value, if readily
marketable, or at management's estimated fair value, if not readily marketable.
The change in unrealized gain or loss with respect to these securities is
recorded as a direct increase or decrease to shareholders' equity, net of
related deferred income tax, if any. Fixed income securities available for sale
are purchased with the original intent to hold to maturity, but which may be
available for sale if market conditions warrant, or if the Company's investment
policies dictate, in order to maximize the Company's investment yield. Mortgage
loans on real estate are stated at the aggregate unpaid principal balance less
unamortized fees. Short-term investments and restricted short-term investments
are carried at cost which approximates market value.
The realized gain or loss on investment transactions is determined on an
average cost basis and included in earnings on the trade date. When impairment
of the value of an investment is considered other than temporary, the decrease
in value is reported in earnings as a realized investment loss and a new cost
basis is established.
F-9
<PAGE> 109
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING AND REPORTING
POLICIES -- (CONTINUED)
Property and Equipment
Property and equipment are carried at cost, net of accumulated
depreciation. Depreciation expense is provided using the straight-line method
over the estimated useful lives of the related assets. Amortization of leasehold
improvements is provided using the straight-line method over the term of the
respective lease. Upon disposal of assets, the cost and related accumulated
depreciation are removed from the accounts and the resulting gain or loss is
included in earnings.
Costs incurred in developing or purchasing management information systems
are capitalized and included in property and equipment. These costs are
amortized over their estimated useful lives from the dates the systems are
placed in service.
Earned Premium, Deferred Policy Acquisition Costs and Ceding Commissions of
Insurance Company Subsidiaries
Written premium, net of reinsurance, is generally included in earnings on a
pro rata basis over the lives of the related policies. Policy acquisition costs
related to unearned premium, which include commissions, taxes, fees and other
direct costs of underwriting policies and ceding commissions allowed by
reinsurers, which include expense allowances, are deferred and charged or
credited to earnings on the same basis. Historical and current loss and loss
adjustment expense experience are considered in determining the recoverability
of deferred policy acquisition costs.
Fee and Commission Income
Fee and commission income is recognized on the revenue recognition date,
which is the later of the effective date of the policy, the date when the
premium can be reasonably estimated, or the date when substantially all required
services relating to the insurance placement have been rendered to the client.
Commission income relating to additional or return premiums or other policy
adjustments is recognized when the events occur and the amounts become known or
can be estimated.
Premium and Other Receivables
The Company has adopted the gross method for reporting receivables and
payables on brokered transactions.
Management considers all premium and other receivables to be collectable
and, therefore, has not recorded an allowance for doubtful accounts.
Loss and Loss Adjustment Expense of Insurance Company Subsidiaries
Loss and loss adjustment expense is based on undiscounted estimates of
payments to be made for reported and incurred but not reported losses ("IBNR"),
net of reinsurance and anticipated salvage and subrogation receipts. Estimates
for reported losses are based on all available information, including reports
received from ceding companies on assumed business. Estimates for IBNR are based
both on the Company's and industry experience. While management believes that
amounts included in the accompanying financial statements are adequate, such
estimates may be more or less than the amounts ultimately paid when the claims
are settled. The estimates are continually reviewed and any changes are
reflected in current operations.
F-10
<PAGE> 110
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING AND REPORTING
POLICIES -- (CONTINUED)
Reinsurance
The Company records all reinsurance recoverables and ceded unearned
premiums as assets and deferred ceding commissions as a liability. All such
amounts are estimated and recorded in a manner consistent with the underlying
reinsured contracts. Management has recorded a reserve for uncollectible
reinsurance based on estimates of collectability.
Goodwill
In connection with the Company's acquisitions of subsidiaries during 1994,
the excess of cost over fair value of net assets acquired is being amortized
using the straight-line method over forty years. Management of the acquired
businesses have successfully operated in the Companies' insurance markets for a
number of years and, with the additional capital provided by the Company, will
be positioned to take advantage of increased underwriting opportunities.
The Company has no reason to expect major changes in the business
conditions in which the acquired companies operate which might affect the
recoverability of the recorded intangibles. However, in the event business
conditions change, the recoverability will be re-evaluated based upon revised
projections of future undiscounted operating income and cash flows and, if
impaired, the balances will be adjusted accordingly. Amortization charged to
income for the years ended December 31, 1996, 1995 and 1994, was $289,000,
$289,000 and $72,000, respectively.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers certificates of deposit, corporate demand notes receivable and
commercial paper with original maturities of three months or less and money
market funds as cash equivalents. These amounts are shown as short-term
investments in the consolidated balance sheets.
The Company generally invests its excess cash with major banks and in
investment grade commercial paper and repurchase agreements. These securities
typically mature within 90 days and, therefore, bear minimal risk. The Company
has not experienced any losses on these investments.
Restricted Cash and Cash Investments
In conjunction with the management of reinsurance pools, the Company's
agency subsidiaries withhold premium funds for the payment of claims which are
shown as restricted cash and cash investments on the consolidated balance
sheets. The corresponding liability is included within premium and claims
payable in the consolidated balance sheets. These amounts are considered
fiduciary funds, and interest earned on these funds accrues to the benefit of
the members of the reinsurance pools. Therefore, HCCH does not include these
amounts as cash or cash equivalents in the consolidated statements of cash
flows.
Foreign Currency Translation
The functional currency of most foreign subsidiaries is the United States
dollar. Assets and liabilities recorded in foreign currencies are translated
into United States dollars at exchange rates in effect at the balance sheet
date. Transactions in foreign currencies are translated at the rates of exchange
in effect on the date the transaction occurs. The Company's foreign currency
transactions are principally denominated in British Pound Sterling. From time to
time the Company enters into foreign currency forward contracts as a hedge
against foreign currency fluctuations. Gains or losses in the market value of
foreign currency forward
F-11
<PAGE> 111
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING AND REPORTING
POLICIES -- (CONTINUED)
contracts are recognized in the statements of earnings concurrently with the
gains and losses on the hedged balances. For the years ended December 31, 1996,
1995 and 1994, the gain (loss) from currency conversion was ($181,000),
($209,000) and $203,000, respectively.
One subsidiary has a functional currency of the British Pound Sterling
("GBP"). Cumulative translation adjustment, representing the effect of
translating this subsidiary's assets and liabilities into United States dollars
is included in the foreign currency translation adjustment within shareholders'
equity.
Income Tax
The domestic companies and the foreign insurance company subsidiaries
(which have all elected to be taxed as domestic companies) file a single
consolidated Federal income tax return and include the foreign subsidiaries'
income to the extent required by law. Deferred income tax is accounted for using
the liability method, which reflects the tax impact of temporary differences
between the bases of assets and liabilities for financial reporting purposes and
such bases as measured by tax laws and regulations. LDG was an S Corporation
prior to its reorganization and merger with the Company. Therefore, Federal
income tax expense was not provided for LDG's earnings until the S Corporation
election was terminated. LDG is included in the Company's consolidated Federal
income tax return beginning May 24, 1996.
Earnings Per Share
Earnings per share are based on the weighted average number of common and
common equivalent shares outstanding during the year divided into net earnings.
The shares issued in connection with the combination with LDG are included in
outstanding shares for all periods presented. Outstanding common stock options,
when dilutive, are considered to be common stock equivalents for the purpose of
this calculation. The treasury stock method is used to calculate common stock
equivalents due to options. The difference between primary and fully diluted
earnings per share is not material.
Stock Splits
In February, 1994, the Board of Directors declared a three-for-two stock
split in the form of a 50% stock dividend on its shares of $1.00 par value
Common Stock payable to shareholders of record March 15, 1994. This stock split
was recorded retroactively as of December 31, 1993. In April, 1996, the Board of
Directors declared a five-for-two stock split in the form of a 150% stock
dividend on the Company's $1.00 par value Common Stock, payable to shareholders
of record April 30, 1996. The par value of the Company's Common Stock remains
unchanged. All per share, weighted average shares outstanding and option data
presented in the consolidated financial statements and the notes thereto have
been retroactively adjusted to reflect the effects of the splits.
Effects of Recent Accounting Pronouncements
In February, 1997, the Financial Accounting Standards Board issued SFAS No.
128 "Earnings Per Share". SFAS No. 128 is effective for fiscal years ending
after December 15, 1997. Early application is not permitted. SFAS No. 128
modifies the denominator to be used in the earnings per share calculations, and
requires additional disclosures of the calculations. However, the statement will
have no effect on the Company's net earnings, shareholders' equity or cash
flows.
F-12
<PAGE> 112
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING AND REPORTING
POLICIES -- (CONTINUED)
Reclassifications
Certain amounts in the 1995 and 1994 consolidated financial statements have
been reclassified to conform with the 1996 presentation. Such reclassifications
had no effect on the Company's shareholders' equity, net earnings or cash flows.
(2) ACQUISITIONS
IMG and MEIB
Effective January 1, 1994, the Company acquired a 25% interest in MEIB.
Concurrent with the purchase of IMG on October 1, 1994, the Company acquired the
remaining 75% interest, thereby making MEIB a wholly-owned subsidiary of the
Company. To acquire 100% interest of MEIB the Company issued 109,524 shares (pre
split) of its Common Stock and paid a total of $3.9 million. During the first
nine months of 1994, the Company accounted for its 25% interest using the equity
method and beginning October 1, 1994, MEIB's results of operations have been
included in the consolidated statements of earnings.
Effective October 1, 1994, the Company acquired 100% of the stock of IMG.
IMG specializes in insuring large commercial risks, with an emphasis on energy
related business. In exchange for IMG's stock, the Company issued 838,095 shares
(pre split) of its Common Stock and paid $4.4 million. IMG's results of
operations have been included in the consolidated statements of earnings
beginning October 1, 1994.
Both acquisitions were accounted for using the purchase method. In each
case the purchase price was allocated to assets acquired based on their
estimated fair values. On a combined basis, the fair value of assets acquired
was approximately $29.0 million and the fair value of liabilities assumed was
approximately $18.3 million. This resulted in a combined total cost in excess of
net assets acquired (goodwill) of approximately $11.6 million from both
acquisitions. The resulting goodwill is being amortized on a straight-line basis
over forty years.
The following unaudited pro forma summary presents information for the year
ended December 31, 1994, as if the acquisitions of IMG and MEIB had occurred at
the beginning of the year after giving effect to certain adjustments including
amortization of goodwill, increased interest expense from debt issued to fund
the acquisitions and Federal income taxes. The pro forma summary is for
information purposes only, does not necessarily reflect the actual results that
would have occurred, nor is it necessarily indicative of future results of the
combined Company.
Unaudited Pro forma Information
<TABLE>
<CAPTION>
1949
-----------
<S> <C>
Total revenue............................................... $89,110,000
Net earnings................................................ 15,892,000
Earnings per share.......................................... 0.54
</TABLE>
LDG
On May 24, 1996, the Company issued 6,250,000 shares of its Common Stock to
acquire all of the outstanding common stock of LDG. The former principal
shareholder of LDG is a director of the Company. This business combination has
been accounted for as a pooling-of-interests. The Company's consolidated
financial statements have been restated to include the accounts and operations
of LDG for all periods presented.
F-13
<PAGE> 113
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) ACQUISITIONS -- (CONTINUED)
The consolidated financial statements include adjustments made to conform
LDG's accounting policies for fee and commission income to that of HCCH. HCCH's
policy is to recognize fee and commission income on the revenue recognition date
(the later of the effective date of the policy, the date when premium can be
reasonably estimated, or the date when substantially all required services
relating to the placement have been rendered to the client), and subsequent
policy adjustments and contingent profit commissions are recognized when events
occur and amounts are known or can be reasonably estimated. LDG previously
recognized fee and commission income on the later of the effective date or the
reporting date, subsequent adjustments were recognized when they became due, and
contingent profit commission was recognized when received. For the years ended
December 31, 1995 and 1994, these adjustments decreased net income $119,000 and
$844,000, respectively.
Separate total revenue and net earnings (loss) amounts of the merged
entities are presented for the periods prior to merger in the following table:
<TABLE>
<CAPTION>
FOR THE FIVE MONTHS FOR THE YEAR ENDED DECEMBER 31,
ENDED MAY 31, -------------------------------
1996 1995 1994
------------------- -------------- -------------
<S> <C> <C> <C>
Total revenue:
HCCH................................. $48,771,000 $ 99,197,000 $59,869,000
LDG.................................. 12,893,000 28,012,000 25,636,000
----------- ------------ -----------
Total revenue................ $61,664,000 $127,209,000 $85,505,000
=========== ============ ===========
Net earnings (loss):
HCCH................................. $12,144,000 $ 22,273,000 $13,409,000
LDG.................................. (9,919,000) 2,064,000 1,859,000
----------- ------------ -----------
Net earnings................. $ 2,225,000 $ 24,337,000 $15,268,000
=========== ============ ===========
</TABLE>
Certain nonrecurring expenses were incurred during the first six months of
1996. Of the nonrecurring expenses, approximately $24.0 million was related to
the compensatory grant of LDG stock to certain key employees by LDG's majority
shareholder immediately prior to the combination. Other nonrecurring expenses,
which totalled approximately $2.1 million, included legal, accounting and
investment banking fees in connection with the merger. The following table
presents pro forma net income and earnings per share amounts which reflect the
elimination of nonrecurring compensation and merger related expenses in 1996,
pro forma adjustments to all years to present Federal income taxes on LDG's
earnings prior to its reorganization and merger with the Company and pro forma
adjustments to reduce 1995 and 1994 compensation expense based on employment
arrangements in effect during 1996, for LDG's previous principal shareholders.
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Net earnings................................ $ 29,298,000 $24,337,000 $15,268,000
Nonrecurring expenses....................... 26,160,000 -- --
Compensation adjustment, net of state income
tax....................................... -- 6,534,000 5,910,000
Pro forma Federal income tax................ (11,803,000) (2,923,000) (2,641,000)
------------ ----------- -----------
Pro forma net earnings............ $ 43,655,000 $27,948,000 $18,537,000
============ =========== ===========
Pro forma earnings per share...... $ 1.21 $ 0.86 $ 0.66
============ =========== ===========
</TABLE>
F-14
<PAGE> 114
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) ACQUISITIONS -- (CONTINUED)
NASRA
On November 27, 1996, the Company acquired all of the outstanding shares of
NASRA by issuing 1,136,400 shares of its Common Stock and a payment of $1.7
million in cash to one dissenting shareholder. This combination has been
accounted for as a pooling-of-interests. However, the Company's consolidated
financial statements have not been restated due to immateriality.
TRM
On November 11, 1996, the Company announced that it had agreed to acquire
all of the occupational accident business of the TRM International, Inc. group
of companies ("TRM") in exchange for 266,667 shares of its Common Stock and
$6.55 million in cash. The acquisition was finalized on January 24, 1997 and
will be accounted for as a purchase.
INTERWORLD
On January 6, 1997, the Company announced that it had agreed in principal
to acquire all of the outstanding shares of Interworld Inc. Group ("Interworld")
in exchange for 725,000 shares of its Common Stock. The transaction will be
accounted for as a pooling-of-interests.
AVEMCO
On January 17, 1997, HCCH and AVEMCO Corporation ("AVEMCO") jointly
announced that the Companies had signed a letter of intent to merge in a stock
for stock transaction, each share of AVEMCO common stock to be exchanged for one
share of HCCH's Common Stock. The Companies executed definitive agreements on
February 28, 1997. This transaction will be accounted for as a
pooling-of-interests. The merger is still subject to approval by the
shareholders of both Companies and to certain regulatory approvals. As of March
1, 1997, there were 8.4 million shares of AVEMCO common stock outstanding.
F-15
<PAGE> 115
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) INVESTMENTS
Substantially all of the Company's fixed income securities are investment
grade; most are A rated or better. No high-yield corporate bonds are owned or
contemplated. The amortized cost, gross unrealized gain or loss and estimated
market value of securities available for sale are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAIN LOSS VALUE
------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
December 31, 1996:
Marketable equity securities........... $ 2,481,000 $ 256,000 $ (304,000) $ 2,433,000
US Treasury securities................. 3,527,000 83,000 (6,000) 3,604,000
Obligations of states, municipalities
and political subdivisions.......... 259,140,000 3,078,000 (1,095,000) 261,123,000
------------ ---------- ----------- ------------
Total securities available for
sale......................... $265,148,000 $3,417,000 $(1,405,000) $267,160,000
============ ========== =========== ============
December 31, 1995:
Marketable equity securities........... $ 10,097,000 $3,866,000 $ (151,000) $ 13,812,000
US Treasury securities................. 3,914,000 44,000 (10,000) 3,948,000
Obligations of states, municipalities
and political subdivisions.......... 227,893,000 3,872,000 (832,000) 230,933,000
------------ ---------- ----------- ------------
Total securities available for
sale......................... $241,904,000 $7,782,000 $ (993,000) $248,693,000
============ ========== =========== ============
</TABLE>
The amortized cost and estimated market value of fixed income securities
available for sale at December 31, 1996, 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.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
------------ ------------
<S> <C> <C>
Due in 1 year or less.................................... $ 4,229,000 $ 4,276,000
Due after 1 year through 5 years......................... 66,362,000 67,383,000
Due after 5 years through 10 years....................... 80,119,000 80,876,000
Due after 10 years through 15 years...................... 60,990,000 61,408,000
Due after 15 years....................................... 50,967,000 50,784,000
------------ ------------
Total fixed income securities available for
sale......................................... $262,667,000 $264,727,000
============ ============
</TABLE>
As of December 31, 1996, the Company's insurance company subsidiaries had
deposited fixed income securities available for sale with an amortized cost of
approximately $9.1 million (market: $9.1 million) to meet the deposit
requirements of the insurance departments of certain states.
F-16
<PAGE> 116
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) INVESTMENTS -- (CONTINUED)
The sources of net investment income for the years ended December 31, 1996,
1995 and 1994, are detailed below:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
Fixed income securities.................................. $12,524,000 $10,172,000 $7,604,000
Short-term investments................................... 2,817,000 2,952,000 1,633,000
Equity securities........................................ 130,000 136,000 308,000
Other.................................................... 18,000 152,000 317,000
----------- ----------- ----------
Total investment income........................ 15,489,000 13,412,000 9,862,000
Investment expense....................................... (117,000) (162,000) (329,000)
----------- ----------- ----------
Net investment income.......................... $15,372,000 $13,250,000 $9,533,000
=========== =========== ==========
</TABLE>
There were no investments in fixed income securities available for sale
that were non-income producing for the twelve months preceding December 31,
1996.
F-17
<PAGE> 117
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) INVESTMENTS -- (CONTINUED)
Realized pre-tax gain (loss) on the sale of investments is as follows:
<TABLE>
<CAPTION>
GAIN LOSS NET
---------- ----------- ----------
<S> <C> <C> <C>
For the year ended December 31, 1996:
Fixed income securities available for sale... $ 20,000 $ (221,000) $ (201,000)
Equity securities available for sale......... 5,635,000 (337,000) 5,298,000
---------- ----------- ----------
Realized gain (loss)................. $5,655,000 $ (558,000) $5,097,000
========== =========== ==========
For the year ended December 31, 1995:
Fixed income securities available for sale... $ 513,000 $ (524,000) $ (11,000)
Equity securities available for sale......... 1,767,000 (697,000) 1,070,000
Other........................................ 2,000 -- 2,000
---------- ----------- ----------
Realized gain (loss)................. $2,282,000 $(1,221,000) $1,061,000
========== =========== ==========
For the year ended December 31, 1994:
Fixed income securities available for sale... $ 152,000 $ (241,000) $ (89,000)
Equity securities available for sale......... 1,156,000 (381,000) 775,000
Other........................................ -- (4,000) (4,000)
---------- ----------- ----------
Realized gain (loss)................. $1,308,000 $ (626,000) $ 682,000
========== =========== ==========
</TABLE>
(4) PROPERTY AND EQUIPMENT
The following table summarizes property and equipment at December 31, 1996
and 1995:
<TABLE>
<CAPTION>
ESTIMATED
1996 1995 USEFUL LIFE
----------- ----------- ------------
<S> <C> <C> <C>
Building and improvements................... $ 6,150,000 $ 6,067,000 31.5 years
Furniture, fixtures and equipment........... 5,753,000 4,875,000 3 to 5 years
Management information systems.............. 5,356,000 4,847,000 3 to 7 years
----------- -----------
Total property and equipment...... 17,259,000 15,789,000
Less accumulated depreciation and
amortization.............................. (8,124,000) (6,349,000)
----------- -----------
Property and equipment, net............... $ 9,135,000 $ 9,440,000
=========== ===========
</TABLE>
(5) NOTES PAYABLE
Notes payable at December 31, 1996 and 1995 are shown in the table below.
The estimated fair value of the notes payable at December 31, 1996 and 1995,
which is based on current rates offered to the company for debt with similar
terms, approximates the carrying value.
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
First note................................................ $16,250,000 $16,250,000
Second note............................................... -- 411,000
Line of credit............................................ 250,000 --
----------- -----------
Total notes payable............................. $16,500,000 $16,661,000
=========== ===========
</TABLE>
The first note is payable to a bank in quarterly installments of $1.5
million plus interest increasing to quarterly installments of $1.75 million plus
interest as of October 1, 1997. Interest is payable quarterly at the prime rate
(8 1/4% at December 31, 1996). During February, 1994, the first note was amended
changing the interest rate to a fixed rate of 6 1/2% until February 7, 1997. The
rate reverts back to the prime rate after such
F-18
<PAGE> 118
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) NOTES PAYABLE -- (CONTINUED)
date or can be set at London Interbank Offering Rate ("LIBOR") plus 2 1/4% at
the Company's discretion. The note is collateralized by all of the Common Stock
of HCC. The loan agreement contains certain restrictive covenants, including
restrictions on certain transactions in the Company's capital stock or the
capital stock of HCC and the maintenance of required financial ratios.
Additionally, the loan agreement prohibits the payment of dividends by the
Company without the bank's approval. The bank has approved the Company's current
dividend policy. During 1995, the Company prepaid the first two installments of
$1.5 million due in 1996. The bank deferred the second two installments due in
1996 until maturity on October 1, 1998. The Company paid the first 1997
quarterly payment of $1.5 million in January, 1997.
The second note was payable to a bank in monthly installments of $21,000
plus interest. This note was repaid in full during 1996.
The outstanding advance at December 31, 1996, on a revolving line of
credit, is owed to a bank and represents the maximum available on that line of
credit. Interest is payable quarterly beginning March 20, 1997, at a variable
rate which is the bank's prime rate plus one percent (9 1/4% at December 31,
1996). The principal is due in one payment upon maturity on December 20, 1998.
The loan is collateralized by a certificate of deposit.
At December 31, 1996, HCC maintained a revolving line of credit with a bank
in the maximum amount of $12 million available through April 30, 1997. Advances
under the line of credit are limited to amounts required to fund draws, if any,
on letters of credit issued by the bank on behalf of HCC and short-term direct
cash advances. The line of credit is collateralized by securities having an
aggregate market value of up to $15 million, the actual amount of collateral at
any one time being 125% of the aggregate amount outstanding. Interest on the
line is payable at the bank's prime rate of interest (8 1/4% at December 31,
1996). At December 31, 1996, letters of credit totaling $4.6 million had been
issued to insurance companies by the bank on behalf of HCC, with total
securities collateralizing the line of $5.8 million. As of December 31, 1996,
there were no cash advances outstanding under this line of credit, therefore,
$7.4 million is available for short-term borrowings under this facility.
Principal payments due on the note payable and the line of credit at
December 31, 1996, are shown in the table below:
<TABLE>
<CAPTION>
FOR THE
YEARS ENDED
DECEMBER 31, AMOUNT DUE
- ------------ -----------
<S> <C> <C>
1997 .................................................. $ 6,250,000
1998 .................................................. 10,250,000
-----------
Total principal payments due........................... $16,500,000
===========
</TABLE>
F-19
<PAGE> 119
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) INCOME TAX
Several of the Company's foreign subsidiaries are not subject to foreign
income taxes and no foreign income tax expense was incurred for the three years
ended December 31, 1996. United States Federal income taxes are provided on all
foreign earnings. As of December 31, 1996 and 1995, the Company had income taxes
payable of $1.9 million and $702,000, respectively. For Federal income tax
purposes, LDG has approximately $19.1 million of net operating loss
carryforwards which will expire in the year 2010. The components of the income
tax provision for the years ended December 31, 1996, 1995 and 1994, are as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Current..................................... $14,655,000 $10,500,000 $ 5,782,000
Deferred:
Change in net deferred tax at current
enacted tax rate....................... (7,326,000) (1,528,000) (1,201,000)
Change in deferred tax valuation
allowance.............................. -- (17,000) 17,000
----------- ----------- -----------
Total income tax provision........ $ 7,329,000 $ 8,955,000 $ 4,598,000
=========== =========== ===========
</TABLE>
The composition of deferred tax assets and liabilities and the related tax
effects as of December 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Tax net operating loss carryforward........................ $ 7,820,000 $ --
Excess of financial unearned premium over tax.............. 3,930,000 3,714,000
Effect of loss reserve discounting and salvage and
subrogation accrual for tax.............................. 3,199,000 2,746,000
Bad debt expense, deducted for financial over tax.......... 845,000 838,000
Accrued expenses and other items deductible when paid for
tax...................................................... 510,000 677,000
----------- ----------
Total assets..................................... 16,304,000 7,975,000
Excess of financial over currently taxable earnings from
foreign subsidiaries..................................... 421,000 --
Unrealized gain on increase in value of securities
available for sale (shareholders' equity)................ 707,000 2,372,000
Deferred policy acquisition costs, net of ceding
commissions, deductible for tax.......................... 3,027,000 2,240,000
Property and equipment depreciation and other items........ 625,000 442,000
----------- ----------
Total liabilities................................ 4,780,000 5,054,000
----------- ----------
Net deferred tax asset........................... $11,524,000 $2,921,000
=========== ==========
</TABLE>
Changes in the valuation allowance account applicable to the net deferred
tax asset are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- -------- -------
<S> <C> <C> <C>
Balance, beginning of year............................. $ -- $ 17,000 $ --
Increase charged (decrease credited) to income......... -- (17,000) 17,000
Valuation allowance acquired........................... 54,000 -- --
------- -------- -------
Balance, end of year......................... $54,000 $ 0 $17,000
======= ======== =======
</TABLE>
F-20
<PAGE> 120
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) INCOME TAX -- (CONTINUED)
During 1994, the Company's statutory Federal income tax rate changed from
34% to 35%. This change resulted in a deferred tax benefit of approximately
$70,000. The rate change also resulted in an increase in the current income tax
provision of approximately $135,000. The following table summarizes the
differences between the Company's effective tax rate for financial statement
purposes and the Federal statutory rate:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Statutory tax rate............................ 35.0% 35.0% 35.0%
Federal tax at statutory rate................. $12,819,000 $11,652,000 $ 6,953,000
Nontaxable municipal bond interest and
dividends received deduction................ (3,670,000) (2,624,000) (2,176,000)
State income taxes............................ (234,000) 397,000 349,000
Tax exempt status of S Corporation............ (1,617,000) (722,000) (651,000)
Deferred taxes at date of S Corporation
conversion.................................. (680,000) -- --
Other, net.................................... 711,000 252,000 123,000
----------- ----------- -----------
Income tax provision................ $ 7,329,000 $ 8,955,000 $ 4,598,000
=========== =========== ===========
Effective tax rate.................. 20.0% 26.9% 23.1%
=========== =========== ===========
</TABLE>
(7) SEGMENT AND GEOGRAPHIC DATA
The Company classifies its activities into two core business segments: 1)
property and casualty insurance company operations and 2) insurance agency and
brokerage operations. Corporate includes general corporate items and
intersegment eliminations. Geographic location is determined by physical
location of the Company's offices, and does not represent the location of
insureds or reinsureds from whom the business was generated. The following table
shows information by business segment and geographic location:
<TABLE>
<CAPTION>
COMPANY AGENCY CORPORATE TOTAL
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
For the year ended December 31, 1996:
Revenue:
Domestic............................. $ 94,507,000 $36,418,000 $ 41,000 $130,966,000
Jordan............................... 17,836,000 1,219,000 -- 19,055,000
United Kingdom....................... -- 2,224,000 -- 2,224,000
Intersegment......................... 600,000 763,000 (1,363,000) --
------------ ----------- ----------- ------------
Total revenue................ $112,943,000 $40,624,000 $(1,322,000) $152,245,000
============ =========== =========== ============
Net earnings:
Domestic............................. $ 28,340,000 $ (766,000) $(2,853,000) $ 24,721,000
Jordan............................... 5,254,000 874,000 -- 6,128,000
United Kingdom....................... -- (1,551,000) -- (1,551,000)
------------ ----------- ----------- ------------
Total net earnings........... $ 33,594,000 $(1,443,000) $(2,853,000) $ 29,298,000
============ =========== =========== ============
Depreciation and amortization.......... $ 1,509,000 $ 780,000 $ 29,000 $ 2,318,000
============ =========== =========== ============
Capital expenditures................... $ 598,000 $ 1,126,000 $ -- $ 1,724,000
============ =========== =========== ============
</TABLE>
F-21
<PAGE> 121
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) SEGMENT AND GEOGRAPHIC DATA -- (CONTINUED)
<TABLE>
<CAPTION>
COMPANY AGENCY CORPORATE TOTAL
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
For the year ended December 31, 1995:
Revenue:
Domestic............................. $ 79,209,000 $30,766,000 $ 36,000 $110,011,000
Jordan............................... 13,889,000 1,524,000 -- 15,413,000
United Kingdom....................... -- 1,785,000 -- 1,785,000
Intersegment......................... 474,000 383,000 (857,000) --
------------ ----------- ----------- ------------
Total revenue................ $ 93,572,000 $34,458,000 $ (821,000) $127,209,000
============ =========== =========== ============
Net earnings:
Domestic............................. $ 17,192,000 $ 3,608,000 $(1,824,000) $ 18,976,000
Jordan............................... 4,508,000 602,000 -- 5,110,000
United Kingdom....................... -- 251,000 -- 251,000
------------ ----------- ----------- ------------
Total net earnings........... $ 21,700,000 $ 4,461,000 $(1,824,000) $ 24,337,000
============ =========== =========== ============
Depreciation and amortization.......... $ 932,000 $ 758,000 $ 10,000 $ 1,700,000
============ =========== =========== ============
Capital expenditures................... $ 2,399,000 $ 684,000 $ 186,000 $ 3,269,000
============ =========== =========== ============
For the year ended December 31, 1994:
Revenue:
Domestic............................. $ 54,060,000 $28,552,000 $ -- $ 82,612,000
Jordan............................... 1,996,000 93,000 -- 2,089,000
United Kingdom....................... -- 804,000 -- 804,000
Intersegment......................... 674,000 376,000 (1,050,000) --
------------ ----------- ----------- ------------
Total revenue................ $ 56,730,000 $29,825,000 $(1,050,000) $ 85,505,000
============ =========== =========== ============
Net earnings:
Domestic............................. $ 12,475,000 $ 3,959,000 $(1,377,000) $ 15,057,000
Jordan............................... 725,000 (17,000) -- 708,000
United Kingdom....................... -- (497,000) -- (497,000)
------------ ----------- ----------- ------------
Total net earnings........... $ 13,200,000 $ 3,445,000 $(1,377,000) $ 15,268,000
============ =========== =========== ============
Depreciation and amortization.......... $ 632,000 $ 652,000 $ -- $ 1,284,000
============ =========== =========== ============
Capital expenditures................... $ 1,033,000 $ 405,000 $ -- $ 1,438,000
============ =========== =========== ============
</TABLE>
Identifiable assets by business segment and geographic location are shown
in the following table:
<TABLE>
<CAPTION>
COMPANY AGENCY CORPORATE TOTAL
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
December 31, 1996:
Domestic.......................... $494,870,000 $119,628,000 $14,418,000 $628,916,000
Jordan............................ 92,033,000 4,405,000 -- 96,438,000
United Kingdom.................... -- 20,425,000 -- 20,425,000
------------ ------------ ----------- ------------
Total identifiable
assets.................. $586,903,000 $144,458,000 $14,418,000 $745,779,000
============ ============ =========== ============
December 31, 1995:
Domestic.......................... $466,366,000 $ 95,917,000 $11,917,000 $574,200,000
Jordan............................ 89,078,000 4,675,000 -- 93,753,000
United Kingdom.................... -- 13,723,000 -- 13,723,000
------------ ------------ ----------- ------------
Total identifiable
assets.................. $555,444,000 $114,315,000 $11,917,000 $681,676,000
============ ============ =========== ============
</TABLE>
F-22
<PAGE> 122
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) SEGMENT AND GEOGRAPHIC DATA -- (CONTINUED)
During 1996 and 1995, one broker in London, England, produced gross written
premium to the Company of approximately $25.7 million and $31.2 million,
respectively. This represents 11% and 13% of the Company's total gross written
premium for those years.
The Company has insureds and/or reinsureds in approximately 100 countries
world-wide. The following table shows the geographical distribution of gross
premium written by the domestic insurance company subsidiaries based on location
of the insureds and reinsureds:
<TABLE>
<CAPTION>
1996 1995
------------------- -------------------
GWP % GWP %
------------ --- ------------ ---
<S> <C> <C> <C> <C>
United States............................. $ 94,755,000 45% $ 93,897,000 42%
Europe.................................... 35,110,000 16 44,052,000 20
South America............................. 26,033,000 12 30,093,000 13
Central America........................... 19,253,000 9 22,241,000 10
Other..................................... 36,525,000 17 33,269,000 15
------------ --- ------------ ---
$211,676,000 100% $223,552,000 100%
============ === ============ ===
</TABLE>
(8) REINSURANCE
In the normal course of business the Company's insurance company
subsidiaries cede a substantial portion of their premium to unrelated domestic
and foreign reinsurers through quota share, surplus, excess of loss and
facultative reinsurance agreements. Although the ceding of reinsurance does not
discharge the primary insurer from liability to its policyholder, the
subsidiaries participate in such agreements for the purpose of limiting their
loss exposure and diversifying their business. Substantially all of the
reinsurance assumed by the Company's insurance company subsidiaries was
underwritten directly by the subsidiaries but issued by other unrelated
companies in order to satisfy local licensing or other requirements,
predominantly on foreign business or as reinsurance of captives. The following
table represents the effect of such reinsurance transactions on net premium and
loss and loss adjustment expense:
<TABLE>
<CAPTION>
LOSS AND LOSS
WRITTEN EARNED ADJUSTMENT
PREMIUM PREMIUM EXPENSE
------------ ------------ -------------
<S> <C> <C> <C>
For the year ended December 31, 1996:
Direct business......................... $ 84,166,000 $ 99,436,000 $ 57,768,000
Reinsurance assumed..................... 146,589,000 135,294,000 97,305,000
Reinsurance ceded....................... (133,979,000) (141,416,000) (103,831,000)
------------ ------------ ------------
Net amounts..................... $ 96,776,000 $ 93,314,000 $ 51,242,000
============ ============ ============
For the year ended December 31, 1995:
Direct business......................... $111,466,000 $ 97,675,000 $ 81,425,000
Reinsurance assumed..................... 127,492,000 110,344,000 65,061,000
Reinsurance ceded....................... (140,172,000) (128,008,000) (96,717,000)
------------ ------------ ------------
Net amounts..................... $ 98,786,000 $ 80,011,000 $ 49,769,000
============ ============ ============
For the year ended December 31, 1994:
Direct business......................... $ 97,585,000 $ 68,174,000 $ 45,386,000
Reinsurance assumed..................... 95,293,000 76,895,000 60,837,000
Reinsurance ceded....................... (133,184,000) (98,235,000) (76,635,000)
------------ ------------ ------------
Net amounts..................... $ 59,694,000 $ 46,834,000 $ 29,588,000
============ ============ ============
</TABLE>
F-23
<PAGE> 123
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) REINSURANCE -- (CONTINUED)
The table below represents the composition of reinsurance recoverables in
the accompanying consolidated balance sheets:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Reinsurance recoverable on paid losses................... $ 21,708,000 $ 13,678,000
Reinsurance recoverable on outstanding losses............ 96,247,000 83,847,000
Reinsurance recoverable on IBNR.......................... 7,641,000 8,278,000
Reserve for uncollectible reinsurance.................... (2,415,000) (2,395,000)
------------ ------------
Total reinsurance recoverables................. $123,181,000 $103,408,000
============ ============
</TABLE>
The insurance company subsidiaries require reinsurers not authorized by
their respective states of domicile to collateralize their reinsurance
obligations to the Company with letters of credit or cash deposits. At December
31, 1996, the Company held letters of credit and cash deposits in the amounts of
$67.9 million and $9.1 million, respectively, to collateralize certain
reinsurance balances. The Company has established a reserve of $2.4 million as
of December 31, 1996, to reduce the effects of any recoverable problem.
In order to minimize their exposure to reinsurance credit risk, the Company
evaluates the financial condition of their reinsurers and place their
reinsurance with a diverse group of financially sound companies. The following
table shows reinsurance balances relating to the reinsurers with a total
recoverable balance greater than $10.0 million and the collateral and potential
offsets held by the Company as of each year end:
<TABLE>
<CAPTION>
REINSURANCE
RECOVERABLES AND LETTERS OF CREDIT,
CEDED UNEARNED CASH DEPOSITS AND
REINSURER LOCATION PREMIUM OTHER PAYABLES
- --------- -------- ---------------- ------------------
<S> <C> <C> <C>
December 31, 1996:
Underwriters at Lloyd's.................... London, England $28,962,000 $18,446,000
GIO Insurance Limited...................... Sydney, Australia 25,204,000 26,106,000
Reinsurance Australia Corporation, Ltd..... Sydney, Australia 20,562,000 19,332,000
Underwriters Indemnity Company............. Houston, TX 12,531,000 5,934,000
SCOR Reinsurance Company................... New York, NY 11,105,000 2,428,000
AXA Reinsurance Company.................... Wilmington, DE 10,402,000 2,759,000
December 31, 1995:
GIO Insurance Limited...................... Sydney, Australia $30,160,000 $31,202,000
Underwriters at Lloyd's.................... London, England 24,518,000 25,916,000
Reinsurance Australia Corporation, Ltd..... Sydney, Australia 16,620,000 14,198,000
AXA Reinsurance Company.................... Wilmington, DE 13,096,000 5,586,000
</TABLE>
Approximately $1.9 million in recoverables is due from reinsurers that are
either under regulatory supervision or insolvent. The Company holds letters of
credit and cash deposits totaling $1.9 million to collateralize these balances
plus other credits of $1.1 million available for potential offset. The Company
is involved in a dispute with two reinsurers over coverage and other issues. The
Company believes the reinsurers' positions are without merit and all amounts due
from the reinsurers will be recovered. The total amount in dispute is
approximately $3.4 million.
(9) COMMITMENTS AND CONTINGENCIES
Litigation
The Company is a party to numerous lawsuits arising in the normal course of
business. All pending lawsuits involve claims under policies underwritten or
reinsured by the Company, which management believes have been adequately
included in its established loss reserves. The Company believes the resolution
of these lawsuits will not have a material adverse effect on its financial
condition, results of operations or cash flows.
F-24
<PAGE> 124
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
Foreign Currency Forward Contracts
From time to time the Company enters into foreign currency forward
contracts as a hedge against foreign currency fluctuations, primarily British
Pound Sterling. The Company's balances denominated in foreign currency fluctuate
as transactions are recorded and settled. During 1996, the average Sterling
liability, for subsidiaries whose functional currency was the United States
dollar, was approximately L907,000 ($1.6 million at the December 31, 1996, rate
of exchange) which was hedged by an average open forward contract balance of
approximately L460,000 ($785,000 at the December 31, 1996, rate of exchange).
There was one open foreign currency forward contract as of December 31, 1996 to
purchase L500,000 ($856,000 at the December 31, 1996, rate of exchange) with a
maturity of January, 1997. As of December 31, 1996, the open foreign currency
contract had a gain of $37,000. During January, 1997, the Company entered into a
foreign currency forward contract for L500,000 ($856,000 at December 31, 1996,
rate of exchange). The Company expects to continue to limit its exposure to
currency fluctuations through the use of foreign currency forward contracts.
The Company utilizes these foreign currency forward contracts strictly as a
hedge against existing exposure to foreign currency fluctuations and it does not
do so as any form of speculative or trading investment.
Leases
The Company leases administrative office facilities under long-term
noncancelable operating lease agreements expiring at various dates through
October, 2001. The agreements generally require the payment of utilities, real
estate taxes, insurance and repairs. The Company has recognized rent expense on
a straight-line basis over the terms of these leases. In addition, the Company
leases computer equipment and automobiles under operating leases expiring at
various dates through the year 1999. Rent expense under these leases amounted to
$1,495,000, $1,095,000 and $895,000 for the years ended December 31, 1996, 1995
and 1994, respectively.
At December 31, 1996, future minimum annual rental payments required under
the long-term noncancelable operating leases, excluding certain expenses payable
by the Company, are as follows:
<TABLE>
<CAPTION>
FOR THE
YEARS ENDED
DECEMBER 31, AMOUNT DUE
------------ ----------
<S> <C>
1997...................................................... $1,125,000
1998...................................................... 877,000
1999...................................................... 815,000
2000...................................................... 789,000
2001...................................................... 575,000
----------
Total future minimum annual rental payments due... $4,181,000
==========
</TABLE>
F-25
<PAGE> 125
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) RELATED PARTY TRANSACTIONS
Certain of the Company's directors are officers, directors or owners of
business entities with which the Company transacts business. Balances with these
business entities and other related parties included in the accompanying
consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Marketable equity securities................................ $ 773,000 $ --
Reinsurance recoverables.................................... 3,472,000 590,000
Ceded unearned premium...................................... 9,059,000 4,786,000
Reinsurance balances payable................................ 3,780,000 3,903,000
Premium payable............................................. 1,532,000 --
Loss and loss adjustment expense payable.................... 663,000 9,000
Accounts payable and accrued liabilities.................... -- 7,000
</TABLE>
Transactions with these business entities and other related parties
included in the accompanying consolidated statements of earnings are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Gross earned premium............................ $ 871,000 $ -- $ --
Commission income............................... 1,249,000 -- --
Ceded earned premium............................ 12,050,000 1,194,000 1,017,000
Gross loss and loss adjustment expense.......... 661,000 106,000 157,000
Ceded loss and loss adjustment expense.......... 5,852,000 185,000 866,000
Other operating expense......................... 1,011,000 758,000 104,000
</TABLE>
During 1995, $63,000 was paid to a related party for construction
management services related to improvements to the Company's offices in Houston,
Texas. Also, during 1994, real estate acquired with the acquisition of IMG was
sold to a related party for $788,000. There was no gain or loss recorded on this
sale.
(11) EMPLOYEE BENEFIT PLANS
The Company has defined contribution retirement plans under Section 401(k)
of the Internal Revenue Code which cover substantially all of the domestic
employees who meet specified service requirements. The Company's contributions
of these plans are based on varying percentages of the employees' contributions,
up to varying maximum levels. The Company contributed $506,000, $693,000 and
$646,000 to the plans for the years ended December 31, 1996, 1995 and 1994,
respectively, which is included in compensation expense in the accompanying
consolidated statements of earnings.
(12) SHAREHOLDERS' EQUITY
Under the Texas Insurance Code, HCC must maintain minimum statutory capital
of $1,000,000 and minimum statutory surplus of $1,000,000, and can only pay
dividends out of surplus funds. In addition, HCC is limited in the amount of
dividends which it may pay in any twelve month period, without prior regulatory
approval, to the greater of statutory net investment income for the prior
calendar year or ten percent (10%)of statutory capital and surplus as of the
prior calendar year end. During 1997, HCC's ordinary dividend capacity will be
approximately $15.1 million. As of December 31, 1996, HCC's and TIC's total
adjusted capital greatly exceeded the NAIC authorized control level risk-based
capital.
Under Jordanian Law, IMG and MEIB must transfer 10% of their earnings
before income tax each year to a statutory reserve until the reserve balance
equals the paid up capital balance. This reserve is not available for the
payment of dividends. As of December 31, 1996, IMG and MEIB had combined capital
plus statutory reserves totaling $17.0 million included as part their combined
shareholders' equity totaling $61.1 million.
F-26
<PAGE> 126
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(13) STOCK OPTIONS
The Company has four option plans, the 1994 Nonemployee Director Stock
Option Plan, the 1996 Nonemployee Director Stock Option Plan, the 1992 Incentive
Stock Option Plan, and the 1995 Flexible Incentive Plan. All plans are
administered by the Compensation Committee of the Board of Directors. Each
option may be used to purchase one share of Common Stock of the Company. As of
December 31, 1996, 4,004,669 shares of Common Stock were reserved for issuance
of options, of which 1,748,276 shares were reserved for future issuances of
options.
Options generally vest over a one, three or five year period and expire ten
years after grant date. All options have been granted at fixed exercise prices,
generally at the market price of the Company's Common Stock on the grant date.
Any excess of the market price on the grant date over the exercise price is
recognized as compensation expense in the accompanying financial statements.
During 1996, such compensation expense amounted to $494,000. If the fair value
method of valuing compensation related to options would have been used, pro
forma net earnings and pro forma earnings per share would have been $28.3
million, or $0.79 per share, for the year ended December 31, 1996. The pro forma
compensation cost for the year ended December 31, 1995, is immaterial. The fair
value of each option grant was estimated on the grant date using the
Black-Scholes single option pricing model with the following assumptions: a)
risk free interest rate of 5.6% for 1996 and 6.6% for 1995, b) expected
volatility factor of .3, c) dividend yield of .3% for 1996 and 0% for 1995, and
d) expected option life of six years.
Stock option activity is shown below after adjustment for the effects of
the three-for-two stock split payable as a 50% stock dividend to shareholders of
record March 15, 1994, and for the effects of the five-for-two stock split
payable as a 150% stock dividend to shareholders of record April 30, 1996. (See
note 1).
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------ ------------------------------ --------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE FAIR NUMBER EXERCISE FAIR NUMBER EXERCISE
OF SHARES PRICE VALUE OF SHARES PRICE VALUE OF SHARES PRICE
--------- -------- ------- --------- -------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year.......... 2,036,563 $ 9.29 1,166,187 $ 5.75 1,146,562 $3.77
Granted at market value................. 292,500 23.63 $ 9.87 1,078,751 12.29 $4.99 371,250 7.87
Granted above market value.............. -- -- -- -- -- -- 59,000 8.47
Granted below market value.............. 60,000 13.01 11.51 16,000 7.70 5.70 -- --
Cancelled............................... (12,250) 11.51 (77,184) 7.54 (89,155) 3.93
Exercised............................... (120,420) 4.52 (147,191) 3.92 (321,470) 2.14
--------- ------ --------- ------ --------- -----
Outstanding, end of year................ 2,256,393 $11.49 2,036,563 $ 9.29 1,166,187 $5.75
========= ====== ========= ====== ========= =====
Exercisable, end of year................ 722,142 $ 8.12 420,142 $ 4.49 387,021 $3.87
========= ====== ========= ====== ========= =====
</TABLE>
Options outstanding at December 31, 1996, are shown on the following
schedule:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- --------------------
AVERAGE
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OF SHARES LIFE PRICE OF SHARES PRICE
- --------------- --------- ----------- -------- --------- --------
<C> <S> <C> <C> <C> <C> <C>
Under $4.00 ................................................... 239,842 3.33 years $ 3.73 225,782 $3.73
$4.00 - $10.00 ................................................... 619,050 6.33 7.19 200,927 6.90
$10.01 - $15.00 ................................................... 1,105,001 8.78 12.37 295,433 12.31
$15.01 - $21.00 ................................................... -- -- -- -- --
Over $21.00 ................................................... 292,500 8.98 23.63 -- --
--------- ---------- ------ ------- -----
Total Options.............................................. 2,256,393 7.55 years $11.49 722,142 $8.12
========= ========== ====== ======= =====
</TABLE>
F-27
<PAGE> 127
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(14) STATUTORY TO GAAP RECONCILIATIONS
Reconciliations of statutory policyholders' surplus as of December 31, 1996
and 1995, and net income for the years ended December 31, 1996, 1995 and 1994,
of the Company's insurance company subsidiaries included in those companies'
respective filings with regulatory authorities to the amounts shown in the
accompanying consolidated financial statements on the basis of generally
accepted accounting principles ("GAAP") are as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Statutory policyholders' surplus......................... $212,194,000 $177,317,000
Difference in carrying value of fixed income
securities............................................. 1,652,000 2,467,000
Assets non-admitted for statutory reporting.............. 2,174,000 2,973,000
Deferred policy acquisition costs and deferred ceding
commissions capitalized for GAAP....................... 820,000 (1,569,000)
Deferred income taxes recorded for GAAP.................. 4,519,000 3,199,000
Statutory provisions for reinsurance, net of GAAP reserve
for uncollectible reinsurance.......................... 1,587,000 4,224,000
Other.................................................... (133,000) --
------------ ------------
Shareholder's equity of insurance company
subsidiaries on basis of GAAP................ 222,813,000 188,611,000
Equity attributable to non-insurance company parent and
subsidiaries, net of elimination entries in
consolidation.......................................... 17,877,000 6,848,000
------------ ------------
Total shareholders' equity per accompanying
consolidated financial statements............ $240,690,000 $195,459,000
============ ============
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Statutory net income........................ $34,640,000 $23,004,000 $15,711,000
Deferred income tax benefit (expense) not
recorded for statutory purposes........... (250,000) 1,650,000 1,318,000
Change in deferred policy acquisition costs
and deferred ceding commissions
capitalized for GAAP...................... 2,390,000 (165,000) (1,065,000)
Provision for reinsurance not expensed for
statutory purposes........................ 100,000 (900,000) (600,000)
Other, net.................................. (18,000) (10,000) (4,000)
----------- ----------- -----------
Net income of insurance company
subsidiaries on basis of GAAP... 36,862,000 23,579,000 15,360,000
Net income (loss) attributable to
non-insurance parent and subsidiaries..... (7,564,000) 758,000 (92,000)
----------- ----------- -----------
Net earnings per accompanying
consolidated financial
statements...................... $29,298,000 $24,337,000 $15,268,000
=========== =========== ===========
</TABLE>
(15) SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the three years ended December 31,
1996, is summarized below:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Interest paid.................................. $ 1,109,000 $2,313,000 $1,876,000
Income tax paid................................ 13,740,000 9,803,000 5,139,000
</TABLE>
F-28
<PAGE> 128
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(15) SUPPLEMENTAL CASH FLOW INFORMATION -- (CONTINUED)
The unrealized gain or loss on securities available for sale, deferred
taxes related thereto, and the issuance of the Company's Common Stock for the
purchase of subsidiaries are noncash transactions which have been included as
direct increases or decreases in shareholders' equity. During the year ended
December 31, 1995, non-cash contributions to LDG's additional paid-in capital of
$50,000 was recorded by a reduction in certain payable balances.
(16) LIABILITY FOR UNPAID LOSS AND LOSS ADJUSTMENT EXPENSE
The following table provides a reconciliation of the liability of loss and
loss adjustment expense, for the years ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Reserves for loss and loss adjustment
expense at beginning of the year........ $158,451,000 $129,755,000 $ 98,399,000
Less reinsurance recoverables............. 92,125,000 85,214,000 66,468,000
------------ ------------ ------------
Net reserves at beginning of the
year.......................... 66,326,000 44,541,000 31,931,000
Net reserves acquired with purchase of
subsidiary.............................. -- -- 1,769,000
Provision for loss and loss adjustment
expense for claims occurring in the
current year............................ 55,045,000 51,387,000 28,871,000
Increase (decrease) in estimated loss and
loss adjustment expense for claims
occurring in prior years................ (3,803,000) (1,618,000) 717,000
------------ ------------ ------------
Incurred loss and loss
adjustment expense, net of
reinsurance................... 51,242,000 49,769,000 29,588,000
------------ ------------ ------------
Loss and loss adjustment expense payments
for claims occurring during:
Current year............................ 15,903,000 12,268,000 6,386,000
Prior years............................. 19,731,000 15,716,000 12,361,000
------------ ------------ ------------
Loss and loss adjustment expense
payments, net of
reinsurance................... 35,634,000 27,984,000 18,747,000
------------ ------------ ------------
Net reserves at end of the year........... 81,934,000 66,326,000 44,541,000
Plus reinsurance recoverables............. 103,888,000 92,125,000 85,214,000
------------ ------------ ------------
Reserves for loss and loss
adjustment expense at end of
the year...................... $185,822,000 $158,451,000 $129,755,000
============ ============ ============
</TABLE>
F-29
<PAGE> 129
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(17) QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FOURTH QUARTER THIRD QUARTER SECOND QUARTER FIRST QUARTER
1996 1996 1996 1996
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Net earned premium..................... $27,212,000 $20,145,000 $22,459,000 $23,498,000
Fee and commission income.............. 8,428,000 9,981,000 10,536,000 9,517,000
Total revenue.......................... 41,424,000 35,569,000 37,768,000 37,484,000
Loss and loss adjustment expense....... 14,367,000 10,508,000 12,128,000 14,239,000
Total expense.......................... 23,683,000 19,308,000 47,430,000 25,197,000
Earnings (loss) before income tax
provision............................ 17,741,000 16,261,000 (9,662,000) 12,287,000
Income tax provision (benefit)......... 5,177,000 4,931,000 (5,602,000) 2,823,000
----------- ----------- ----------- -----------
Net earnings (loss).................... $12,564,000 $11,330,000 $(4,060,000) $ 9,464,000
=========== =========== =========== ===========
Earnings per share data:
Earnings per share..................... $ 0.35 $ 0.31 $ (0.11) $ 0.27
=========== =========== =========== ===========
Weighted average shares outstanding.... 36,387,000 35,993,000 35,785,000 35,638,000
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
FOURTH QUARTER THIRD QUARTER SECOND QUARTER FIRST QUARTER
1995 1995 1995 1995
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Net earned premium..................... $21,160,000 $20,254,000 $20,532,000 $18,065,000
Fee and commission income.............. 9,437,000 7,860,000 8,182,000 7,408,000
Total revenue.......................... 35,000,000 31,535,000 32,186,000 28,488,000
Loss and loss adjustment expense....... 12,749,000 12,517,000 13,227,000 11,276,000
Total expense.......................... 23,445,000 23,566,000 24,232,000 22,674,000
Earnings before income tax provision... 11,555,000 7,969,000 7,954,000 5,814,000
Income tax provision................... 3,208,000 2,333,000 1,987,000 1,427,000
----------- ----------- ----------- -----------
Net earnings........................... $ 8,347,000 $ 5,636,000 $ 5,967,000 $ 4,387,000
=========== =========== =========== ===========
Earnings per share data:
Earnings per share..................... $ 0.24 $ 0.16 $ 0.20 $ 0.15
=========== =========== =========== ===========
Weighted average shares outstanding.... 35,156,000 34,999,000 30,506,000 29,906,000
=========== =========== =========== ===========
</TABLE>
All amounts have been restated to include the accounts and operations of
LDG (see note 2). All share and per share data have been retroactively adjusted
to reflect the effects of the five-for-two stock split and the shares issued in
connection with the combination with LDG (see note 1). Nonrecurring expenses of
$25.0 million were incurred in the second quarter of 1996. (see note 2).
F-30
<PAGE> 130
AVEMCO FINANCIAL STATEMENTS
F-31
<PAGE> 131
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
AVEMCO Corporation:
We have audited the accompanying consolidated balance sheets of AVEMCO
Corporation and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the years in the three-year period ended December 31, 1996. In connection
with our audits of the aforementioned consolidated financial statements, we also
have audited the related financial statement schedules incorporated in the
registration statement by reference. These consolidated financial statements and
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedules 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 AVEMCO
Corporation and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles. Also in our opinion, the related 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.
The Company changed its method of accounting for fixed maturity investments
in 1994 to adopt the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities."
/s/ KPMG PEAT MARWICK LLP
Washington, D.C.
January 31, 1997
(February 28, 1997, as to Note 12)
F-32
<PAGE> 132
AVEMCO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Investments (note 2):
Fixed maturities, at fair value (amortized cost
$109,177,000; $107,068,000 in 1995).................... $112,828,000 $112,136,000
Equity securities, at fair value (cost $10,953,000;
$20,199,000 in 1995)................................... 10,817,000 22,524,000
Short-term investments, at cost which approximates fair
value.................................................. 25,593,000 14,884,000
------------ ------------
Total investments................................. 149,238,000 149,544,000
Cash........................................................ 5,959,000 3,466,000
Receivables:
Premiums.................................................. 21,267,000 16,406,000
Reinsurance recoverable (note 9).......................... 9,503,000 14,292,000
Other, net................................................ 8,341,000 8,231,000
------------ ------------
Total receivables................................. 39,111,000 38,929,000
Deferred policy acquisition costs........................... 6,071,000 5,511,000
Prepaid reinsurance premiums (note 9)....................... 5,913,000 5,178,000
Property and equipment, at cost, less accumulated
depreciation (note 3)..................................... 7,886,000 8,051,000
Other assets, net........................................... 3,488,000 3,123,000
------------ ------------
Total assets...................................... $217,666,000 $213,802,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses (note 4)....... $ 43,227,000 $ 42,305,000
Unearned premiums......................................... 37,201,000 32,363,000
Accounts payable, accrued expenses, and other
liabilities............................................ 17,797,000 16,009,000
Ceded reinsurance premiums payable........................ 1,549,000 5,047,000
Deferred income tax liabilities (note 6).................. 653,000 1,352,000
Debt (note 7)............................................. 56,667,000 54,967,000
------------ ------------
Total liabilities................................. 157,094,000 152,043,000
------------ ------------
Stockholders' Equity (notes 2, 5, 7, and 10):
Preferred stock, par value, $10.00 per share; 500,000
shares authorized; none issued......................... -- --
Common stock, par value, $.10 per share; 20,000,000 shares
authorized; 11,565,811 issued; 11,551,161 in 1995...... 1,157,000 1,155,000
Additional paid-in capital.................................. 19,140,000 18,293,000
Net unrealized appreciation on investments.................. 2,320,000 4,879,000
Foreign currency translation adjustments.................... (218,000) (182,000)
Retained earnings........................................... 94,843,000 88,184,000
------------ ------------
117,242,000 112,329,000
Less treasury stock, 3,301,741 shares in 1996 and 2,901,741
in 1995, at cost.......................................... (56,670,000) (50,570,000)
------------ ------------
Total stockholders' equity........................ 60,572,000 61,759,000
------------ ------------
Contingent liabilities (note 9)
Total liabilities and stockholders' equity........ $217,666,000 $213,802,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-33
<PAGE> 133
AVEMCO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Premiums earned (note 9)......................... $ 86,170,000 $ 80,458,000 $ 75,518,000
Commissions...................................... 8,819,000 7,046,000 6,418,000
Net investment income (note 2)................... 8,223,000 8,498,000 8,245,000
Computer products and services................... 9,913,000 10,188,000 9,185,000
Realized gain (loss) on sale of investments (note
2)............................................ 3,244,000 575,000 (248,000)
Realized gain on subsidiary sale (note 11)....... 3,307,000 -- --
Other revenues................................... 8,214,000 6,439,000 5,472,000
------------ ------------ ------------
Total revenues........................... 127,890,000 113,204,000 104,590,000
------------ ------------ ------------
Expenses:
Losses and loss adjustment expenses (notes 4 and
9)............................................ 62,866,000 55,605,000 46,310,000
Commissions (note 11)............................ 7,092,000 6,513,000 7,159,000
Interest (note 7)................................ 3,827,000 4,224,000 3,725,000
Cost of computer hardware sold................... 1,442,000 1,961,000 1,032,000
Selling, general and administrative expenses..... 36,701,000 35,799,000 32,825,000
------------ ------------ ------------
Total expenses........................... 111,928,000 104,102,000 91,051,000
------------ ------------ ------------
Earnings before income taxes....................... 15,962,000 9,102,000 13,539,000
Income taxes (note 6):
Current provision................................ 3,054,000 1,287,000 2,679,000
Deferred provision (benefit)..................... 620,000 (103,000) 27,000
------------ ------------ ------------
Total income taxes....................... 3,674,000 1,184,000 2,706,000
------------ ------------ ------------
Net earnings............................. $ 12,288,000 $ 7,918,000 $ 10,833,000
============ ============ ============
Earnings per common and common equivalent share
(note 10):
Net earnings............................. $ 1.45 $ .90 $ 1.20
============ ============ ============
Weighted average number of common and common
equivalent shares................................ 8,478,393 8,845,857 9,019,322
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-34
<PAGE> 134
AVEMCO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
NET
COMMON STOCK UNREALIZED FOREIGN
----------------------- ADDITIONAL APPRECIATION/ CURRENCY
SHARE PAID-IN (DEPRECIATION) TRANSLATION RETAINED
ISSUED PAR VALUE CAPITAL ON INVESTMENT ADJUSTMENT EARNINGS
---------- ---------- ----------- --------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994
Balance at beginning of year.......... 11,534,861 $1,153,000 $18,136,000 $ 284,000 $ (169,000) $ 77,381,000
Net earnings.......................... -- -- -- -- -- 10,833,000
Dividends declared ($.44 per share)... -- -- -- -- -- (3,929,000)
Cumulative net unrealized appreciation
on fixed maturities at January 1,
1994................................ -- -- -- 4,922,000 -- --
Change in net unrealized appreciation
(depreciation) on investments....... -- -- -- (6,048,000) -- --
Exercise of common stock options...... 8,500 1,000 70,000 -- -- --
Repurchase of common stock............ -- -- -- -- -- --
Foreign currency translation
adjustments......................... -- -- -- -- (36,000) --
---------- ---------- ----------- ---------- ----------- ------------
Balance at end of year................ 11,543,361 1,154,000 18,206,000 (842,000) (205,000) 84,285,000
---------- ---------- ----------- ---------- ----------- ------------
YEAR ENDED DECEMBER 31, 1995
Net earnings.......................... -- -- -- -- -- 7,918,000
Dividends declared ($.46 per share)... -- -- -- -- -- (4,019,000)
Change in net unrealized appreciation
on investments...................... -- -- -- 5,721,000 -- --
Exercise of common stock options...... 7,800 1,000 87,000 -- -- --
Repurchase of common stock............ -- -- -- -- -- --
Foreign currency translation
adjustments......................... -- -- -- -- 23,000 --
---------- ---------- ----------- ---------- ----------- ------------
Balance at end of year................ 11,551,161 1,155,000 18,293,000 4,879,000 (182,000) 88,184,000
---------- ---------- ----------- ---------- ----------- ------------
YEAR ENDED DECEMBER 31, 1996
Net earnings.......................... -- -- -- -- -- 12,288,000
Dividends declared ($.48 per share)... -- -- -- -- -- (4,022,000)
Change in net unrealized appreciation
on investments...................... -- -- (2,559,000) -- --
Issuance of common stock.............. 120,000 12,000 913,000 -- -- --
Exercise of common stock options...... 14,650 2,000 124,000 -- -- --
Repurchase of common stock............ -- -- -- -- -- --
Retirement of treasury stock.......... (120,000) (12,000) (190,000) -- -- (1,607,000)
Foreign currency translation
adjustments......................... -- -- -- -- (36,000) --
---------- ---------- ----------- ---------- ----------- ------------
Balance at end of year................ 11,565,811 $1,157,000 $19,140,000 $2,320,000 $ (218,000) $ 94,843,000
========== ========== =========== ========== =========== ============
<CAPTION>
TOTAL
TREASURY STOCKHOLDERS'
STOCK EQUITY
------------ -------------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1994
Balance at beginning of year.......... $(42,855,000) $ 53,930,000
Net earnings.......................... -- 10,833,000
Dividends declared ($.44 per share)... -- (3,929,000)
Cumulative net unrealized appreciation
on fixed maturities at January 1,
1994................................ -- 4,922,000
Change in net unrealized appreciation
(depreciation) on investments....... -- (6,048,000)
Exercise of common stock options...... -- 71,000
Repurchase of common stock............ (4,133,000) (4,133,000)
Foreign currency translation
adjustments......................... -- (36,000)
------------ ------------
Balance at end of year................ (46,988,000) 55,610,000
------------ ------------
YEAR ENDED DECEMBER 31, 1995
Net earnings.......................... -- 7,918,000
Dividends declared ($.46 per share)... -- (4,019,000)
Change in net unrealized appreciation
on investments...................... -- 5,721,000
Exercise of common stock options...... -- 88,000
Repurchase of common stock............ (3,582,000) (3,582,000)
Foreign currency translation
adjustments......................... -- 23,000
------------ ------------
Balance at end of year................ (50,570,000) 61,759,000
------------ ------------
YEAR ENDED DECEMBER 31, 1996
Net earnings.......................... -- 12,288,000
Dividends declared ($.48 per share)... -- (4,022,000)
Change in net unrealized appreciation
on investments...................... -- (2,559,000)
Issuance of common stock.............. -- 925,000
Exercise of common stock options...... -- 126,000
Repurchase of common stock............ (7,909,000) (7,909,000)
Retirement of treasury stock.......... 1,809,000 --
Foreign currency translation
adjustments......................... -- (36,000)
------------ ------------
Balance at end of year................ $(56,670,000) $ 60,572,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-35
<PAGE> 135
AVEMCO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings..................................... $ 12,288,000 $ 7,918,000 $ 10,833,000
Adjustments to reconcile net earnings to cash
flows from operating activities:
Depreciation and amortization.................. 1,679,000 1,604,000 1,348,000
Deferred tax expense (benefit)................. 620,000 (103,000) 27,000
Realized (gain) loss on sale of investments.... (3,244,000) (575,000) 248,000
Realized (gain) loss on sale of property and
equipment................................... (128,000) 14,000 (4,000)
Realized gain on sale of subsidiary............ (3,307,000) -- --
Change in:
Receivables................................. (22,000) (1,994,000) 5,329,000
Deferred policy acquisition costs........... (560,000) (589,000) 70,000
Prepaid reinsurance premiums................ (735,000) 254,000 1,626,000
Unpaid losses and loss adjustment
expenses.................................. 922,000 1,103,000 (4,577,000)
Unearned premiums........................... 4,838,000 5,362,000 (3,737,000)
Ceded reinsurance premiums payable.......... (3,498,000) (484,000) (1,617,000)
Accounts payable, accrued expenses and
other..................................... (3,071,000) (1,448,000) 2,249,000
------------ ------------ ------------
Net cash flows provided from operating
activities................................ 5,782,000 11,062,000 11,795,000
------------ ------------ ------------
INVESTMENT ACTIVITIES:
Proceeds from sale of fixed maturities........... 20,934,000 23,318,000 22,747,000
Proceeds from redemption of fixed maturities..... 9,288,000 13,227,000 13,036,000
Proceeds from sale of equity securities.......... 22,991,000 14,692,000 7,711,000
Purchase of fixed maturities..................... (38,372,000) (45,225,000) (26,673,000)
Purchase of equity securities.................... (10,729,000) (5,181,000) (14,270,000)
Net purchase of short-term investments........... (10,709,000) (4,614,000) (1,494,000)
Proceeds from sale of subsidiary................. 13,957,000 -- --
Proceeds from sale of property and equipment..... 185,000 9,000 11,000
Purchase of property, equipment, and long-term
assets......................................... (728,000) (1,867,000) (2,699,000)
------------ ------------ ------------
Net cash flows provided from (used by)
investment activities................ 6,817,000 (5,641,000) (1,631,000)
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from borrowings......................... 44,000,000 11,700,000 12,700,000
Principal payments on debt....................... (42,300,000) (11,333,000) (12,600,000)
Proceeds from exercise of common stock options... 125,000 88,000 71,000
Dividends to stockholders........................ (4,022,000) (4,019,000) (3,929,000)
Repurchase of common stock....................... (7,909,000) (3,582,000) (4,133,000)
------------ ------------ ------------
Net cash flows used by financing
activities........................... (10,106,000) (7,146,000) (7,891,000)
------------ ------------ ------------
Net increase (decrease) in cash.................. 2,493,000 (1,725,000) 2,273,000
Cash, beginning of year.......................... 3,466,000 5,191,000 2,918,000
------------ ------------ ------------
Cash, end of year................................ $ 5,959,000 $ 3,466,000 $ 5,191,000
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-36
<PAGE> 136
AVEMCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The consolidated financial statements include the accounts of AVEMCO
Corporation and all of its subsidiaries ("the company"). All material
intercompany accounts and transactions have been eliminated in consolidation.
The company's insurance subsidiaries underwrite aviation and other
specialty insurance products. Non-aviation lines include lenders single
interest, short-term health and pleasure marine. The insurance service
businesses complement the insurance operations and are concentrated in claims
management, specialty insurance administration, reinsurance brokerage, worldwide
emergency assistance, and software systems for the property/casualty insurance
industry.
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(b) Insurance Premiums and Commissions
Premiums on insurance policies written are recognized, net of ceded
premiums, principally on a monthly pro rata basis over the terms of individual
policies. Commissions on reinsurance are included in the computation of deferred
policy acquisition costs and thereby are partially deferred (see note 1(e)).
(c) Computer Products and Services
Revenue from custom software products is recognized using the percentage of
completion method of accounting. Other software contracts are recognized when
delivery has occurred, other remaining vendor obligations are no longer
significant, and collectibility is probable. Computer hardware is recognized
when delivery has occurred. Maintenance support is recognized pro rata over the
term of the maintenance agreement.
(d) Unpaid Losses and Loss Adjustment Expenses
The liability for insurance losses is determined by aggregating the
estimated liability on both individually reported and incurred but not reported
claims. The liability for adjustment expenses on losses incurred but not settled
is determined on the basis of historical experience of adjustment expenses in
relation to losses incurred. Estimated amounts of salvage recoverable on paid
and unpaid losses are recorded as a reduction of unpaid losses. Claims are
continually monitored and management believes that the liability for losses and
loss adjustment expenses at December 31, 1996 and 1995, is adequate to cover the
ultimate liability. However, such estimates may be more or less than the amount
ultimately paid when the claims are settled (see note 4).
(e) Deferred Policy Acquisition Costs
Policy acquisition costs (such as premium taxes, commissions paid on
reinsurance assumed, and a portion of other underwriting expenses) incurred in
the writing of insurance business are deferred and amortized over the terms of
the insurance policies. Anticipated losses and loss expenses, based on
historical and current experience, are considered in determining the
recoverability of deferred acquisition costs.
F-37
<PAGE> 137
AVEMCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(f) Investments
Investments in fixed maturities (bonds and redeemable preferred stock) are
considered as available for sale and are carried at fair value, as determined by
quoted market prices. The company has the ability to hold all fixed maturity
investments until their maturity. However, securities may be sold to take
advantage of market and economic conditions or as part of the company's
investment strategy. Equity securities (common stock and nonredeemable preferred
stock) are classified as available for sale and are carried at fair value, as
determined by quoted market prices. Gain or loss on securities transactions are
recognized as realized, or when other than temporary declines occur, and are
determined by the identified certificate method. Unrealized appreciation or
depreciation of equity securities and fixed maturity investments, net of
deferred tax effect, if any, are excluded from net earnings and credited or
charged directly to stockholders' equity (see note 2).
(g) Depreciation and Amortization
Property and equipment are depreciated by straight-line and accelerated
methods over their useful lives, which range from three years for certain
equipment to 45 years for certain buildings. Intangible costs of acquisitions,
included in other assets, are amortized on a straight-line basis over their
useful lives ranging from three to 15 years.
(h) Income Taxes
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. 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.
(i) Earnings Per Share
Earnings per share are based on the weighted average number of common and
common equivalent shares outstanding during the year. Outstanding common stock
options, when dilutive, are considered to be common stock equivalents for the
purpose of this calculation. The weighted average number of common and common
equivalent shares has been impacted by the company's continuing common stock
repurchase program implemented in 1987.
F-38
<PAGE> 138
AVEMCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) INVESTMENTS
The following summarizes the amortized cost, unrealized gains and losses,
and fair value of investments in fixed income securities at December 31, 1996,
1995, and 1994. Bonds consist primarily of debt securities issued by states and
political subdivisions.
<TABLE>
<CAPTION>
UNREALIZED
--------------------------------------------------------
AMORTIZED
COST GAINS LOSSES FAIR VALUE
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
December 31, 1996:
Bonds....................... $101,117,000 $3,910,000 $ 309,000 $104,718,000
Redeemable preferred
stocks................... 8,060,000 81,000 31,000 8,110,000
------------ ---------- ---------- ------------
Total............... $109,177,000 $3,991,000 $ 340,000 $112,828,000
============ ========== ========== ============
December 31, 1995:
Bonds....................... $102,376,000 $5,219,000 $ 276,000 $107,319,000
Redeemable preferred
stocks................... 4,692,000 145,000 20,000 4,817,000
------------ ---------- ---------- ------------
Total............... $107,068,000 $5,364,000 $ 296,000 $112,136,000
============ ========== ========== ============
December 31, 1994:
Bonds....................... $ 96,114,000 $2,830,000 $2,794,000 $ 96,150,000
Redeemable preferred
stocks................... 8,487,000 10,000 158,000 8,339,000
------------ ---------- ---------- ------------
Total............... $104,601,000 $2,840,000 $2,952,000 $104,489,000
============ ========== ========== ============
</TABLE>
The amortized cost and estimated fair value of fixed income securities at
December 31, 1996, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------
AMORTIZED FAIR
MATURITY COST VALUE
-------- ------------ ------------
<S> <C> <C>
Less than one year...................................... $ 3,344,000 $ 3,356,000
1 to 3 years............................................ 6,215,000 6,366,000
3 to 5 years............................................ 12,519,000 12,881,000
5 to 10 years........................................... 45,986,000 47,661,000
Over 10 years........................................... 41,113,000 42,564,000
------------ ------------
Total......................................... $109,177,000 $112,828,000
============ ============
</TABLE>
The company has $7,268,000 of fixed income securities at December 31, 1996,
pledged with regulators and treasurers of various states and the Canadian
national government for protection of its policyholders and creditors as
required by various state and Canadian national government insurance
regulations.
F-39
<PAGE> 139
AVEMCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) INVESTMENTS -- (CONTINUED)
The following summarizes the cost, unrealized gains and losses, and fair
value of investments in equity securities at December 31, 1996, 1995, and 1994:
<TABLE>
<CAPTION>
UNREALIZED
---------------------------------------------------
COST GAINS LOSSES FAIR VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
December 31, 1996:
Common stocks..................... $ -- $ -- $ -- $ --
Preferred stocks.................. 10,953,000 122,000 258,000 10,817,000
----------- ---------- ---------- -----------
Total..................... $10,953,000 $ 122,000 $ 258,000 $10,817,000
=========== ========== ========== ===========
December 31, 1995:
Common stocks..................... $ 6,158,000 $2,609,000 $ 14,000 $ 8,753,000
Preferred stocks.................. 14,041,000 243,000 513,000 13,771,000
----------- ---------- ---------- -----------
Total..................... $20,199,000 $2,852,000 $ 527,000 $22,524,000
=========== ========== ========== ===========
December 31, 1994:
Common stocks..................... $ 6,871,000 $ 371,000 $ 180,000 $ 7,062,000
Preferred stocks.................. 15,912,000 6,000 1,361,000 14,557,000
----------- ---------- ---------- -----------
Total..................... $22,783,000 $ 377,000 $1,541,000 $21,619,000
=========== ========== ========== ===========
</TABLE>
Below are the changes, as reflected in stockholders' equity, in net
unrealized appreciation (depreciation) in fair value, net of applicable income
taxes, of investments in fixed maturities and equity securities for the years
ended December 31, 1996, 1995, and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- -----------
<S> <C> <C> <C>
Fixed maturities................................ $ (936,000) $3,419,000 $(4,995,000)
Equity securities............................... (1,623,000) 2,302,000 (1,053,000)
----------- ---------- -----------
Net change for year............................. (2,559,000) 5,721,000 (6,048,000)
Cumulative net unrealized appreciation on fixed
maturities at January 1, 1994................. -- -- 4,922,000
Net unrealized appreciation, beginning of
year.......................................... 4,879,000 (842,000) 284,000
----------- ---------- -----------
Net unrealized appreciation (depreciation), end
of year....................................... $ 2,320,000 $4,879,000 $ (842,000)
=========== ========== ===========
</TABLE>
Net investment income consists of the following for the years ended
December 31, 1996, 1995, and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Fixed maturities.................................. $6,616,000 $6,496,000 $7,125,000
Equity securities................................. 984,000 1,225,000 998,000
Short-term investments............................ 1,083,000 1,177,000 522,000
---------- ---------- ----------
Gross investment income........................... 8,683,000 8,898,000 8,645,000
Investment expenses............................... (460,000) (400,000) (400,000)
---------- ---------- ----------
Net investment income............................. $8,223,000 $8,498,000 $8,245,000
========== ========== ==========
</TABLE>
F-40
<PAGE> 140
AVEMCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) INVESTMENTS -- (CONTINUED)
Realized gains (losses), before taxes, on the sale of investment securities
are as follows for the years ended December 31, 1996, 1995, and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
---------- -------- ---------
<S> <C> <C> <C>
Fixed maturities.................................. $ 230,000 $382,000 $(147,000)
Equity securities................................. 3,014,000 193,000 (101,000)
---------- -------- ---------
Net realized gains (losses)....................... $3,244,000 $575,000 $(248,000)
========== ======== =========
</TABLE>
Proceeds from the sale and redemption of fixed income securities during
1996, 1995, and 1994, were $30,222,000, $36,545,000, and $35,783,000,
respectively. Gross gains of $523,000, $492,000, and $452,000 in 1996, 1995, and
1994, respectively, and gross losses of $293,000, $110,000, and $599,000, in
1996, 1995, and 1994, respectively, were realized from these transactions.
(3) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 and 1995, consist of the
following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Buildings and improvements................................. $ 6,583,000 $ 6,128,000
Furniture, fixtures, and equipment......................... 9,841,000 9,819,000
----------- -----------
16,424,000 15,947,000
Less accumulated depreciation.............................. (8,538,000) (7,896,000)
----------- -----------
Property and equipment, net................................ $ 7,886,000 $ 8,051,000
=========== ===========
</TABLE>
For the years ended December 31, 1996, 1995, and 1994, depreciation expense
was $1,284,000, $1,221,000, and $1,091,000, respectively.
F-41
<PAGE> 141
AVEMCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
The following table presents the net liability for unpaid losses and loss
adjustment expenses as originally estimated at December 31, 1987 through 1996,
the cumulative amounts paid with respect to the liability for each subsequent
year, the re-estimated liability at each subsequent year-end, the resulting
development of original liability estimates for 1987 through 1995, and
supplemental gross unpaid losses and loss adjustment expense information.
<TABLE>
<CAPTION>
1987 1988 1989 1990 1991 1992
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net unpaid losses and loss
adjustment expenses............... $41,170,000 $37,846,000 $38,955,000 $33,146,000 $24,957,000 $26,663,000
Cumulative paid losses and loss
adjustment expenses:
One year later.................... 20,932,000 17,689,000 17,145,000 16,350,000 14,137,000 12,263,000
Two years later................... 26,950,000 25,364,000 26,118,000 22,766,000 17,524,000 19,262,000
Three years later................. 29,483,000 30,043,000 30,015,000 24,516,000 21,791,000 21,298,000
Four years later.................. 31,463,000 32,107,000 30,671,000 27,415,000 23,063,000 22,557,000
Five years later.................. 32,538,000 31,822,000 33,300,000 27,969,000 23,952,000
Six years later................... 31,844,000 33,580,000 33,803,000 28,373,000
Seven years later................. 33,485,000 33,862,000 34,128,000
Eight years later................. 33,739,000 33,940,000
Nine years later.................. 33,801,000
Net unpaid losses and loss
adjustment expenses re-estimated
as of:
One year later.................... 37,447,000 36,147,000 36,145,000 27,373,000 23,624,000 24,299,000
Two years later................... 36,000,000 35,483,000 32,946,000 27,728,000 24,066,000 22,903,000
Three years later................. 34,884,000 34,013,000 33,464,000 27,904,000 23,886,000 22,949,000
Four years later.................. 33,817,000 34,531,000 33,458,000 28,277,000 24,061,000 23,284,000
Five years later.................. 34,365,000 34,106,000 33,958,000 28,384,000 24,443,000
Six years later................... 33,985,000 34,178,000 34,092,000 28,669,000
Seven years later................. 34,069,000 34,050,000 34,401,000
Eight years later................. 33,927,000 34,179,000
Nine years later.................. 34,039,000
Net cumulative redundancy
(deficiency)...................... $ 7,131,000 $ 3,667,000 $ 4,554,000 $ 4,477,000 $ 514,000 $ 3,379,000
----------- ----------- ----------- ----------- ----------- -----------
Gross unpaid losses and loss
adjustment expenses...............
Reinsurance recoverable on unpaid
losses and loss adjustment
expenses..........................
Net unpaid losses and loss
adjustment expenses...............
Re-estimated gross unpaid losses and
loss adjustment expenses..........
Re-estimated reinsurance recoverable
on unpaid losses and loss
adjustment expenses...............
Re-estimated net unpaid losses and
loss adjustment expenses..........
Gross cumulative redundancy.........
<CAPTION>
1993 1994 1995 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net unpaid losses and loss
adjustment expenses............... $29,958,000 $31,137,000 $32,933,000 $35,349,000
Cumulative paid losses and loss
adjustment expenses:
One year later.................... 16,897,000 20,786,000 22,216,000
Two years later................... 22,805,000 27,052,000
Three years later................. 25,676,000
Four years later..................
Five years later..................
Six years later...................
Seven years later.................
Eight years later.................
Nine years later..................
Net unpaid losses and loss
adjustment expenses re-estimated
as of:
One year later.................... 27,011,000 29,989,000 31,799,000
Two years later................... 27,535,000 31,520,000
Three years later................. 28,614,000
Four years later..................
Five years later..................
Six years later...................
Seven years later.................
Eight years later.................
Nine years later..................
Net cumulative redundancy
(deficiency)...................... $ 1,344,000 $ (383,000) $ 1,134,000
----------- ----------- -----------
Gross unpaid losses and loss
adjustment expenses............... $41,202,000 $42,305,000 $43,227,000
Reinsurance recoverable on unpaid
losses and loss adjustment
expenses.......................... 10,065,000 9,372,000 7,878,000
----------- ----------- -----------
Net unpaid losses and loss
adjustment expenses............... $31,137,000 $32,933,000 $35,349,000
----------- ----------- -----------
Re-estimated gross unpaid losses and
loss adjustment expenses.......... $39,067,000 $38,997,000
Re-estimated reinsurance recoverable
on unpaid losses and loss
adjustment expenses............... 7,547,000 7,198,000
----------- -----------
Re-estimated net unpaid losses and
loss adjustment expenses.......... $31,520,000 $31,799,000
----------- -----------
Gross cumulative redundancy......... $ 2,135,000 $ 3,308,000
=========== ===========
</TABLE>
The development of unpaid losses and loss adjustment expenses refers to the
difference between original estimates for unpaid losses and loss adjustment
expenses and the re-evaluation of these estimates in subsequent years as loss
payments are made and open claims adjusted to reflect current information.
Redundant or favorable development occurs when original estimates are higher
than subsequently indicated, whereas deficient development occurs when original
estimates are lower than subsequently indicated.
F-42
<PAGE> 142
AVEMCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES -- (CONTINUED)
The following table sets forth a reconciliation of beginning and ending net
unpaid losses and loss adjustment expenses and additional supplemental gross
unpaid loss and loss adjustment expense information. Net unpaid losses and loss
adjustment expenses reflect unpaid losses and loss adjustment expenses after
reinsurance arrangements have been considered.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net unpaid losses and loss adjustment expenses,
beginning of year................................. $32,933,000 $31,137,000 $29,958,000
----------- ----------- -----------
Losses and loss adjustment expenses:
Provision for insured events of the current
year........................................... 64,000,000 56,753,000 49,257,000
Decrease in provision for insured events of prior
years.......................................... (1,134,000) (1,148,000) (2,947,000)
----------- ----------- -----------
Total losses and loss adjustment
expenses................................ 62,866,000 55,605,000 46,310,000
----------- ----------- -----------
Payments:
Losses and loss adjustment expenses attributable
to insured events of the current year.......... 38,234,000 33,023,000 28,234,000
Losses and loss adjustment expenses attributable
to insured events of prior years............... 22,216,000 20,786,000 16,897,000
----------- ----------- -----------
Total payments............................ 60,450,000 53,809,000 45,131,000
----------- ----------- -----------
Net unpaid losses and loss adjustment expenses, end
of year........................................... 35,349,000 32,933,000 31,137,000
Reinsurance recoverable on unpaid losses and loss
adjustment expenses, end of year.................. 7,878,000 9,372,000 10,065,000
----------- ----------- -----------
Gross unpaid losses and loss adjustment expenses,
end of year....................................... $43,227,000 $42,305,000 $41,202,000
=========== =========== ===========
</TABLE>
(5) STOCK OPTIONS
The stockholders approved a 375,000 share non-statutory stock option plan
in 1991 and a 1,350,000 share incentive stock option plan in 1982. Both plans
are administered by the Compensation and Stock Option Committee of the Board of
Directors.
Under the non-statutory stock option plan, options may be granted to
employees to purchase shares of the company's common stock. Options are granted
at the fair market value on the date of the grant and, generally, expire ten
years from the date of grant. Generally, options cannot be exercised earlier
than one year after the date on which granted and become exercisable at a rate
of 25% per year provided, however, that an option may be exercised in full in
the event of, among other things, a change in control of the company.
The incentive stock option plan expired December 1992 and no additional
grants can be made under this plan. Major provisions are similar to the
non-statutory stock option plan, except that upon the exercise of an option, an
incentive stock option participant agrees not to voluntarily terminate
employment without the consent of the company for a period of at least two years
from the date of such exercise. The actual options that any participant may
annually receive or exercise, including any that may be accelerated due to a
change in control, are limited, however, to the maximum amount allowable under
the Internal Revenue Code.
F-43
<PAGE> 143
AVEMCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) STOCK OPTIONS -- (CONTINUED)
The following table summarizes stock option activity under these plans for
the years ended December 31, 1996, 1995, and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
------------------- ------------------- -------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year... 899,300 $17.19 910,025 $ 17.18 877,925 $ 17.33
Granted............................ 45,600 15.25 9,000 16.4375 51,000 13.625
Exercised.......................... (14,650) 8.54 (7,800) 11.15 (8,500) 8.42
Cancelled.......................... (61,850) 20.02 (11,925) 20.10 (10,400) 19.51
------- ------- -------
Outstanding at year-end............ 868,400 $17.03 899,300 $ 17.19 910,025 $ 17.18
======= ======= =======
Exercisable at year-end............ 769,650 $17.03 747,200 $ 16.67 629,725 $ 16.07
======= ======= =======
</TABLE>
The fair value of options granted during 1996, 1995, and 1994 were $4.69,
$4.91, and $5.39, respectively.
Outstanding options at December 31, 1996, consist of the following:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- -----------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES AT 12/31/96 LIFE PRICE AT 12/31/96 PRICE
- -------------- ----------- ----------- --------- ----------- ---------
<C> <S> <C> <C> <C> <C> <C>
$10.00 - 13.99 ............................. 234,075 1.94 $11.95 215,075 $11.80
14.00 - 17.99 ............................. 407,575 3.84 16.12 355,675 16.22
18.00 - 21.99 ............................. 52,600 6.92 18.50 39,250 18.50
$22.00 - 26.00 ............................. 174,150 5.25 25.55 159,650 25.53
------- -------
868,400 3.80 $17.03 769,650 $17.03
======= =======
</TABLE>
The intrinsic value method was applied in accounting for stock option
activity. Accordingly, no compensation cost is recognized in the consolidated
statements of income. Had compensation cost been determined consistent with the
fair value method, the proforma net earnings and earnings per share impact, if
any, would have been immaterial.
(6) INCOME TAXES
The following is a reconciliation of the expected federal income tax rate
with the company's effective tax rate on earnings:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Expected tax rate........................................... 35.0% 35.0% 35.0%
Effect on tax rate resulting from:
Tax exempt income on securities........................... (11.3) (18.8) (13.7)
Allowable dividend exclusion.............................. (2.0) (3.7) (2.3)
Other..................................................... 1.3 .5 1.0
----- ----- -----
Effective tax rate.......................................... 23.0% 13.0% 20.0%
===== ===== =====
</TABLE>
F-44
<PAGE> 144
AVEMCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) INCOME TAXES -- (CONTINUED)
Deferred income tax assets and liabilities are comprised of the following
at December 31:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ----------- ----------
<S> <C> <C> <C>
Deferred income tax assets:
Discounted unpaid loss and loss adjustment
expenses.................................... $ 841,000 $ 1,120,000 $1,059,000
Unearned premiums reduction.................... 2,151,000 1,849,000 1,501,000
California Proposition 103 deferral............ 105,000 132,000 1,016,000
Alternative minimum tax credit carryforwards... 653,000 927,000 121,000
Unrealized depreciation on investments......... -- -- 434,000
Other.......................................... 172,000 262,000 254,000
---------- ----------- ----------
Gross deferred income tax assets....... 3,922,000 4,290,000 4,385,000
========== =========== ==========
Deferred income tax liabilities:
Deferred policy acquisition costs.............. 2,064,000 1,874,000 1,674,000
Property and equipment......................... 856,000 859,000 860,000
Investments.................................... 459,000 395,000 359,000
Unrealized appreciation on investments......... 1,196,000 2,514,000 --
---------- ----------- ----------
Gross deferred income tax
liabilities.......................... 4,575,000 5,642,000 2,893,000
---------- ----------- ----------
Net deferred income tax assets
(liabilities)........................ $ (653,000) $(1,352,000) $1,492,000
========== =========== ==========
</TABLE>
A valuation allowance as of December 31, 1996 and 1995, has not been
recognized as it appears more likely than not that the combination of carryback
potential and estimated future taxable income should be sufficient to allow for
the realization of the deferred income tax assets.
State income taxes, which are included in the current income tax
provisions, were $780,000, $405,000, and $395,000 in 1996, 1995, and 1994,
respectively. Federal and state income taxes paid in 1996, 1995, and 1994 were
$2,686,000, $944,000, and $2,801,000, respectively.
(7) DEBT
The company has an unsecured revolving credit facility with a bank that
allows it to borrow up to $60,000,000 through April 30, 1997. Interest is
payable at the lower of the bank's floating prime rate or the daily London
Interbank Offered Rate for three month U.S. dollar deposits (LIBOR) plus 1.45%.
The interest rate at December 31, 1996, was 7.08%. The company also has the
option, at any time, to convert any portion of the outstanding principal balance
of the loan into term notes, which may be amortized over any period not to
extend beyond December 31, 2000. Interest would be based on the revolving credit
facility's fluctuating rate. However, the company may, at its option, convert
the fluctuating rate to a negotiated fixed rate by executing an interest rate
swap agreement. The revised credit agreement provides for a commitment fee of
one half of 1% per annum of the average daily unused credit. $53,000,000 was
drawn under this credit facility at December 31, 1996.
The revised credit facility requires the company to maintain a consolidated
net worth, as defined, of $48,895,000. Dividends to stockholders in any one year
may not exceed 53% of the prior year's net earnings. Other significant covenants
in the credit facility provide for certain limitations on the company's
liability to net worth ratio, cash flow to current portion of long term debt,
the acquisition, disposition and pledging of assets, incurring of indebtedness,
and require its insurance subsidiary to maintain a certain statutory
policyholders' surplus and net premium written to policyholders' surplus ratio.
F-45
<PAGE> 145
AVEMCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) DEBT -- (CONTINUED)
The company also has a $10,000,000 unsecured five-year term loan with a
bank. The loan will be repaid in 60 monthly principal installments of $166,667,
plus interest. Interest is payable on a fluctuating basis equal to LIBOR plus
1.65%. The company may, however, at its option, convert the fluctuating rate to
a negotiated fixed rate by executing an interest rate swap agreement. The
interest rate at December 31, 1996, was 7.28%. At December 31, 1996, the
outstanding principal amount of the loan was $3,667,000. Principal payments for
the next two years ending December 31, 1998, are $2,167,000 in 1997, and
$1,500,000 in 1998.
Interest paid on all debt in 1996, 1995, and 1994, was $3,918,000,
$4,031,000, and $3,915,000, respectively.
(8) EMPLOYEE BENEFITS
The company has a non-contributory defined benefit retirement plan covering
substantially all employees who meet specified age and service requirements.
Benefits are based on years of service, final average compensation and are
integrated with the provisions of the Federal Insurance Compensation Act (Social
Security), as provided for in the plan. Pension plan assets are primarily
invested in immediate participation guaranteed contracts and pooled separate
investment accounts of a life insurance company. The company's funding policy is
to contribute amounts that meet minimum funding requirements, but which do not
exceed the maximum funding limits as currently determined under applicable tax
regulations.
Total pension expense (credit) amounted to $(590,000), $512,000, and
$430,000 in 1996, 1995, and 1994, respectively. A curtailment gain of $1,044,000
was recognized in 1996 as a result of the company's decision to eliminate
certain future service time credits. The following summarizes the plan's status
at December 31:
Actuarial present value of pension benefit obligations:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Vested benefit obligation..................... $(4,352,000) $(4,383,000) $(3,930,000)
Non-vested benefit obligation................. (277,000) (191,000) (93,000)
----------- ----------- -----------
Accumulated benefit obligation................ (4,629,000) (4,574,000) (4,023,000)
Effect of projected future compensation
increases................................... (458,000) (2,013,000) (1,414,000)
----------- ----------- -----------
Projected benefit obligation.................. (5,087,000) (6,587,000) (5,437,000)
Fair value of plan assets..................... 6,995,000 5,613,000 4,296,000
Unrecognized net prior obligation............. 53,000 209,000 236,000
Unrecognized prior service cost............... 27,000 497,000 557,000
Unrecognized net (gain) loss.................. (1,423,000) 147,000 248,000
----------- ----------- -----------
Prepaid (accrued) pension cost................ $ 565,000 $ (121,000) $ (100,000)
=========== =========== ===========
</TABLE>
F-46
<PAGE> 146
AVEMCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) EMPLOYEE BENEFITS -- (CONTINUED)
Net periodic pension expense (credit) for the years ended December 31,
<TABLE>
<CAPTION>
1996 1995 1994
----------- --------- ---------
<S> <C> <C> <C>
Service cost..................................... $ 459,000 $ 378,000 $ 328,000
Interest cost.................................... 481,000 422,000 376,000
Actual return on plan assets..................... (534,000) (376,000) (362,000)
Amortization of prior service cost............... 21,000 61,000 61,000
Amortization of net prior obligation............. 27,000 27,000 27,000
Gain from curtailment............................ (1,044,000) -- --
----------- --------- ---------
Net periodic pension expense (credit)............ $ (590,000) $ 512,000 $ 430,000
=========== ========= =========
</TABLE>
Rate assumptions:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Average discount rate....................................... 8.0% 7.25% 7.5%
Expected long-term rate of return........................... 8.5% 8.5% 8.5%
Compensation increase rate.................................. 5.0% 5.0% 5.0%
</TABLE>
The company also has a trusteed defined contribution profit sharing plan
covering substantially all employees who meet specified service requirements.
Under the plan, the company contributes 5% of defined net earnings before income
taxes. The company's contribution is limited, however, to the maximum amount
allowable as a tax deduction under the Internal Revenue Code. For the years
ended December 31, 1996, 1995, and 1994, the company's contribution to the plan
was $491,000, $420,000, and $709,000 respectively.
(9) REINSURANCE
In the normal course of business, AVEMCO Insurance Company and
subsidiaries, the company's principal insurance subsidiary, assumes and cedes
reinsurance as a party to quota share, surplus share, excess of loss,
facultative, and catastrophe reinsurance agreements. These reinsurance
arrangements are utilized to limit maximum loss, provide greater diversification
of risk and to minimize exposures on larger risks. Accounts in the accompanying
consolidated statements of income are reflected net of the reinsurance ceded.
A summary of reinsurance activity follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Direct premiums written.................... $ 94,487,000 $ 79,602,000 $ 74,850,000
Assumed premiums written................... 12,478,000 20,546,000 15,802,000
Ceded premiums written..................... (14,719,000) (14,608,000) (17,202,000)
------------ ------------ ------------
Net premiums written....................... $ 92,246,000 $ 85,540,000 $ 73,450,000
============ ============ ============
Direct earned premiums..................... $ 90,093,000 $ 76,218,000 $ 77,521,000
Assumed earned premiums.................... 12,070,000 18,580,000 16,806,000
Ceded earned premiums...................... (15,993,000) (14,340,000) (18,809,000)
------------ ------------ ------------
Net earned premiums........................ $ 86,170,000 $ 80,458,000 $ 75,518,000
============ ============ ============
Losses and loss adjustment expenses........ $ 72,607,000 $ 64,418,000 $ 57,668,000
Reinsurance recoveries..................... (9,741,000) (8,813,000) (11,358,000)
------------ ------------ ------------
Net losses and loss adjustment expenses.... $ 62,866,000 $ 55,605,000 $ 46,310,000
============ ============ ============
</TABLE>
F-47
<PAGE> 147
AVEMCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) REINSURANCE -- (CONTINUED)
The ceding or transfer of business to reinsurers does not discharge the
primary liability of AVEMCO Insurance Company; therefore, the insurance
subsidiary is contingently liable for the estimated amounts recoverable from
reinsurers should reinsurers be unable to meet their obligations. AVEMCO
Insurance Company held $9,285,000 and $8,498,000 of irrevocable letters of
credit and other funds from reinsurers at December 31, 1996 and 1995,
respectively.
(10) STOCKHOLDERS' EQUITY AND CAPITAL TRANSACTIONS
The company's stock repurchase program, initially approved by the Board of
Directors in October 1987 and subsequently revised to reflect current
conditions, allows the company to buy back shares of AVEMCO Corporation common
stock from time to time on the open market at prevailing prices and through
private block transactions as may become available. At December 31, 1996, the
company had repurchased 6,727,380 common shares under the stock repurchase
program at prices ranging from $9.75 to $22.00. As a result of the company's
stock repurchase program, there were 8,264,070 shares of its common stock
outstanding on December 31, 1996.
AVEMCO Insurance Company is restricted on paying dividends, loans, or
advances by minimum statutory surplus requirements. In addition, state
regulatory restrictions were revised, effective July 1993, to limit the amount
of distribution that may be paid without prior approval by regulatory
authorities. At December 31, 1996, the maximum dividend payout which could be
made during 1997 without prior approval is $7,667,000. During 1996 and 1995, the
company received annual dividends of $7,400,000 and $7,200,000, respectively,
from the principal subsidiary. These dividends have been eliminated in the
accompanying consolidated financial statements.
Policyholders' surplus (stockholder's equity as determined in accordance
with statutory accounting practices) of AVEMCO Insurance Company and
subsidiaries, at December 31, 1996 and 1995, was $76,669,000 and $73,808,000,
respectively.
(11) SUMMARY SUPPLEMENTAL FINANCIAL DATA WITH RESPECT TO INSURANCE SUBSIDIARY
Following are the consolidated financial summaries of the AVEMCO Insurance
Company and subsidiaries, which is the principal subsidiary of AVEMCO
Corporation.
F-48
<PAGE> 148
AVEMCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) SUMMARY SUPPLEMENTAL FINANCIAL DATA WITH RESPECT TO INSURANCE
SUBSIDIARY -- (CONTINUED)
AVEMCO INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED SUMMARIES OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Revenues:
Premiums earned.................................. $ 86,170,000 $80,458,000 $75,518,000
Net investment income............................ 6,638,000 6,988,000 6,952,000
Commissions on reinsurance ceded................. 3,969,000 3,586,000 4,624,000
Realized investment gains (losses)............... 2,218,000 390,000 (301,000)
Realized gain on subsidiary sale................. 3,307,000 -- --
Other revenues................................... 145,000 152,000 65,000
------------ ----------- -----------
Total revenues..................................... 102,447,000 91,574,000 86,858,000
------------ ----------- -----------
Expenses:
Losses and loss adjustment expenses.............. 62,866,000 55,605,000 46,310,000
Commissions...................................... 9,599,000 8,495,000 9,142,000
Other expenses................................... 15,179,000 15,882,000 16,480,000
------------ ----------- -----------
Total expenses..................................... 87,644,000 79,982,000 71,932,000
------------ ----------- -----------
Earnings before income taxes....................... 14,803,000 11,592,000 14,926,000
Income taxes....................................... 3,705,000 2,426,000 3,251,000
------------ ----------- -----------
Net earnings....................................... $ 11,098,000 $ 9,166,000 $11,675,000
============ =========== ===========
</TABLE>
AVEMCO INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED SUMMARY BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Assets:
Investments...................................... $125,555,000 $125,399,000 $114,104,000
Cash............................................. 895,000 86,000 460,000
Premiums and other receivables................... 28,723,000 23,113,000 17,488,000
Reinsurance recoverable.......................... 9,503,000 14,292,000 16,903,000
Deferred policy acquisition costs................ 6,071,000 5,511,000 4,922,000
Prepaid reinsurance premiums..................... 5,913,000 5,178,000 4,924,000
Other assets..................................... 183,000 137,000 2,217,000
------------ ------------ ------------
Total assets............................. $176,843,000 $173,716,000 $161,018,000
============ ============ ============
Liabilities and Stockholder's Equity:
Unpaid losses and expenses....................... $ 43,227,000 $ 42,305,000 $ 41,202,000
Unearned premiums................................ 37,201,000 32,363,000 27,001,000
Ceded reinsurance payable........................ 1,549,000 5,045,000 5,503,000
Other liabilities................................ 4,208,000 4,977,000 4,855,000
------------ ------------ ------------
Total liabilities.................................. 86,185,000 84,690,000 78,561,000
Total stockholder's equity......................... 90,658,000 89,026,000 82,457,000
------------ ------------ ------------
Total liabilities and stockholder's
equity................................. $176,843,000 $173,716,000 $161,018,000
============ ============ ============
</TABLE>
F-49
<PAGE> 149
AVEMCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) SUMMARY SUPPLEMENTAL FINANCIAL DATA WITH RESPECT TO INSURANCE
SUBSIDIARY -- (CONTINUED)
Policy acquisition costs amortized for the years ended December 31, 1996,
1995, and 1994, were $16,421,000, $14,722,000, and $15,488,000, respectively,
which includes $2,782,000, $1,982,000, and $1,983,000 of commission expense paid
to affiliates which were eliminated in consolidation.
Net earnings as determined in accordance with statutory accounting
practices for AVEMCO Insurance Company and subsidiaries were $10,439,000,
$8,098,000, and $11,751,000 for the years ended December 31, 1996, 1995, and
1994, respectively. Net earnings as determined in accordance with statutory
accounting practices differ from net earnings as prepared in accordance with
generally accepted accounting principles primarily because of deferred policy
acquisition costs.
AVEMCO Insurance Company sold its National Assurance Underwriters, Inc.,
subsidiary during 1996 while retaining all that subsidiary's insurance business.
The sale generated a $3.3 million realized gain.
AVEMCO Insurance Company and U.S. Specialty Insurance Company settled their
outstanding Proposition 103 matters with the California Department of Insurance
during 1995. The company had previously provided for a potential rollback impact
in prior years. Refund payments were made in 1996.
(12) SUBSEQUENT EVENT
On January 17, 1997, AVEMCO and HCC Insurance Holdings, Inc., ("HCCH")
jointly announced that they had signed a Letter of Intent to merge AVEMCO with a
wholly-owned subsidiary of HCCH in a stock-for-stock transaction, with AVEMCO
becoming a wholly-owned subsidiary of HCCH. On February 28, 1997, AVEMCO and
HCCH jointly announced that the Boards of Directors of AVEMCO and HCCH had
executed an Agreement and Plan of Reorganization (the "Agreement"). Pursuant to
the terms of the Agreement, each share of AVEMCO's common stock will be
exchanged for one share of HCCH's common stock.
The proposed transaction is intended to be accounted for as a pooling of
interests and to be a nontaxable exchange to AVEMCO's shareholders. It is
subject to various conditions, including receipt of required regulatory
approvals and the approval of the transaction by shareholders of both AVEMCO and
HCCH. A special shareholders' meeting is anticipated to be held in the second
quarter of 1997, and a proxy statement describing the transaction in detail is
expected to be submitted to the shareholders shortly. There can be no assurance
that the conditions to the proposed merger will be satisfied or that the
shareholders will approve the transaction.
F-50
<PAGE> 150
AVEMCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(13) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The quarterly results for the three years ended December 31, 1996, are set
forth in the following tables:
<TABLE>
<CAPTION>
EARNINGS (LOSS) EARNINGS
BEFORE NET PER
REVENUES INCOME TAXES EARNINGS SHARE
------------ --------------- ----------- --------
<S> <C> <C> <C> <C>
1996 BY QUARTER
First...................................... $ 28,378,000 $ 3,409,000 $ 2,687,000 $ .31
Second..................................... 33,146,000 6,420,000 4,702,000 .55
Third...................................... 34,391,000 3,059,000 2,419,000 .29
Fourth..................................... 31,975,000 3,074,000 2,480,000 .30
------------ ----------- ----------- -----
Annual........................... $127,890,000 $15,962,000 $12,288,000 $1.45
============ =========== =========== =====
1995 BY QUARTER
First...................................... $ 26,004,000 $ 3,461,000 $ 2,814,000 $ .32
Second..................................... 29,859,000 3,442,000 2,669,000 .30
Third...................................... 29,085,000 (652,000) 74,000 .01
Fourth..................................... 28,256,000 2,851,000 2,361,000 .27
------------ ----------- ----------- -----
Annual........................... $113,204,000 $ 9,102,000 $ 7,918,000 $ .90
============ =========== =========== =====
1994 BY QUARTER
First...................................... $ 22,004,000 $ 2,898,000 $ 2,399,000 $ .26
Second..................................... 29,710,000 5,014,000 3,570,000 .39
Third...................................... 27,369,000 2,603,000 2,287,000 .26
Fourth..................................... 25,507,000 3,024,000 2,577,000 .29
------------ ----------- ----------- -----
Annual................................... $104,590,000 $13,539,000 $10,833,000 $1.20
============ =========== =========== =====
</TABLE>
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APPENDIX A
================================================================================
AGREEMENT AND PLAN OF REORGANIZATION
DATED AS OF
FEBRUARY 28, 1997
BY AND AMONG
HCC INSURANCE HOLDINGS, INC.,
MERGER SUB #4, INC.,
AND
AVEMCO CORPORATION
================================================================================
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
ARTICLE I DEFINITIONS..........................................................
Section 1.1 Definitions.................................................
ARTICLE II THE MERGER..........................................................
Section 2.1 The Closing.................................................
Section 2.2 The Merger..................................................
Section 2.3 Conversion of Shares........................................
Section 2.4 Exchange of Certificates....................................
Section 2.5 Stock Options...............................................
ARTICLE III THE SURVIVING CORPORATION..........................................
Section 3.1 Certificate of Incorporation................................
Section 3.2 Bylaws......................................................
Section 3.3 Directors and Officers......................................
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF AVEMCO............................
Section 4.1 Corporate Existence, Power and Documentation................
Section 4.2 Reciprocal Exchange.........................................
Section 4.3 Corporate Authorization.....................................
Section 4.4 Governmental Authorization..................................
Section 4.5 Non-Contravention...........................................
Section 4.6 Capitalization..............................................
Section 4.7 Subsidiaries and Joint Ventures.............................
Section 4.8 SEC and NYSE Filings........................................
Section 4.9 AVEMCO Financial Statements.................................
Section 4.10 No Undisclosed Liabilities..................................
Section 4.11 SAP Statements..............................................
Section 4.12 Absence of Certain Changes..................................
Section 4.13 Litigation..................................................
Section 4.14 Accounting Matters..........................................
Section 4.15 Taxes.......................................................
Section 4.16 Employee Benefit Plans, ERISA...............................
Section 4.17 Material Agreements.........................................
Section 4.18 Properties and Leases.......................................
Section 4.19 Condition of AVEMCO's Assets................................
Section 4.20 Voting Requirements.........................................
Section 4.21 Suppliers and Customers.....................................
Section 4.22 Employee Matters............................................
Section 4.23 Environmental Matters.......................................
Section 4.24 Compliance With Law; Permits................................
Section 4.25 Interests in Clients, Suppliers, Etc........................
Section 4.26 Transactions With Related Parties...........................
Section 4.27 Statements are True and Correct.............................
Section 4.28 Broker's and Other Fees.....................................
Section 4.29 Trademarks, Tradenames, Etc.................................
Section 4.30 Disclosure..................................................
Section 4.31 Opinion of Financial Advisor................................
Section 4.32 Insurance Issued by AVEMCO Insurer Subsidiaries.............
Section 4.33 Examination Reports.........................................
ARTICLE V REPRESENTATIONS AND WARRANTIES OF HCCH AND
MERGER SUB......................................................
Section 5.1 Corporate Existence, Power and Documentation................
Section 5.2 Corporate Authorization.....................................
Section 5.3 Governmental Authorization..................................
</TABLE>
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Section 5.4 Non-Contravention...........................................
Section 5.5 Capitalization of HCCH......................................
Section 5.6 Organization and Capitalization of Merger Sub...............
Section 5.7 Subsidiaries and Joint Ventures.............................
Section 5.8 SEC and NYSE Filings........................................
Section 5.9 Financial Statements........................................
Section 5.10 No Undisclosed Liabilities..................................
Section 5.11 SAP Statements..............................................
Section 5.12 Absence of Certain Changes..................................
Section 5.13 Litigation..................................................
Section 5.14 Accounting Matters..........................................
Section 5.15 Taxes.......................................................
Section 5.16 Employee Benefit Plans; ERISA...............................
Section 5.17 Material Agreements.........................................
Section 5.18 Properties and Leases.......................................
Section 5.19 Voting Requirements.........................................
Section 5.20 Environmental Matters.......................................
Section 5.21 Statements are True and Correct.............................
Section 5.22 Disclosure..................................................
Section 5.23 Labor Matters...............................................
Section 5.24 Compliance with Laws........................................
Section 5.25 Trademarks, Tradenames, Etc.................................
Section 5.26 Broker's Fees...............................................
Section 5.27 Opinion of Financial Advisor................................
Section 5.28 Insurance Issued by HCCH Insurer Subsidiaries...............
Section 5.29 Examination Reports.........................................
ARTICLE VI PRE-CLOSING COVENANTS...............................................
Section 6.1 Cooperation and Commercially Reasonable Efforts.............
Section 6.2 Registration Statement and Joint Proxy Statement; Special
Meetings....................................................
Section 6.3 Conduct of Business By Both Parties Prior to the Closing
Date........................................................
Section 6.4 Conduct of Business of Merger Sub...........................
Section 6.5 Conduct of Business By AVEMCO Prior to the Closing Date.....
Section 6.6 No Solicitations............................................
Section 6.7 Press Releases..............................................
Section 6.8 Access to Information and Confidentiality...................
Section 6.9 Consultation and Reporting..................................
Section 6.10 Notice and Cure.............................................
Section 6.11 Update Schedules............................................
Section 6.12 Merger Sub Shareholder Approval.............................
Section 6.13 Affiliates' Agreement.......................................
Section 6.14 Necessary Consents..........................................
Section 6.15 Regulatory Approval.........................................
Section 6.16 Actions Contrary to Stated Intent...........................
Section 6.17 Satisfaction of Conditions Precedent........................
Section 6.18 Tax Cooperation.............................................
Section 6.19 Standstill..................................................
Section 6.20 Stock Exchange Listing......................................
Section 6.21 Exercise of Stock Options...................................
ARTICLE VII CLOSING CONDITIONS.................................................
Section 7.1 Conditions to Obligations of HCCH and Merger Sub............
Section 7.2 Conditions to Obligations of AVEMCO.........................
Section 7.3 Conditions Applicable to All Parties........................
ARTICLE VIII POST-CLOSING COVENANTS............................................
Section 8.1 Use of AVEMCO Name..........................................
Section 8.2 Indemnification and Insurance Coverage of Directors and
Officers of the AVEMCO Group................................
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Section 8.3 Publication of Post-Merger Results..........................
Section 8.4 Employee Benefits...........................................
Section 8.5 Stock Offerings.............................................
Section 8.6 Registration Rights.........................................
ARTICLE IX TERMINATION OF AGREEMENT............................................
Section 9.1 Termination.................................................
Section 9.2 Effect of Termination.......................................
ARTICLE X MISCELLANEOUS........................................................
Section 10.1 Further Assurances..........................................
Section 10.2 Fees and Expenses...........................................
Section 10.3 Notices.....................................................
Section 10.4 Governing Law...............................................
Section 10.5 Binding upon Successors and Assigns, Assignment.............
Section 10.6 Severability................................................
Section 10.7 Entire Agreement............................................
Section 10.8 Amendment and Modification..................................
Section 10.9 Extension; Waiver...........................................
Section 10.10 Construction of Agreement...................................
Section 10.11 Counterparts................................................
Section 10.12 Gender and Certain Definitions..............................
Section 10.13 Survival of Representations and Warranties..................
Section 10.14 Effect of Due Diligence.....................................
Schedules to Agreement
AVEMCO Disclosure Schedule
HCCH Disclosure Schedule
Appendices to Agreement
<TABLE>
<S> <C>
Appendix A -- Form of Certificate of Merger
Appendix B -- Form of Affiliates' Agreement
Appendix C -- Form of HCCH Affiliates' Agreement
Appendix D -- Form of Opinion of Piper & Marbury L.L.P.
Appendix E -- Form of Opinion of Thomas H. Chero
Appendix F -- Form of Opinion of Winstead Sechrest & Minick P.C.
</TABLE>
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AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is entered
into as of the 28th day of February, 1997 by and among HCC Insurance Holdings,
Inc., a Delaware corporation ("HCCH"), Merger Sub #4, Inc., a Delaware
corporation and a wholly owned subsidiary of HCCH ("Merger Sub"), and AVEMCO
Corporation ("AVEMCO"), a Delaware corporation.
RECITALS:
A. The Boards of Directors of each of HCCH, Merger Sub and AVEMCO deem it
desirable to merge Merger Sub into AVEMCO (the "Merger") with the result that
AVEMCO shall become a wholly owned subsidiary of HCCH pursuant to the terms and
conditions hereof and have approved the Merger in accordance with the General
Corporation Law of the State of Delaware, as amended (the "DGCL").
B. It is the parties' mutual intent that the Merger constitute a
reorganization under Section 368 of the Internal Revenue Code of 1986, as
amended (the "Code") and that this Agreement constitute a plan of reorganization
thereunder.
C. For accounting purposes, the Merger shall be accounted for as a
pooling-of-interests.
NOW, THEREFORE, in consideration of the foregoing and the mutual
representations, warranties, covenants and agreements set forth herein, and
intending to be legally bound hereby, the parties hereto do hereby agree as
follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 DEFINITIONS. As used in this Agreement, the following terms
when capitalized have the meanings indicated, except as otherwise provided
herein:
"Affiliate" shall have the meaning ascribed by Rule 12b-2 promulgated under
the Exchange Act.
"Agreement" shall mean this Agreement and Plan of Reorganization, including
the Schedules and Appendices hereto, all as amended or otherwise modified from
time-to-time.
"AVEMCO Audited Financial Statements" shall mean the audited consolidated
balance sheets and related statements of income, stockholders' equity and cash
flows, and the related notes thereto of AVEMCO as of and for the years ended
December 31, 1993, 1994 and 1995.
"AVEMCO Common Stock" means the shares of AVEMCO common stock, $.10 par
value per share.
"AVEMCO Financial Statements" shall mean the AVEMCO Audited Financial
Statements and the AVEMCO Interim Financial Statements, if any, collectively.
"AVEMCO Group" shall mean AVEMCO and any entity in which AVEMCO directly or
indirectly owns at least 20% of its equity interest.
"AVEMCO Incentive Stock Options" shall mean any and all outstanding
qualified options granted to employees, officers and directors under the AVEMCO
Incentive Stock Option Plan.
"AVEMCO Insurer Subsidiaries" shall mean AVEMCO Insurance Company, U.S.
Specialty Insurance Company and National Insurance Underwriters and any other
Insurer Subsidiary of the AVEMCO Group.
"AVEMCO Interim Financial Statement" shall mean the unaudited balance sheet
and the related unaudited statements of income and cash flows of AVEMCO as of
and for the nine-month period ended September 30, 1996.
"AVEMCO Latest Balance Sheet" shall mean the most current balance sheet of
AVEMCO included in the AVEMCO Financial Statements.
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"AVEMCO Nonstatutory Stock Options" shall mean any and all outstanding
non-qualified options granted to employees, officers, directors and others under
the AVEMCO Stock Option Plans.
"AVEMCO Stock Options" shall mean the AVEMCO Nonstatutory Stock Options and
the AVEMCO Incentive Stock Options.
"AVEMCO Stock Option Plans" shall mean collectively AVEMCO's Nonstatutory
Stock Option Plan adopted in 1990, AVEMCO's Incentive Stock Option Plan, which
expired in December 1992 with respect to new grants, and any other AVEMCO stock
option plan.
"Average Market Price" shall mean the average of the daily closing prices
of a share of HCCH Common Stock or AVEMCO Common Stock, as the case may be, on
the NYSE as reported in The Wall Street Journal for any ten consecutive trading
days (with respect to the right of termination described in Section 7.2(h)).
"Benefit Arrangement" means any employment, severance or similar contract,
or any other contract, plan, policy or arrangement (whether or not written)
providing for compensation, bonus, profit-sharing, stock option or other stock
related rights or other forms of incentive or deferred compensation, vacation
benefits, insurance coverage (including any self-insured arrangement), health or
medical benefits, Code Section cafeteria plan benefits, disability benefits,
severance benefits and post-employment or retirement benefits (including
compensation, pension, health, medical or life insurance benefits), other than
the Employee Plans.
"Business Day" shall mean a day other than a Saturday, a Sunday or a day on
which national banks or the NYSE is closed.
"Closing Date" shall have the meaning ascribed to it in Section 2.1(a).
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"DGCL" shall mean the General Corporation Law of the State of Delaware, as
amended.
"Effective Date" shall have the meaning ascribed to it in Section 2.1(b)
hereof.
"Effective Time" shall have the meaning ascribed to it in Section 2.1(b)
hereof.
"Employee Plan" means a plan or arrangement as defined in Section 3(3) of
ERISA, that (A) is subject to any provision of ERISA, (B) is maintained,
administered or contributed to by any member of the AVEMCO Group or HCCH ERISA
Affiliate, as the case may be, and (C) covers any employee or former employee of
any such member.
"Environmental Laws" shall have the meaning ascribed to it in Section 4.23
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended, and the rules and regulations promulgated thereunder.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended
and the rules and regulations promulgated thereunder.
"Exchange Ratio" shall mean one-to-one (i.e., one share of HCCH Common
Stock for each share of AVEMCO Common Stock).
"HCCH Audited Financial Statements" shall mean the audited balance sheets,
and the related statements of earnings, stockholders' equity and cash flows, and
the related notes thereto of HCCH as of and for the years ended December 31,
1993, 1994 and 1995.
"HCCH Balance Sheet" shall mean the most current balance sheet of HCCH
included in the HCCH Financial Statements.
"HCCH Common Stock" shall mean shares of the common stock of HCCH, $1.00
par value per share.
"HCCH ERISA Affiliate" shall mean HCCH and any person treated, together
with HCCH, as a single employer under Sections 414(b), (c), (m) or (o) of the
Code or Section 4001(b) of ERISA.
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"HCCH Financial Statements" shall mean the HCCH Audited Financial
Statements and the HCCH Interim Financial Statements, if any, collectively.
"HCCH Group" shall mean HCCH, Merger Sub and any entity in which HCCH
directly or indirectly owns at least 20% of its equity interest.
"HCCH Insurer Subsidiaries" shall mean Houston Casualty Company, Trafalgar
Insurance Company, IMG Insurance Company Ltd., Houston Reinsurance Company Ltd.
and any other Insurer Subsidiary of the HCCH Group.
"HCCH Interim Financial Statements" shall mean the unaudited balance sheet,
and the related unaudited statements of earnings and cash flows of HCCH as of
and for the nine-month period ended September 30, 1996.
"HCCH Stock Option Plans" shall mean HCCH's 1992 Incentive Stock Option
Plan, HCCH's 1995 Flexible Incentive Plan, HCCH's 1994 and 1996 Non-Employee
Director Stock Option Plans, and any other HCCH stock option plan.
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
"HSR Report" shall mean the premerger notification and report form to be
filed under the HSR Act.
"Insurer Subsidiary" shall mean any subsidiary organized as a domestic
insurer under the laws of the state or other jurisdiction of the United States.
"IRS" shall mean the Internal Revenue Service.
"Joint Proxy Statement" shall mean the proxy statement of AVEMCO to be
included in the Registration Statement for the purpose of obtaining approval by
the shareholders of AVEMCO of this Agreement and the proxy statement/prospectus
of HCCH to be included in the Registration Statement for the purposes of
obtaining approval by the shareholders of HCCH of this Agreement and offering
the HCCH Common Stock to the AVEMCO shareholders upon consummation of the
Merger.
"Liens" shall mean pledges, liens, defects, leases, licenses, equities,
conditional sales contracts, charges, claims, encumbrances, security interests,
easements, restrictions, chattel mortgages, mortgages or deeds of trust, of any
kind or nature whatsoever.
"Material Adverse Effect" shall mean a quantifiable loss, cost or expense
to or impact on the financial condition, results of operations, business or
prospects of, with respect to the HCCH Group, at least $14,000,000 and, with
respect to the AVEMCO Group, at least $4,000,000; provided, however, that a
general economic decline or a decline experienced by the United States insurance
industry generally (excluding catastrophic losses resulting from natural
disasters) shall not constitute a Material Adverse Effect; and provided further
that those acts, events or occurrences the effects or reasonably likely effects
of which are not susceptible to being measured or reduced to a quantifiable
loss, cost or expense, but which can nonetheless be demonstrated to have had or
be reasonably likely to have a material negative impact on or to have caused or
be reasonably likely to cause a material deterioration of the financial
condition, results of operations, business or prospects of the party and its
subsidiaries taken as a whole may nevertheless constitute a Material Adverse
Effect with respect to such party and the absence of a quantifiable loss, cost
or expense shall not preclude HCCH or AVEMCO from asserting that such acts or
events or occurrences, individually or in the aggregate, have caused or resulted
in or are reasonably likely to cause or result in such a Material Adverse
Effect.
"Multiemployer Plan" means a plan or arrangement as defined in Section
4001(a)(3) and 3(37) of ERISA.
"NYSE" means the New York Stock Exchange.
"Permitted Liens" shall mean any mechanic's, worker's, materialmen's,
operator's, or other liens arising as a matter of law in the ordinary course of
business.
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"Person" shall mean an individual, firm, corporation, general or limited
partnership, limited liability company, limited liability partnership, joint
venture, trust, governmental authority or body, association, unincorporated
organization or other entity.
"Pre-Closing Periods" shall mean all Tax periods ending at or before the
Effective Time and, with respect to any Tax period that includes but does not
end at the Effective Time, the portion of such period that ends at and includes
the Effective Time.
"Registration Statement" shall mean the registration statement on Form S-4
to be filed by HCCH with the SEC for the purpose, among other things, of
registering the HCCH Common Stock which will be issued to the holders of AVEMCO
Common Stock upon consummation of the Merger.
"Returns" shall mean all returns, reports, estimates, declarations and
statements of any nature regarding Taxes for any Pre-Closing Period required to
be filed by the taxpayer relating to its income, properties or operations.
"SAP" shall mean the accounting practices required or permitted by the
National Association of Insurance Commissioners and the insurance regulatory
authority in the state in which each Insurer Subsidiary is domiciled, as the
case may be, consistently applied throughout the specified period and in the
immediately prior comparable period.
"SAP Statements" shall mean any annual statements, quarterly statements and
other financial statements and presentations of any Insurer Subsidiary prepared
in accordance with SAP and filed with or submitted to the insurance regulatory
authority in the state in which such Insurer Subsidiary is domiciled on forms
prescribed or permitted by such authority.
"SEC" shall mean the Securities and Exchange Commission.
"SEC Documents" shall mean all reports, schedules, forms, statements and
other documents filed with the SEC since January 1, 1994.
"Securities Act" shall mean the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"Special Meeting" shall have the meaning ascribed in Section 6.2 hereof.
"Surviving Corporation" shall mean AVEMCO following the Effective Time.
"Taxes" shall mean any federal, state, local, foreign or other taxes
(including, without limitation, income, alternative minimum, franchise,
property, sales, use, lease, excise, premium, payroll, wage, employment or
withholding taxes), fees, duties, assessments, withholdings or governmental
charges of any kind whatsoever (including interest, penalties and additions to
tax).
"Title IV Plan" means an Employee Plan, other than any Multiemployer Plan,
subject to Title IV of ERISA.
ARTICLE II
THE MERGER
SECTION 2.1 THE CLOSING. (a) The closing of the transactions contemplated
herein (the "Closing") will take place, assuming satisfaction or waiver of each
of the conditions set forth in Article VII hereof, at the offices of Winstead
Sechrest & Minick P.C., 910 Travis, Suite 1700, Houston, Texas at 9:00 A.M.
(Houston time) on a date (the "Closing Date") to be mutually agreed upon between
the parties, or if no date has been agreed to, on the fifth business day after
the last to occur of the conditions set forth in Article VII hereof (other than
the delivery of officer's certificates or closing opinions). At the option of
the parties, documents to be delivered at Closing may be delivered by facsimile
transmission, and the delivery of the original documents shall be made on the
first business day following the Closing Date.
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(b) At the Closing, the parties shall (i) deliver the documents,
certificates and opinions required to be delivered by Article VII hereof, (ii)
provide proof or indication of the satisfaction or waiver of each of the
conditions set forth in Article VII hereof, (iii) cause the appropriate officers
of AVEMCO and Merger Sub to execute and deliver the Certificate of Merger (in
substantially the form attached as Appendix "A," the "Certificate of Merger")
and (iv) consummate the Merger by causing to be filed the properly executed
Certificate of Merger with the Secretary of State of the State of Delaware in
accordance with the provisions of the DGCL. The Merger shall be effective upon
the filing of the Certificate of Merger with the Secretary of State of Delaware
(such date and time being hereinafter referred to respectively as the "Effective
Date" and the "Effective Time").
SECTION 2.2 THE MERGER. Subject to the terms and conditions of this
Agreement, Merger Sub shall be merged with and into AVEMCO at the Effective
Time. Following the Merger, the separate corporate existence of Merger Sub shall
cease and AVEMCO shall be the Surviving Corporation and shall succeed to and
assume all the rights and obligations of Merger Sub in accordance with the DGCL.
The Merger shall have the effects set forth in Section 259 of the DGCL.
SECTION 2.3 CONVERSION OF SHARES. (a) At the Effective Time, by virtue of
the Merger and without any further action on the part of HCCH, Merger Sub,
AVEMCO or the Surviving Corporation, or any holder of any of the following
securities:
(i) each share of common stock of Merger Sub issued and outstanding at
the Effective Time shall be converted into one share of the common
stock, $.10 par value per share, of the Surviving Corporation;
(ii) each issued share of AVEMCO Common Stock that is held in treasury by
AVEMCO or held by any subsidiary of AVEMCO shall be cancelled and no
stock of HCCH or other consideration shall be delivered in exchange
therefor;
(iii) each share of AVEMCO Common Stock issued and outstanding at the
Effective Time shall be converted into the right to receive the
Exchange Ratio of a fully paid and nonassessable share of HCCH Common
Stock;
As used herein, the "Merger Consideration" shall mean the rights of holders
of AVEMCO Common Stock to receive HCCH Common Stock, or, in certain
circumstances as set forth in Section 2.4 hereof, cash.
(b) Upon conversion of the shares of AVEMCO Common Stock into the Merger
Consideration in the manner described in Section 2.3(a)(iii) above, each record
holder of issued and outstanding AVEMCO Common Stock immediately prior to the
Effective Time shall have the right to receive a certificate representing such
number of shares of HCCH Common Stock (rounded down to the nearest whole share)
equal to the product of (A) the Exchange Ratio, and (B) the number of issued and
outstanding shares of AVEMCO Common Stock of which such Person is the record
holder immediately prior to the Effective Time.
SECTION 2.4 EXCHANGE OF CERTIFICATES. (a) As of the Effective Date, HCCH
shall deposit with KeyCorp Shareholder Services, Inc., or such company as may be
designated by HCCH and reasonably acceptable to AVEMCO (the "Exchange Agent"),
for the benefit of the holders of shares of AVEMCO Common Stock, for exchange in
accordance with this Article II, through the Exchange Agent, certificates
representing the shares of HCCH Common Stock (such shares of HCCH Common Stock
being hereinafter referred to as the "Exchange Fund") issuable pursuant to
Section 2.3 in exchange for outstanding shares of AVEMCO Common Stock. Except as
contemplated by Section 2.3, the Exchange Fund shall not be used for any other
purpose. HCCH agrees to make available to the Exchange Agent, from time-to-time
as needed, cash sufficient to pay cash in lieu of fractional shares.
(b) As soon as reasonably practicable after the Effective Time, HCCH shall
cause the Exchange Agent to mail to each holder of record of a certificate or
certificates which immediately prior to the Effective Time represented
outstanding shares of AVEMCO Common Stock (the "Certificates") whose shares were
converted into the right to receive shares of HCCH Common Stock pursuant to
Section 2.3, (i) a letter of
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transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent, and which shall be in such form and have
such other provisions as HCCH may reasonably specify) and (ii) instructions for
use in effecting the surrender of the Certificates in exchange for certificates
representing shares of HCCH Common Stock. Upon surrender of a Certificate for
cancellation to the Exchange Agent, together with such letter of transmittal,
duly executed, and such other documents as may reasonably be required by the
Exchange Agent, the holder of such Certificate shall be entitled to promptly
receive in exchange therefor a certificate representing that number of shares of
HCCH Common Stock (rounded down to the nearest whole share) which such holder
has the right to receive pursuant to the provisions of this Article II after
taking into account all the shares of AVEMCO Common Stock then held by such
holder under all such Certificates so surrendered and/or cash in lieu of
fractional shares of HCCH Common Stock to which such holder is entitled pursuant
to Section 2.3, and the Certificate so surrendered shall forthwith be canceled.
In the event of a transfer of ownership of AVEMCO Common Stock which is not
registered in the transfer records of AVEMCO, a certificate representing the
proper number of shares of HCCH Common Stock may be issued to a person other
than the person in whose name the Certificate so surrendered is registered, if,
upon presentation to the Exchange Agent, such Certificate shall be properly
endorsed or otherwise be in proper form for transfer and the person requesting
such transfer shall pay any transfer or other taxes required by reason of the
issuance of shares of HCCH Common Stock to a person other than the registered
holder of such Certificate or establish to the reasonable satisfaction of HCCH
that such tax has been paid or is not applicable. Until surrendered as
contemplated by this Section 2.4(b), each Certificate shall be deemed at any
time after the Effective Time to represent only the right to receive upon such
surrender the certificate representing shares of HCCH Common Stock and cash in
lieu of any fractional shares of HCCH Common Stock as contemplated by this
Section 2.4. No interest will be paid or will accrue on any cash payable
pursuant to this Article II.
(c) No dividends or other distributions with respect to HCCH Common Stock
with a record date after the Effective Time shall be paid to the holder of any
unsurrendered Certificate with respect to the shares of HCCH Common Stock
represented thereby and no cash payment in lieu of fractional shares shall be
paid to any such holder pursuant to Section 2.4(e) until the holder of record of
such Certificate shall surrender such Certificate. Following surrender of any
such Certificate, there shall be paid to the record holder of the certificate
representing whole shares of HCCH Common Stock issued in exchange therefor,
without interest, (i) at the time of such surrender, the amount of any cash
payable in lieu of a fractional share of HCCH Common Stock to which such holder
is entitled pursuant to Section 2.4(e) and the amount of dividends or other
distributions with a record date after the Effective Time theretofore paid with
respect to such whole shares of HCCH Common Stock, and (ii) at the appropriate
payment date, the amount of dividends or other distributions with a record date
after the Effective Time but prior to such surrender and a payment date
subsequent to such surrender payable with respect to such whole shares of HCCH
Common Stock.
(d) All shares of HCCH Common Stock issued upon the surrender for exchange
of shares of AVEMCO Common Stock in accordance with the terms hereof (including
any cash paid pursuant to Section 2.4(c) or 2.4(e)) shall be deemed to have been
issued in full satisfaction of all rights pertaining to such shares of AVEMCO
Common Stock, and there shall be no further registration of transfers on the
stock transfer books of the Surviving Corporation of the shares of AVEMCO Common
Stock which were outstanding immediately prior to the Effective Time. If, after
the Effective Time, Certificates are presented to the Surviving Corporation or
the Exchange Agent for any reason, they shall be canceled and exchanged as
provided in this Article II.
(e) (i) No certificates or scrip representing fractional shares of HCCH
Common Stock shall be issued upon the surrender for exchange of Certificates,
and such fractional share interests will not entitle the owner thereof to vote
or to any rights of a shareholder of HCCH.
(ii) In lieu of the issuance of fractional shares of HCCH Common Stock,
each holder of record of issued and outstanding shares of AVEMCO Common Stock,
as of the Effective Time shall be entitled to receive a cash payment (without
interest) (each a "Fractional Payment" and, collectively, the "Fractional
Payments") equal to the fair market value of the fractional share of HCCH Common
Stock to which such holder would be entitled but for this provision. For
purposes of calculating such cash payment, the fair market
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value of a fraction of a share of HCCH Common Stock shall be such fraction
multiplied by the Average Market Price.
(f) Any portion of the Exchange Fund which remains undistributed to the
holders of the Certificates for six (6) months after the Effective Time shall be
delivered to HCCH, upon demand, and any holders of the Certificates who have not
theretofore complied with this Article II shall thereafter look only to HCCH for
payment of their claim for HCCH Common Stock, any cash in lieu of fractional
shares of HCCH Common Stock, and any dividends or distributions with respect to
HCCH Common Stock.
(g) None of HCCH, Merger Sub, AVEMCO or the Exchange Agent shall be liable
to any person in respect of any shares of HCCH Common Stock (or dividends or
distributions with respect thereto) or cash that the Exchange Agent delivered to
a public official pursuant to any applicable abandoned property, escheat or
similar law.
(h) If any Certificate shall have been lost, stolen or destroyed, upon the
making of an affidavit of that fact by the person claiming such Certificate to
be lost, stolen or destroyed and, if required by the Surviving Corporation or
HCCH, the posting by such person of a bond in such reasonable amount as the
Surviving Corporation or HCCH may direct as indemnity against any claim that may
be made against it with respect to such Certificate, the Exchange Agent will
issue in exchange for such lost, stolen or destroyed Certificate the shares of
HCCH Common Stock and any cash in lieu of fractional shares, and unpaid
dividends and distributions on shares of HCCH Common Stock deliverable in
respect thereof, pursuant to this Agreement.
SECTION 2.5 STOCK OPTIONS. (a) As soon as practicable following the date
of this Agreement, the Board of Directors of AVEMCO (or, if appropriate, any
committee administering the AVEMCO Stock Option Plans) shall adopt such
resolutions or take such other actions as may be required to effect the
following with respect to all options to purchase shares of AVEMCO Common Stock
granted under the AVEMCO Stock Option Plans or otherwise ("Options") not
exercised prior to the Closing Date:
(i) adjust the terms of all such Options to purchase shares of AVEMCO
Common Stock to provide that, at the Effective Time, each Option
outstanding immediately prior to the Effective Time shall be deemed to
constitute an option to acquire, on substantially the same terms and
conditions, as were applicable to such Option under the terms of such
Option and the applicable AVEMCO Stock Option Plans, the same number of
shares of HCCH Common Stock (rounded down to the nearest whole share) as
the holder of such Option would have been entitled to receive pursuant to
the Merger had such holder exercised such Option in full immediately prior
to the Effective Time, at a price per share equal to (y) the aggregate
exercise price for the shares of AVEMCO Common Stock otherwise purchasable
pursuant to such Option divided by (z) the number of shares of HCCH Common
Stock deemed purchasable pursuant to such Option; provided, however, that
(i) no certificate or scrip representing fractional shares of HCCH Common
Stock shall be issued in respect of any Option as adjusted pursuant to this
Section 2.5 and (ii) any such fractional share will not entitle the owner
thereof to vote or to any rights of a shareholder of HCCH; provided,
further, that in the case of any option to which Section 421 of the Code
applies by reason of its qualification under any of Section 422 of the Code
("qualified stock options"), the option price, the number of shares
purchasable pursuant to such option and the terms and conditions of
exercise of such option shall be determined in order to comply with Section
424(a) of the Code; and
(ii) make such other changes to the AVEMCO Stock Option Plans as it
deems appropriate to give effect to the Merger (subject to the approval of
HCCH, which shall not be unreasonably withheld).
(b) Any provisions in the AVEMCO Stock Option Plans providing for the
issuance, transfer or grant of any capital stock of AVEMCO or any interest in
respect of any capital stock of AVEMCO shall be deleted as of the Effective
Time, and AVEMCO shall use commercially reasonable efforts to ensure that
following the Effective Time no holder of an Option or any participant in any
AVEMCO Stock Option Plan shall have any right thereunder to acquire any capital
stock of AVEMCO, HCCH or the Surviving Corporation, except as contemplated in
this Section 2.5.
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(c) As soon as practicable after the Effective Time, HCCH shall deliver to
the holders of Options appropriate notices setting forth such holder's rights
pursuant to the respective AVEMCO Stock Option Plans and the agreements
evidencing the grants of such Options shall continue in effect on substantially
the same terms and conditions (subject to the adjustments required by this
Section 2.5 after giving effect to the Merger). Except as otherwise provided in
this Section 2.5, HCCH shall comply with the terms of the AVEMCO Stock Option
Plans and ensure, to the extent required by, and subject to the provisions of
such AVEMCO Stock Option Plans, that the Options which qualified as incentive
stock options prior to the Effective Time continue to qualify as incentive stock
options after the Effective Time.
(d) HCCH agrees to use commercially reasonable efforts to take such actions
as are necessary for the conversion of the Options in accordance with this
Section 2.5, including:
(i) the reservation, issuance and listing of HCCH Common Stock as is
necessary to effectuate the transactions contemplated by Section 2.5;
(ii) entering into such agreements as are necessary to assume such
Options; and
(iii) the filing of a registration statement or statements pursuant to
Section 8.6 hereof, to facilitate the public sale of stock issuable upon
the exercise of such Options.
(e) A holder of an Option adjusted in accordance with this Section 2.5 may
exercise such adjusted Option in whole or in part in accordance with its terms
by delivering a properly executed notice of exercise to HCCH, together with the
consideration therefor and the federal withholding tax amount, if any, required
in accordance with the related AVEMCO Stock Option Plans.
ARTICLE III
THE SURVIVING CORPORATION
SECTION 3.1 CERTIFICATE OF INCORPORATION. At the Effective Time, the
Certificate of Incorporation of Merger Sub as in effect immediately prior to the
Effective Time shall be the Certificate of Incorporation of the Surviving
Corporation until thereafter changed or amended as provided therein or by the
DGCL.
SECTION 3.2 BYLAWS. At the Effective Time, the Bylaws of Merger Sub as in
effect immediately prior to the Effective Time shall be the Bylaws of the
Surviving Corporation until thereafter changed or amended as provided therein or
by the DGCL.
SECTION 3.3 DIRECTORS AND OFFICERS. From and after the Effective Time,
until successors are duly elected or appointed and qualified in accordance with
applicable law, the directors and officers of Merger Sub at the Effective Time
shall become directors and the officers of the Surviving Corporation. Nothing in
this Section 3.3 shall be construed to terminate or otherwise affect the status
of any such officer or director as an employee of the Surviving Corporation.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF AVEMCO
Except as disclosed in the disclosure schedule heretofore delivered by
AVEMCO to HCCH which makes reference to this Agreement or in a document, exhibit
or appendix filed with the SEC which has been filed on or before the date hereof
and which has been delivered to HCCH on or before the date hereof (collectively
referred to herein as the "AVEMCO Disclosure Schedule"), AVEMCO represents and
warrants to HCCH as set forth below (it being agreed that the disclosure on the
AVEMCO Disclosure Schedule of the existence of any document or fact or
circumstance or situation relating to any representations, warranties, covenants
or agreements in any section of this Agreement shall be automatically deemed to
be disclosure of such document
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or fact or circumstance or situation for purposes of all other representations,
warranties, covenants and agreements in this Agreement):
SECTION 4.1 CORPORATE EXISTENCE, POWER AND DOCUMENTATION. Each member of
the AVEMCO Group is a corporation duly organized, validly existing and in good
standing under the laws of the state or jurisdiction of its incorporation, and
has all corporate powers and all material governmental licenses, authorizations,
consents and approvals (collectively, "Governmental Authorizations") required to
carry on its business as now conducted, except such Governmental Authorizations
the failure of which to have obtained would not have a Material Adverse Effect
on AVEMCO. Each member of the AVEMCO Group is duly qualified to do business as a
foreign corporation and is in good standing in each jurisdiction where the
character of the property owned or leased by it or the nature of its activities
makes such qualification necessary, except where the failure to be so qualified
would not have a Material Adverse Effect on AVEMCO. AVEMCO has delivered to HCCH
true and complete copies of the Certificate of Incorporation or Articles of
Incorporation, as the case may be, and Bylaws as currently in effect of AVEMCO
and each other member of the AVEMCO Group. The minute books of each member of
the AVEMCO Group contain, in all material respects, complete and accurate
records of all corporate actions of the equity owners of the various entities
and of the boards of directors or other governing bodies thereof, including
committees of such boards or governing bodies. To the knowledge of AVEMCO, the
stock transfer records of AVEMCO are maintained by its transfer agent and
registrar and contain complete and accurate records of all issuances and
redemptions of stock by AVEMCO. Except for outstanding AVEMCO Stock Options,
neither AVEMCO nor any of its Affiliates' is a party to any agreement with
respect to the capital stock of AVEMCO other than this Agreement.
SECTION 4.2 RECIPROCAL EXCHANGE. Specialty Insurance Underwriters, Inc., a
subsidiary of AVEMCO and a Missouri corporation, is the duly authorized
attorney-in-fact of National Insurance Underwriters, a reciprocal insurance
exchange organized under the laws of the State of Missouri. National Insurance
Underwriters is under the control of the AVEMCO Group, but is not owned by the
AVEMCO Group.
SECTION 4.3 CORPORATE AUTHORIZATION. Subject to obtaining approval of the
holders of not less than a majority of the outstanding AVEMCO Common Stock with
respect to the Merger, AVEMCO has the requisite corporate power and authority to
enter into this Agreement and the documents contemplated hereby and to
consummate the transactions described herein and therein. The execution and
delivery by AVEMCO of this Agreement and the documents contemplated hereby and
the consummation by AVEMCO of the transactions described herein and therein have
been duly authorized by all necessary corporate action on the part of AVEMCO,
except for the affirmative vote of the holders of not less than a majority of
the outstanding AVEMCO Common Stock with respect to the Merger. This Agreement
and the documents contemplated hereby have been duly executed and delivered by
AVEMCO and constitute, or upon execution and delivery will constitute, valid and
binding obligations of AVEMCO, enforceable in accordance with their respective
terms, except as such enforcement may be limited by bankruptcy, insolvency or
other similar laws affecting the enforcement of creditors' rights generally or
by general principles of equity and except that the Merger may not be effected
without the affirmative vote of the holders of not less than a majority of the
outstanding AVEMCO Common Stock.
SECTION 4.4 GOVERNMENTAL AUTHORIZATION. The execution, delivery and
performance by AVEMCO of this Agreement and the documents contemplated hereby
and the consummation of the Merger by AVEMCO require no action by or in respect
of, or filing with, any governmental body, agency, official or authority other
than:
(a) the filing of a Certificate of Merger in accordance with the DGCL;
(b) compliance with any applicable requirements of the HSR Act;
(c) compliance with any applicable requirements of the Exchange Act;
(d) compliance with any applicable foreign or state securities or
"blue sky" laws and the rules and regulations of The NYSE;
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(e) compliance with any applicable requirements of the Missouri,
California and Maryland or other insurance regulatory agency having
authority over any member of the AVEMCO Group or the transactions described
herein;
(f) such other filings or registrations with, or authorizations,
consents or approvals of, governmental bodies, agencies, officials or
authorities, the failure of which to make or obtain (i) would not have a
Material Adverse Effect on AVEMCO or the Surviving Corporation or (ii)
would not materially adversely affect the ability of AVEMCO, HCCH or Merger
Sub to consummate the transactions contemplated hereby and operate their
businesses as heretofore operated.
SECTION 4.5 NON-CONTRAVENTION. The execution, delivery and performance by
AVEMCO of this Agreement and the documents contemplated hereby and the
consummation by AVEMCO of the transactions contemplated hereby and thereby do
not and will not:
(a) contravene or conflict with the certificate or articles of
incorporation or Bylaws of any member of the AVEMCO Group;
(b) assuming compliance with the matters referred to in Section 4.4
and assuming the requisite approval by the holders of AVEMCO Common Stock
of the Merger and effectiveness of the Registration Statement, contravene
or conflict with or constitute a violation of any provision of any law,
regulation, judgment, injunction, order or decree binding upon or
applicable to any member of the AVEMCO Group;
(c) conflict with or result in a breach or violation of, or constitute
a default under, or result in a contractual right to cause the termination
or cancellation of or loss of a material benefit under, or right to
accelerate, any material agreement, contract or other instrument binding
upon any member of the AVEMCO Group or any material license, franchise,
permit or other similar authorization held by any member of the AVEMCO
Group; or
(d) result in the creation or imposition of any Lien on any material
asset of any member of the AVEMCO Group.
except with respect to clauses (b), (c) and (d) above, for contraventions,
defaults, losses, Liens and other matters referred to in such clauses, that in
the aggregate would not reasonably be expected to have a Material Adverse Effect
on AVEMCO.
SECTION 4.6 CAPITALIZATION. The authorized, issued and outstanding capital
stock of each member of the AVEMCO Group as of December 31, 1996 is set forth in
the AVEMCO Disclosure Schedule. All outstanding shares of each member of the
AVEMCO Group have been duly authorized and validly issued and are fully paid and
nonassessable and free from any preemptive rights. Except for changes since
December 31, 1996 resulting from the exercise of employee and director stock
options and stock repurchases by AVEMCO, with respect to AVEMCO and each member
of the AVEMCO Group, there are outstanding (i) no shares of capital stock or
other voting securities, (ii) no securities convertible into or exchangeable for
shares of its capital stock or voting securities, (iii) no options or other
rights to acquire, and no obligation to issue, any capital stock, voting
securities or securities convertible into or exchangeable for its capital stock
or other voting securities, (iv) no obligations to repurchase, redeem or
otherwise acquire any of its outstanding securities and (v) no contractual
rights of any person or entity to include any such securities in any
registration statement proposed to be filed under the Securities Act.
SECTION 4.7 SUBSIDIARIES AND JOINT VENTURES.
(a) For purposes of this Agreement, (i) "Subsidiary" means, with respect to
any entity, any corporation of which securities or other ownership interests
having ordinary voting power to elect a majority of the board of directors or
other persons performing similar functions are directly or indirectly owned by
such entity, and (ii) "Joint Venture" means, with respect to any entity, any
corporation or organization (other than such entity and any Subsidiary thereof)
of which such entity or any Subsidiary thereof is, directly or indirectly, the
beneficial owner of 20% or more of any class of equity securities or equivalent
profit participation interests.
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(b) The only Subsidiaries of AVEMCO are the members, other than AVEMCO, of
the AVEMCO Group, and their respective jurisdictions of incorporation or
organization and the ownership interest of AVEMCO or a Subsidiary of AVEMCO
therein are identified in the schedules and filings that comprise the AVEMCO
Disclosure Schedule. Other than such investments and investments in AVEMCO's
investment portfolio reflected in the AVEMCO Latest Balance Sheet or arising
thereafter in the ordinary course of business, neither AVEMCO nor any other
member of the AVEMCO Group owns, directly or indirectly, any outstanding capital
stock or equity interest in any corporation, partnership, Joint Venture, other
Person or other entity.
(c) All of the outstanding capital stock of, or other ownership interests
in, each Subsidiary that is or may be owned, directly or indirectly, by a member
of the AVEMCO Group on the Effective Date and all of the outstanding stock of
each member of the AVEMCO Group other than AVEMCO is owned, directly or
indirectly by AVEMCO, free and clear of any material Lien and free of any other
material limitation or restriction on its rights as owner thereof (including any
restriction on the right to vote, sell or otherwise dispose of such capital
stock or other ownership interests), other than those imposed by applicable law
or this Agreement.
SECTION 4.8 SEC AND NYSE FILINGS.
(a) AVEMCO has since January 1, 1991 filed all forms, proxy statements,
schedules, reports and other documents required to be filed by it with the SEC
pursuant to the Exchange Act and with the NYSE pursuant to its rules and
regulations.
(b) AVEMCO has delivered, and will promptly deliver in the case of any of
the following (collectively the "AVEMCO SEC Documents") filed with the SEC on or
after the date hereof and prior to the Effective Date, to HCCH:
(i) its annual reports on Form 10-K for its fiscal years ended
December 31, 1995 and 1994;
(ii) its quarterly reports on Form 10-Q for its fiscal quarters ending
March 31, June 30, and September 30, 1996;
(iii) any current reports on Form 8-K since January 1, 1995 and its
proxy or information statements relating to meetings of, or actions taken
without a meeting by, the shareholders of AVEMCO held since January 1,
1996; and
(iv) all of its other reports, statements, schedules and registration
statements filed with the SEC since December 31, 1995. No other member of
the AVEMCO Group is required to file any forms, reports or other documents
with the SEC.
(c) As of its filing date, no such report or statement filed pursuant to
the Exchange Act contained any untrue statement of a material fact or omitted to
state any material fact necessary in order to make the statements made therein,
in the light of the circumstances under which they were made, not misleading.
(d) No registration statement, or amendment thereto, filed pursuant to the
Securities Act, if declared effective by the SEC, as of the date such statement
or amendment became effective or on the date such statement or amendment was
supplemented, contained any untrue statement of a material fact or omitted to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading.
SECTION 4.9 AVEMCO FINANCIAL STATEMENTS. The AVEMCO Financial Statements
included in the AVEMCO SEC Documents have been prepared in accordance with
United States generally accepted accounting principles applied on a basis
consistent with prior periods (except as may be indicated in the notes thereto),
and present fairly the consolidated financial position of AVEMCO and its
consolidated subsidiaries and the consolidated results of operations and cash
flows for the periods then ended (subject to normal year-end adjustments in the
case of any interim financial statements). To the knowledge of AVEMCO, the
statements of income included in the AVEMCO Financial Statements do not contain
any income or revenue realized from services that the Surviving Corporation
would be prohibited or restricted from offering after the
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Effective Time pursuant to any covenant or provision in any contract to which
any member of the AVEMCO Group is a party.
SECTION 4.10 NO UNDISCLOSED LIABILITIES. There are no liabilities of any
member of the AVEMCO Group of any kind whatsoever that are, individually or in
the aggregate, material to AVEMCO, other than:
(a) liabilities disclosed or provided for in the AVEMCO Balance Sheet
(including the notes thereto);
(b) liabilities incurred in the ordinary course of business consistent with
past practice since September 30, 1996 (the "AVEMCO Balance Sheet Date"); and
(c) liabilities under this Agreement or as indicated in the schedules and
filings that comprise the AVEMCO Disclosure Schedule.
SECTION 4.11 SAP STATEMENTS. AVEMCO has delivered to HCCH true and
complete copies of the following SAP Statements for the AVEMCO Insurer
Subsidiaries: SAP Statements for each AVEMCO Insurer Subsidiary for the years
ended December 31, 1993, 1994 and 1995, and for the third quarter ended
September 30, 1996, and the notes related thereto ("SAP Financial Statements").
Each of the SAP Financial Statements complied in all material respects with all
applicable laws when so filed, all material deficiencies known to AVEMCO and
each AVEMCO Insurer Subsidiary with respect to any such SAP Financial Statements
have been cured or corrected. Each such SAP Financial Statement (and the notes
related thereto) including without limitation each balance sheet and each of the
statements of income, capital and surplus account, and cash flow contained in
the respective SAP Financial Statement, was prepared in accordance with SAP, is
true and complete in all material respects, and fairly presents the financial
condition, assets and properties and liabilities of each AVEMCO Insurer
Subsidiary as of the respective dates thereof, and the results of operations and
changes in capital and surplus and in the cash flow of each such AVEMCO Insurer
Subsidiary for and during the respective periods covered thereby. All reserves
with respect to insurance written or assumed by each AVEMCO Insurer Subsidiary
as established or reflected on such SAP Financial Statements were determined in
accordance with generally accepted actuarial principles and practices and are in
all material respects in accordance with the related insurance, coinsurance and
reinsurance contracts of the AVEMCO Insurer Subsidiaries, and meet in all
material respects the requirements of the insurance laws of the jurisdictions in
which such contracts were issued or delivered.
SECTION 4.12 ABSENCE OF CERTAIN CHANGES. Since the date of the AVEMCO
Latest Balance Sheet, AVEMCO has, in all material respects, conducted its
business in the ordinary course and there has not been:
(a) any event or circumstance resulting in a Material Adverse Effect
with respect to AVEMCO, or any event, occurrence or development of a state
of circumstances or facts known to any member of the AVEMCO Group, which as
of the date hereof could reasonably be expected to have a Material Adverse
Effect on AVEMCO;
(b) any action by any member of the AVEMCO Group which, if taken after
the date hereof, would constitute a breach of any provision of Sections 6.3
or 6.5;
(c) any damage, destruction or other property or casualty loss
(whether or not covered by insurance) affecting the business, assets,
liabilities, earnings or prospects of AVEMCO or any other member of the
AVEMCO Group which, individually or in the aggregate, has had or would have
a Material Adverse Effect on AVEMCO or any other member of the AVEMCO
Group;
(d) any amendment, termination or waiver by AVEMCO or any other member
of the AVEMCO Group of any material right under any agreement, contract or
other written commitment to which it is a party or by which it is bound and
which is required to be disclosed in the schedule delivered pursuant to
Section 4.17;
(e) any material reduction in the amounts of coverage provided by
existing casualty and liability insurance policies with respect to the
business or properties of AVEMCO or any other member of the AVEMCO Group;
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(f) any (i) grant of any severance or termination pay to any director,
officer or, other than in the ordinary course of business consistent with
past practice, any employee of AVEMCO or any other member of the AVEMCO
Group or (ii) increase in benefits payable to any director, officer or,
other than in the ordinary course of business consistent with past
practice, any employee under any existing severance or termination pay
policies or employment agreements;
(g) any new or amendment to or alteration of any existing bonus,
incentive, compensation, severance, stock option, stock appreciation right,
pension, matching gift, profit-sharing, employee stock ownership,
retirement, pension group insurance, death benefit, or other fringe benefit
plan, arrangement or trust agreement adopted or implemented by AVEMCO or
any other member of the AVEMCO Group, excluding individual actions with
respect to non-officer employees in the ordinary course of business
consistent with past practice;
(h) other than in the ordinary course of business consistent with past
practice, the cancellation, waiver, release or other compromise of any
material debt, claim or right;
(i) any change in any accounting principle or practice or method or
application thereof;
(j) the termination, lapse, suspension, revocation of, amendment of,
limitation upon, disposal of or failure to renew any license or permit
necessary for the operation of the business of AVEMCO or any other member
of the AVEMCO Group which would be material to AVEMCO and the other members
of the AVEMCO Group as a whole;
(k) any transaction other than on an arm's-length basis;
(l) other than in the ordinary course of business consistent with past
practice, any change in any underwriting, actuarial, investment, or
financial reporting practice or policy followed by AVEMCO or any AVEMCO
Insurer Subsidiary or method or application thereof, or any assumption
underlying such principle, practice or policy;
(m) other than in the ordinary course of business consistent with past
practice, any termination, amendment, or execution by any Insurer
Subsidiary of any reinsurance, coinsurance or similar contract or treaty,
as ceding or assuming insurer;
(n) any sale, transfer, or conveyance of Assets or Properties of any
AVEMCO Insurer Subsidiary (other than investment securities) with an
individual book value or with any aggregate book value in excess of
$250,000;
(o) any purchase of any investment securities by any AVEMCO Insurer
Subsidiary other than purchases of investment grade, tax exempt fixed
income securities, commercial paper or cash equivalents since the date of
this Agreement.
SECTION 4.13 LITIGATION. There is no action, suit, proceeding, claim or
investigation pending or, to the knowledge of AVEMCO, overtly threatened against
AVEMCO or any other member of the AVEMCO Group or any of their assets or against
or involving any of their officers, directors or employees in connection with
the business or affairs of AVEMCO or any other member of the AVEMCO Group,
including, without limitation, any such claims for indemnification arising under
any agreement to which AVEMCO or any other member of the AVEMCO Group is a
party, other than claims in the ordinary course of business with respect to
which an AVEMCO Insurer Subsidiary provides or has provided indemnification,
which could, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect on AVEMCO. Neither AVEMCO nor any other member of the
AVEMCO Group is subject, or in default with respect, to any writ, order,
judgment, injunction or decree which could, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect on AVEMCO.
SECTION 4.14 ACCOUNTING MATTERS. Neither AVEMCO nor any other member of
the AVEMCO Group or an Affiliate thereof has taken or agreed to take any action
that (without giving effect to any action taken or agreed to be taken by HCCH or
any of its Affiliates') would prevent HCCH from accounting for the business
combination to be effected by the Merger as a pooling-of-interests.
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SECTION 4.15 TAXES.
(a) Each member of the AVEMCO Group (i) has filed when due (taking into
account extensions) with the appropriate federal, state, local, foreign and
other governmental agencies, all tax returns, estimates and reports required to
be filed by it, (ii) either paid when due and payable or established adequate
reserves or otherwise, accrued on the AVEMCO Financial Statements, all Taxes,
and there are no material tax deficiencies claimed in writing by any Taxing
authority and received by a member of the AVEMCO Group that, in the aggregate,
would result in any tax liability in excess of the amount of the reserves or
accruals and (iii) has or will establish in accordance with its normal
accounting practices and procedures accruals and reserves that, in the
aggregate, are adequate for the payment of all Taxes not yet due and payable and
attributable to any period preceding the Effective Time. The AVEMCO Disclosure
Schedule sets forth those tax returns of each member of the AVEMCO Group (or any
predecessor entities) for all periods that currently are the subject of audit by
any federal, state, local or foreign taxing authority.
(b) There are no material Taxes, interest, penalties, assessments or
deficiencies claimed in writing by any Taxing authority and received by any
member of the AVEMCO Group to be due in respect of any tax returns filed by any
member of the AVEMCO Group (or any predecessor corporations). Neither any member
of the AVEMCO Group nor any predecessor corporation, has executed or filed with
the IRS or any other Taxing authority any agreement or other document extending,
or having the effect of extending, the period of assessment or collection of any
Taxes.
(c) (i) No member of the AVEMCO Group is a party to any agreement, plan,
contract or arrangement that could result in the payment of any amount of
compensation the deduction of which would be prohibited pursuant to Section
162(m) of the Code.
(ii) No member of the AVEMCO Group is a party to any agreement, plan,
contract or arrangement that could result in the payment of any amount of
compensation the deduction of which would be prohibited pursuant to Section 280G
of the Code.
(iii) There are no Tax liens (other than for current Taxes not yet due
and payable) upon the assets of any member of the AVEMCO Group.
(iv) All material Taxes that the AVEMCO Group is required by law to
withhold or collect have been duly withheld or collected, and have been timely
paid over to the appropriate governmental authorities to the extent due and
payable.
(v) The AVEMCO Disclosure Schedule sets forth (A) the taxable years of
each member of the AVEMCO Group as to which the respective statutes of
limitations (as defined in Code Section 6501(a) without application of
exceptions contained in other provisions of Code Section 6501) with respect to
Taxes (limited, however, to Taxes imposed by the Code) have not expired, and (B)
with respect to such taxable years, those years for which examinations have not
been completed, those years for which examinations are currently being
conducted, those years for which examinations have not been initiated, and those
years for which required Returns have not yet been filed. The AVEMCO Disclosure
Schedule lists each state in which any member of the AVEMCO Group has, at any
time within the three-year period ending on the date hereof, filed a Return.
(vi) All Tax deficiencies which have been claimed, proposed or asserted
against any member of the AVEMCO Group have been fully paid or finally settled,
and no issue has been raised in any examination which, by application of similar
principles to the same or a similar factual situation or practice, can be
expected to result in the proposal or assertion of a material Tax deficiency for
any other year not so examined.
(vii) Since 1990, no member of the AVEMCO Group has ever been a member
of an affiliated group (used herein as defined in Section 1504 of the Code)
other than an affiliated group of which AVEMCO is the parent corporation.
(viii) No member of the AVEMCO Group has taken any action or has any
knowledge of any fact or circumstance that is reasonably likely to prevent the
Merger from qualifying as a tax-free reorganization within the meaning of
Section 368(a) of the Code.
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(ix) Since 1990, no member of the AVEMCO Group is (or has ever been) a
party to any tax sharing agreement that includes a party other than AVEMCO and
its subsidiaries nor has any such member assumed the tax liability of any other
person under contract.
SECTION 4.16 EMPLOYEE BENEFIT PLANS, ERISA.
(a) To the knowledge of AVEMCO, neither AVEMCO nor any other member of the
AVEMCO Group is a party to any oral or written (i) employment, severance,
collective bargaining or consulting agreement not terminable on 90 days' or less
notice, (ii) agreement with any executive officer or other key employee of
AVEMCO or any other member of the AVEMCO Group (A) the benefits of which are
contingent, or the terms of which are materially altered, upon the occurrence of
a transaction involving AVEMCO or any other member of the AVEMCO Group of the
nature of any of the transactions contemplated by this Agreement, (B) providing
any term of employment or compensation guarantee extending for a period longer
than one year, or (C) providing severance benefits or other benefits after the
termination of employment of such executive officer or key employee regardless
of the reason for such termination of employment, (iii) agreement, plan or
arrangement under which any person may receive payments subject to the tax
imposed by Section 4999 of the Code, or (iv) agreement or plan, including,
without limitation, any stock option plan, stock appreciation right plan,
restricted stock plan or stock purchase plan, the benefits of which would be
increased, or the vesting of benefits of which will be accelerated, by the
occurrence of any of the transactions contemplated by this Agreement or the
value of any of the benefits of which will be calculated, other than pursuant to
Section 2.5 above, on the basis of any of the transactions contemplated by this
Agreement.
(b) The AVEMCO Disclosure Schedule lists each Employee Plan that each
member of the AVEMCO Group maintains, administers, contributes to, or has any
contingent liability with respect thereto. AVEMCO has provided a true and
complete copy to HCCH of each such Employee Plan, current summary plan
description, (and, if applicable, related trust documents) and all amendments
thereto, together with (i) the three most recent annual reports, if any,
prepared in connection with each such Employee Plan (Form 5500 including, if
applicable, Schedule B thereto); (ii) the most recent actuarial report, if any,
and trust financial statement prepared in connection with each Employee Plan;
(iii) to the knowledge of AVEMCO, all material communications concerning each
Employee Plan received from or sent to the IRS or the Department of Labor
("DOL") within the last two years (including a written description of any
material oral communications relating to the IRS Voluntary Compliance Resolution
or Closing Agreement Programs); (iv) the most recent IRS determination letter
with respect to each Employee Plan and the most recent application for a
determination letter, both as applicable; (v) all insurance contracts or other
funding arrangements, currently in force; and (vi) an actuarial study of any
post-employment life or medical benefits provided, if any. Each Employee Plan
has been maintained and administered in material compliance with its terms and
with the requirements (including reporting requirements if any) prescribed by
any and all statutes, orders, rules and regulations which are applicable to such
Employee Plan.
(c) The AVEMCO Disclosure Schedule identifies each Benefit Arrangement that
each member of the AVEMCO Group maintains, administers, contributes to, or to
the knowledge of AVEMCO has any contingent liability with respect thereto.
AVEMCO has furnished to HCCH copies or descriptions of each Benefit Arrangement
and any of the information set forth in Section 4.16(b) applicable to any such
Benefit Arrangement.
(d) Benefits under any Employee Plan or Benefit Arrangement are as
represented in said documents and have not been increased or modified (whether
written or not written) subsequent to the dates of such documents. Each Benefit
Arrangement has been maintained and administered in material compliance with its
terms and with the requirements (including reporting requirements, if any)
prescribed by any and all statutes, orders, rules and regulations which are
applicable to such Benefit Arrangement. To the knowledge of AVEMCO, no member of
the AVEMCO Group has communicated to any employee or former employee any
intention or commitment to modify any Employee Plan or Benefit Arrangement or to
establish or implement any other employee or retiree benefit or compensation
arrangement.
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(e) To the knowledge of AVEMCO, no Employee Plan or Benefit Arrangement is
currently subject to an audit or other investigation by the IRS, the DOL, the
Pension Benefit Guaranty Corporation or any other governmental agency or office
nor is any such Employee Plan or Benefit Arrangement subject to any lawsuits or
legal proceedings of any kind or to any pending disputed material claims by
employees or beneficiaries covered under any such Employee Plan or Benefit
Arrangement or by any other parties.
(f) To the knowledge of AVEMCO, no "prohibited transaction," as defined in
Section 406 of ERISA or Section 4975 of the Code, resulting in liability to
AVEMCO, or any other member of the AVEMCO Group has occurred with respect to any
Employee Plan.
(g) No current or former member of the AVEMCO Group, since January 1, 1986,
has maintained or contributed to, or been obligated or required to contribute
to, a "Multiemployer Plan."
(h) No member of the AVEMCO Group has any knowledge that the qualified
status of any Employee Plan listed on the AVEMCO Disclosure Schedule or the tax
exempt status of each trust created thereunder is jeopardized.
(i) To the knowledge of AVEMCO, full payment has been made of all amounts
which any member of the AVEMCO Group is or has been required to have made as
contributions to or benefits due under any Employee Plan or Benefit Arrangement
under applicable law or under the terms of any such plan or any arrangement.
(j) To the knowledge of AVEMCO, no member of the AVEMCO Group has any
current or projected liability in respect of post-retirement or post-employment
welfare benefits for retired, current or former employees, except as required to
avoid excise tax under Section 4980B of the Code or to avoid a violation of
Section 601 of ERISA, relating to the Consolidated Omnibus Budget Reconciliation
Act of 1985 ("COBRA").
(k) To the knowledge of AVEMCO, all group health plans (as defined in Code
Section 5000(b)(1)) of any member of the AVEMCO Group have at all times
materially complied with all applicable notification and continuation coverage
requirements of Section 4980B(f) of the Code and Section 601 of ERISA, and the
regulations promulgated thereunder. Further, no Employee Plan provides health,
medical, death or survivor benefits to any shareholders or directors who are not
employees, former employees or beneficiaries thereof, except to the extent
otherwise required by the continuation requirements of Section 4980B(f) of the
Code and Section 601 of ERISA, and there are no claims by terminated employees
with respect thereto.
(l) To the knowledge of AVEMCO, no employee or former employee, officer or
director of any member of the AVEMCO Group is or will, on or after the date of
this Agreement, become entitled to receive any award under discretionary or
other bonus plans of any member of the AVEMCO Group.
SECTION 4.17 MATERIAL AGREEMENTS.
(a) The AVEMCO Disclosure Schedule includes a complete and accurate list of
all contracts, agreements, leases (other than AVEMCO Property Leases, as
hereinafter defined), and instruments to which any member of the AVEMCO Group is
a party or by which it or its properties or assets are bound which individually
involve net payments or receipts in excess of $250,000 per annum, inclusive of
contracts entered into with customers and suppliers in the ordinary course of
business, or that pertain to employment or severance benefits for any officer,
director or employee of any member of the AVEMCO Group, whether written or oral,
but exclusive of contracts, agreements, leases and instruments (i) terminable
without penalty upon 90 days' or less prior written notice to the other party or
parties thereto or (ii) relating to insurance or reinsurance policies issued or
investments made in the ordinary course of business (the "Material AVEMCO
Agreements").
(b) No member of the AVEMCO Group nor, to the knowledge of AVEMCO, any
other party is in default under any Material AVEMCO Agreement and no event has
occurred which (after notice or lapse of time or both) would become a breach or
default under, or would permit modification, cancellation, acceleration or
termination of any Material AVEMCO Agreement or result in the creation of any
security interest upon, or any person obtaining any right to acquire, any
properties, assets or rights of any member of
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the AVEMCO Group which, in any such case, has had or would reasonably be
expected to have a Material Adverse Effect on AVEMCO.
(c) To the knowledge of AVEMCO, each such Material AVEMCO Agreement is in
full force and effect and is valid and legally binding and there are no material
unresolved disputes involving or with respect to any Material AVEMCO Agreement.
No party to a Material AVEMCO Agreement has advised any member of the AVEMCO
Group that it intends either to terminate a Material AVEMCO Agreement or to
refuse to renew a Material AVEMCO Agreement upon the expiration of the term
thereof.
(d) No member of the AVEMCO Group is, to its knowledge, in violation of, or
in default with respect to, any term of its Articles or Certificate of
Incorporation, as the case may be, or Bylaws.
SECTION 4.18 PROPERTIES AND LEASES. (a) All of the properties and assets
which are owned by any member of the AVEMCO Group are owned by each of them,
respectively, free and clear of any material Lien. Each member of the AVEMCO
Group has good and indefeasible title with respect to such owned properties and
assets subject to no material Liens, other than those permitted under this
Section 4.18, to all of the properties and assets necessary for the conduct of
their business other than to the extent that the failure to have such title
would not have a Material Adverse Effect on AVEMCO.
(b) With respect to each lease of any real property, or a material amount
of other personal property, to which a member of the AVEMCO Group is a party
(the "AVEMCO Property Leases"), to AVEMCO's knowledge, (i) such member of the
AVEMCO Group has a valid leasehold interest in such real property or personal
property; (ii) such lease is in full force and effect in accordance with its
terms; (iii) all rents and other monetary amounts that have become due and
payable thereunder have been paid in full; (iv) no waiver, indulgence or
postponement of the obligations thereunder has been granted by the other party
thereto; (v) there exists no material default (or an event that with notice or
lapse of time or both would constitute a material default) under such lease;
(vi) such member of the AVEMCO Group has not violated any of the material terms
or conditions under any such lease and there has been no (A) material condition
or covenant to be observed or performed by any other party under any such lease
that has not been fully observed and performed and (B) in the case of each lease
concerning demised premises subleased to any member of the AVEMCO Group,
material condition or covenant to be observed or performed by any other party
thereto that has not been fully observed and performed and there does not exist
any event of default or event, occurrence, condition or act that, with the
giving of notice, the lapse of time or the happening of any further event or
condition, would become a default under any such lease; and (vii) the
transactions described in this Agreement will not constitute a default under or
cause for termination or modification of any such lease.
(c) The AVEMCO Disclosure Schedule contains a list of all real property
owned by members of the AVEMCO Group and a list of all leases to which the
members of the AVEMCO Group are parties.
SECTION 4.19 CONDITION OF AVEMCO'S ASSETS. All of the tangible assets of
the AVEMCO Group which are being used in the business of the AVEMCO Group are
currently in good and usable condition, ordinary wear and tear excepted. There
are no defects in such assets or other conditions that have or would be
reasonably likely to have a Material Adverse Effect on AVEMCO.
SECTION 4.20 VOTING REQUIREMENTS. The affirmative vote of a majority of
the outstanding shares of AVEMCO Common Stock entitled to vote on the Merger is
the only vote of the holders of any class or series of AVEMCO's capital stock
necessary to approve this Agreement and the transactions described herein.
SECTION 4.21 SUPPLIERS AND CUSTOMERS. To the knowledge of AVEMCO except as
would not have a Material Adverse Effect on AVEMCO, (a) no supplier providing
products, materials or services to any member of the AVEMCO Group intends to
cease providing such products, materials or services to any member of the AVEMCO
Group or to limit or reduce such sales to any member of the AVEMCO Group or
alter the terms or conditions of any such sales and (b) no customer of any
member of the AVEMCO Group intends to terminate, limit or reduce its or their
business relations with any member of the AVEMCO Group. Gross written premiums
by the AVEMCO Insurer Subsidiaries have not declined, in the aggregate, by more
than 5% in any fiscal quarter of 1997 when compared to the same fiscal quarter
of 1996, nor have the gross
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written premiums by any member of the AVEMCO Group producing insurance premiums
declined, in the aggregate, by more than 5% over any such comparative period.
SECTION 4.22 EMPLOYEE MATTERS. (a) The AVEMCO Disclosure Schedule sets
forth the name, title, current annual compensation rate (including bonus and
commissions), current base salary rate, accrued bonus, accrued sick leave,
accrued severance pay and accrued vacation benefits of each officer of each
member of the AVEMCO Group as of January 1, 1997. Copies of organizational
charts, any employee handbook(s), and any reports and/or plans prepared or
adopted pursuant to the Equal Employment Opportunity Act of 1972, as amended,
have been provided to HCCH.
(b) Each of the following is true with respect to the AVEMCO Group:
(i) each such member is in material compliance with all applicable
laws respecting employment and employment practices, terms and conditions
of employment, wages and hours and occupational safety and health, and is
not engaged in any material unfair labor practice within the meaning of
Section 8 of the National Labor Relations Act, and there is no proceeding
pending or threatened or any investigation pending or threatened against it
relating to any thereof;
(ii) no member of the AVEMCO Group is a party to any collective
bargaining agreement or other labor union contract applicable to persons
employed by a member of the AVEMCO Group nor does AVEMCO know of any
efforts being made to unionize any of such employees; and
(iii) to the knowledge of AVEMCO, there are no charges of, formal,
informal or internal complaints of, or proceedings involving,
discrimination or harassment (including without limitation discrimination
or harassment based upon sex, age, marital status, race, religion, color,
creed, national origin, sexual preference, handicap or veteran status)
pending or threatened, nor, to the knowledge of AVEMCO, is there any
investigation pending or threatened, including without limitation
investigations before the Equal Employment Opportunity Commission or any
federal, state or local agency or court, with respect to any such member.
SECTION 4.23 ENVIRONMENTAL MATTERS.
(a) For the purposes of this Agreement, the following terms have the
following meanings:
"Environmental Laws" shall mean any and all federal, state, local and
foreign statutes, laws (including case law), regulations, ordinances,
rules, judgments, orders, decrees, codes, injunctions, permits, licenses,
agreements and governmental restrictions relating to human health, the
environment or to emissions, discharges or releases of pollutants,
contaminants, Hazardous Substances (as hereinafter defined) or wastes into
the environment or otherwise relating to the processing, distribution, use,
treatment, storage, disposal, transport or handling of pollutants,
contaminants, Hazardous Substances or wastes or the clean-up or other
remediation thereof or relating to the presence of asbestos or presumed
asbestos containing material in any building or other structure.
"Environmental Liabilities" shall mean all liabilities, whether
vested, or unvested, contingent or fixed, actual or potential, which (i)
arise under Environmental Laws and (ii) relate to actions occurring or
conditions existing on or prior to the Effective Time.
"Hazardous Substances" shall mean any toxic, radioactive, caustic or
otherwise hazardous substance, including petroleum, its derivatives,
by-products and other hydrocarbons, or any substance having any constituent
elements displaying any of the foregoing characteristics that are regulated
under the Environmental Laws, including but not limited to, asbestos.
"Regulated Activity" shall mean any generation, treatment, storage,
recycling, transportation, disposal or release of any Hazardous Substances.
(b) Each member of the AVEMCO Group possesses all necessary licenses,
permits and other approvals and authorizations that are required under, and is,
and at all times in the past has been in material compliance with all
Environmental Laws.
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(c) No notice, notification, demand, request for information, citation,
summons, complaint or order has been received by any member of the AVEMCO Group
and to the knowledge of AVEMCO, no complaint has been filed, no penalty has been
assessed and no investigation or review is pending or has been threatened by any
governmental entity or other party, with respect to any (i) alleged violation of
any Environmental Law by any member of the AVEMCO Group or any person or entity
whose liability any member of the AVEMCO Group has or may have retained or
assumed, (ii) alleged failure to have any environmental permit, certificate,
license, approval, registration or authorization required under the
Environmental Laws in connection with the conduct of the business of any member
of the AVEMCO Group, or any person or entity whose liability any member of the
AVEMCO Group has or may have retained or assumed, or (iii) Regulated Activity
involving any member of the AVEMCO Group, or any person or entity whose
liability any member of the AVEMCO Group has or may have retained or assumed.
(d) To the knowledge of AVEMCO, no member of the AVEMCO Group has any
material Environmental Liabilities and there have been no material releases of
Hazardous Substances into the environment by any member of the AVEMCO Group
except in material compliance with applicable Environmental Laws, or, to
AVEMCO's knowledge, with respect to any of their respective properties which has
had, or would reasonably be expected to have, a Material Adverse Effect on
AVEMCO.
(e) To the knowledge of AVEMCO, there are no underground tanks of any type
(including tanks storing gasoline, diesel fuel, oil or other petroleum products)
or disposal sites for hazardous substances, hazardous wastes or any other waste,
located on or under the real estate currently owned, leased or used by any
member of the AVEMCO Group and, to AVEMCO's knowledge, there were no such
disposal sites located on or under the real estate previously owned, leased or
used by any member of the AVEMCO Group on the date of the sale thereof by any
member of the AVEMCO Group or during the period of lease for use by any member
of the AVEMCO Group.
(f) Except in the ordinary course of business, and in all cases in material
compliance with Environmental Laws, no member of the AVEMCO Group has engaged
any third party to handle, transport or dispose of hazardous substances or
wastes (including for this purpose, gasoline, diesel fuel, oil or other
petroleum products, or bilge waste) on its behalf.
(g) AVEMCO Group has delivered to HCCH or otherwise made available for
inspection by HCCH true, complete, and correct copies of any material reports,
studies, analyses, tests or monitoring in its possession or control pertaining
to the environmental condition of any property currently or formerly owned,
operated or leased by any member of the AVEMCO Group any other person or entity
whose liability any member of the AVEMCO Group may have retained or assumed, or
pertaining to any member of the AVEMCO Group's compliance with Environmental
Laws.
SECTION 4.24 COMPLIANCE WITH LAW; PERMITS. Other than compliance with
Environmental Laws and except for violations which do not have and would not
reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect on AVEMCO, (a) the operations and activities of each member of
the AVEMCO Group comply with all applicable laws, regulations, ordinances, rules
or orders of any federal, state or local court or any governmental authority,
and (b) each member of the AVEMCO Group possesses all governmental licenses,
certificates of authority, permits and other governmental authorizations that
are (i) required under all federal, state and local laws and regulations for the
ownership, use and operation of its assets or (ii) otherwise necessary to permit
the conduct of its business without interruption, and such licenses,
certificates of authority, permits and authorizations are in full force and
effect and have been and are being fully complied with by it. No member of the
AVEMCO Group has received any notice of any violation of any of the terms and
conditions of any such license, certificate of authority, permit or
authorization and no facts or circumstances exist that would form the reasonable
basis of a revocation, claim, citation or allegation against it for a violation
of any such license, permit or authorization. To the knowledge of AVEMCO, no
such license, permit or authorization or any renewal thereof will be terminated,
revoked, suspended, modified or limited in any respect as a result of the
transactions contemplated by this Agreement.
SECTION 4.25 INTERESTS IN CLIENTS, SUPPLIERS, ETC. To AVEMCO's knowledge,
no officer or director of any member of the AVEMCO Group possesses, directly or
indirectly, any financial interest in, or is a director,
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officer or employee of, any corporation or business organization that is a
supplier, customer, lessor, lessee, or competitor or potential competitor of the
AVEMCO Group or that has entered into any material contract with any member of
the AVEMCO Group. Ownership of less than 1% of any class of securities of a
company whose securities are registered under the Exchange Act will not be
deemed to be a financial interest for purposes of this Section 4.25.
SECTION 4.26 TRANSACTIONS WITH RELATED PARTIES. (a) The AVEMCO Disclosure
Schedule lists all transactions between January 1, 1995 and the date of this
Agreement involving or for the benefit of any member of the AVEMCO Group, on the
one hand, and any director or officer of any member of the AVEMCO Group or
Affiliate of such director or officer, on the other hand, including (i) any
debtor or creditor relationship, (ii) any transfer or lease of real or personal
property, (iii) agreements relating to employment currently in effect and (iv)
purchases or sales of products or services.
(b) Except with respect to claims pursuant to Employee Plans and wages,
salaries, commissions and bonuses, the AVEMCO Disclosure Schedule lists (i) all
agreements and claims of any nature that any officer or director of any member
of the AVEMCO Group or any Affiliate (other than another member of the AVEMCO
Group) of such officer or director has with or against any member of the AVEMCO
Group as of the date of this Agreement that are not identified on the AVEMCO
Latest Balance Sheet and (ii) all agreements and claims of any nature that any
member of the AVEMCO Group has with or against any officer or director of any
member of the AVEMCO Group or any Affiliate (other than another member of the
AVEMCO Group) of such officer or director as of the date of this Agreement that
are not identified on the AVEMCO Latest Balance Sheet.
SECTION 4.27 STATEMENTS ARE TRUE AND CORRECT. None of the information that
has been or will be supplied by the AVEMCO Group included in (i) the
Registration Statement to be filed by HCCH with the SEC in connection with the
HCCH Common Stock to be issued in the Merger, (ii) the Joint Proxy Statement to
be mailed to the shareholders of AVEMCO and HCCH in connection with the
shareholders meetings, and (iii) any other documents to be filed with the SEC or
any other regulatory authority in connection with the transactions contemplated
hereby will at the respective times such documents are filed, and, in the case
of the Registration Statement, when it becomes effective and, with respect to
the Joint Proxy Statement, when first mailed to the shareholders of AVEMCO and
HCCH, be false or misleading with respect to any material fact, or omit to state
any material fact necessary in order to make the statements therein not
misleading, or, in the case of the Joint Proxy Statement or any amendment
thereof or supplement thereto, at the time of the AVEMCO shareholders' meetings,
be false or misleading with respect to any material fact, or omit to state any
material fact necessary to make the statements therein in light of the
circumstances under which they were made not misleading. All documents that
AVEMCO is responsible for filing with the SEC or any other regulatory authority
in connection with the transactions contemplated hereby, will comply in all
material respects with the provisions of applicable law.
SECTION 4.28 BROKER'S AND OTHER FEES. No agent, broker, Person or firm
acting on behalf of AVEMCO is or will be entitled to any commission or broker's
or finder's fee from any of the parties hereto or from any Affiliate of the
parties hereto, in connection with any of the transactions contemplated herein,
except fees to Alex. Brown & Sons Incorporated to be paid by AVEMCO that are
disclosed in the AVEMCO Disclosure Schedule. Fees and expenses to Alex. Brown &
Sons Incorporated and to AVEMCO's attorneys and accountants in connection with
the transactions contemplated hereunder will not exceed, in the aggregate
$2,700,000, including all costs and expenses.
SECTION 4.29 TRADEMARKS, TRADENAMES, ETC. Each member of the AVEMCO Group
owns or possesses, or holds a valid right or license to use, all intellectual
property, patents, trademarks, tradenames, service marks, copyrights and
licenses, and all rights with respect to the foregoing (collectively the "IP
Rights"), necessary for the conduct of its business as now conducted, without
any known conflict with the rights of others.
SECTION 4.30 DISCLOSURE. (a) No representation or warranty by AVEMCO in
this Agreement and no statement contained in the schedules or exhibits or in any
certificate to be delivered pursuant to this Agreement, or in the AVEMCO
Disclosure Schedule, contains or will contain any untrue statement of
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material fact or omits or will omit to state any material fact necessary, in
light of the circumstances under which it was made, in order to make the
statements herein or therein not misleading.
(b) HCCH has been furnished with, or given access to, complete and correct
copies of all agreements, instruments and documents, together with any
amendments or supplements thereto, set forth on, or underlying a disclosure set
forth on, the AVEMCO Disclosure Schedule. The AVEMCO Disclosure Schedule is
complete and correct in all material respects.
SECTION 4.31 OPINION OF FINANCIAL ADVISOR. The financial advisor of
AVEMCO, Alex. Brown & Sons Incorporated, has delivered to AVEMCO an opinion
dated within five days before the date of this Agreement to the effect that as
of such date the Exchange Ratio is fair from a financial point of view to
AVEMCO's shareholders.
SECTION 4.32 INSURANCE ISSUED BY AVEMCO INSURER SUBSIDIARIES. To AVEMCO's
knowledge:
(a) all material insurance contract benefits payable by the AVEMCO
Insurer Subsidiaries and by any other Person that is a party to or bound by
any reinsurance, coinsurance or other similar contract with such AVEMCO
Insurer Subsidiaries, have in all material respects been paid or are in the
course of settlement in accordance with the terms of the insurance,
reinsurance or coinsurance contracts under which they arose, except for
such benefits which the AVEMCO Insurer Subsidiaries reasonably believe
there is a reasonable basis to contest payment;
(b) no material outstanding insurance contract issued, reinsured,
underwritten or assumed by any AVEMCO Insurer Subsidiary entitles the
holder thereof or any other Person to receive dividends, distributions or
other benefits based upon the revenues or earnings of such AVEMCO Insurer
Subsidiary or any other Person;
(c) the underwriting standards utilized and ratings applied by the
AVEMCO Insurer Subsidiaries and by any other Person that is a party to or
bound by any insurance, reinsurance, coinsurance or other similar contract
with any of the AVEMCO Insurer Subsidiaries conform as to such contracts in
all material respects to the standards and ratings required pursuant to the
terms of the respective insurance, reinsurance, coinsurance or other
similar contracts;
(d) all amounts to which each AVEMCO Insurer Subsidiary is entitled
under reinsurance, coinsurance or similar contracts (including without
limitation amounts based on paid and unpaid losses) are fully collectible,
in accordance with the terms of such contracts; and
(e) each insurance agent, broker, producer, or representative, at the
time such Person wrote, sold, or produced business for any AVEMCO Insurer
Subsidiary, was duly licensed under state insurance laws for the type of
business written, sold or produced by such Person in the particular
jurisdiction in which such Person wrote, sold or produced such business for
the AVEMCO Insurer Subsidiary.
SECTION 4.33 EXAMINATION REPORTS. AVEMCO has delivered to HCCH copies of
the most recent examination reports, including related management letters, of
each of the AVEMCO Insurer Subsidiaries conducted by any state insurance
department examiners, and reflecting the results of the most recent examinations
of the affairs of such AVEMCO Insurer Subsidiaries, and will furnish promptly to
HCCH any additional such reports or drafts of such reports received by AVEMCO or
any AVEMCO Insurer Subsidiary prior to Closing. All material deficiencies or
violations noted in such examination reports for the periods examined have
either been resolved or are being resolved to the satisfaction of or accepted by
the insurance regulatory authorities of the states conducting such examinations,
without any enforcement action taken against any such AVEMCO Insurer Subsidiary.
There are no examinations by any state insurance department examiners in
progress at any AVEMCO Insurer Subsidiary, nor, to the knowledge of AVEMCO,
pending or scheduled with respect to any AVEMCO Insurer Subsidiary.
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ARTICLE V
REPRESENTATIONS AND WARRANTIES OF HCCH AND MERGER SUB
Except as disclosed in the disclosure schedule heretofore delivered by HCCH
to AVEMCO which makes reference to this Agreement or in a document, exhibit or
appendix filed with the SEC which has been filed on or before the date hereof
(collectively referred to herein as the "HCCH Disclosure Schedule") which has
been delivered to AVEMCO on or before the date hereof, each of HCCH and Merger
Sub, jointly and severally, represents and warrants to AVEMCO as set forth below
(it being agreed that the disclosure on the HCCH Disclosure Schedule of the
existence of any document or fact or circumstance or situation relating to any
representations, warranties, covenants or agreements in any section of this
Agreement shall be automatically deemed to be disclosure of such document or
fact or circumstance or situation for purposes of all other representations,
warranties, covenants and agreements in this Agreement):
SECTION 5.1 CORPORATE EXISTENCE, POWER AND DOCUMENTATION. Each member of
the HCCH Group is a corporation duly organized, validly existing and in good
standing under the laws of the state or jurisdiction of its incorporation and
has all corporate powers and all material Governmental Authorizations required
to carry on its business as now conducted, except such Governmental
Authorizations the failure of which to have obtained would not have a Material
Adverse Effect on HCCH. Each member of the HCCH Group is duly qualified to do
business as a foreign corporation and is in good standing in each jurisdiction
where the character of the property owned or leased by it or the nature of its
activities makes such qualification necessary, except where the failure to be so
qualified would not have a Material Adverse Effect on HCCH. HCCH has delivered
to AVEMCO true and complete copies of HCCH's and Merger Sub's Certificate of
Incorporation and Bylaws, each as currently in effect.
SECTION 5.2 CORPORATE AUTHORIZATION. Subject to obtaining approval of the
holders of not less than a majority of the HCCH Common Stock present in person
or by proxy at a meeting at which holders of at least 50% of the outstanding
HCCH Common Stock entitled to vote with respect to the Merger are present in
person or by proxy (the "Required Vote"), the execution, delivery and
performance by HCCH and Merger Sub of this Agreement and the documents
contemplated hereby and the consummation by HCCH and Merger Sub of the
transactions contemplated hereby and thereby are within the corporate powers of
HCCH and Merger Sub and have been duly authorized by all necessary corporate
action, except for the Required Vote. This Agreement and the documents
contemplated hereby have been duly executed and delivered by HCCH or Merger Sub
and constitute, or upon execution and delivery will constitute, valid and
binding obligations of HCCH and Merger Sub, respectively, enforceable in each
case against each in accordance with their respective terms, except as such
enforcement may be limited by bankruptcy, insolvency or other similar laws
affecting the enforcement of creditors' rights generally or by general
principles of equity and except that the Merger may not be effected without the
Required Vote.
SECTION 5.3 GOVERNMENTAL AUTHORIZATION. The execution, delivery and
performance by HCCH and Merger Sub of this Agreement and the documents
contemplated hereby and the consummation of the Merger by HCCH and Merger Sub,
require no action by or in respect of, or filing with, any governmental body,
agency, official or authority other than:
(a) the filing of the Certificate of Merger in accordance with the
DGCL;
(b) compliance with any applicable requirements of the HSR Act;
(c) compliance with any applicable requirements of the Exchange Act;
(d) compliance with any applicable requirements of the Securities Act;
(e) compliance with any applicable foreign or state securities or
"blue sky" laws and the rules and regulations of the NYSE;
(f) compliance with any applicable requirements of the California,
Missouri, Maryland, or other insurance regulatory agency having authority
over HCCH or the transactions described herein; and
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(g) such other filings or registrations with, or authorizations,
consents or approvals of, governmental bodies, agencies, officials or
authorities, the failure of which to make or obtain (i) would not have a
Material Adverse Effect on HCCH or (ii) would not materially adversely
affect the ability of the AVEMCO Group, HCCH or Merger Sub to consummate
the transactions contemplated hereby and operate their businesses as
heretofore operated.
SECTION 5.4 NON-CONTRAVENTION. The execution, delivery and performance by
HCCH and Merger Sub of this Agreement and the documents contemplated hereby and
the consummation by HCCH and Merger Sub of the transactions contemplated hereby
and thereby do not and will not:
(a) contravene or conflict with the Certificates of Incorporation or
Bylaws of HCCH or Merger Sub;
(b) assuming compliance with the matters referred to in Section 5.3
and assuming the requisite approval by the holders of HCCH Common Stock of
the Merger and subject to obtaining clearance under the HSR Act and
effectiveness of the Registration Statement, contravene or conflict with or
constitute a violation of any provision of any law, regulation, judgment,
injunction, order or decree binding upon or applicable to any member of the
HCCH Group;
(c) conflict with or result in a breach or violation of, or constitute
a default under, or result in a contractual right to cause the termination
or cancellation of or loss of a material benefit under, or right to
accelerate, any material agreement, contract or other instrument binding
upon any member of the HCCH Group or any material license, franchise,
permit or other similar authorization held by any member of the HCCH Group;
or
(d) result in the creation or imposition of any Lien on any material
asset of any member of the HCCH Group,
except, with respect to clauses (b), (c) and (d) above, for contraventions,
defaults, losses, Liens and other matters referred to in such clauses that in
the aggregate would not be reasonably expected to have, individually or in the
aggregate, a Material Adverse Effect on HCCH.
SECTION 5.5 CAPITALIZATION OF HCCH.
(a) The authorized capital stock of HCCH consists of 100,000,000 shares of
HCCH Common Stock. As of December 31, 1996, there were 35,850,832 shares of HCCH
Common Stock issued and outstanding. All outstanding shares of HCCH Common Stock
have been duly authorized and validly issued and are fully paid and
nonassessable and free from any preemptive rights. Except as otherwise
contemplated by this Agreement, and except for changes since December 31, 1996
resulting from the exercise of employee and director stock options, there are
outstanding (i) no shares of capital stock or other voting securities, (ii) no
securities convertible into or exchangeable for shares of its capital stock or
voting securities (iii) no options or other rights to acquire and no obligation
to issue, any capital stock, voting securities or securities convertible into or
exchangeable for its capital stock or other voting securities, (iv) no
obligations to repurchase, redeem or otherwise acquire any of its outstanding
securities, and (v) no contractual rights of any person or entity to include any
such securities in any registration statement proposed to be filed under the
Securities Act.
(b) All shares of HCCH Common Stock issued in the Merger and the shares
issuable upon exercise of options issued under the AVEMCO Stock Option Plans
shall, upon issuance, be duly authorized and fully paid, validly issued and
nonassessable and free from any preemptive rights. HCCH has reserved sufficient
shares of HCCH Common Stock for issuance pursuant to the Merger.
SECTION 5.6 ORGANIZATION AND CAPITALIZATION OF MERGER SUB. The authorized
capital stock of Merger Sub consists of 3,000 shares of common stock, par value
$1.00 per share, all of which are issued and outstanding. All the issued and
outstanding capital stock of Merger Sub is owned by HCCH. Merger Sub has not
conducted any business prior to the date hereof and has no assets, liabilities
or obligations of any nature other than those incident to its formation and
pursuant to this Agreement.
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SECTION 5.7 SUBSIDIARIES AND JOINT VENTURES.
(a) All Subsidiaries and Joint Ventures of HCCH which constitute
significant subsidiaries under applicable SEC rules and regulations ("HCCH
Subsidiaries") and their respective jurisdictions of incorporation or
organization and HCCH's ownership interest therein are identified in the
schedules and filings that comprise the HCCH Disclosure Schedule. Other than its
investments in its Subsidiaries and Joint Ventures, and shares of stock in
publicly held companies aggregating less than 10% of such public company's
outstanding stock, HCCH does not own, directly or indirectly, any outstanding
capital stock or equity interest in any corporation, partnership, Joint Venture
or other entity.
(b) All of the outstanding capital stock of, or other ownership interests
in, each HCCH Subsidiary that is owned by any member of the HCCH Group on the
Effective Time, directly or indirectly, and all of the outstanding stock of each
member of the HCCH Group other than HCCH, is owned directly or indirectly, free
and clear of any material Lien and free of any other material limitation or
restriction on its rights as owner thereof (including any restriction on the
right to vote, sell or otherwise dispose of such capital stock or other
ownership interests), other than those imposed by applicable law. There are no
existing options, calls or commitments of any character relating to the issued
or unissued capital stock or other securities or equity interests (collectively,
"HCCH Subsidiary Securities") of any HCCH Subsidiary.
SECTION 5.8 SEC AND NYSE FILINGS.
(a) HCCH has since October 28, 1992 filed all forms, proxy statements,
schedules, reports and other documents required to be filed by it with the SEC
pursuant to the Exchange Act and with the NYSE pursuant to its rules and
regulations.
(b) HCCH has delivered, and will promptly deliver in the case of any of the
following (collectively, the "HCCH SEC Documents") filed with the SEC on or
after the date hereof and prior to the Effective Date, to AVEMCO:
(i) its annual reports on Form 10-K for its fiscal years ended
December 31, 1995 and 1994;
(ii) its quarterly reports on Form 10-Q for its fiscal quarters ending
March 31, June 30, and September 30, 1996;
(iii) any current reports on Form 8-K since January 1, 1995 and its
proxy or information statements relating to meetings of, or actions taken
without a meeting by, the shareholders of HCCH held since January 1, 1996;
and
(iv) all of its other reports, statements, schedules and registration
statements filed with the SEC since December 31, 1995. No other member of
the HCCH Group is required to file any forms, reports or other documents
with the SEC.
(c) As of its filing date, no such report or statement filed pursuant to
the Exchange Act contained any untrue statement of a material fact or omitted to
state any material fact necessary in order to make the statements made therein,
in the light of the circumstances under which they were made, not misleading.
(d) No registration statement, or any amendment thereto, filed pursuant to
the Securities Act, if declared effective by the SEC, as of the date such
statement or amendment became effective or on the date such statement or
amendment was supplemented, contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary to
make the statements therein not misleading.
SECTION 5.9 FINANCIAL STATEMENTS. The HCCH Financial Statements included
in the HCCH SEC Documents have been prepared in accordance with United States
generally accepted accounting principles applied on a consistent basis with
prior periods (except as may be indicated in the notes thereto), and present
fairly the consolidated financial position of HCCH and its consolidated
subsidiaries as of the dates thereof and their consolidated results of
operations and cash flows for the periods then ended (subject to normal year-end
adjustments in the case of any interim financial statements).
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SECTION 5.10 NO UNDISCLOSED LIABILITIES. There are no liabilities of any
member of the HCCH Group of any kind whatsoever that are, individually or in the
aggregate, material to HCCH other than:
(a) liabilities disclosed or provided for in the HCCH Balance Sheet
(including the notes thereto);
(b) liabilities incurred in the ordinary course of business consistent
with past practice since September 30, 1996 (the "HCCH Balance Sheet
Date"); and
(c) liabilities under this Agreement or as indicated in the schedules
and filings that comprise the HCCH Disclosure Schedule.
SECTION 5.11 SAP STATEMENTS. HCCH has delivered to AVEMCO true and
complete copies of the following SAP Statements for the HCCH Insurer
Subsidiaries: SAP Statements for each HCCH Insurer Subsidiary for the years
ended December 31, 1993, 1994 and 1995, and for the third quarter ended
September 30, 1996, and the notes related thereto ("SAP Financial Statements").
Each of the SAP Financial Statements complied in all material respects with all
applicable laws when so filed, all material deficiencies known to HCCH and each
HCCH Insurer Subsidiary with respect to any such SAP Financial Statements have
been cured or corrected. Each such SAP Financial Statement (and the notes
related thereto) including without limitation each balance sheet and each of the
statements of income, capital and surplus account, and cash flow contained in
the respective SAP Financial Statement, was prepared in accordance with SAP, is
true and complete in all material respects, and fairly presents the financial
condition, assets and properties and liabilities of each HCCH Insurer Subsidiary
as of the respective dates thereof, and the results of operations and changes in
capital and surplus and in the cash flow of each such HCCH Insurer Subsidiary
for and during the respective periods covered thereby. All reserves with respect
to insurance written or assumed by each HCCH Insurer Subsidiary as established
or reflected on such SAP Financial Statements were determined in accordance with
generally accepted actuarial principles and practices and are in all material
respects in accordance with the related insurance, coinsurance and reinsurance
contracts of the HCCH Insurer Subsidiaries, and meet in all material respects
the requirements of the insurance laws of the jurisdictions in which such
contracts were issued or delivered.
SECTION 5.12 ABSENCE OF CERTAIN CHANGES. Since the date of the HCCH
Balance Sheet, each member of the HCCH Group has in all material respects
conducted its business in the ordinary course and there has not been:
(a) any event or circumstance resulting in a Material Adverse Effect
with respect to HCCH or any event, occurrence or development of a state of
circumstances or facts known to HCCH, which as of the date hereof could
reasonably be expected to have a Material Adverse Effect on HCCH;
(b) any action by any member of the HCCH Group which, if taken after
the date hereof, would constitute a breach of any provision of Sections 6.3
or 6.4; or
(c) the entering into of any agreement by HCCH or any person on behalf
of HCCH to take any of the foregoing actions.
SECTION 5.13 LITIGATION. There is no action, suit, proceeding, claim or
investigation pending or, to the knowledge of HCCH, overtly threatened, against
HCCH or any other member of the HCCH Affiliated Group or any of their assets or
against or involving any of its officers, directors or employees in connection
with the business or affairs of HCCH or any other member of the HCCH Group,
including, without limitation, any such claims for indemnification arising under
any agreement to which HCCH or any other member of the HCCH Group is a party,
which could, individually or in the aggregate, have a Material Adverse Effect on
HCCH. No member of the HCCH Group is subject to or in default with respect to
any writ, order, judgment, injunction or decree which could, individually or in
the aggregate, have a Material Adverse Effect on HCCH.
SECTION 5.14 ACCOUNTING MATTERS. Neither HCCH nor any member of the HCCH
Group or an Affiliate thereof has taken or agreed to take any action that
(without giving effect to any action taken or agreed to be taken by AVEMCO or
any of its Affiliates') would prevent HCCH from accounting for the business
combination to be effected by the Merger as a pooling-of-interests.
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SECTION 5.15 TAXES.
(a) HCCH and each of its Subsidiaries (i) has filed when due (taking into
account extensions) with the appropriate federal, state, local, foreign and
other governmental agencies, all material tax returns, estimates and reports
required to be filed by it, (ii) either paid when due and payable or established
adequate reserves or otherwise accrued on the HCCH Balance Sheet all material
Taxes, and there are no material tax deficiencies claimed in writing by any
Taxing authority and received by HCCH that, in the aggregate, would result in
any tax liability in excess of the amount of the reserves or accruals, and (iii)
has or will establish in accordance with its normal accounting practices and
procedures accruals and reserves that, in the aggregate, are adequate for the
payment of all Taxes not yet due and payable and attributable to any period
preceding the Effective Time. The HCCH Disclosure Schedule sets forth those tax
returns of HCCH (or any predecessor entities) for all periods that currently are
the subject of audit by any federal, state, local or foreign Taxing authority.
(b) There are no material Taxes, interest, penalties, assessments or
deficiencies claimed in writing by any Taxing authority and received by HCCH or
any of its Subsidiaries to be due in respect of any tax returns filed by HCCH
(or any predecessor corporations) or any of its Subsidiaries. Neither HCCH nor
any predecessor corporation, nor any of their respective Subsidiaries, has
executed or filed with the IRS or any other Taxing authority any agreement or
other document extending, or having the effect of extending, the period of
assessment or collection of any Taxes.
(c) HCCH is not a party to or bound by (or will prior to the Effective Date
become a party to or bound by) any Tax indemnity, Tax sharing or Tax allocation
agreement or other similar arrangement which includes a party other than HCCH
and its Subsidiaries. Neither HCCH nor any of its Subsidiaries has been a member
of an affiliated group other than one of which HCCH was the common parent, or
filed or been included in a combined, consolidated or unitary Tax return other
than one filed by HCCH (or a return for a group consisting solely of its
Subsidiaries and predecessors).
(d) No member of the HCCH Group has taken any action or has any knowledge
of any fact or circumstance that is reasonably likely to prevent the Merger from
qualifying as a tax-free reorganization within the meaning of Section 368(a) of
the Code.
SECTION 5.16 EMPLOYEE BENEFIT PLANS; ERISA.
(a) Neither HCCH nor any HCCH ERISA Affiliate maintains or within the past
five years has maintained, contributed to, or been obligated to contribute to,
any Employee Plan. Each Employee Plan as disclosed in the HCCH Disclosure
Schedule (complete copies of which have been heretofore delivered to AVEMCO) has
been maintained in all material respects in compliance with their terms and all
provisions of ERISA and the Code (including rules and regulations thereunder)
applicable thereto.
(b) Neither HCCH nor any HCCH ERISA Affiliate maintains or has maintained
or contributed to any Title IV plan or any other Employee Plan that is or was
subject to Section 302 of ERISA or Section 412 of the Code. HCCH has made
available to AVEMCO, for each Employee Plan which is intended to be "qualified"
within the meaning of Section 401(a) of the Code, a copy of the most recent
determination letter issued by the IRS to the effect that each such Plan is so
qualified and that each trust created thereunder is tax exempt under Section 501
of the Code, and HCCH is unaware of any fact or circumstances that would
jeopardize the qualified status of any such Employee Plan or the tax exempt
status of any trust created thereunder.
(c) To the knowledge of HCCH, no Employee Plan is currently subject to an
audit or other investigation by the IRS, the DOL, the Pension Benefit Guaranty
Corporation or any other governmental agency or office nor is any such Employee
Plan subject to any lawsuits or legal proceedings of any kind or to any material
pending disputed claims by employees or beneficiaries covered under any such
Employee Plan or by any other parties.
(d) No "prohibited transaction," as defined in Section 406 of ERISA or
Section 4975 of the Code, resulting in liability to HCCH or any HCCH ERISA
Affiliate has occurred with respect to any Employee Plan. HCCH has no knowledge
of any breach of fiduciary responsibility under Part 4 of Title I of ERISA
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which has resulted in liability of HCCH, any HCCH ERISA Affiliate, any trustee,
administrator or fiduciary of any Employee Plan.
(e) Neither HCCH nor any current or former HCCH ERISA Affiliate, since
January 1, 1986, has maintained or contributed to, or been obligated or required
to contribute to, a Multiemployer Plan.
(f) The HCCH Disclosure Schedule lists each Employee Plan and Benefit
Arrangement that HCCH and/or an HCCH ERISA Affiliate maintains, administers,
contributes to, or has any liability with respect thereto.
SECTION 5.17 MATERIAL AGREEMENTS.
(a) The HCCH Disclosure Schedule includes a complete and accurate list of
all contracts, agreements, leases (other than HCCH Property Leases, as
hereinafter defined) and instruments to which any member of the HCCH Group is a
party or by which it or its properties or assets are bound which individually
involve net payments or receipts in excess of $1,000,000 per annum, inclusive of
contracts that pertain to employment or severance benefits for any officer,
director or employee of HCCH, whether written or oral, but exclusive of
contracts entered into with customers and suppliers in the ordinary course of
business or contracts, agreements, leases and instruments terminable without
penalty by HCCH upon 60 days or less prior written notice to the other party or
parties thereto (the "Material HCCH Agreements").
(b) No member of the HCCH Group nor, to the knowledge of HCCH, any other
party is in default under any material HCCH Agreement and no event has occurred
which (after notice or lapse of time or both) would become a breach or default
under, or would permit modification, cancellation, acceleration or termination
of any Material HCCH Agreement or result in the creation of any security
interest upon, or any person obtaining any right to acquire, any properties,
assets or rights of HCCH which, in any such case, has had or would reasonably be
expected to have a Material Adverse Effect on HCCH.
(c) To the knowledge of HCCH, each such Material HCCH Agreement is in full
force and effect and is valid and legally binding and there are no material
unresolved disputes involving or with respect to any Material HCCH Agreement. No
party to a Material HCCH Agreement has advised any member of the HCCH Group that
it intends either to terminate a Material HCCH Agreement or to refuse to renew a
Material HCCH Agreement upon the expiration of the term thereof.
(d) No member of the HCCH Group is in violation of, or in default with
respect to, any term of its Certificate of Incorporation or Bylaws.
SECTION 5.18 PROPERTIES AND LEASES. To the knowledge of HCCH, all leases
of real property to which any member of the HCCH Group is a party or by which
any member of the HCCH Group is bound ("HCCH Property Leases") which are
material to the business of HCCH are in full force and effect. To the knowledge
of HCCH, there exists no default under such HCCH Property Leases, nor any event
which with notice or lapse of time or both would constitute a default thereunder
by any member of the HCCH Group, which default would have a Material Adverse
Effect on HCCH. All of the properties and assets which are owned by any member
of the HCCH Group are owned by each of them, respectively, free and clear of any
material Lien. Each member of the HCCH Group has good and indefeasible title
with respect to such owned properties and assets subject to no Liens, other than
those permitted under this Section 5.18, to all of the properties and assets
necessary for the conduct of their business other than to the extent that the
failure to have such title would not have a Material Adverse Effect on HCCH.
SECTION 5.19 VOTING REQUIREMENTS. The affirmative vote of a majority of
the shares of HCCH Common Stock present at a meeting at which holders of at
least 50% of the outstanding shares of HCCH Common Stock entitled to vote on the
Merger are present in person or by proxy is the only vote of the holders of any
class or series of the capital stock of HCCH necessary to approve this Agreement
and the transactions described herein.
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SECTION 5.20 ENVIRONMENTAL MATTERS.
(a) Each member of the HCCH Group possesses all necessary licenses, permits
and other approvals and authorizations that are required under, and is, and at
all times in the past has been in material compliance with all Environmental
Laws.
(b) To the knowledge of HCCH, there are no underground tanks of any type
(including tanks storing gasoline, diesel fuel, oil or other petroleum products)
or disposal sites for hazardous substances, hazardous wastes or any other waste,
located on or under the real estate currently owned, leased or used by any
member of the HCCH Group and, to HCCH's knowledge, there were no such disposal
sites located on or under the real estate previously owned, leased or used by
any member of the HCCH Group on the date of the sale thereof by any member of
the HCCH Group or during the period of lease for use by any member of the HCCH
Group.
(c) Except in the ordinary course of business, and in all cases in material
compliance with Environmental Laws, no member of the HCCH Group has engaged any
third party to handle, transport or dispose of hazardous substances or wastes
(including for this purpose, gasoline, diesel fuel, oil or other petroleum
products, or bilge waste) on its behalf.
(d) HCCH Group has delivered to AVEMCO or otherwise made available for
inspection by AVEMCO true, complete, and correct copies of any material reports,
studies, analyses, tests or monitoring in its possession or control pertaining
to the environmental condition of any property currently or formerly owned,
operated or leased by any member of the HCCH Group any other person or entity
whose liability any member of the HCCH Group may have retained or assumed, or
pertaining to any member of the HCCH Group's compliance with Environmental Laws.
(e) No notice, notification, demand, request for information, citation,
summons, complaint or order has been received by any member of the HCCH Group,
and to the knowledge of HCCH, no complaint has been filed, no penalty has been
assessed and no investigation or review is pending, or to HCCH's knowledge, has
been threatened by any governmental entity or other party with respect to any
(i) alleged violation of any Environmental Law by any member of the HCCH Group
or any person or entity whose liability any member of the HCCH Group has or may
have retained or assumed, (ii) alleged failure by any member of the HCCH Group
or any person or entity whose liability any member of the HCCH Group to have any
environmental permit, certificate, license, approval, registration or
authorization required under the Environmental Laws in connection with the
conduct of its business or (iii) Regulated Activity any member of the HCCH Group
or any person or entity whose liability any member of the HCCH Group has or may
have retained or assumed.
(f) To the knowledge of HCCH, no member of the HCCH Group has any material
Environmental Liabilities and there has been no material release of Hazardous
Substances into the environment by any member of the HCCH Group except in
material compliance with applicable Environmental Laws or, to HCCH's knowledge,
with respect to any of their respective properties which has had, or would be
reasonably expected to have, a Material Adverse Effect on HCCH.
SECTION 5.21 STATEMENTS ARE TRUE AND CORRECT. None of the information that
has been or will be supplied by the HCCH Group included in (i) the Registration
Statement to be filed by HCCH with the SEC in connection with the HCCH Common
Stock to be issued in the Merger, (ii) the Joint Proxy Statement to be mailed to
the shareholders of AVEMCO and HCCH in connection with the shareholder meetings,
and (iii) any other documents to be filed with the SEC or any other regulatory
authority in connection with the transactions contemplated hereby will, at the
respective times such documents are filed, and, in the case of the Registration
Statement, when it becomes effective and, with respect to the Joint Proxy
Statement, when first mailed to the shareholders of AVEMCO and HCCH, be false or
misleading with respect to any material fact, or omit to state any material fact
necessary in order to make the statements therein not misleading, or in the case
of the Joint Proxy Statement or any amendment thereof or supplement thereto, at
the time of the shareholders' meetings, be false or misleading with respect to
any material fact or omit to state any material fact necessary to make the
statements therein in light of the circumstances under which they were made not
misleading. All documents that HCCH is responsible for filing with the SEC or
any other regulatory authority
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in connection with the transactions contemplated hereby, will comply in all
material respects with the provisions of applicable law.
SECTION 5.22 DISCLOSURE. (a) No representation or warranty by HCCH or
Merger Sub in this Agreement and no statement contained in the schedules or
exhibits or in any certificate to be delivered pursuant to this Agreement or in
the HCCH Disclosure Schedule contains or will contain any untrue statement of
material fact or omits or will omit to state any material fact necessary, in
light of the circumstances under which it was made, in order to make the
statements herein or therein not misleading.
(b) AVEMCO has been furnished with complete and correct copies of all
agreements, instruments and documents, together with any amendments or
supplements thereto, set forth on, or underlying a disclosure set forth on, the
HCCH Disclosure Schedule. The HCCH Disclosure Schedule is complete and correct
in all material respects.
SECTION 5.23 LABOR MATTERS. No member of the HCCH Group is a party to any
collective bargaining agreement or other labor union contract applicable to
persons employed by any member of the HCCH Group nor does HCCH know of any
activities or proceedings of any labor union to organize any such employees.
SECTION 5.24 COMPLIANCE WITH LAWS. Except for violations which do not have
and would not reasonably be expected to have, individually or in the aggregate,
a Material Adverse Effect on HCCH, no member of the HCCH Group is in violation
of, or has violated, any applicable provisions of any laws, statutes, ordinances
or regulations or any term of any judgment, decree, injunction or order binding
against it.
SECTION 5.25 TRADEMARKS, TRADENAMES, ETC. Each member of the HCCH Group
owns or possesses, or holds a valid right or license to use, all intellectual
property, patents, trademarks, tradenames, service marks, copyrights and
licenses, and all rights with respect to the foregoing, necessary for the
conduct of its business as now conducted, without any known conflict with the
rights of others.
SECTION 5.26 BROKER'S FEES. Neither HCCH nor Merger Sub, nor anyone acting
on the behalf or at the request thereof has any liability to any broker, finder,
investment banker or agent, or has agreed to pay any brokerage fees, finder's
fees or commissions, or to reimburse any expenses of any broker, finder,
investment banker or agent in connection with the Merger except fees to Smith
Barney Inc. to be paid by HCCH that are disclosed in the HCCH Disclosure
Schedule.
SECTION 5.27 OPINION OF FINANCIAL ADVISOR. The financial advisor of HCCH,
Smith Barney Inc. has delivered to HCCH an opinion dated the date of this
Agreement to the effect that as of such date the Exchange Ratio is fair from a
financial point of view to HCCH.
SECTION 5.28 INSURANCE ISSUED BY HCCH INSURER SUBSIDIARIES. To the
knowledge of HCCH:
(a) all material insurance contract benefits payable by the HCCH
Insurer Subsidiaries and by any other Person that is a party to or bound by
any reinsurance, coinsurance or other similar contract with such HCCH
Insurer Subsidiaries, have in all material respects been paid or are in the
course of settlement in accordance with the terms of the insurance,
reinsurance or coinsurance contracts under which they arose, except for
such benefits which the HCCH Insurer Subsidiaries reasonably believe there
is a reasonable basis to contest payment;
(b) no material outstanding insurance contract issued, reinsured,
underwritten or assumed by any HCCH Insurer Subsidiary entitles the holder
thereof or any other Person to receive dividends, distributions or other
benefits based upon the revenues or earnings of such HCCH Insurer
Subsidiary or any other Person;
(c) the underwriting standards utilized and ratings applied by the
HCCH Insurer Subsidiaries and by any other Person that is a party to or
bound by any insurance, reinsurance, coinsurance or other similar contract
with any of the HCCH Insurer Subsidiaries conform as to such contracts in
all material respects to the standards and ratings required pursuant to the
terms of the respective insurance, reinsurance, coinsurance or other
similar contracts;
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(d) all amounts to which each HCCH Insurer Subsidiary is entitled
under reinsurance, coinsurance or similar contracts (including without
limitation amounts based on paid and unpaid losses) are fully collectible,
in accordance with the terms of such contracts; and
(e) each insurance agent, broker, producer, or representative, at the
time such Person wrote, sold, or produced business for any HCCH Insurer
Subsidiary, was duly licensed under state insurance laws for the type of
business written, sold or produced by such Person in the particular
jurisdiction in which such Person wrote, sold or produced such business for
the HCCH Insurer Subsidiary.
SECTION 5.29 EXAMINATION REPORTS. HCCH has delivered to AVEMCO copies of
the most recent examination reports, including related management letters, of
each of the HCCH Insurer Subsidiaries conducted by any state insurance
department examiners, and reflecting the results of the most recent examinations
of the affairs of such HCCH Insurer Subsidiaries, and will furnish promptly to
HCCH any additional such reports or drafts of such reports received by HCCH or
any HCCH Insurer Subsidiary prior to Closing. All material deficiencies or
violations noted in such examination reports for the periods examined have
either been resolved or are being resolved to the satisfaction of or accepted by
the insurance regulatory authorities of the states conducting such examinations,
without any enforcement action taken against any such HCCH Insurer Subsidiary.
There are no examinations by any state insurance department examiners in
progress at any HCCH Insurer Subsidiary, nor, to the knowledge of HCCH, pending
or scheduled with respect to any HCCH Insurer Subsidiary.
ARTICLE VI
PRE-CLOSING COVENANTS
SECTION 6.1 COOPERATION AND COMMERCIALLY REASONABLE EFFORTS. (a) AVEMCO
and HCCH shall cooperate in good faith and take all actions reasonably necessary
or appropriate to file within ten days of the date hereof, and expeditiously and
diligently prosecute to a favorable conclusion, the HSR Reports required to be
filed by each of them in connection herewith with the Federal Trade Commission
(the "FTC") and the Department of Justice (the "DOJ") pursuant to the HSR Act;
provided that HCCH shall not be required to accept any conditions that may be
imposed by the FTC or the DOJ in connection with such filings that would require
the divestiture of any HCCH or AVEMCO assets or otherwise have a Material
Adverse Effect on such party.
(b) AVEMCO and HCCH agree that from the date of this Agreement through the
Effective Time, neither party shall enter into any transaction with a third
party or recapitalization that would have the effect of impeding the ability to
obtain HSR Act clearance; provided however, that the provisions of Section 6.6
hereof shall be effective notwithstanding this Section 6.1(b).
(c) Each party shall cooperate with the other and use commercially
reasonable efforts to (i) receive all necessary and appropriate consents of
third parties to the transactions contemplated hereunder, (ii) satisfy all
requirements prescribed by law for, and all conditions set forth in this
Agreement to, the consummation of the Merger, and (iii) effect the Merger in
accordance with this Agreement at the earliest practicable date.
SECTION 6.2 REGISTRATION STATEMENT AND JOINT PROXY STATEMENT; SPECIAL
MEETINGS. (a) As promptly as practical, after the execution of this Agreement,
HCCH and AVEMCO shall prepare and file with the SEC the Joint Proxy Statement to
be sent to the shareholders of HCCH and AVEMCO in connection with the meeting of
HCCH's shareholders (the "HCCH's shareholders' meeting") and AVEMCO's
shareholders (the "AVEMCO's shareholders' meeting") to consider the Merger and
HCCH shall prepare and file with the SEC a registration statement on Form S-4
pursuant to which the shares of HCCH common stock to be issued as a result of
the Merger will be registered with the SEC (the "Registration Statement") in
which the Joint Proxy Statement will be included as a prospectus. HCCH and
AVEMCO shall use all reasonable efforts to cause the Registration Statement to
become effective as soon after such filing is practical. The Joint Proxy
Statement shall include the recommendation of the Board of Directors of AVEMCO
in favor of this Agreement and the Merger and the recommendation of the Board of
Directors of HCCH in favor of the issuance of shares of HCCH Common Stock
pursuant to the Merger, provided that the Board of Directors of AVEMCO may
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withdraw such recommendation, after consultation with its outside legal counsel
and compliance with any applicable requirements of Section 6.6 hereof, if it
determines in good faith that the withdrawal of such recommendation is necessary
for the Board of Directors to comply with its fiduciary duties under applicable
law. HCCH and AVEMCO shall make all other necessary filings with respect to the
Merger under the Securities Act and the Exchange Act and the rules and
regulations thereunder.
(b) Each of the parties will cooperate in the preparation of the
Registration Statement and the Joint Proxy Statement. Each of the parties will
as promptly as practicable after the date hereof furnish all such data and
information relating to it as the other may reasonably request for the purpose
of including such data and information in the Registration Statement and Joint
Proxy Statement. Each party shall notify the other of the receipt of any
comments of the SEC with respect to the Registration Statement or the Joint
Proxy Statement and of any requests by the SEC for any amendment or supplement
thereto or for additional information and shall provide to the other promptly
copies of all correspondence to and from the SEC with respect to the
Registration Statement or the Joint Proxy Statement. HCCH shall give AVEMCO and
its counsel the opportunity to review the Registration Statements and the Joint
Proxy Statement and all responses to requests for additional information by and
replies to comments of the SEC before their being filed with, or sent to, the
SEC. Each party agrees to use commercially reasonable efforts, after
consultation with the other parties hereto, to respond promptly to all such
comments of and requests by the SEC and to cause (x) the Registration Statement
to be declared effective by the SEC at the earliest practicable time and to be
kept effective as long as is necessary to consummate the Merger, and (y) the
Joint Proxy Statement to be mailed to the holders of HCCH Common Stock and
AVEMCO Common Stock entitled to vote at the meetings of the stockholders of HCCH
and AVEMCO at the earliest practicable time.
(c) Each of the parties shall, as soon as practicable following
effectiveness of the Registration Statement, take all action necessary under the
DGCL and its respective Certificate of Incorporation and Bylaws to convene a
special meeting of its respective shareholders (the "Special Meetings") for the
purpose of approving the transactions contemplated by this Agreement. The
parties shall coordinate and cooperate with respect to the timing of the Special
Meetings and shall use commercially reasonable efforts to cause the Special
Meetings to be held on the same day and as soon as practicable after the date
hereof.
(d) AVEMCO shall take such action as may be necessary to insure that (i)
the information to be supplied by AVEMCO for inclusion in the Registration
Statement shall not at the time the Registration Statement is declared effective
by the SEC contain any untrue statement of a material fact or omit to state any
material fact required to be stated in the Registration Statement or necessary
in order to make the statements in the Registration Statement, in light of the
circumstances under which they were made, not misleading, and (ii) the
information supplied by AVEMCO for inclusion in the Joint Proxy Statement shall
not, on the date the Joint Proxy Statement is first mailed to shareholders of
AVEMCO or HCCH, at the time of the AVEMCO Shareholders' Meeting and HCCH
Shareholders' Meeting, and at the Effective Time, contain any statement which,
at such time and in light of the circumstances under which it shall be made, is
false or misleading with respect to any material fact, or omit to state any
material fact necessary in order to make the statements made in the Joint Proxy
Statement not false or misleading, or omit to state any material fact necessary
to correct any statement in any earlier communication with respect to the
solicitation of proxies for the AVEMCO Shareholders' Meeting or HCCH
Shareholders' Meeting which has become false or misleading. If at any time prior
to the Effective Time any event relating to AVEMCO or any of its Affiliates',
officers, or directors is discovered by AVEMCO which should be set forth in an
amendment to the Registration Statement or a supplement to the Joint Proxy
Statement, AVEMCO shall promptly so inform HCCH.
(e) HCCH shall take such action as may be necessary to insure that (i) the
information supplied by HCCH for inclusion in the Registration Statement shall
not at the time the Registration Statement is declared effective by the SEC
contain any untrue statement of a material fact or omit to state any material
fact required to be stated in the Registration Statement or necessary in order
to make the statements in the Registration Statement, in light of the
circumstances under which they were made, not misleading, and (ii) the
information supplied by HCCH for inclusion in the Joint Proxy Statement shall
not on the date the Joint Proxy Statement is first mailed to shareholders of
HCCH or AVEMCO, at the time of the HCCH
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Shareholders' Meeting and AVEMCO Shareholders' Meeting, and at the Effective
Time, contain any statement which, at such time and in light of the
circumstances under which it shall be made, is false or misleading with respect
to any material fact, or omit to state any material fact necessary in order to
make the statements made in the Joint Proxy Statement not false or misleading,
or omit to state any material fact necessary to correct any statement in any
earlier communication with respect to the solicitation of proxies for the HCCH
Shareholders' Meeting or AVEMCO Shareholders' Meeting which has become false or
misleading. If at any time prior to the Effective Time any event relating to
HCCH or any of its Affiliates', officers, or directors is discovered by HCCH
which should be set forth in an amendment to the Registration Statement or a
supplement to the Joint Proxy Statement, HCCH shall promptly so inform AVEMCO.
SECTION 6.3 CONDUCT OF BUSINESS BY BOTH PARTIES PRIOR TO THE CLOSING
DATE. During the period from the date of this Agreement to the Effective Time,
each member of the AVEMCO Group and the HCCH Group shall each use its
commercially reasonable efforts to preserve, in all material respects, the
goodwill of employees, suppliers, customers, landlords, contractors, bankers,
and others having business relations with it and to do nothing knowingly to
impair its ability to keep and preserve its business as it exists on the date of
this Agreement. Without limiting the generality of the foregoing, during the
period from the date of this Agreement to the Effective Time of the Merger each
member of the AVEMCO Group and the HCCH Group shall not, without the prior
written consent of the other:
(a) conduct their business outside of the ordinary course consistent
with past practice;
(b) adopt a plan of complete or partial liquidation or declare, set
aside, increase or pay any dividend (including any stock dividends), or
declare or make any distribution on, or directly or indirectly combine,
redeem, reclassify, purchase, or otherwise acquire, any shares of its
capital stock or authorize the creation or issuance of, or, issue, deliver
or sell any additional shares of its capital stock or any securities or
obligations convertible into or exchangeable for its capital stock or
effect any stock split or reverse stock split or other recapitalization,
except (i) dividends consistent with past practice (except that AVEMCO
shall not declare a dividend with a record date before June 1, 1997 without
the written consent of HCCH and shall not declare a dividend with a record
date of June 1, 1997 or subsequently if on or before such date the date of
the AVEMCO Shareholders Meeting to consider the Merger has been fixed and
announced by the AVEMCO Board of Directors and the Joint Proxy Statement
has been distributed to the shareholders of AVEMCO), (ii) the issuance of
any shares upon the exercise of any stock options outstanding on the date
of this Agreement issued pursuant to any HCCH Stock Option Plan and
pursuant to its existing terms, (iii) the acceptance by HCCH of any shares
in consideration of the exercise of such stock options, HCCH Stock Option
or in satisfaction of any tax or tax withholding obligations of the holders
of such options; (iv) the issuance of any shares upon the exercise of any
AVEMCO Stock Options outstanding on the date of this Agreement; (v) the
acceptance by AVEMCO of any shares of AVEMCO Common Stock in consideration
of the exercise of AVEMCO Stock Options or in satisfaction of any tax or
tax withholding obligations of the holders of such AVEMCO Stock Options; or
(vi) HCCH may issue and deliver shares of its capital stock or any
securities or obligations convertible into or exchangeable for its capital
stock pursuant to any acquisition by HCCH subject to a determination by the
board of directors of HCCH that such acquisition is fair to its
shareholders and if such issuance requires shareholder approval, HCCH shall
obtain a fairness opinion from a nationally recognized investment banking
firm in connection therewith.
(c) amend its certificate or articles of incorporation or by-laws, or
adopt or amend any resolution or agreement concerning indemnification of
its directors, officers, employees or agents;
(d) pledge or otherwise encumber any shares of its capital stock, any
other voting securities or any securities convertible into, or any rights,
warrants or options to acquire, any such shares, or any other voting
securities or convertible securities;
(e) commit or omit to do any act which act or omission would cause a
breach of any covenant contained in this Agreement or would cause any
representation or warranty contained in this Agreement to become untrue, as
if each such representation and warranty were continuously made from and
after the date hereof;
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(f) violate any applicable law, statute, rule, governmental regulation
or order that would have a Material Adverse Effect on such party;
(g) fail to maintain its books, accounts and records in the usual
manner on a basis consistent with that heretofore employed or change any
accounting method, policy, practice or application previously employed;
(h) fail to pay, or to make adequate provision in all material
respects for the payment of, all Taxes, interest payments and penalties due
and payable (for all periods up to the Effective Date, including that
portion of its fiscal year to and including the Effective Date) to any
city, parish, state, the United States, foreign or any other taxing
authority, except those being contested in good faith by appropriate
proceedings and for which sufficient reserves have been established, or
make any elections with respect to Taxes;
(i) make any material tax election that is inconsistent with any
corresponding election made on a prior return or settle or compromise any
income tax liability for an amount materially in excess of the liability
therefor that is reflected on the AVEMCO Financial Statements or HCCH
Financial Statements, as the case may be;
(j) take any action that would prevent the accounting for the business
combination to be effected by the Merger as a pooling-of-interests;
(k) authorize any of, or agree or commit to do any of, the foregoing
actions.
SECTION 6.4 CONDUCT OF BUSINESS OF MERGER SUB. Prior to the Effective
Time, except as may be required by applicable law and subject to the other
provisions of this Agreement, HCCH shall cause Merger Sub to (a) perform its
obligations under this Agreement in accordance with its terms, (b) not incur
directly or indirectly any liabilities or obligations other than those incurred
in connection with the Merger and the other transactions contemplated hereby,
(c) not engage directly or indirectly in any business or activities of any type
or kind and not enter into any agreements or arrangements with any person, or be
subject to or bound by any obligation or undertaking, which is not contemplated
by this Agreement and (d) not create, grant or suffer to exist any Lien upon its
properties or assets which would attach to any properties or assets of the
Surviving Corporation after the Effective Time.
SECTION 6.5 CONDUCT OF BUSINESS BY AVEMCO PRIOR TO THE CLOSING
DATE. During the period from the date of this Agreement to the Effective Time,
in addition to its covenants set forth in Section 6.3, each member of the AVEMCO
Group shall use commercially reasonable efforts to preserve the possession and
control of all of its assets other than those permitted to be disposed of
pursuant to the terms of this Agreement, shall conduct its business only in the
ordinary course consistent with past practice, and, except as otherwise provided
herein, shall not, without the prior written consent of HCCH:
(a) except for normal compensation increases, hirings and promotions
in the ordinary course of business consistent with past practice, enter
into or modify any written or oral employment, severance or similar
agreement or arrangement with any director, executive officer or employee
or grant any increase in the rate of wages, salaries, bonuses or other
compensation or benefits of any such person;
(b) acquire or agree to acquire (i) by merging or consolidating with,
or by purchasing a substantial portion of the assets of, or by any other
manner, any business or any corporation, partnership, joint venture,
association or other business organization or division thereof or (ii) any
assets that are material, individually or in the aggregate, to the AVEMCO
Group, except purchases of investments and other assets in the ordinary
course of business consistent with past practice and for a fair and
adequate consideration;
(c) other than in the ordinary course of business consistent with past
practice, and for a fair and adequate consideration, sell, lease, license,
mortgage or otherwise encumber or subject to any Lien or otherwise dispose
of any of its other properties or assets;
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(d) other than in the ordinary course of business consistent with past
practice, and for a fair and adequate consideration, incur any indebtedness
for borrowed money, or guarantee any such indebtedness of another Person,
issue or sell any debt securities or warrants or other rights to acquire
any debt securities of such party or any of its subsidiaries, guarantee any
debt securities of another Person, enter into any "keep well" or other
agreement to maintain any financial condition of another Person or enter
into any arrangement having the economic effect of any of the foregoing, or
make any loans, advances or capital contributions to, or investments in,
any other Person, or alter any credit terms;
(e) make or agree to make any new capital expenditures other than
those made in the ordinary course of business and consistent with past
practices;
(f) other than in the ordinary course of business consistent with past
practice, and for a fair and adequate consideration, place or suffer to
exist on any of its assets or properties any Lien, other than Liens listed
on the AVEMCO Disclosure Schedule and Permitted Liens, or forgive any
material indebtedness owing to it or any claims which it may have
possessed, or waive any right of substantial value or discharge or satisfy
any material noncurrent liability;
(g) other than in the ordinary course of business consistent with past
practice, grant or pay to any salaried employee or former salaried
employee, officer or director of any member of the AVEMCO Group any award
under any AVEMCO discretionary or other bonus plans or under any AVEMCO
Stock Option Plans;
(h) fail to maintain in all material respects all licenses,
certificates of authority, qualifications and Governmental Authorizations
to do business in which it is so licensed, qualified or authorized;
(i) other than in the ordinary course of business consistent with past
practice, fail to maintain in full force and effect, other than those that
expire in accordance with their terms, all material contracts, including
all reinsurance, coinsurance and similar agreements of each AVEMCO Insurer
Subsidiary, and not permit or effect any material amendment thereof without
the prior written consent of HCCH;
(j) fail to cause each AVEMCO Insurer Subsidiary to properly prepare
and timely file all financial statements, reports and Tax returns required
to be filed by such AVEMCO Insurer Subsidiaries with any Governmental
Authorities with respect to the business, operations or affairs of such
AVEMCO Insurer Subsidiary, and pay duly and fully all Taxes indicated as
due on such Tax returns, and all required filing fees;
(k) fail to cause all reserves with respect to insurance contracts
issued by each AVEMCO Insurer Subsidiary to be established or reflected on
the books and records of such AVEMCO Insurer Subsidiaries on a basis
consistent with those reserves and reserving methods followed by the AVEMCO
Insurer Subsidiaries at December 31, 1996, and to continue to own
investment assets that qualify under state insurance laws and regulations
as admitted assets in an amount at least equal to all of the required
reserves of such AVEMCO Insurer Subsidiaries, established in accordance
with generally accept actuarial principles and practices consistently
applied; or
(l) authorize any of, or agree or commit to do any of, the foregoing
actions.
SECTION 6.6 NO SOLICITATIONS. (a) No member of the AVEMCO Group shall
directly or indirectly, through any officer, director, employee, representative
or agent of any member of the AVEMCO Group, solicit or encourage the initiation
or submission of any inquiries, proposals or offers regarding any acquisition,
merger, take-over bid, sale of all or substantially all of the assets or 20% or
more of the outstanding shares of capital stock of AVEMCO, whether or not in
writing and whether or not delivered to the shareholders of AVEMCO generally
(including without limitation by way of a tender offer) (any of the foregoing
inquiries or proposals being referred to herein as an "Acquisition Proposal");
provided, however, that nothing contained in this Agreement shall prevent the
Board of Directors of AVEMCO from referring any third party to this Section 6.6.
Nothing contained in this Section 6.6 or any other provision of this Agreement
shall prevent the Board of Directors of AVEMCO from considering or negotiating
an unsolicited bona fide Acquisition Proposal. If the Board of Directors of
AVEMCO, after duly considering advice, written or otherwise, of
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outside counsel and financial advisors to AVEMCO, determines in good faith that
it would be inconsistent with its fiduciary responsibilities to not approve or
recommend (and in connection therewith withdraw or modify its approval or
recommendation of this Agreement, and the transactions contemplated hereby) a
Superior Proposal (as defined below), then, notwithstanding any such approval or
recommendation (x) AVEMCO shall not enter into any agreement with respect to the
Superior Proposal and (y) any other obligation of AVEMCO under this Agreement
shall not be affected, unless this Agreement is terminated pursuant to Section
9.1(h) hereof prior to or simultaneously with the grant of such approval or the
making of such recommendation and AVEMCO, within six Business Days following
such termination resulting from such Superior Proposal, pays HCCH the
Termination Fee (as defined in Section 9.1(h)). As used herein the term
"Superior Proposal" means an unsolicited bona fide proposal made by a third
party to acquire AVEMCO pursuant to a tender or exchange offer, a merger, a sale
of all or substantially all of its assets or otherwise that the AVEMCO Board of
Directors determines in its good faith judgment to be more favorable to the
holders of the AVEMCO Common Stock than the transactions contemplated by this
Agreement (after considering the advice, written or otherwise, of AVEMCO's
professional advisors).
(b) AVEMCO shall immediately notify HCCH after receipt of any formal,
informal, written or oral Acquisition Proposal or any request for nonpublic
information relating to any member of the AVEMCO Group in connection with an
Acquisition Proposal or for access to the properties, books or records of any
member of the AVEMCO Group that informs the Board of Directors or any member of
the AVEMCO Group that some other Person is considering making, or has made, an
Acquisition Proposal. To the extent not prohibited by confidentiality provisions
imposed by the offering party or by applicable law or fiduciary duty, such
notice to HCCH shall be made orally and in writing and shall indicate in
reasonable detail the identity of the offeror and the terms and conditions of
such proposal, inquiry or contact.
(c) If AVEMCO has determined to terminate this Agreement pursuant to
subparagraph (a) above, prior to the time AVEMCO gives such notice to HCCH of
such termination, AVEMCO shall give written notice to HCCH of its intent to
terminate and, thereafter HCCH shall have five (5) business days in which to
propose additional terms to this Agreement (the "New Proposal"); provided,
however, if HCCH's New Proposal is equal to the Superior Proposal, AVEMCO shall
be obligated to reject the Superior Proposal and accept HCCH's New Proposal.
(d) If the Board of Directors of AVEMCO receives a request for material
nonpublic information by a Person who makes or who states in writing that it
intends, subject to satisfactory review of such nonpublic information, to make a
bona fide Acquisition Proposal, AVEMCO may, subject to the execution of a
confidentiality agreement substantially similar to that then in effect between
AVEMCO and HCCH, provide such Person with access to information regarding
AVEMCO.
(e) Nothing contained in this Section 6.6 shall prevent AVEMCO from
complying with Rule 14e-2(a) or Rule 14d-9 promulgated under the Exchange Act,
if applicable, with regard to an Acquisition Proposal made in the form of a
tender offer by a third party.
SECTION 6.7 PRESS RELEASES. HCCH and AVEMCO shall jointly prepare any
press release with respect to the transactions described in this Agreement.
Except with respect to the issuance of a press release by HCCH with respect to
its 1996 year-end earnings, each of HCCH and AVEMCO will provide to the other at
least 24 hours before issuing any press release a copy of such press release and
an opportunity to provide comments thereon. HCCH and AVEMCO, as applicable,
shall give due consideration to any such comments, but shall retain final
authority with respect to any such press release, and shall not issue any such
press releases or make any such public statement before complying with the terms
hereof, except as may be and only when required by applicable law, court process
or by obligations pursuant to a listing agreement with the NYSE.
SECTION 6.8 ACCESS TO INFORMATION AND CONFIDENTIALITY. (a) Prior to the
Closing Date, each of AVEMCO and HCCH shall afford to the other party and to the
officers, employees. accountants, counsel, financial advisors and other
representatives of such other party, reasonable access during normal business
hours to their respective premises, books and records and will furnish to the
other party (i) a copy of each report, schedule, registration statement and
other documents filed by it during such period pursuant to the
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requirements of federal or state securities laws, and (ii) such other
information with respect to its business and properties as such other party
reasonably requests.
(b) Each of AVEMCO and HCCH will, and will use its commercially reasonable
efforts to cause its officers, directors, employees, agents and representatives
to, (i) hold in confidence, unless compelled to disclose by judicial or
administrative process, or, in the opinion of its counsel, by other requirements
of law, or unless disclosed in an action or proceeding brought by a party hereto
in pursuit of its rights or in the exercise of its remedies hereunder, all
nonpublic information concerning the other party furnished in connection with
the transactions contemplated by this Agreement until such time as such
information becomes publicly available (otherwise than through the wrongful act
of such person), (ii) not release or disclose such information to any other
person, except in connection with this Agreement to its auditors, attorneys,
financial advisors, other consultants and advisors, and (iii) not use such
information for any competitive or other purpose other than with respect to its
consideration and evaluation of the transactions contemplated by this Agreement.
No investigation pursuant to this paragraph or otherwise shall affect any
representation or warranty contained in this Agreement or any condition to the
obligations of the parties hereto. Any such information or material obtained
pursuant to this Section 6.8(b) that constitutes "Confidential Information" (as
such term is defined in the letter agreement dated as of November 14, 1996
between AVEMCO and HCCH (the "Confidentiality Agreement")) shall be governed by
the terms of the Confidentiality Agreement. In the event of termination of this
Agreement for any reason, AVEMCO and HCCH will promptly return or destroy all
documents containing nonpublic information so obtained from the other party and
any copies made of such documents and any summaries, analyses or compilations
made therefrom.
SECTION 6.9 CONSULTATION AND REPORTING. During the period from the date of
this Agreement to the Closing Date, each party will, subject to any applicable
legal or contractual restrictions, confer on a regular and frequent basis with
the other party to report material operational matters and to report on the
general status of ongoing operations including profits margin options, cost
increases and material adverse trends. Each party will notify the other party of
any unexpected emergency or other material change in the normal course of its
business or in the operation of its properties and of any material governmental
complaints, investigations, adjudicatory proceedings, or hearings (or
communications indicating that the same may be contemplated) and will keep the
other party fully informed of such events and permit representatives of the
other party prompt access to all materials prepared by or on behalf of such
party or served on of the other party, in connection therewith. Each party shall
further, upon obtaining knowledge of any of the following, promptly notify the
other party of: (a) any notice or other communication from any person alleging
that the consent of such person is or may be required in connection with the
Merger, (b) any notice or other communication from any governmental or
regulatory agency or authority in connection with the Merger, and (c) any
actions, suits, claims, investigations or other judicial proceedings commenced
or threatened against any member of the AVEMCO Group or the HCCH Group which
relate to the consummation of the Merger; provided that no party shall be
required to make any disclosure to the extent such disclosure would constitute a
violation of any applicable law.
SECTION 6.10 NOTICE AND CURE. Each party will notify the other of, and
will use all commercially reasonable efforts to cure before the Closing, any
event, transaction or circumstance, as soon as practical after it becomes known
to such party, that causes or will cause any covenant or agreement of either
party under this Agreement to be breached or that renders or will render untrue
any representation or warranty of either party contained in this Agreement. Each
party also will notify the other in writing of, and will use all commercially
reasonable efforts to cure, before the Closing, any violation or breach, as soon
as practical after it becomes known to such party, of any representation,
warranty, covenant or agreement made by either party. No notice given pursuant
to this paragraph shall have any effect on the representations, warranties,
covenants or agreement contained in this Agreement for purposes of determining
satisfaction of any condition contained herein.
SECTION 6.11 UPDATE SCHEDULES. Each party hereto will promptly disclose to
the other any information contained in its representations and warranties and on
the related disclosure schedules that, because of an event occurring after the
date hereof, is incomplete or no longer correct; provided, however, that none of
such
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disclosures will be deemed to modify, amend or supplement the representations
and warranties of such party, unless the other party consents to such
modification, amendment or supplement in writing.
SECTION 6.12 MERGER SUB SHAREHOLDER APPROVAL. HCCH, as the sole
shareholder of Merger Sub, shall take all action necessary to effect the
necessary shareholder approval by Merger Sub of this Agreement.
SECTION 6.13 AFFILIATES" AGREEMENT. The AVEMCO Disclosure Schedule sets
forth a list which in AVEMCO's judgment represents all of AVEMCO's "affiliates"
(as that term is used in paragraph (c) and (d) of Rule 145 under the Securities
Act). To facilitate the treatment of the Merger for accounting purposes as a
pooling-of-interests, AVEMCO shall, and shall cause each other member of the
AVEMCO Group to, use commercially reasonable efforts to deliver to HCCH within
ten days of the date of this Agreement a written agreement from each of its
affiliates (the "Affiliates' Agreement") in form and substance attached hereto
as Appendix "B". HCCH shall, within ten days of the date of this Agreement, use
commercially reasonable efforts to cause to be executed by each person HCCH
believes to be an "affiliate" (as that term is used in paragraphs (c) and (d) of
Rule 145 under the Securities Act) of HCCH, a written agreement in form and
substance attached hereto as Appendix "C" and shall deliver copies thereof to
AVEMCO.
SECTION 6.14 NECESSARY CONSENTS. Each of HCCH and AVEMCO shall, and shall
cause each other member of the HCCH Group or AVEMCO Group, as applicable, to,
use commercially reasonable efforts to obtain such written consent and take such
other actions as may be necessary or appropriate for HCCH or AVEMCO and each
other member of the HCCH Group or AVEMCO Group, as applicable, to facilitate and
allow the consummation of the transactions provided for herein and to facilitate
and allow HCCH to carry on the acquired business after the Closing Date.
SECTION 6.15 REGULATORY APPROVAL. Each of HCCH and AVEMCO shall, and shall
cause each other member of the HCCH Group and the AVEMCO Group respectively to,
where required pursuant to the HSR Act or the rules or regulations of any
regulatory agency, including all required insurance regulatory agencies, execute
and file, or join in the execution and filing, with any application or other
document that may be necessary in order to obtain the authorization, approval or
consent of any governmental body, federal, state, local or foreign which may be
reasonably required, in connection with the consummation of the transaction
provided for in this Agreement. Each of AVEMCO and HCCH shall, and shall cause
each other member of the AVEMCO Group and HCCH Group, respectively, to use
commercially reasonable efforts to obtain or assist HCCH in obtaining all such
authorizations, approvals and consents.
SECTION 6.16 ACTIONS CONTRARY TO STATED INTENT. Subject to the terms and
conditions of this Agreement, neither AVEMCO nor HCCH shall, from or after the
date hereof and either before or after the Effective Time, take or fail to take
the extent such action or omission any action would prevent the Merger from
qualifying as a reorganization under Section 368(a) of the Code or prevent the
business combination to be effected by the Merger from being accounted for as a
pooling-of-interests under generally accepted accounting principles. Each of
HCCH and AVEMCO shall use commercially reasonable efforts to cause its
affiliates not to take any action that would preclude the ability of HCCH to
account for the business combination to be effected by the Merger as a
pooling-of-interests.
SECTION 6.17 SATISFACTION OF CONDITIONS PRECEDENT. Subject to the terms
and conditions of this Agreement, HCCH and AVEMCO will each use commercially
reasonable efforts to satisfy or cause to be satisfied all the conditions
precedent that are applicable to each of them, and to cause the transactions
contemplated by this Agreement to be consummated, and, without limiting the
generality of the foregoing, to obtain all material consents and authorizations
of third parties and to make filings with, and give all notices to, third
parties that may be necessary or reasonably required on its part in order to
effect the transactions contemplated hereby.
SECTION 6.18 TAX COOPERATION. Subject to the terms and conditions of this
Agreement, HCCH and AVEMCO shall cooperate in the preparation, execution and
filing of all returns, questionnaires, applications or other documents regarding
any transfer or gains, sales, use, transfer, value added, stock transfer and
stamp taxes, any transfer, recording, registration and other fees, and any
similar taxes or fees which become payable in connection with the transactions
contemplated by this Agreement that are required or permitted to be filed
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on or before the Effective Time. Each of HCCH and AVEMCO shall not take or fail
to take any action if such action or omission would cause HCCH, AVEMCO or their
respective shareholders (except to the extent that any shareholder of AVEMCO may
receive cash in lieu of fractional shares) to recognize gain or loss for federal
income tax purposes as a result of the exchange of HCCH Common Stock for AVEMCO
Common Stock in the Merger.
SECTION 6.19 STANDSTILL. If this Agreement is terminated, no member of the
AVEMCO Group or the HCCH Group nor any Affiliate (whether or not such person or
entity is an Affiliate thereof on the date hereof) of the AVEMCO Group or the
HCCH Group shall for a period of two years following such termination (i)
acquire, offer to acquire or agree to acquire directly or indirectly by purchase
or otherwise any voting securities of any member of the other group, (ii) make
or in any way participate directly or indirectly in any "solicitation" of
"proxies" to vote (as such terms are used in the proxy rules of the SEC) or seek
to advise or influence any person or entity with respect to the voting of any
voting securities of any member of the other group, (iii) form, join or in any
way participate in a "group" within the meaning of Section 13(d)(3) of the
Exchange Act with respect to any voting securities of the other party or (iv)
otherwise act alone or in concert with others to seek to control or influence
the management, board of directors or policies of any member of the other party,
provided, however, that if AVEMCO terminates this Agreement pursuant to Section
9.1(g) in connection with the receipt of a Superior Proposal, no member of the
HCCH Group shall be bound by the terms of this Section and provided further that
the terms of this Section shall not apply to any member of the AVEMCO Group if
this Agreement cannot be consummated because HCCH has willfully and
intentionally failed, on or before the Closing Date, to satisfy those conditions
to be satisfied by HCCH that are within its control to satisfy nor to any member
of the HCCH Group if this Agreement cannot be consummated because AVEMCO has
willfully and intentionally failed, on or before the Closing Date, to satisfy
the conditions to be satisfied by AVEMCO that are within its control to satisfy.
SECTION 6.20 STOCK EXCHANGE LISTING. HCCH shall use commercially
reasonable efforts to cause the shares of HCCH Common Stock to be issued in the
Merger in accordance with this Agreement to be approved for listing on the NYSE,
subject to official notice of issuance, prior to the Closing Date.
SECTION 6.21 EXERCISE OF STOCK OPTIONS. AVEMCO shall provide to HCCH a
schedule, as of a date within five days of the date hereof and the Closing Date,
setting forth the name of each person who since December 31, 1996 has exercised
an option for the purchase of shares of AVEMCO Common Stock, together with the
number of shares received pursuant to such exercise.
ARTICLE VII
CLOSING CONDITIONS
SECTION 7.1 CONDITIONS TO OBLIGATIONS OF HCCH AND MERGER SUB. The
obligations of HCCH and Merger Sub hereunder are also subject to the fulfillment
or satisfaction, on and as of the Effective Date, of each of the following
conditions (any one or more of which may be waived by HCCH, but only in a
writing signed by HCCH):
(a) The representations and warranties of AVEMCO contained in Article
IV shall be true and accurate on and as of the Effective Date with the same
force and effect as if they had been made on the Effective Date or, in the
case of representations and warranties made as of a specified date earlier
than the Effective Date, on and as of such earlier date, except as affected
by the transactions contemplated by this Agreement and except for such
failures of representations or warranties to be true and correct (without
regard to any materiality qualifiers contained therein) which, individually
or in the aggregate, are not having and are not reasonably expected to have
a Material Adverse Effect on AVEMCO, and AVEMCO shall have provided HCCH
with a certificate executed by the Chief Executive Officer or the President
and the Chief Financial Officer of AVEMCO, dated as of the Effective Date,
to such effect.
(b) AVEMCO shall have performed and complied with all of its
covenants, agreements and obligations contained herein, in all material
respects, on or before the Effective Date, and HCCH shall
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receive a certificate to such effect signed by the Chief Executive Officer
or the President and Chief Financial Officer of AVEMCO.
(c) Except as set forth in the AVEMCO Disclosure Schedule, there shall
not have occurred any event or circumstance resulting in a Material Adverse
Effect with respect to AVEMCO from the date of this Agreement through the
Closing Date.
(d) HCCH shall have received from each person or entity who may be
deemed pursuant to Section 6.13 to be an affiliate of AVEMCO or any other
member of the AVEMCO Group a duly executed Affiliates' Agreement and such
agreements shall remain in full force and effect.
(e) HCCH shall have received a written opinion from Winstead Sechrest
& Minick P.C. to the effect that the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code. In
preparing such opinion, counsel may rely on (and to the extent reasonably
required, the parties and their shareholders shall make) reasonable
representations related thereto.
(f) HCCH shall have received the opinions of Piper & Marbury L.L.P.,
counsel to AVEMCO and Thomas H. Chero, Senior Vice President of AVEMCO, in
the form and substance as attached hereto as Appendix "D" and Appendix "E"
respectively.
(g) The waiting periods (and any extensions thereof) applicable to the
Merger under the HSR Act shall have been terminated or shall have expired
and no condition shall have been imposed on AVEMCO or HCCH to obtain such
termination that would require the divestiture of any of either of such
party's assets or otherwise have a Material Adverse Effect on such party.
(h) Smith Barney Inc. shall have confirmed as of a date within five
days before the mailing of the Joint Proxy Statement to the shareholders of
HCCH the opinion to which Section 5.27 refers, and such opinion shall not
have been withdrawn as of the date of the Closing.
(i) AVEMCO shall have filed with the SEC its annual report on Form
10-K for the fiscal year ending December 31, 1996, which shall contain an
unqualified report from its independent auditors.
(j) HCCH shall have received all regulatory approvals of insurance
regulatory authorities with respect to the acquisition of control of the
AVEMCO Insurer Subsidiaries.
(k) AVEMCO will have delivered to HCCH such other documents and
certificates as HCCH may reasonably request.
SECTION 7.2 CONDITIONS TO OBLIGATIONS OF AVEMCO. AVEMCO's obligations
hereunder are subject to the fulfillment or satisfaction, on and as of the
Effective Date, of each of the following conditions (any one or more of which
may be waived, but only in a writing signed by AVEMCO):
(a) The representations and warranties of HCCH set forth herein shall
be true and accurate on and as of the Effective Date with the same force
and effect as if they had been made on the Effective Date or, in the case
of representations and warranties made as of a specified date earlier than
the Effective Date, on and as of such earlier date, except as affected by
the transactions contemplated by this Agreement and except for such
failures of representations or warranties to be true and correct (without
regard to any materiality qualifiers contained therein) which, individually
or in the aggregate, are not having and are not reasonably expected to have
a Material Adverse Effect on HCCH, and HCCH shall have provided AVEMCO with
a certificate executed by the Chief Executive Officer or the President and
the Chief Financial Officer of HCCH, dated as of the Effective Date, to
such effect.
(b) HCCH shall have performed and complied with all of its covenants,
agreements and obligations contained herein in all material respects on or
before the Effective Date, and AVEMCO shall receive a certificate to such
effect signed by HCCH's Chief Executive Officer or President and Chief
Financial Officer.
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(c) Except as set forth in the HCCH Disclosure Schedule, there shall
not have occurred any event or circumstance resulting in a Material Adverse
Effect with respect to HCCH from the date of this Agreement through the
Closing Date.
(d) AVEMCO shall have received a written opinion from Piper & Marbury
L.L.P. to the effect that the Merger will constitute a reorganization
within the meaning of Section 368(a) of the Code. In preparing such
opinion, counsel may rely on (and to the extent reasonably required, AVEMCO
shall make) reasonable representations as to facts related thereto.
(e) AVEMCO shall have received from Winstead Sechrest & Minick P.C.,
counsel to HCCH, an opinion in form and substance as attached hereto as
Appendix "F."
(f) HCCH shall have filed with the SEC its annual report on Form 10-K
for the fiscal year ending December 31, 1996, which shall contain an
unqualified report from its independent auditors.
(g) Alex. Brown & Sons Incorporated shall have confirmed as of a date
within five days before the mailing of the Joint Proxy Statement to the
shareholders of AVEMCO the opinion to which Section 4.31 refers, and such
opinion shall not have been withdrawn as of the date of the Closing.
(h) The Average Market Price of HCCH Common Stock shall not be, or
have been, at any time between the date of this Agreement and the Closing
Date, below $23 per share (the "Minimum Acceptable Price"); provided,
however, if such Average Market Price is below the Minimum Acceptable Price
per share prior to the Closing Date, AVEMCO shall be required to notify
HCCH of AVEMCO's election to terminate this Agreement within 72 hours of
any time such Average Market Price is below the Minimum Acceptable Price.
Failure of AVEMCO to so notify HCCH within the time period set forth herein
shall act as a waiver of AVEMCO's right to terminate this Agreement
pursuant to this subparagraph 7.2(h) with respect to such ten-day period,
but shall not act as a waiver with respect to any subsequent ten-day
period, which period may contain days from any other such period.
SECTION 7.3 CONDITIONS APPLICABLE TO ALL PARTIES. The respective
obligations of each of the parties hereto to effect the Merger and the other
transactions contemplated by this Agreement are subject to the fulfillment or
satisfaction, on and as of the Effective Date of each of the following
conditions (any one or more of which may be waived by the other party, but only
in a writing signed by the other party).
(a) The Registration Statement shall have become effective with the SEC
(and no stop order suspending the effectiveness of the Registration Statement
shall have been issued and no proceedings for that purpose shall have been
instituted by the SEC). The Joint Proxy Statement included therein shall have
been mailed to the shareholders of HCCH and AVEMCO. The shares of HCCH Common
Stock to be issued pursuant to the Merger and the shares issuable under the
AVEMCO Option Plans shall have been approved for listing on the NYSE, subject to
official notice of issuance, and the required approval of this Agreement by the
shareholders of HCCH and AVEMCO, under applicable law and the applicable
regulations of the NYSE, as the case may be, shall have been obtained at the
Special Meetings.
(b) No action, suit, or proceeding before any court or governmental or
regulatory authority will be pending, no investigation by any governmental or
regulatory authority will have been commenced, and no action, suit or proceeding
by any governmental or regulatory authority will have been threatened, against
AVEMCO, HCCH or any of the principals, officers or directors of either of them,
seeking to restrain, prevent or change the transactions contemplated hereby or
questioning the legality or validity of any such transactions or seeking damages
in connection with any such transactions.
(c) Any waiting period (and any extension thereof) applicable to the
consummation of the Merger under the HSR Act shall have expired or been
terminated.
(d) HCCH and AVEMCO shall have received letters from Coopers & Lybrand
L.L.P., each dated the date of the Joint Proxy Statement and confirmed in
writing at the Effective Time and addressed to HCCH and AVEMCO, respectively,
stating that the business combination to be effected by the Merger will qualify
as a pooling of interests transaction under Opinion 16 of the Accounting
Principles Board in accordance with generally accepted accounting principles and
all published rules, regulations and policies of the SEC.
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(e) HCCH and AVEMCO shall have received letters from KPMG Peat Marwick,
LLP, each dated the date of the Joint Proxy Statement and confirmed in writing
at the Effective Time and addressed to HCCH and AVEMCO, respectively, stating
that AVEMCO qualifies as an entity that may be a party to a business combination
for which the pooling-of-interests method of accounting would be available.
(f) All governmental and third party consents and approvals, if any,
necessary to permit the consummation of the transactions contemplated by this
Agreement will have been received.
(g) Neither party shall take any action that would have the effect of
preventing or materially delaying the Merger without the consent of the other
party.
ARTICLE VIII
POST-CLOSING COVENANTS
SECTION 8.1 USE OF AVEMCO NAME. HCCH shall be entitled to use the AVEMCO
name and any abbreviation thereof and any associated trade or service marks.
SECTION 8.2 INDEMNIFICATION AND INSURANCE COVERAGE OF DIRECTORS AND
OFFICERS OF THE AVEMCO GROUP.
(a) From and after the Effective Time of the Merger, HCCH and the Surviving
Corporation shall 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 an officer or director of any member of the AVEMCO Group on the
date of this Agreement (an "Indemnified Person") from and against: (i) all
losses, damages, liabilities, judgments and claims (and related expenses
including, but not limited to, attorney's fees and amounts paid in settlement)
based upon or arising in whole or in part out of the fact that such Indemnified
Person is or was a director or officer of a member of the AVEMCO Group and
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 or officers, as the case may be. Subject to an
Indemnified Person's obligation to refund any advances in accordance with the
DGCL, HCCH shall advance all expenses reasonably incurred by such Indemnified
Person.
(b) The rights granted to the Indemnified Persons hereby shall be
contractual rights inuring to the benefit of all Indemnified Persons and shall
survive this Agreement and any merger, consolidation or reorganization of HCCH.
(c) The rights to indemnification granted by this Section 8.2 are subject
to the following limitations: (i) amounts otherwise required to be paid by HCCH
to an Indemnified Person pursuant to this Section 8.2 shall be reduced by any
amounts that such Indemnified Person has recovered by virtue of the claim for
which indemnification is sought and HCCH shall be reimbursed for any amounts
paid by HCCH that such Indemnified Person subsequently recovers by virtue of
such claim; (ii) any claim for indemnification pursuant to this Section 8.2 must
be submitted in writing to the Chief Executive Officer of HCCH promptly upon
such Indemnified Person becoming aware of such claim, but the failure so to
notify shall not relieve HCCH or the Surviving Corporation from any liability
under this paragraph except to the extent such failure materially prejudices
HCCH or the Surviving Corporation; and (iii) an Indemnified Person shall not
settle any claim for which indemnification is provided herein without the prior
written consent of HCCH, which consent shall not be unreasonably withheld.
(d) Except to the extent prohibited by law, HCCH will keep in effect and
guarantee performance of the provisions for indemnification of directors or
officers contained in the certificates or articles of incorporation or bylaws
(or other comparable charter documents) of the Surviving Corporation and its
Subsidiaries (which as of the Effective Time shall be those maintained by AVEMCO
and its Subsidiaries on the date hereof) in such a manner as would not adversely
affect the rights of any individual who shall have served as a director or
officer of any member of the AVEMCO Group prior to the Effective Time to be
indemnified by such corporations in respect of their serving in such capacities
prior to the Effective Time.
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(e) HCCH shall, to the extent and for so long as it provides
indemnification (and insurance therefor) to officers and directors of members of
the HCCH Group, provide such indemnification (and insurance) to Indemnified
Persons who continue as officers and directors of the Surviving Corporation or
any of its subsidiaries on and after the Effective Date.
(f) HCCH and the Surviving Corporation shall, until the sixth anniversary
of the Effective Time, cause to be maintained in effect, the policies of
directors' and officers' liability insurance maintained by all members of the
AVEMCO Group 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; provided, however, that the total aggregate amount
with respect to which HCCH and the Surviving Corporation shall maintain
insurance pursuant to this Section 8.2(f) shall not exceed, as to all
Indemnified Persons described herein as a group, the amount of $10 million.
(g) The provisions of this Section are intended to be for the benefit of,
and shall be enforceable by, each of the Indemnified Persons and his or her
heirs and legal representatives, and shall be in addition to any other rights
any Indemnified Person may have under the certificate or articles of
incorporation or bylaws of the Surviving Corporation or any of its Subsidiaries,
under the DGCL or otherwise.
SECTION 8.3 PUBLICATION OF POST-MERGER RESULTS. HCCH shall use
commercially reasonable efforts to cause financial results covering at least
thirty days of post Merger combined operations to be published in its first
report of quarterly financial statements as soon as practicable and by the date
after such information is required to be filed with the SEC.
SECTION 8.4 EMPLOYEE BENEFITS. Following the consummation of the Merger,
as soon as reasonably practicable, HCCH shall arrange to make generally
available to the employees of AVEMCO the benefits generally applicable to
employees of HCCH.
SECTION 8.5 STOCK OFFERINGS. HCCH shall not participate in a primary or
secondary offering of securities during the period in which HCCH Affiliates' are
prevented from disposing of securities pursuant to the terms of the HCCH
Affiliates' Agreements.
SECTION 8.6 REGISTRATION RIGHTS. HCCH shall use commercially reasonable
efforts to cause a Registration Statement or Registration Statements on Form S-8
or S-3 to be filed with the SEC within thirty days after Closing and covering
the shares of HCCH Common Stock to be issued upon exercise of the AVEMCO Stock
Options (provided that no representation is made by HCCH that any such Form S-8
Registration Statement will in all cases be available to permit resales of HCCH
Common Stock).
ARTICLE IX
TERMINATION OF AGREEMENT
SECTION 9.1 TERMINATION. This Agreement may be terminated and the Merger
contemplated herein abandoned at any time before the Effective Time whether
before or after the approval by the shareholders of HCCH and AVEMCO:
(a) By the mutual written consent of the parties hereto duly
authorized by action taken by or on behalf of their respective Boards of
Directors.
(b) By either HCCH or AVEMCO upon written notification to the
non-terminating party if there has been a material breach by the other of
any representation or warranty or of any covenant contained in this
Agreement, which in either case cannot be, or has not been, cured within 15
days after written notice of such breach is given to the party committing
such breach, provided that the right to effect such cure shall not extend
beyond the date set forth in subparagraph (c) below.
(c) By either HCCH or AVEMCO upon written notification to the
non-terminating party if (i) all conditions of Closing required by Article
VII hereof have not been met or waived by August 31, 1997, or (ii) the
Merger has not occurred by such date; provided, however, that neither HCCH
nor AVEMCO,
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shall be entitled to terminate this Agreement pursuant to this subparagraph
(c) if such party is in willful and material violation of any of its
representations, warranties or covenants in this Agreement.
(d) If any governmental authority shall have issued an order, decree
or ruling or taken any other action permanently enjoining, restraining or
otherwise prohibiting the Merger and such order, decree, ruling or other
action shall have become final and nonappealable, or shall refuse to enter
an order approving the acquisition of control of any Insured Subsidiary by
HCCH.
(e) By either AVEMCO or HCCH upon written notification to the
non-terminating party, if any required approval of the shareholders of
AVEMCO or HCCH shall not have been obtained by reason of the failure to
obtain the required vote of the shareholders of either AVEMCO or HCCH at
their respective Special Meeting or at any adjournment thereof.
(f) By AVEMCO if the Average Market Price falls below the Minimum
Acceptable Price and HCCH is notified in accordance with Section 7.2(h).
(g) By AVEMCO if it has received and accepts a Superior Proposal
pursuant to Section 6.6.
(h) If this Agreement is terminated by AVEMCO's Board of Directors in
order to accept a Superior Proposal pursuant to Section 6.6, AVEMCO shall
be obligated to pay to HCCH a fee (the "Termination Fee") in cash in an
amount equal to $7.5 million, plus all reasonable expenses, including
legal, accounting and tax expenses, incurred by HCCH in connection with the
negotiation and preparation of this Agreement and the transactions
contemplated herein. If this Agreement is terminated by either party
because the other party's shareholders did not vote to approve this
Agreement at the Special Meetings, then a Termination Fee equal to $3.75
million, plus all reasonable expenses, shall be paid by the party failing
to get shareholder approval to the other party. Any party obligated to pay
a Termination Fee shall be obligated to pay the applicable Termination Fee
within six business days following such termination.
SECTION 9.2 EFFECT OF TERMINATION. Upon termination of this Agreement
pursuant to this Article IX, this Agreement shall be void and of no effect,
other than the obligation to pay the Termination Fee and expenses referred to in
Section 9.1(h), if applicable, and the obligations set forth in Article X,
Section 6.8(b), Section 6.19 and the Confidentiality Agreement (except as
modified by Section 6.19, if applicable), and shall result in no obligation of
or liability to any party or their respective directors, officers, employees,
agents or shareholders, unless such termination was the result of a willful and
intentional breach of any representation, warranty or covenant in this
Agreement, in which case, in addition to the Termination Fee, if any, to be paid
hereunder, the party who breached the representation, warranty or covenant shall
be liable to the other party for damages, and all costs and expenses incurred in
connection with the preparation, negotiation, execution and performance of this
Agreement.
ARTICLE X
MISCELLANEOUS
SECTION 10.1 FURTHER ASSURANCES. Each party agrees to cooperate fully with
the other parties and to execute such further instruments, documents and
agreements and to give such further written assurances as may be reasonably
requested by any other party to better evidence and reflect the transactions
described herein and contemplated hereby and to carry into effect the intents
and purposes of this Agreement.
SECTION 10.2 FEES AND EXPENSES. Except as otherwise provided herein, each
party shall bear its own fees and expenses, including counsel fees and fees of
accountants, brokers and investment bankers contracted by such party, in
connection with the transaction contemplated hereby.
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SECTION 10.3 NOTICES. Whenever any party hereto desires or is required to
give any notice, demand, or request with respect to this Agreement, each such
communication shall be in writing and shall be effective only if it is delivered
by personal service or mailed, United States registered or certified mail,
postage prepaid, or sent by prepaid overnight courier or confirmed telecopier,
addressed as follows:
HCCH and Merger Sub:
HCC Insurance Holdings, Inc.
13403 Northwest Freeway
Houston, Texas 77040-6094
Telecopy: (713) 462-2401
Attention: Stephen L. Way, Chairman and Chief Executive Officer
With copies to:
Winstead Sechrest & Minick P.C.
910 Travis, Suite 1700
Houston, Texas 77002
Telecopy: (713) 951-3800
Attention: Arthur S. Berner, Esq.
AVEMCO:
AVEMCO Corporation
Frederick Municipal Airport
411 Aviation Way
Frederick, MD 21701
Telecopy: (301) 694-4242
Attention: William P. Condon, Chairman and Chief Executive Officer
With copies to:
Piper & Marbury L.L.P.
36 S. Charles Street
Baltimore, MD 21201
Telecopy: 410-576-1700
Attention: R. W. Smith, Jr., Esq.
Such communications shall be effective when they are received by the
addressee thereof. Any party may change its address for such communications by
giving notice thereof to other parties in conformity with this Section.
SECTION 10.4 GOVERNING LAW. The internal laws of the State of Delaware
(irrespective of its choice of law principles) will govern the validity of this
Agreement, the construction of its terms, and the interpretation and enforcement
of the rights and duties of the parties hereto.
SECTION 10.5 BINDING UPON SUCCESSORS AND ASSIGNS, ASSIGNMENT. This
Agreement and the provisions hereof shall be binding upon each of the parties,
their permitted successors and assigns. Nothing in this Agreement, express or
implied, is intended to confer on any Person other than the parties hereto and
their respective successors and assigns (and to the extent provided in Section
8.2 the Indemnified Persons and their successors and assigns) any rights,
remedies, obligations or liabilities under or by reason of this Agreement. This
Agreement may not be assigned by any party without the prior consent of the
others, provided, however, that HCCH shall be permitted at any time prior to the
Effective Time to cause the assignment of Merger Sub's rights and obligations
under this Agreement to another wholly owned Subsidiary of HCCH (without in any
way relieving HCCH of its obligations under this Agreement with respect to
Merger Sub or the Merger).
SECTION 10.6 SEVERABILITY. If any provision of this Agreement, or the
application thereof, shall for any reason or to any extent be invalid or
unenforceable, the remainder of this Agreement and application of such
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provision to other persons or circumstances shall continue in full force and
effect and in no way be affected, impaired or invalidated.
SECTION 10.7 ENTIRE AGREEMENT. This Agreement and the other agreements and
instruments referenced herein constitute the entire understanding and agreement
of the parties with respect to the subject matter hereof and supersede all prior
and contemporaneous agreements or understandings, inducements or conditions,
express or implied, written or oral, between parties with respect hereto,
provided, however, that except as modified herein the terms of the
Confidentiality Agreement shall remain in effect.
SECTION 10.8 AMENDMENT AND MODIFICATION. This Agreement may be amended or
modified only by written agreement of the parties hereto. This Agreement may be
amended by the parties at any time before or after any required approval of
matters presented in connection with the Merger by the shareholders of AVEMCO
and HCCH; provided, however, that after any such approval, there shall be made
no amendment that by law requires further approval by such shareholders without
the further approval of such shareholders.
SECTION 10.9 EXTENSION; WAIVER. At any time prior to the Effective Time of
the Merger, the parties may (a) extend the time for the performance of any of
the obligations or other acts of the other parties, (b) waive any inaccuracies
in the representations and warranties contained in this Agreement or in any
document delivered pursuant to this Agreement or (c) waive compliance with any
of the agreements or conditions contained in this Agreement except for Sections
7.3(a) or 7.3(c). The failure of a party to insist upon strict adherence to any
term of this Agreement on any occasion shall not be considered a waiver or
deprive that party of the right thereafter to insist upon strict adherence to
that term or any other term of this Agreement. No waiver of any breach of this
Agreement shall be held to constitute a waiver of any other or subsequent
breach. Any waiver must be in writing.
SECTION 10.10 CONSTRUCTION OF AGREEMENT. A reference to an Article,
Section, Paragraph, subparagraph or an Appendix shall mean an Article of, a
Section in, Paragraph, subparagraph or Appendix to, this Agreement unless
otherwise explicitly set forth. The table of contents and headings herein are
for reference purposes only and shall not in any manner limit the construction
of this Agreement which shall be considered as a whole. The words "include,"
"includes" and "including" when used herein shall be deemed in each case to be
followed by the words "without limitation."
SECTION 10.11 COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which shall be an original as against any party whose
signature appears thereon and all of which together shall constitute one and the
same instrument. This Agreement shall become binding when one or more
counterparts hereof, individually or taken together, shall bear the signatures
of all the parties reflected hereon as signatories.
SECTION 10.12 GENDER AND CERTAIN DEFINITIONS. All words used herein,
regardless of the number and gender specifically used, shall be deemed and
construed to include any other number, singular or plural, and any other gender,
masculine, feminine or neuter, as the context requires.
SECTION 10.13 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. No
representation, warranty, covenant or agreement shall survive the Closing Date,
except those contained in Article II, Article III, Article VIII, Article X,
Section 6.8(b), Section 6.16, Section 6.18, Section 6.20, Section 6.21 and the
agreement of "affiliates" of AVEMCO and HCCH contained in Section 6.13 or in the
respective AVEMCO and HCCH Affiliates' Agreements.
SECTION 10.14 EFFECT OF DUE DILIGENCE. No investigation by HCCH or AVEMCO
into the business, operations and conditions of the other shall affect any
representation or warranty made by either party in this Agreement or shall
relieve such party of any of its obligations under this Agreement.
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IN WITNESS WHEREOF the parties hereto have executed this Agreement as of
the date first above written.
"AVEMCO CORPORATION"
By:
----------------------------------
Name: William P. Condon
Title: Chairman of the Board and
Chief Executive Officer
"HCC INSURANCE HOLDINGS, INC."
By:
----------------------------------
Name: Stephen L. Way
Title: Chairman of the Board and
Chief Executive Officer
"MERGER SUB #4, INC."
By:
----------------------------------
Name: Stephen L. Way
Title: President and Chief
Executive Officer
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APPENDIX B
OPINION OF SMITH BARNEY INC.
February 17, 1997
The Board of Directors
HCC Insurance Holdings, Inc.
13403 Northwest Freeway
Houston, Texas 77040
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to HCC Insurance Holdings, Inc. ("HCC") of the consideration proposed to
be paid by HCC pursuant to the terms and subject to the conditions set forth in
an Agreement and Plan of Reorganization (the "Reorganization Agreement") to be
entered into by and among HCC, HCC Merger Sub #4, Inc., a wholly owned
subsidiary of HCC ("Merger Sub"), and Avemco Corporation ("Avemco"). As more
fully described in the Reorganization Agreement, (i) Merger Sub will be merged
with and into Avemco (the "Merger") and (ii) each outstanding share of the
common stock, par value $0.10 per share, of Avemco (the "Avemco Common Stock")
will be converted into the right to receive one share (the "Exchange Ratio") of
the common stock, par value $1.00 per share, of HCC (the "HCC Common Stock").
In arriving at our opinion, we reviewed a draft of the Reorganization Agreement
and held discussions with certain senior officers, directors and other
representatives and advisors of HCC and certain senior officers and other
representatives and advisors of Avemco concerning the businesses, operations and
prospects of HCC and Avemco. We examined certain publicly available business and
financial information relating to HCC and Avemco as well as certain financial
forecasts and other information and data for HCC and Avemco which were provided
to or otherwise discussed with us by the respective managements of HCC and
Avemco, including information relating to certain strategic implications and
operational benefits anticipated to result from the Merger. We reviewed the
financial terms of the Merger as set forth in the Reorganization Agreement in
relation to, among other things: current and historical market prices and
trading volumes of HCC Common Stock and Avemco Common Stock; the historical and
projected earnings and other operating data of HCC and Avemco; and the
capitalization and financial condition of HCC and Avemco. We considered, to the
extent publicly available, the financial terms of similar transactions recently
effected which we considered relevant in evaluating the Merger and analyzed
certain financial, stock market and other publicly available information
relating to the businesses of other companies whose operations we considered
relevant in evaluating those of HCC and Avemco. We also evaluated the potential
pro forma financial impact of the Merger on HCC. In addition to the foregoing,
we conducted such other analyses and examinations and considered such other
financial, economic and market criteria as we deemed appropriate in arriving at
our opinion.
In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all financial and other
information publicly available or furnished to or otherwise reviewed by or
discussed with us. We also have assumed, with your consent, that the final terms
of the Reorganization Agreement reviewed by us in draft form will not vary
materially from the draft reviewed by us. With respect to financial forecasts
and other information and data provided to or otherwise reviewed by or discussed
with us, we have been advised by the managements of HCC and Avemco that such
forecasts and other information and data were reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
respective managements of HCC and Avemco as to the future financial performance
of HCC and Avemco and the strategic implications and operational benefits
anticipated to result from the Merger. We have assumed, with your consent, that
the Merger will be treated as a pooling of interests in accordance with
generally accepted accounting principles and as a tax-free reorganization for
federal income tax purposes. Our opinion, as set forth herein, relates to the
relative values of HCC and Avemco. We are not expressing any opinion as to what
the value of the HCC Common Stock actually will be when issued pursuant
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to the Merger or the price at which the HCC Common Stock will trade subsequent
to the Merger. We have not made or, with the exception of certain reserve
reports relating to Avemco, been provided with an independent evaluation or
appraisal of the assets, liabilities (contingent or otherwise) or reserves of
HCC or Avemco nor have we made any physical inspection of the properties or
assets of HCC or Avemco. We have not been asked to consider, and our opinion
does not address, the relative merits of the Merger as compared to any
alternative business strategies that might exist for HCC or the effect of any
other transaction in which HCC might engage. Our opinion is necessarily based
upon information available to us, and financial, stock market and other
conditions and circumstances existing and disclosed to us, as of the date
hereof.
Smith Barney has been engaged to render financial advisory services to HCC in
connection with the Merger and will receive a fee for such services, a
significant portion of which is contingent upon the consummation of the Merger.
We also will receive a fee upon the delivery of this opinion. In the ordinary
course of our business, we and our affiliates may actively trade or hold the
securities of HCC and Avemco for our own account or for the account of our
customers and, accordingly, may at any time hold a long or short position in
such securities. We have in the past provided financial advisory and investment
banking services to HCC unrelated to the Merger, for which services we have
received compensation. In addition, we and our affiliates (including Travelers
Group Inc. and its affiliates) may maintain relationships with HCC and Avemco.
Our advisory services and the opinion expressed herein are provided for the
information of the Board of Directors of HCC in its evaluation of the proposed
Merger, and our opinion is not intended to be and does not constitute a
recommendation to any shareholder as to how such shareholder should vote on any
matter relating to the proposed Merger. Our opinion may not be published or
otherwise used or referred to, nor shall any public reference to Smith Barney be
made, without our prior written consent.
Based upon and subject to the foregoing, our experience as investment bankers,
our work as described above and other factors we deemed relevant, we are of the
opinion that, as of the date hereof, the Exchange Ratio is fair, from a
financial point of view, to HCC.
Very truly yours,
SMITH BARNEY INC.
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APPENDIX C
OPINION OF ALEX. BROWN & SONS INCORPORATED
February 24, 1997
The Board of Directors
of AVEMCO Corporation
411 Aviation Way
Frederick, MD 21701
Dear Members of the Board of Directors:
We understand that AVEMCO Corporation ("AVEMCO"), HCC Insurance Holdings,
Inc. ("HCCH") and Merger Sub #4, Inc. a Delaware Corporation and a wholly-owned
subsidiary of HCCH (the "Merger Sub"), intend to enter into an Agreement and
Plan of Reorganization (the "Plan of Reorganization"). Pursuant to the Plan of
Reorganization and subject to the terms and conditions therein, Merger Sub will
be merged into AVEMCO resulting in AVEMCO becoming a wholly owned subsidiary of
HCCH (the "Merger"), and each share of the common stock, par value $0.10 per
share (the "AVEMCO Common Stock"), issued and outstanding immediately prior to
the effective time of the Merger will be converted into one share (the "Exchange
Ratio") of common stock, par value $1.00 per share, of HCCH. We have assumed,
with your consent, that the Merger will qualify for pooling-of-interests
accounting treatment and as a tax free transaction for federal income tax
purposes. You have requested our opinion as to whether the Exchange Ratio is
fair, from a financial point of view, to AVEMCO's stockholders.
Alex. Brown & Sons Incorporated ("Alex. Brown"), as a customary part of its
investment banking business, is engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, private placements and valuations for estate, corporate and other
purposes. We have acted as financial advisor to the Board of Directors of AVEMCO
in connection with the transaction described above and will receive a fee for
our services, a portion of which is contingent upon the consummation of the
Merger and a portion of which becomes payable upon the delivery of this opinion.
Alex. Brown regularly publishes research reports regarding the insurance
industry and the businesses and securities of publicly traded companies in the
insurance industry. In the ordinary course of business, Alex. Brown may actively
trade the securities of both AVEMCO and HCCH for our own account and the account
of our customers and, accordingly, may at any time hold a long or short position
in such securities.
In connection with this opinion, we have reviewed certain publicly
available financial information and other information concerning AVEMCO and HCCH
and certain internal analyses and other information furnished to us by AVEMCO
and HCCH. We have also held discussions with the members of the senior
managements of AVEMCO and HCCH regarding the businesses and prospects of their
respective companies and the joint prospects of a combined company. In addition,
we have (i) reviewed the reported prices and trading activity for the common
stock of both AVEMCO and HCCH, (ii) compared certain financial and stock market
information for the AVEMCO and HCCH with similar information for certain other
companies whose securities are publicly traded, (iii) reviewed the financial
terms of certain recent business combinations which we deemed comparable, in
whole or in part, to the Merger, (iv) reviewed the terms of the February 16,
1997 draft of the Plan of Reorganization, and (v) performed such other studies
and analyses and considered such other factors as we deemed appropriate.
We have not independently verified the information described above and for
purposes of this opinion have assumed the accuracy, completeness and fairness
thereof. With respect to the information relating to the prospects of AVEMCO and
HCCH, we have assumed that such information reflects the best currently
available judgments and estimates of the management of AVEMCO and HCCH as to the
likely future financial performances of their respective companies. In addition,
we have not made nor been provided with an independent evaluation or appraisal
of the assets or liabilities of AVEMCO and HCCH, nor have we been furnished with
any such evaluations or appraisals, except for certain reserve reports relating
to AVEMCO.
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Alex. Brown assumes no responsibility for the accuracy of such reports. With
respect to all legal matters relating to AVEMCO and HCCH, we have relied on the
advice of legal counsel to AVEMCO. We are not expressing our opinion as to the
value of HCCH's common stock when issued pursuant to the Merger or the prices at
which HCCH's common stock will trade subsequent to such issuance. Our opinion is
based on market, economic and other conditions as they exist and can be
evaluated as of the date of this letter.
In arriving at our opinion, we were not authorized to solicit, and did not
solicit, interest from any party with respect to the acquisition of the AVEMCO
or any of its assets.
Our advisory services and the opinion expressed herein were prepared for
the use of the Board of Directors of AVEMCO and do not constitute a
recommendation to any stockholder as to how such stockholder should vote. We
hereby consent to the inclusion of this opinion in its entirety as an exhibit to
any proxy or registration statement distributed in connection with the Merger.
Based upon and subject to the foregoing, it is our opinion that, as of the
date of this letter, the Exchange Ratio is fair, from a financial point of view,
to AVEMCO's stockholders.
Very truly yours,
ALEX. BROWN & SONS INCORPORATED
By: /s/ PETER F. DE VOS
----------------------------------
Name: /s/ PETER F. DE VOS
---------------------------------
Managing Director
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APPENDIX D
RESTATED
CERTIFICATE OF INCORPORATION
OF
HCC INSURANCE HOLDINGS, INC.
HCC INSURANCE HOLDINGS, INC., a corporation organized and existing under
the laws of the State of Delaware (the "Corporation") hereby certifies as
follows:
1. The name of the Corporation is HCC INSURANCE HOLDINGS, INC. which
was originally incorporated under the name HCC Holdings, Inc., and the
original Certificate of Incorporation was filed with the Secretary of State
of the State of Delaware on March 27, 1991.
2. Pursuant to Section 245 of the General Corporation Law of the State
of Delaware, this Restated Certificate is duly adopted by the Board of
Directors without a vote of the shareholders. This Restated Certificate of
Incorporation only restates and integrates and does not further amend the
provisions of the Corporation's Certificate of Incorporation, as
theretofore amended or supplemented, and there is no discrepancy between
those provisions and the provisions of the Restated Certificate of
Incorporation.
3. The text of the Restated Certificate of Incorporation is hereby
restated and integrated to read in its entirety as follows:
ARTICLE I
The name of the Corporation is HCC INSURANCE HOLDINGS, INC.
ARTICLE II
The address of its registered office in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County
of New Castle. The name of its registered agent at such address is The
Corporation Trust Company.
ARTICLE III
The nature of the business or purposes to be conducted or promoted is to
engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware.
ARTICLE IV
The total number of shares of all classes of stock which the Corporation
shall be authorized to issue is one hundred million (100,000,000) shares of
common stock, of the par value $1.00 per share ("Common Stock").
(a) Voting Rights.
(1) Common Stock. Except as set forth herein or as otherwise required by
law, each outstanding share of Common Stock shall be entitled to vote on each
matter on which the shareholders of the Corporation shall be entitled to vote,
and each holder of Common Stock shall be entitled to one vote for each share of
such stock held by such holder.
(b) Dividends. The Board of Directors of the Corporation may cause
dividends to be paid to holders of shares of Capital Stock out of funds legally
available for the payment of dividends.
(c) Liquidation. In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, all distributions on the Common
Stock of the Corporation shall be payable to the holders of shares of Common
Stock.
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ARTICLE V
No shareholder of the Corporation shall have the right of cumulative voting
at any election of directors or upon any other matter. No holder of securities
of the Corporation shall be entitled as a matter of right, preemptive or
otherwise, to subscribe for or purchase any securities of the Corporation now or
hereafter authorized to be issued, or securities held in the treasury of the
Corporation, whether issued or sold for cash or other consideration or as
dividend or otherwise. Any such securities may be issued or disposed of by the
Board of Directors to such persons on such terms as in its discretion it shall
deem applicable.
ARTICLE VI
The Corporation is to have perpetual existence.
ARTICLE VII
The Board of Directors of the Corporation is expressly authorized to make,
alter, or repeal the by-laws of the Corporation. Elections of directors need not
be written by ballot.
ARTICLE VIII
The Corporation reserves the right to amend, alter, change, or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon shareholders
herein are granted subject to this reservation.
ARTICLE IX
(a) Actions Not By or In the Right of the Corporation. The Corporation
shall indemnify its officers and directors and may indemnify its other employees
or agents to the fullest extent permitted by law if any such person was or is a
party, or is threatened to be made a party, to any threatened, pending, or
completed action, suit, or proceeding, whether civil, criminal, administrative,
arbitrative, or investigative (other than an action by or in the right of the
corporation), by reason of the fact that he is or was a director, officer,
employee, or agent of the corporation, or is or was serving at the request of
the Corporation as a director, officer, employee, or agent of another
Corporation, partnership, joint venture, trust, or other enterprise, to the
fullest extent authorized or permitted by the General Corporation Law of
Delaware and any other applicable law, as the same exists or may hereafter be
amended (but, in the case of any such amendment, only to the extent that such
amendment permits the Corporation to provide broader indemnification rights than
said law permitted the corporation to provide prior to such amendment), against
expenses (including attorneys' fees), judgments, fines, and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit, or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
(b) Action By or In the Right of the Corporation. The Corporation shall
indemnify its officers and directors and may indemnify its other employees or
agents to the fullest extent permitted by law if any such person was or is a
party, or is threatened to be made a party, to any threatened, pending, or
completed action or suit by or in the right of the Corporation to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer, employee, or agent of the Corporation or is or was serving at the
request of the Corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust, or other enterprise, to the
fullest extent authorized or permitted by the General Corporation Law of
Delaware and any other applicable law, as the same exists or may hereafter be
amended (but, in the case of any such amendment, only to the extent that such
amendment permits the Corporation to provide broader indemnification rights than
said law permitted the Corporation to provide prior to such amendment), against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or
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not opposed to the best interest of the Corporation. Notwithstanding the
foregoing, no indemnification shall be made in respect of any claim, issue, or
matter as to which such person shall have been adjudged to be liable to the
Corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
(c) Expenses Allowed. Expenses incurred by an officer or director in
defending a civil or criminal action, suit, or proceeding shall be paid by the
Corporation in advance of the final disposition of such action, suit, or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the Corporation as authorized herein or otherwise.
Such expense incurred by other employees and agents may be so paid upon such
terms and conditions, if any, as the Board of Directors deems appropriate.
(d) Not Exclusive. Such right of indemnification shall not be deemed
exclusive of any other rights to which such person may be entitled under any
by-law, agreement, vote of stockholders, or otherwise.
ARTICLE X
No director of the Corporation shall be personally liable to the
Corporation or any of its shareholders for monetary damages for breach of
fiduciary duty or as a director, provided however, that the limitation of
liability contained in this Article X shall not eliminate or limit the liability
of a director:
(1) For any breach of the director's duty of loyalty to the Corporation or
its shareholders;
(2) For acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
(3) Under Section 174 of the General Corporation Law of Delaware; or
(4) For any transaction from which the director derived an improper
personal benefit.
If the General Corporation Law of Delaware is amended to authorize
corporate action further eliminating or limiting the personal liability of
directors, then the personal liability of a director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the General Corporation
Law of Delaware, as so amended. Any repeal or modification of the provisions of
this Article X by the shareholders of the Corporation shall not adversely effect
any right or protection of a director of the Corporation existing at the time of
such repeal or modification.
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APPENDIX E
BYLAWS
OF
HCC INSURANCE HOLDINGS, INC
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
ARTICLE I -- OFFICES........................................ 1
1.1 Principal Office................................... 1
1.2 Other Offices...................................... 1
ARTICLE II -- MEETINGS OF STOCKHOLDERS...................... 1
2.1 Time and Place of Meetings......................... 1
2.2 Annual Meetings.................................... 1
2.3 Special Meetings................................... 1
2.4 Notice of Annual or Special Meeting................ 1
2.5 Quorum of Stockholders............................. 2
2.6 Conduct of the Stockholders Meeting................ 2
2.7 Act of Stockholders................................ 2
2.8 Shares............................................. 2
2.9 Proxies............................................ 2
2.10 Voting List........................................ 2
2.11 Action by Written Consent Without a Meeting........ 3
ARTICLE III -- BOARD OF DIRECTORS........................... 3
3.1 Powers............................................. 3
3.2 Number of Directors................................ 3
3.3 Election and Term.................................. 3
3.4 Vacancies.......................................... 4
3.5 Resignation and Removal............................ 4
3.6 Compensation of Directors.......................... 4
3.7 Interested Directors............................... 4
3.8 Committees......................................... 5
ARTICLE IV -- MEETINGS OF THE BOARD......................... 5
4.1 General............................................ 5
4.2 First Meeting...................................... 5
4.3 Regular Meetings................................... 5
4.4 Special Meetings................................... 5
4.5 Business at Meeting................................ 6
4.6 Quorum of Directors................................ 6
4.7 Act of Directors' Meeting.......................... 6
4.8 Action by Written Consent Without a Meeting........ 6
ARTICLE V -- NOTICES........................................ 6
5.1 Giving of Notice................................... 6
5.2 Waiver of Notice................................... 6
ARTICLE VI -- TELEPHONE MEETINGS............................ 6
ARTICLE VII -- OFFICERS..................................... 7
7.1 Executive Officers................................. 7
7.2 Election and Qualification......................... 7
7.3 Other Officers and Agents.......................... 7
7.4 Salaries........................................... 7
7.5 Term, Removal, and Vacancies....................... 7
7.6 Chairman of the Board.............................. 7
7.7 President.......................................... 7
7.8 Vice Presidents.................................... 7
7.9 Secretary.......................................... 7
7.10 Assistant Secretaries.............................. 8
7.11 Treasurer.......................................... 8
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
7.12 Assistant Treasurers............................... 8
7.13 Officer's Bond..................................... 8
ARTICLE VIII -- INDEMNIFICATION OF OFFICERS AND DIRECTORS... 8
8.1 General............................................ 8
8.2 Determination...................................... 9
8.3 Reimbursement in Advance........................... 9
8.4 Not Exclusive...................................... 9
8.5 Insurance.......................................... 9
8.6 Indemnification of Others.......................... 9
8.7 Miscellaneous...................................... 9
ARTICLE IX -- SHARE CERTIFICATES............................ 10
9.1 Certificates Representing Shares................... 10
9.2 Issuance of Fractional Shares or Scrip............. 10
9.3 Lost, Stolen, or Destroyed Certificates............ 10
9.4 Transfer of Shares................................. 11
9.5 Record Date........................................ 11
9.6 Dates for Consents to Action....................... 11
ARTICLE X -- VOTING TRUSTS AND VOTING AGREEMENTS............ 11
10.1 Voting Trusts...................................... 11
10.2 Voting Agreements.................................. 12
ARTICLE XI -- GENERAL PROVISIONS............................ 12
11.1 Distributions...................................... 12
11.2 Reserves........................................... 12
11.3 Checks............................................. 12
11.4 Fiscal Year........................................ 12
11.5 Seal............................................... 12
11.6 Books and Records.................................. 12
11.7 Covenants.......................................... 12
ARTICLE XII -- AMENDMENTS................................... 13
</TABLE>
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BYLAWS
OF
HCC INSURANCE HOLDINGS, INC
ARTICLE I -- OFFICES
1.1 Principal Office. The principal office of the corporation shall be
located in Houston, Harris County, Texas.
1.2 Other Offices. The corporation may also have offices at such other
places both within and without the State of Texas as the Board of Directors may
from time to time determine or the business of the corporation may require.
ARTICLE II -- MEETINGS OF STOCKHOLDERS
2.1 Time and Place of Meetings. Meetings of stockholders for any purpose
may be at such time and place within or without the State of Delaware as shall
be stated in the notice of the meeting or in a duly executed waiver of notice
thereof.
2.2 Annual Meetings. Annual meetings of stockholders for the election of
Directors and such other business as may properly be brought before the meeting
shall be held at such place within or without the State of Delaware and at such
date and time as shall be designated by the Board of Directors not later than
December 31 of the immediately preceding year and stated in the notice of the
meeting.
2.3 Special Meetings. Special meetings of the stockholders for any purpose
or purposes may be called by the President, the Board of Directors, or the
holders of record of a majority of all the shares entitled to vote at the
proposed special meeting. A request for a special meeting shall state the
purpose or purposes of the proposed meeting, and business transacted at any
special meeting of stockholders shall be limited to the purposes stated in the
notice.
2.4 Notice of Annual or Special Meeting.
(a) Written or printed notice stating the place, day, and hour of the
meeting and, in the case of a special meeting, the purpose or purposes for which
the meeting is called, shall be delivered not less than ten (10) nor more than
sixty (60) days before the date of the meeting, either personally or by mail, by
the Secretary to each stockholder entitled to vote at such meeting. If mailed,
such notice shall be deemed to be delivered when deposited in the United States
mail, addressed to the stockholder at his address as it appears on the records
of the corporation, with postage thereon prepaid. However, no notice need be
given to a stockholder if (i) notice of two consecutive annual meetings and all
notices of meetings or of the taking of action by written consent without a
meeting to such person during the period between such two consecutive annual
meetings, if any, or (ii) all (but in no event less than two) payments (if sent
by first class mail) of distributions or interest on securities during a twelve
(12) month period have been mailed to that person, addressed at his address as
shown on the records of the corporation, and have been returned undeliverable.
Any action or meeting taken or held without notice to such person shall have the
same force and effect as if the notice had been duly given and, if the action
taken by the corporation is reflected in any certificate or document filed with
the Secretary of State, that certificate or document may state that notice was
duly given to all persons to whom notice was required to be given. If such a
person delivers to the corporation a written notice setting forth his then
current address, the requirement that notice be given to that person shall be
reinstated.
(b) When a meeting is adjourned to another time or place, it shall not be
necessary to give any notice of the adjourned meeting if the time and place to
which the meeting is adjourned is announced at the meeting at which the
adjournment is taken. If, after adjournment, the Board of Directors fixes a new
record date for the adjourned meeting or if the adjournment is for more than
thirty (30) days, a notice of the adjourned meeting shall be given to each
stockholder who is entitled to vote at such adjourned meeting. At any adjourned
meeting, any business may be transacted that might have been transacted on the
original date of the meeting.
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2.5 Quorum of Stockholders. Unless otherwise provided in the certificate
of incorporation or by law, the holders of a majority of the shares entitled to
vote, represented in person or by proxy, shall constitute a quorum at all
meetings of the stockholders. Unless otherwise provided in the certificate of
incorporation, once a quorum is present at a meeting of stockholders, the
stockholders represented in person or by proxy at the meeting may conduct such
business as may be properly brought before the meeting until it is adjourned,
and the subsequent withdrawal from the meeting of any stockholder or the refusal
of any stockholder represented in person or by proxy to vote shall not affect
the presence of a quorum at the meeting. Unless otherwise provided in the
certificate of incorporation, the stockholders represented in person or by proxy
at a meeting of stockholders at which a quorum is not present may adjourn the
meeting until such time and to such place as may be determined by a vote of the
holders of a majority of the shares represented in person or by proxy at that
meeting.
2.6 Conduct of the Stockholders Meeting. At every meeting of the
stockholders, the Chairman of the Board, if there is a person holding such
position, or if not or in his absence, the President of the corporation, or, in
his absence, the Vice President designated by the President, or, in the absence
of the President or any Vice President, a chairman chosen by the majority of the
voting shares represented in person or by proxy shall act as chairman. The
Secretary of the corporation or a person designated by the chairman of the
meeting shall act as secretary of the meeting.
2.7 Act of Stockholders. With respect to any matter other than the
election of directors, the affirmative vote of the holders of a majority of the
shares entitled to vote on the matter and present in person or represented by
proxy at a meeting of stockholders at which a quorum is present shall be the act
of the stockholders, unless the vote of a greater number is required by law or
by the certificate of incorporation. Directors shall be elected by a plurality
of the votes cast by the holders of shares entitled to vote in the election of
directors at a meeting of stockholders at which a quorum is present, unless the
vote of a greater number is required by the certificate of incorporation.
2.8 Shares. Each outstanding share, regardless of class, shall be entitled
to one vote on each matter submitted to a vote at a meeting of stockholders,
except to the extent that the certificate of incorporation provides for more or
less than one vote per share or limits or denies voting rights to the holders of
the shares of any class or series, or as otherwise provided by law. At each
election for directors every stockholder entitled to vote at such election shall
have the right to vote, in person or by proxy, the number of shares owned by him
for as many persons as there are directors to be elected and for whose election
he has the right to vote. Election of directors shall be by written ballot. The
vote on any other matter before the meeting shall be by ballot only if so
ordered by the person presiding at the meeting or if so requested by any
Stockholder present, in person or by proxy, at the meeting and entitled to vote
on such matter.
2.9 Proxies. At any meeting of the stockholders, each stockholder having
the right to vote shall be entitled to vote either in person or by proxy
executed in writing by the stockholder. A telegram, telex, cablegram, or similar
transmission by the stockholder, or a photographic, photostatic, facsimile, or
similar reproduction of a writing executed by the stockholder, shall be treated
as an execution in writing for purposes of this Section. If it is determined
that such telegrams, cablegrams, or similar transmissions are valid, the
inspectors or, if there are no inspectors, such other persons making that
determination shall specify the information upon which they relied. No proxy
shall be valid after three (3) years from the date of its execution unless
otherwise provided in the proxy. Each proxy shall be revocable unless the proxy
form conspicuously states that the proxy is irrevocable and the proxy is coupled
with an interest or unless otherwise made irrevocable by law.
2.10 Voting List. The officer or agent having charge of the stock ledger
for shares of the corporation shall make, at least ten (10) days before each
meeting of stockholders, a complete list of the stockholders entitled to vote at
such meeting or any adjournment thereof, arranged in alphabetical order, with
the address of and the number of shares held by each stockholder, which list,
for a period of ten (10) days prior to such meeting, shall be kept on file at a
place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held, and shall be subject to inspection by any
stockholder at any time during usual business hours. Such list shall also
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be produced and kept open at the time and place of the meeting and shall be
subject to the inspection of any stockholder during the whole time of the
meeting. The original stock ledger shall be the only evidence as to who are the
stockholders entitled to examine such list or stock ledger or to vote in person
or by proxy at any such meeting of stockholders.
2.11 Action by Written Consent Without a Meeting. Any action required by
the Delaware General Corporation Law to be taken at any annual or special
meeting of stockholders, or any action which may be taken at any annual or
special meeting of stockholders, may be taken without a meeting, without prior
notice, and without a vote, if a consent or consents in writing, setting forth
the action so taken, shall have been signed by the holder or holders of shares
having not less than the minimum number of votes that would be necessary to
authorize or take such action at a meeting at which the holders of all shares
entitled to vote on the action were present and voted and shall be delivered to
the corporation by delivery to its registered office in the State of Delaware,
its principal place of business, or an officer or agent of the corporation
having custody of the book in which proceedings of meetings of stockholders are
recorded. Every written consent shall bear the date of signature of each
stockholder who signs the consent. No written consent shall be effective to take
the action that is the subject of the consent unless, within sixty (60) days
after the date of the earliest dated consent delivered to the corporation in the
manner required by this Section, a consent or consents signed by the holder or
holders of shares having not less than the minimum number of votes that would be
necessary to take the action that is the subject of the consent are delivered to
the corporation by delivery to its registered office in the State of Delaware,
its principal place of business, or an officer or agent of the corporation
having custody of the books in which proceedings of meetings of stockholders are
recorded. Delivery shall be by hand or certified or registered mail, return
receipt requested. Delivery to the corporation's principal place of business
shall be addressed to the President or principal executive officer of the
corporation. A telegram, telex, cablegram, or similar transmission by a
stockholder, or a photographic, photostatic, facsimile, or similar reproduction
of a writing signed by a stockholder, shall be regarded as signed by the
stockholder for purposes of this Section. Prompt notice of the taking of any
action by stockholders without a meeting by less than unanimous written consent
shall be given to those stockholders who did not consent in writing to the
action.
ARTICLE III -- BOARD OF DIRECTORS
3.1 Powers. The powers of the corporation shall be exercised by or under
the authority of, and the business and affairs of the corporation shall be
managed under the direction of, the Board of Directors of the corporation, which
may exercise all such powers of the corporation and do all such lawful acts and
things as are not by law, the certificate of incorporation, or these bylaws
directed or required to be exercised and done by the stockholders.
3.2 Number of Directors.
(a) The number of directors of the corporation constituting the Board of
Directors shall be at least seven (7) and no more than fifteen (15) and shall
otherwise be fixed from time to time by resolution of the Board of Directors. No
decrease shall have the effect of shortening the term of any incumbent director.
(b) The Board of Directors shall at all times contain a majority of members
who are not present or former officers or employees of the corporation or family
members of present or former officers or employees of the corporation, and each
committee of the Board of Directors shall at all times contain a majority of
members who are not present or former officers or employees of the corporation
or family members of present or former officers or employees of the corporation.
The Board of Directors shall be elected by the holders of the Common Stock who
shall be entitled to one vote per share of Common Stock held by them. This
Section 3.2(b) may not be amended without the affirmative vote or written
consent of stockholders holding at least eighty percent (80%) of the outstanding
shares of Common Stock.
3.3 Election and Term. Unless removed in accordance with the provisions of
these bylaws, the initial Board of Directors shall hold office until the first
annual meeting of stockholders and until their successors shall have been
elected and qualified. At the first annual meeting of stockholders and at each
annual meeting thereafter, the holders of shares entitled to vote in the
election of directors as herein provided shall elect
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directors to hold office until the next succeeding annual meeting, except in
case of the classification of directors as otherwise provided in these bylaws.
Unless removed in accordance with the provisions of these bylaws, each director
shall hold office for the term for which he is elected and until his successor
shall have been elected and qualified. Directors need not be residents of the
State of Delaware or stockholders of the corporation.
3.4 Vacancies. Any vacancy occurring in the Board of Directors may be
filled by election at an annual or special meeting of stockholders called for
that purpose or by the affirmative vote of a majority of the remaining
directors, although less than a quorum of the Board of Directors, or by a sole
remaining director. A director elected to fill a vacancy shall be elected for
the unexpired term of his predecessor in office. Any directorship to be filled
by reason of an increase in the number of directors may be filled by election at
an annual or special meeting of stockholders called for that purpose or by the
Board of Directors for a term of office continuing only until the next election
of one or more directors by the stockholders. Notwithstanding the prior
provisions of this Section, whenever the holders of any class or series of
shares are entitled to elect one or more directors by the certificate of
incorporation, any vacancies in such directorships and any newly created
directorships of such class or series to be filled by reason of an increase in
the number of such directors shall be filled by the affirmative vote of a
majority of the directors elected by such class or series then in office or by a
sole remaining director so elected then in office, or by the vote of the holders
of the outstanding shares of such class or series. Such directorships shall not
in any case be filled by the vote of the remaining directors or the holders of
the outstanding shares as a whole, unless otherwise provided in the certificate
of incorporation.
3.5 Resignation and Removal.
(a) Any director may resign at any time upon giving written notice to the
corporation. Unless otherwise provided in the certificate of incorporation, when
one or more directors shall resign from the board, effective at a future date, a
majority of the directors then in office, including those who have so resigned,
shall have power to fill such vacancy or vacancies, the vote thereon to take
effect when such resignation or resignations shall become effective, and each
director so chosen shall hold office as provided in these bylaws in the filling
of other vacancies.
(b) At any meeting of stockholders called expressly for the purpose of
removing a director or directors, any director or the entire Board of Directors
may be removed, with or without cause, by a vote of the holders of a majority of
the shares then entitled to vote at an election of directors, subject to any
further restrictions on removal that may be contained in these bylaws. If the
holders of any class or series of shares are entitled to elect one or more
directors by the provisions of the certificate of incorporation, only the
holders of shares of that class or series shall be entitled to vote for or
against the removal of any director elected by the holders of shares of that
class or series. If the stockholders of this corporation are entitled to
cumulative voting in the election of directors and if less than the entire board
is to be removed, no one of the directors may be removed if the votes cast
against his removal would be sufficient to elect him if then cumulatively voted
at an election of the entire Board of Directors, or if there be classes of
directors, at an election of the class of directors of which he is a part.
3.6 Compensation of Directors. As specifically prescribed from time to
time by resolution of the Board of Directors, the directors of the corporation
may be paid their expenses of attendance at each meeting of the board and may be
paid a fixed sum for attendance at each meeting of the board or a stated salary
in their capacity as directors. This provision shall not preclude any director
from serving the corporation in any other capacity and receiving compensation
therefor. Members of special or standing committees may be allowed like
compensation for attending committee meetings.
3.7 Interested Directors. No contract or transaction between the
corporation and one or more of its directors or officers or between the
corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers or have a financial interest shall be void or voidable solely for this
reason, or solely because the director or officer is present at or participates
in the meeting of the board or committee thereof which authorizes the contract
or transaction, or solely because his or their votes are counted for such
purpose, if: (i) the material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the Board of Directors
or the
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committee, and the board or committee in good faith authorizes the contract or
transaction by the affirmative vote of a majority of the disinterested
directors, even though the disinterested directors be less than a quorum; or
(ii) the material facts as to his relationship or interest and as to the
contract or transaction are disclosed or are known to the stockholders entitled
to vote thereon, and the contract or transaction is specifically approved in
good faith by vote of the stockholders; or (iii) the contract or transaction is
fair as to the corporation as of the time it is authorized, approved, or
ratified by the Board of Directors, a committee thereof, or the stockholders.
Common or interested directors may be counted in determining the presence of a
quorum at a meeting of the Board of Directors or of a committee which authorizes
the contract or transaction.
3.8 Committees. The Board of Directors, by resolution adopted by a
majority of the full Board of Directors, may designate from among its members
one or more committees, each of which shall be comprised of one or more of its
members, and may designate one or more of its members as alternate members of
any committee, who may replace absent or disqualified members at any meeting of
that committee. In the absence or disqualification of a member of a committee,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member. Any such committee, to the extent
provided in such resolution or in the certificate of incorporation or in these
bylaws, shall have and may exercise all of the authority of the Board of
Directors, except that no such committee shall have the authority of the Board
of Directors in reference to the following matters: (a) amending the certificate
of incorporation, except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the Board of Directors as provided in Section 151(a) of the Delaware General
Corporation Law, fix the designations and any of the preferences or rights of
such shares relating to dividends, redemption, dissolution, any distribution of
assets of the corporation or the conversion into, or the exchange of such shares
for, shares of any other class or classes or any other series of the same or any
other class or classes of stock of the corporation or fix the number of shares
of any series of stock or authorize the increase or decrease of the shares of
any series; (b) adopting an agreement of merger or consolidation; (c)
recommending to the stockholders the sale, lease, or exchange of all or
substantially all of the property and assets of the corporation; (d)
recommending to the stockholders a voluntary dissolution of the corporation or a
revocation thereof; (e) amending, altering, or repealing the bylaws of the
corporation or adopting new bylaws of the corporation; and (f) unless the
resolution designating a particular committee, the certificate of incorporation,
or the bylaws expressly so provide, no committee of the Board of Directors shall
have the power or authority to declare a dividend, to authorize the issuance of
shares of the corporation, or to adopt a certificate of ownership and merger.
Any such committee shall keep regular minutes of its proceedings and report the
same to the board when required. The designation of a committee of the Board of
Directors and the delegation thereto of authority shall not operate to relieve
the Board of Directors, or any member thereof, of any responsibility imposed by
law.
ARTICLE IV -- MEETINGS OF THE BOARD
4.1 General. Meetings of the Board of Directors, regular or special, may
be held either within or without the State of Delaware.
4.2 First Meeting. The first meeting of each newly elected Board of
Directors shall be held at such time and place as shall be fixed by the vote of
the stockholders at the annual meeting and no notice of such meeting shall be
necessary to the newly elected directors in order legally to constitute the
meeting, provided a quorum shall be present. In the event that the stockholders
fail to fix the time and place of such first meeting, it shall be held without
notice immediately following the annual meeting of stockholders, and at the same
place, unless by the unanimous consent of the directors then elected and serving
such time or place shall be changed.
4.3 Regular Meetings. Regular meetings of the Board of Directors may be
held upon such notice, or without notice, and at such time and at such place as
shall from time to time be determined by the board.
4.4 Special Meetings. Special meetings of the Board of Directors may be
called by the Chairman of the Board or the President and shall be called by the
President or Secretary on the written request of one director.
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Notice of each special meeting of the Board of Directors shall be given to each
director at least forty-eight (48) hours before the date of the meeting.
4.5 Business at Meeting. Except as may be otherwise provided by law or by
the certificate of incorporation or by the bylaws, neither the business to be
transacted at, nor the purpose of, any regular or special meeting of the Board
of Directors need be specified in the notice or waiver of notice of such
meeting.
4.6 Quorum of Directors. A majority of the number of directors fixed by,
or in the manner provided in, the certificate of incorporation or these bylaws
shall constitute a quorum for the transaction of business unless a greater
number is required by law, the certificate of incorporation, or these bylaws. If
a quorum shall not be present at any meeting of the Board of Directors, the
directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
4.7 Act of Directors' Meeting. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the Board
of Directors unless the act of a greater number is required by law, the
certificate of incorporation, or these bylaws.
4.8 Action by Written Consent Without a Meeting. Any action required or
permitted by law, the certificate of incorporation, or these bylaws to be taken
at a meeting of the Board of Directors or any committee may be taken without a
meeting if a consent in writing, setting forth the action so taken, is signed by
all of the members of the Board of Directors or committee, as the case may be,
and the written consent or consents are filed with the minutes of proceedings of
the board or committee. Such consent shall have the same force and effect as a
unanimous vote at a meeting.
ARTICLE V -- NOTICES
5.1 Giving of Notice. Any notice to directors or stockholders shall be in
writing and shall be delivered personally or mailed to the directors or
stockholders at their respective addresses appearing on the books of the
corporation. Notice by mail shall be deemed to be given at the time when the
same shall be deposited in the United States mail, postage prepaid. Notice to
directors may also be given by telegram, cablegram, or other electronic
transmission.
5.2 Waiver of Notice. Whenever any notice is required to be given under
the provisions of the statutes or of the certificate of incorporation or of
these bylaws, a waiver thereof in writing signed by the person or persons
entitled to such notice, whether before or after the time stated therein, shall
be deemed equivalent to the giving of such notice. Attendance of a person at a
meeting shall constitute a waiver of notice of such meeting, except when the
person attends a meeting for the express purpose of objecting, at the beginning
of the meeting, to the transaction of any business because the meeting is not
lawfully called or convened. Neither the business to be transacted at, nor the
purpose of, any regular or special meeting of the stockholders, directors, or
members of a committee of directors need be specified in any written waiver of
notice unless so required by the certificate of incorporation or these bylaws.
ARTICLE VI -- TELEPHONE MEETINGS
Unless otherwise restricted by the certificate of incorporation, members of
the Board of Directors or members of any committee designated by such board may
participate in and hold a meeting of such board or committee by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other. Participation in a
meeting conducted pursuant to this Article shall constitute presence in person
at such meeting, except where a person participates in the meeting for the
express purpose of objecting, at the beginning of the meeting, to the
transaction of any business on the ground that the meeting is not lawfully
called or convened.
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ARTICLE VII -- OFFICERS
7.1 Executive Officers. The officers of the corporation shall consist of a
President and a Secretary, each of whom shall be elected by the Board of
Directors as provided in Section 7.2. Such other officers, including assistant
officers, and agents as may be deemed necessary may be elected or appointed by
the Board of Directors or chosen in such other manner as may be permitted by
these bylaws. Two or more offices may be held by the same person.
7.2 Election and Qualification. The Board of Directors, at its first
meeting after each annual meeting of stockholders, shall elect a President and a
Secretary and may elect one or more other officers, none of whom need be a
member of the board. The Board of Directors may also appoint a Chairman of the
Board from among its members. The Board of Directors shall have the power to
enter into contracts for the employment and compensation of officers for such
terms as the board deems advisable.
7.3 Other Officers and Agents. The Board of Directors may appoint such
other officers and assistant officers and agents as it shall deem necessary, who
shall hold their offices for such terms and shall have such authority and
exercise such powers and perform such duties as shall be determined from time to
time by the board by resolution not inconsistent with these bylaws.
7.4 Salaries. The salaries of all officers and agents of the corporation
shall be fixed by the Board of Directors.
7.5 Term, Removal, and Vacancies. The officers of the corporation shall
hold office until their successors are elected or appointed and qualify, or
until their death or until their resignation or removal from office. Any
officer, agent, or member of a committee elected or appointed by the Board of
Directors may be removed at any time by the board, but such removal shall be
without prejudice to the contract rights, if any, of the person so removed.
Election or appointment of an officer, agent, or member of a committee shall not
of itself create contract rights. Any vacancy occurring in any office of the
corporation by death, resignation, removal, or otherwise shall be filled by the
Board of Directors.
7.6 Chairman of the Board. The Chairman of the Board, if one be elected,
shall preside at all meetings of the Board of Directors and shall have such
other powers and duties as may from time to time be prescribed by the Board of
Directors, upon written directions given to him pursuant to resolutions duly
adopted by the Board of Directors.
7.7 President. The President shall be the chief executive officer of the
corporation and shall, subject to the control of the Board of Directors, have
general supervision, direction, and control of the business and the officers of
the corporation. The President shall preside at all meetings of the stockholders
of the corporation. The President shall be ex-officio member of all standing
committees, shall have general and active management of the business of the
corporation, and shall see that all orders and resolutions of the Board of
Directors are carried into effect.
7.8 Vice Presidents. The Vice Presidents in the order of their seniority,
unless otherwise determined by the Board of Directors, shall, in the absence or
disability of the President, perform the duties and have the authority and
exercise the powers of the President. They shall perform such other duties and
have such other authority and powers as the Board of Directors may from time to
time prescribe or as the President may from time to time delegate.
7.9 Secretary. The Secretary shall attend all meetings of stockholders and
record all of the proceedings of the meetings of the stockholders in a minute
book to be kept for that purpose and shall perform like duties for the Board of
Directors and the standing committees when required. He shall give, or cause to
be given, notice of all meetings of the stockholders and special meetings of the
Board of Directors, and shall perform such other duties as may be prescribed by
the Board of Directors or President, under whose supervision he shall be. He
shall keep in safe custody the seal of the corporation and, when authorized by
the Board of Directors, shall affix the same to any instrument requiring it and,
when so affixed, it shall be attested by his signature or by the signature of an
Assistant Secretary or of the Treasurer.
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7.10 Assistant Secretaries. The Assistant Secretaries in the order of
their seniority, unless otherwise determined by the Board of Directors, shall,
in the absence or disability of the Secretary, perform the duties and exercise
the powers of the Secretary. They shall perform such other duties and have such
other powers as the Board of Directors may from time to time prescribe or as the
President may from time to time delegate.
7.11 Treasurer. The Treasurer shall have custody of the corporate funds
and securities and shall keep full and accurate accounts and records of
receipts, disbursements, and other transactions in books belonging to the
corporation, and shall deposit all moneys and other valuable effects in the name
and to the credit of the corporation in such depositories as may be designated
by the Board of Directors. He shall disburse the funds of the corporation as may
be ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render the President and the Board of Directors, at its
regular meetings, or when the President or Board of Directors so requires, an
account of all his transactions as Treasurer and of the financial condition of
the corporation.
7.12 Assistant Treasurers. The Assistant Treasurers in the order of their
seniority unless otherwise determined by the Board of Directors, shall, in the
absence or disability of the Treasurer, perform the duties and exercise the
powers of the Treasurer. They shall perform such other duties and have such
other powers as the Board of Directors may from time to time prescribe or the
President may from time to time delegate.
7.13 Officer's Bond. If required by the Board of Directors, any officer so
required shall give the corporation a bond in such sum and with such surety or
sureties as shall be satisfactory to the Board of Directors for the faithful
performance of the duties of his office and for the restoration to the
corporation, in case of his death, resignation, retirement, or removal from
office, of any and all books, papers, vouchers, money, and other property of
whatever kind in his possession or under his control belonging to the
corporation.
ARTICLE VIII -- INDEMNIFICATION
OF OFFICERS AND DIRECTORS
8.1 General
(a) The corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action,
suit, or proceeding, whether civil, criminal, administrative, or investigative
(other than an action by or in the right of the corporation), by reason of the
fact that he is or was a director or officer of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee, or
agent of another corporation, partnership, joint venture, trust, or other
enterprise, against expenses (including attorneys' fees), judgments, fines, and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit, or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit, or proceeding by judgment, order, settlement, conviction, or upon
a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
(b) The corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director or officer of the corporation,
or is or was serving at the request of the corporation as a director, officer,
employee, or agent of another corporation, partnership, joint venture, trust, or
other enterprise, against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection with the defense or settlement of such
action or suit if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the corporation and except that
no indemnification shall be made in respect of any claim, issue, or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly
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and reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
(c) To the extent that a director or officer of the corporation has been
successful on the merits or otherwise in defense of any action, suit, or
proceeding referred to in subsections (a) and (b), or in defense of any claim,
issue, or matter therein, he shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith.
8.2 Determination. The indemnification contained in Section 8.1 (unless
ordered by a court) shall be made by the corporation only as authorized in the
specific case upon a determination that indemnification of the director or
officer is proper in the circumstances because he has met the applicable
standard of conduct set forth in Section 8.1. Such determination shall be made:
(i) by a majority vote of a quorum consisting of directors who at the time
of the vote are not parties to the proceeding;
(ii) if such a quorum cannot be obtained, or, even if obtainable a quorum
of disinterested directors so directs, by independent legal counsel in
a written opinion; or
(a) by the stockholders.
8.3 Reimbursement in Advance. Expenses (including attorneys' fees)
incurred by a director or officer in defending any civil, criminal,
administrative, or investigative action, suit, or proceeding may be paid or
reimbursed by the corporation in advance of the final disposition of such
action, suit, or proceeding upon receipt of a written undertaking by or on
behalf of the director or officer to repay the amount paid or reimbursed if it
is ultimately determined that he is not entitled to be indemnified by the
corporation as authorized in this Article.
8.4 Not Exclusive. The indemnification and advancement of expenses
provided by, or granted pursuant to, the other sections of this Article shall
not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any bylaw,
agreement, vote of stockholders or disinterested directors, or otherwise, both
as to action in his official capacity and as to action in another capacity while
holding such office.
8.5 Insurance. The corporation may purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee, or agent of
the corporation or who is or was serving at the request of the corporation as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust, or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liability under this Article.
8.6 Indemnification of Others. The corporation may indemnify to the extent
of the provisions set forth herein, any person, other than an officer or
director, who was or is a party or is threatened to be made a party to any
threatened, pending, or completed action, suit, or proceeding, whether civil,
criminal, administrative, or investigative, by reason of the fact that he is or
was an employee or agent of the corporation, or is or was serving at the request
of the corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust, or other enterprise. Any such
employee or agent desiring indemnification shall make written application for
such indemnification to the Board of Directors of the corporation. A special
meeting of the directors shall be called within ten (10) days after receipt of
such application to determine if the person so applying shall be indemnified,
and if so, to what extent.
8.7 Miscellaneous. For purposes of this Article, references to "the
corporation" shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, employees,
and agents, so that any person who is or was a director, officer, employee, or
agent of such constituent corporation, or is or was serving at the request of
such constituent corporation as a director, officer, employee, or agent of
another corporation, partnership, joint venture, trust, or other enterprise,
shall stand in the same position under the provisions of this Article with
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respect to the resulting or surviving corporation as he would have with respect
to such constituent corporation if its separate existence had continued. For
purposes of this Article, references to "other enterprises" shall include
employee benefit plans; references to "fines" shall include any excise taxes
assessed on a person with respect to an employee benefit plan; and references to
"serving at the request of the corporation" shall include any service as a
director, officer, employee, or agent of the corporation which imposes duties
on, or involves services by, such director, officer, employee, or agent with
respect to an employee benefit plan, its participants, or beneficiaries; and a
person who acted in good faith and in a manner he reasonably believed to be in
the interest of the participants and beneficiaries of an employee benefit plan
shall be deemed to have acted in a manner "not opposed to the best interests of
the corporation" as referred to in this Article. The indemnification and
advancement of expenses provided by, or granted pursuant to, this Article shall,
unless otherwise provided when authorized or ratified, continue as to a person
who has ceased to be a director, officer, employee, or agent and shall inure to
the benefit of the heirs, executors, and administrators of such a person.
ARTICLE IX -- SHARE CERTIFICATES
9.1 Certificates Representing Shares. The corporation shall deliver
certificates representing all shares to which stockholders are entitled. Such
certificates shall be numbered and shall be entered in the stock ledger of the
corporation as they are issued, and shall be signed by the President or a Vice
President and the Secretary or an Assistant Secretary of the corporation, and
may be sealed with the seal of the corporation or a facsimile thereof. The
signatures of the President or Vice President and the Secretary or Assistant
Secretary upon a certificate may be facsimiles. In case any officer who has
signed or whose facsimile signature has been placed upon such certificate shall
have ceased to be such officer before such certificate is issued, it may be
issued by the corporation with the same effect as if he were such officer at the
date of its issuance. If the corporation is authorized to issue shares of more
than one class or more than one series of any class, each certificate
representing shares issued by such corporation (1) shall conspicuously set forth
on the face or back of the certificate a full or summary statement of all of the
designations, preferences, limitations, and relative rights of the shares of
each class or series thereof authorized to be issued, or (2) shall conspicuously
state on the face or back of the certificate that the corporation will furnish
the powers, designations, preferences, and relative, participating, optional, or
other special rights thereof and the qualifications, limitations, or
restrictions of such preferences and rights to the record holder of the
certificate without charge on written request to the corporation at its
principal place of business or registered office. Each certificate representing
shares shall state upon the face thereof that the corporation is organized under
the laws of the State of Delaware, the name of the person to whom issued, the
number and class of shares and the designation of the series, if any, which such
certificate represents, and the par value of each share represented by such
certificate or a statement that the shares are without par value.
9.2 Issuance of Fractional Shares or Scrip. The corporation may (1) issue
fractions of a share represented by a certificate, (2) arrange for the
disposition of fractional interests by those entitled thereto, (3) pay in cash
the fair value of fractions of a share as of the time when those entitled to
receive such fractions are determined, or (4) issue scrip or warrants in
registered form or in bearer form which shall entitle the holder to receive a
certificate for a full share upon the surrender of scrip or warrants aggregating
a full share. The holder of a certificate for a fractional share shall be
entitled to exercise voting rights, to receive dividends thereon, and to
participate in any of the assets of the corporation in the event of liquidation.
The holder of scrip or warrants shall not be so entitled. The Board of Directors
may cause scrip or warrants to be issued subject to such conditions which the
Board of Directors may determine advisable.
9.3 Lost, Stolen, or Destroyed Certificates. The Board of Directors may
direct a new certificate or certificates to be issued in place of any
certificate or certificates theretofore issued by the corporation alleged to
have been lost, stolen, or destroyed upon the making of an affidavit of that
fact by the person claiming the certificate or certificates to be lost, stolen,
or destroyed. When authorizing such issue of a new certificate or certificates,
the Board of Directors, in its discretion and as a condition precedent to the
issuance thereof, may prescribe such terms and conditions as it deems expedient
and may require such indemnities as it deems adequate to protect the corporation
from any claim that may be made against it with respect to any such certificate
or certificates alleged to have been lost, stolen, or destroyed.
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9.4 Transfer of Shares. Upon surrender to the corporation or the transfer
agent of the corporation of a certificate representing shares duly endorsed or
accompanied by proper evidence of succession, assignment, or authority to
transfer, a new certificate shall be issued to the person entitled thereto and
the old certificate cancelled and the transaction recorded upon the books of the
corporation.
9.5 Record Date. For the purpose of determining stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights or the stockholders entitled to exercise any rights in
respect of any change, conversion, or exchange of stock, or in order to make a
determination of stockholders for any other proper purpose (other than
determining stockholders entitled to consent to action by stockholders proposed
to be taken without a meeting of stockholders), the Board of Directors may fix
in advance a date as the record date for any such determination of stockholders,
which record date shall not precede the date upon which the resolution fixing
the record date is adopted by the Board of Directors, such date in any case to
be not more than sixty (60) days and, in case of a meeting of stockholders, not
less than ten (10) days, prior to the date on which the particular action
requiring such determination of stockholders is to be taken. If no record date
is fixed for the determination of stockholders entitled to notice of or to vote
at a meeting of stockholders, the record date shall be at the close of business
on the day next preceding the day on which notice is given, or, if notice is
waived, at the close of business on the day next preceding the day on which the
meeting is held. Except as otherwise provided in these bylaws, a determination
of stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
If no record date is fixed for the determination of stockholders entitled to
receive payment of any dividend or other distribution or allotment of any rights
or the stockholders entitled to exercise any rights in respect of any change,
conversion, or exchange of stock, or in order to make a determination of
stockholders for any other proper purpose (other than determining stockholders
entitled to consent to action by stockholders proposed to be taken without a
meeting of stockholders), the record date for determining stockholders for any
such purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
9.6 Dates for Consents to Action. Whenever action by stockholders is
proposed to be taken by consent in writing without a meeting of stockholders,
the Board of Directors may fix a record date for the purpose of determining
stockholders entitled to consent to that action, which record date shall not
precede, and shall not be more than ten (10) days after, the date upon which the
resolution fixing the record date is adopted by the Board of Directors. If no
record date has been fixed by the Board of Directors and no prior action of the
Board of Directors is required by law, the record date for determining
stockholders entitled to consent to action in writing without a meeting shall be
the first date on which a signed written consent setting forth the action taken
or proposed to be taken is delivered to the corporation by delivery to its
registered office, its principal place of business, or an officer or agent of
the corporation having custody of the books in which proceedings of meetings of
stockholders are recorded. Delivery shall be by hand or by certified or
registered mail, return receipt requested. Delivery to the corporation's
principal place of business shall be addressed to the President or the principal
executive officer of the corporation. If no record date shall have been fixed by
the Board of Directors and prior action of the Board of Directors is required by
law, the record date for determining stockholders entitled to consent to action
in writing without a meeting shall be at the close of business on the day on
which the Board of Directors adopts a resolution taking such prior action.
ARTICLE X -- VOTING TRUSTS AND VOTING AGREEMENTS
10.1 Voting Trusts. Any number of stockholders of the corporation may
enter into a written voting trust agreement for the purpose of conferring upon a
trustee or trustees the right to vote or otherwise represent shares of the
corporation. The shares that are to be subject to the agreement shall be
transferred to the trustee or trustees for purposes of the agreement, and a
counterpart of the agreement shall be deposited with the corporation at its
registered office in the State of Delaware. The counterpart of the voting trust
agreement so deposited with the corporation shall be subject to the same right
of examination by a stockholder of the corporation, in person or by agent or
attorney, as are the books and records of the corporation, and shall be
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<PAGE> 222
subject to examination by any holder of a beneficial interest in the voting
trust, either in person or by agent or attorney, at any reasonable time for any
proper purpose.
10.2 Voting Agreements. Any number of stockholders of the corporation, or
any number of stockholders of the corporation and the corporation itself, may
enter into a written voting agreement for the purpose of providing that shares
of the corporation shall be voted in the manner prescribed in the agreement. A
counterpart of the agreement shall be deposited with the corporation at its
registered office in the State of Delaware and shall be subject to the same
right of examination by a stockholder of the corporation, in person or by agent
or attorney, as are the books and records of the corporation.
ARTICLE XI -- GENERAL PROVISIONS
11.1 Distributions. The Board of Directors from time to time may authorize
and the corporation may make distributions in cash, in property, or in its own
shares as the Board of Directors may determine, except when the authorization or
payment thereof would be contrary to any restrictions contained in the
certificate of incorporation. Such distributions may be declared at any regular
or special meeting of the board, and the authorization and payment shall be
subject to all applicable provisions of law, the certificate of incorporation,
and these bylaws.
11.2 Reserves. Before payment of any dividend, there may be set aside out
of any funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, deem proper as a
reserve fund for meeting contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purpose as the director shall deem conducive to the interest of the corporation,
and the directors may modify or abolish any such reserve in the manner in which
it was created.
11.3 Checks. All checks or demands for money and notes of the corporation
shall be signed by such officer or officers or such other person or persons as
the Board of Directors may from time to time designate.
11.4 Fiscal Year. The fiscal year of the corporation shall be fixed by
resolution of the Board of Directors.
11.5 Seal. The corporate seal shall be in such form as may be prescribed
by the Board of Directors. The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or in any manner reproduced upon instruments
of any nature required to be executed by its proper officers.
11.6 Books and Records. The corporation shall keep books and records of
account and shall keep minutes of the proceedings of its stockholders, its Board
of Directors, and each committee of its Board of Directors. The corporation
shall keep at its registered office or principal place of business, or at the
office of its transfer agent or registrar, a record of the original issuance of
shares issued by the corporation and a record of each transfer of those shares
that have been presented to the corporation for registration of transfer. Such
records shall contain the names and addresses of all past and current
stockholders of the corporation and the number and class of shares issued by the
corporation held by each of them. Any books, records, minutes, and stock ledgers
may be in written form or in any other form capable of being converted into
written form within a reasonable time. Any stockholder, upon written demand
under oath stating the purpose thereof, shall have the right to examine, in
person or by agent, accountant, or attorney, at any reasonable time or times,
for any proper purpose, the corporation's relevant books and records of account,
minutes, and stock ledgers, and to make extracts therefrom.
11.7 Covenants. Notwithstanding any provision herein to the contrary, and
in addition to any other rights provided by law, so long as any Common Stock
shall be outstanding, the corporation shall not, without first obtaining the
affirmative vote or written consent of the holders of not less than eighty
percent (80%) of the outstanding shares of Common Stock:
(i) effect any sale, lease, assignment, transfer or other conveyance of
more than seventy-five percent (75%) of the corporation's assets in any
transaction or integrated series of transactions;
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<PAGE> 223
(ii) authorize or approve any merger or consolidation with or into any
other corporation;
(iii) effect any dissolution or liquidation of the corporation; or
(iv) issue any Common Stock of the corporation after the Closing Date, as
such term is defined in that certain Subscription and Exchange
Agreement, dated December 31, 1990, other than pursuant to the
Subscription and Exchange Agreement and/or the exercise of options,
warrants or agreements to grant options to purchase up to 580,000
shares of such Common Stock which have been referred to in the
Subscription and Exchange Agreement.
This Section 11.7 may not be amended without the affirmative vote or
written consent of stockholders holding at least eighty percent (80%) of the
outstanding shares of Common Stock.
ARTICLE XII -- AMENDMENTS
The initial bylaws of the corporation shall be adopted by its Board of
Directors. Except for this Article XII, and Sections 3.2(b) and 11.7 which can
only be altered, amended or repealed with the affirmative vote of written
consent of the stockholders holding at least eighty percent (80%) of the
outstanding shares of the Common Stock, and unless the certificate of
incorporation or a bylaw adopted by the stockholders provides otherwise as to
all or some other portion or portions of the corporation's bylaws, these bylaws
may be altered, amended, or repealed, and new bylaws may be adopted, by a
majority of the Board of Directors or by affirmative vote of a majority of the
shares entitled to vote at any regular or special meeting of the stockholders at
which a quorum is present and represented in person or by proxy subject to
repeal or change by action of the stockholders. The bylaws may contain any
provisions for the regulation and management of the affairs of the corporation
not inconsistent with law or the certificate of incorporation.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
HCCH is incorporated under the laws of the State of Delaware. Section 145
of the DGCL ("Section 145") provides that a Delaware corporation may indemnify
any persons who are, or are threatened to be made, parties to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of such
corporation), by reason of the fact that such person is or was an officer,
director, employee or agent of such corporation, or is or was serving at the
request of such corporation as a director, officer, employee or agent of another
corporation or enterprise. The indemnity may include expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided such person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the corporation's best interests
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe that his conduct was unlawful. A Delaware corporation may indemnify
any persons who were or are parties, or are threatened to be made a party, to
any threatened, pending or completed action or suit by or in the right of the
corporation by reason of the fact that such person is or was a director,
officer, employee or agent of such corporation or enterprise. The indemnity may
include expenses (including attorneys' fees) actually and reasonably incurred by
such person in connection with the defense or settlement of such action or suit,
provided such person acted in good faith and in a manner he reasonably believed
to be in or not opposed to the corporation's best interest except that no
indemnification is permitted without judicial approval if the officer is
adjudged to be liable to the corporation. Where an officer or director is
successful on the merits or otherwise in the defense of any action referred to
above, the corporation must indemnify him against the expenses which such
officer or director has actually and reasonably incurred.
Article IX of HCCH's Restated Certificate of Incorporation, as amended,
requires HCCH to indemnify HCCH's directors and officers to the extent permitted
under Section 145.
Article VIII of HCCH's Bylaws provides that HCCH shall indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding whether civil, criminal,
administrative or investigative (other than an action by or in the right of
HCCH), by reason of the fact that he is or was a director or officer of HCCH, or
is or was serving at the request of HCCH as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of HCCH
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe his conduct was unlawful. The determination of whether an incumbent
or former director or officer is entitled to indemnification because such
officer or director has met the applicable standards of conduct set forth above
is to be made, unless ordered by a court: (i) by a majority vote of a quorum
consisting of directors who at the time of the vote are not parties to the
proceeding; (ii) if such quorum cannot be obtained, or even if obtainable a
quorum of disinterested directors so directs, by independent legal counsel in a
written opinion; or (iii) by a vote of shareholders of HCCH. The HCCH Bylaws
further provide that the expenses (including attorneys' fees) incurred in any
such action by a director of officer of HCCH may be paid or reimbursed by HCCH
in advance of the final disposition of such action, suit or proceeding upon
receipt of a written undertaking by or on behalf of the director or officer to
repay the amount paid or reimbursed if it is ultimately determined that he is
not entitled to be indemnified by HCCH as authorized therein.
HCCH's Bylaws also provide that HCCH may indemnify to the extent of the
provisions set forth therein, any person, other than an officer or director, who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative, by reason of the fact that he is or was an employee or agent
of HCCH, or was serving at the request of HCCH as a director, officer, employee
or agent of another corporation, partnership, joint venture,
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<PAGE> 225
trust or other enterprise, if such person makes written application for such
indemnification to the HCCH Board and the HCCH Board so determines that
indemnification is appropriate and the extent thereof.
HCCH's Bylaws further provide that the indemnification described therein is
not exclusive, and shall not exclude any other rights to which the person
seeking to be indemnified may be entitled under statute, any bylaw, agreement,
vote of shareholders or disinterested directors, or otherwise, both as to action
in his official capacity and to his action in another capacity while holding
such office.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
------- -------
<C> <S>
2 -- Agreement and Plan of Reorganization -- Included as
Appendix "A" to the Proxy Statement/Prospectus
3.1 -- Restated Certificate of Incorporation of HCC Holdings,
Inc. as filed with the Delaware Secretary of State on
July 23, 1996 -- Included as Appendix "D" to the Proxy
Statement/Prospectus
3.2 -- Bylaws of HCC Insurance Holdings, Inc., as
amended -- Included as Appendix "E" to the Proxy
Statement/Prospectus
4.1 -- Specimen Common Stock Certificate, $1.00 par value per
share, of HCC Insurance Holdings, Inc. -- Filed with the
SEC as Exhibit 4.1 to the Registrant's Registration
Statement on Form S-1, Reg. No. 33-48737, and
incorporated herein by reference
5.1 -- Opinion and Consent of Winstead Sechrest & Minick P.C.
regarding legality
8.1 -- Opinion and Consent of Winstead Sechrest & Minick P.C.
regarding federal income tax matters
23.1 -- Consent of Coopers & Lybrand L.L.P.
23.2 -- Consent of KPMG Peat Marwick LLP
23.3 -- Consent of Tonneson & Company, C.P.A.'s P.C.
23.4 -- Consent of Winstead Sechrest & Minick P.C. -- included in
their opinions filed as Exhibits 5.1 and 8.1
24 -- Powers of Attorney
28 -- Information from reports furnished to the State Board of
Insurance for the State of Texas -- Filed with the SEC as
Exhibits to the Registrant's Form 10-K for the year ended
December 31, 1996
99.1 -- Consent of Smith Barney Inc.
99.2 -- Consent of Alex. Brown & Sons Incorporated
99.3 -- Proxy Card of HCC Insurance Holdings, Inc.
99.4 -- Proxy Card of AVEMCO Corporation
</TABLE>
The Disclosure Schedules and other appendices of the Registrant and AVEMCO
Corporation are referred to in the Agreement and Plan of Reorganization, but are
omitted from submission to the SEC in connection herewith. Upon request, the
Registrant undertakes to furnish to the SEC a copy of any omitted schedule or
appendix.
(b) Financial Statement Schedules
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<PAGE> 226
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the Registrant's annual report
pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act
of 1934 (and, where applicable, each filing of any employee benefit plan's
annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the Registration Statement shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(2) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the Registrant undertakes that such reoffering
prospectus will contain the information called for by Form S-4 with respect
to reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other items of Form S-4.
(3) That every prospectus (i) that is filed pursuant to paragraph (2)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the Registration Statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(5) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the Registration Statement through the date of responding
to the request.
(6) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the Registration Statement when
it became effective.
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<PAGE> 227
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Houston, State of Texas,
on the 18th day of April, 1997.
HCC INSURANCE HOLDINGS, INC.
By: /s/ STEPHEN L. WAY
----------------------------------
Stephen L. Way
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ STEPHEN L. WAY* Chairman of the Board and Chief
- ----------------------------------------------------- Executive Officer (Principal
Stephen L. Way Executive Officer)
/s/ FRANK J. BRAMANTI Executive Vice President,
- ----------------------------------------------------- Secretary, Chief Financial
Frank J. Bramanti Officer (Principal Financial
Officer and Principal Accounting
Officer)
/s/ STEPHEN J. LOCKWOOD* President and Director
- -----------------------------------------------------
Stephen J. Lockwood
/s/ JAMES M. BERRY* Director
- -----------------------------------------------------
James M. Berry
/s/ PATRICK B. COLLINS* Director
- -----------------------------------------------------
Patrick B. Collins
/s/ J. ROBERT DICKERSON* Director
- -----------------------------------------------------
J. Robert Dickerson
/s/ EDWIN H. FRANK, III* Director
- -----------------------------------------------------
Edwin H. Frank, III
/s/ JOHN L. KAVANAUGH* Director
- -----------------------------------------------------
John L. Kavanaugh
/s/ WALTER J. LACK* Director
- -----------------------------------------------------
Walter J. Lack
/s/ HUGH T. WILSON* Director
- -----------------------------------------------------
Hugh T. Wilson
*By: /s/ FRANK J. BRAMANTI
------------------------------------------------
Frank J. Bramanti
Attorney-in-fact
</TABLE>
April 18, 1997
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<PAGE> 228
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. EXHIBIT PAGE
------- ------- ------------
<C> <S> <C>
2 -- Agreement and Plan of Reorganization -- Included as
Appendix "A" to the Proxy Statement/Prospectus
3.1 -- Restated Certificate of Incorporation of HCC Holdings,
Inc. as filed with the Delaware Secretary of State on
July 23, 1996 -- Included as Appendix "D" to the Proxy
Statement/Prospectus
3.2 -- Bylaws of HCC Insurance Holdings, Inc., as
amended -- Included as Appendix "E" to the Proxy
Statement/Prospectus
4.1 -- Specimen Common Stock Certificate, $1.00 par value per
share, of HCC Insurance Holdings, Inc. -- Filed with the
SEC as Exhibit 4.1 to the Registrant's Registration
Statement on Form S-1, Reg. No. 33-48737, and
incorporated herein by reference
5.1 -- Opinion and Consent of Winstead Sechrest & Minick P.C.
regarding legality
8.1 -- Opinion and Consent of Winstead Sechrest & Minick P.C.
regarding federal income tax matters
23.1 -- Consent of Coopers & Lybrand L.L.P.
23.2 -- Consent of KPMG Peat Marwick LLP
23.3 -- Consent of Tonneson & Company, C.P.A.'s P.C.
23.4 -- Consent of Winstead Sechrest & Minick P.C. -- included in
their opinions filed as Exhibits 5.1 and 8.1
24 -- Powers of Attorney
28 -- Information from reports furnished to the State Board of
Insurance for the State of Texas -- Filed with the SEC as
Exhibits to the Registrant's Form 10-K for the year ended
December 31, 1996
99.1 -- Consent of Smith Barney Inc.
99.2 -- Consent of Alex. Brown & Sons Incorporated
99.3 -- Proxy Card of HCC Insurance Holdings, Inc.
99.4 -- Proxy Card of AVEMCO Corporation
</TABLE>
<PAGE> 1
EXHIBIT 5.1
[WINSTEAD SECHREST & MINICK LETTERHEAD]
April 18, 1997
The Board of Directors
HCC Insurance Holdings, Inc.
13403 Northwest Freeway, Suite 200
Houston, Texas 77040
Gentlemen:
You have requested our opinion as to the legality of the issuance of
9,119,410 shares (the "Shares") of the Common Stock, $1.00 par value, of HCC
Insurance Holdings, Inc. (the "Company"), which are the subject of a
registration statement on Form S-4 (the "Registration Statement") filed by the
Company with the Securities and Exchange Commission pursuant to the Securities
Act of 1933, as amended. You have requested our opinion as to whether the Shares
to be issued will, when issued, be fully-paid and non-assessable.
We have examined the Certificate of Incorporation of the Company, the
Bylaws and such other corporate records, documents, and proceedings (including
the proposed Agreement and Plan of Reorganization) and the resolutions adopted
by the Board of Directors of the Company in connection with the issuance, sale,
and delivery of the Shares as we have deemed necessary for the purposes of this
opinion.
On the basis of the foregoing, it is our opinion that the Shares to be
issued and sold by the Company pursuant to the Registration Statement have been
duly and validly authorized by all necessary corporate action of the Company
and, subject to consummation of the Agreement and Plan of Reorganization, each
of such Shares will, when issued, be duly and validly issued, fully-paid, and
non-assessable shares of Common Stock of the Company.
We know that we are named in the Registration Statement, and we hereby
consent to the use of our name in the Registration Statement and to the filing
of this opinion as an exhibit to the Registration Statement.
Very truly yours,
WINSTEAD SECHREST & MINICK P. C.
By: /s/ ARTHUR S. BERNER
----------------------------------
Arthur S. Berner
For the Firm
ASB:blg
<PAGE> 1
EXHIBIT 8.1
April 18, 1997
HCC Insurance Holdings, Inc.
13403 Northwest Freeway
Houston, Texas 77040-6094
Re: Merger of Merger Sub #4, Inc., a Delaware corporation ("Merger Sub"),
with and into AVEMCO Corporation, a Delaware corporation ("AVEMCO")
Dear Sirs:
You have requested our opinion concerning certain issues relating to the
federal income taxation of the proposed merger (the "Merger") of Merger Sub, a
wholly owned subsidiary of HCC Insurance Holdings, Inc. ("HCCH"), with and into
AVEMCO pursuant to that certain Agreement and Plan of Reorganization dated as of
February 28, 1997 by and among HCCH, Merger Sub, and AVEMCO (the "Agreement").
Capitalized terms not otherwise defined herein have the meanings as defined in
the Agreement.
BASIS OF OPINION
Our opinion is based upon (1) the assumptions listed below, and (2) our
review of the following documents:
1. the Agreement;
2. a form of a Certificate of Officer of HCC Insurance Holdings, Inc.
attached as Exhibit A;
3. a form of a Certificate of Officer of AVEMCO Corporation attached
as Exhibit B;
4. such other documents relating to the Merger as we have deemed
necessary or appropriate.
Except for the review of such documents, we have not undertaken any independent
investigation of any matters material to the opinion expressed herein, the truth
or completeness of any warranty or representation contained in any of the
documents listed above, or the validity of any of the assumptions listed below.
In rendering our opinion, we have assumed (1) that the Certificate of
Officer of HCC Insurance Holdings, Inc. and the Certificate of Officer of AVEMCO
Corporation will be executed and delivered to us on behalf of HCCH and AVEMCO,
respectively, in substantially the forms as attached hereto, on or prior to the
Effective Date of the Merger, (2) that each of the warranties, representations,
and statements made in each of the documents referred to above are complete and
accurate and will be complete and accurate as of the Effective Date of the
Merger, (3) that the Merger will be effective under all applicable state law,
(4) that the Agreement correctly and completely embodies the terms of the Merger
and that the Merger will be effected as provided in the Agreement, (5) the
authenticity of all documents submitted to us as originals, (6) the conformity
to the originals of all documents submitted to us as photostatic, certified, or
conformed copies, and (7) the due authorization, execution, and delivery of all
of the documents referred to above.
The opinion expressed herein is rendered as of the date hereof and is based
upon the existing Internal Revenue Code of 1986, as amended (the "Code"),
existing final and proposed Treasury regulations promulgated pursuant thereto
("Regulations"), existing published Revenue Rulings, Revenue Procedures, and
other announcements issued by the Internal Revenue Service, and existing
judicial and administrative decisions and rulings, all of which are subject to
change.
OPINION
Based on and subject to the documents, assumptions, qualifications, and
limitations set forth herein, it is our opinion that the Merger will qualify as
a reorganization under Section 368(a) of the Code.
LIMITATIONS ON OPINION
Our opinion is limited to that expressly stated herein. The opinion
expressed herein represents only our legal judgment, and has no binding effect
or official status of any kind. No assurance can be given that the
<PAGE> 2
HCC Insurance Holdings, Inc.
April 18, 1997
Internal Revenue Service would concur in the conclusion reached in this opinion.
Any contest or challenge to a tax position taken by a participant in the Merger
could have material adverse tax consequences to such participant.
Our opinion is limited to that expressly set forth above. No opinion is
expressed as to any transaction other than the Merger, including any transaction
undertaken in connection with the Merger. In addition, we express no opinion as
to any estate, gift, excise, state, local, or foreign tax consequences of the
Merger. In particular, we express no opinion regarding: (1) the amount,
existence, or availability after the Merger of any of the federal income tax
attributes of AVEMCO or HCCH (including, without limitation, net operating loss
carryovers, if any, of AVEMCO or HCCH); (2) the tax consequences of any
disposition of stock of HCCH; or (3) the tax treatment of any disposition of any
stock of AVEMCO or any of its affiliates in any transaction other than in
exchange for HCCH stock pursuant to the Merger.
EFFECT OF CHANGES
The opinion expressed herein is based upon the documents, representations,
decisions, rulings, Code, Regulations, and Internal Revenue Service publications
referred to above, all as of the date of this letter. No opinion can be
expressed at this time as to the likelihood of any change, amendment,
modification, or repeal of, or addition to, any such decisions, rulings, Code,
Regulations, or Internal Revenue Service publications, or as to the possible
impact on the tax treatment of the Merger or the participants in the Merger of
any such change or any change in the documents or representations or facts
underlying the assumptions referred to above. Any such change could adversely
affect the tax treatment of the Merger and the participants in the Merger, and
could have retroactive effect. We undertake no responsibility to advise you of
any changes to any such documents, representations, decisions, rulings, Code,
Regulations, Internal Revenue Service publications, or facts, or as to the
impact, if any, of any such change on the tax treatment of the Merger or the
participants in the Merger.
REGISTRATION STATEMENT
In addition to your request for our opinion on the specific issue of
federal income tax law addressed above, you have asked us to review the
discussion of federal income tax issues contained in the Registration Statement
on Form S-4, as amended, to be filed with the Securities and Exchange Commission
by HCCH in connection with the Merger on or about April 18, 1997 (the
"Registration Statement"). We have reviewed the discussion entitled "Certain
Federal Income Tax Matters" contained in the Registration Statement and believe,
based on and subject to the documents, assumptions, qualifications, and
limitations set forth herein, that such information fairly presents the current
federal income tax law applicable to the Merger, and the material tax
consequences to HCCH, AVEMCO, and their respective shareholders as a result of
the Merger. We hereby consent to the use of our name in the Registration
Statement and to the filing of this opinion as an exhibit to the Registration
Statement.
Very truly yours,
WINSTEAD SECHREST & MINICK P.C.
lsd
Page 2
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4 or
incorporation by reference of our reports dated March 27, 1997 on our audits of
the consolidated financial statements and financial statement schedules as of
December 31, 1996 and 1995 and for the three years in the period ended December
31, 1996 of HCC Insurance Holdings, Inc. Our reports state that our reports are
based on the report of Tonneson & Company C.P.A.'s P.C., independent certified
public accountants with respect to their audit of the combined financial
statements of LDG Management Company Incorporated and Affiliates for the year
ended December 31, 1994. We also consent to the reference to our firm under the
caption "Experts".
COOPERS & LYBRAND L.L.P.
Houston, Texas
April 18, 1997
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Stockholders
AVEMCO Corporation:
We consent to the use of our report dated January 31, 1997 (February 28,
1997, as to Note 12) on the consolidated financial statements and financial
statement schedules of AVEMCO Corporation and subsidiaries as of December 31,
1996 and 1995, and for each of the years in the three-year period then ended
included herein or incorporated by reference and to the reference to our firm
under the heading "Experts" in the prospectus. Our report refers to a change in
the method of accounting for investments in fixed maturities.
KPMG PEAT MARWICK LLP
Washington, D.C.
April 18, 1997
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4 of
our report dated April 6, 1995 on our audit of the combined financial statements
of LDG Management Company Incorporated (an S corporation) and Affiliates (S
corporations) for the year ended December 31, 1994. We also consent to the
reference to our firm under the caption "Experts".
TONNESON & COMPANY C.P.A.'s P.C.
Wakefield, Massachusetts
April 18, 1997
<PAGE> 1
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints STEPHEN L. WAY and FRANK J. BRAMANTI, and each of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution for him and in his name, place, and stead, in any and all
capacities, to sign the Form S-4 Registration Statement of HCC Insurance
Holdings, Inc. (the 'Registrant') with respect to the proposed merger of a
subsidiary of the Registrant with and into AVEMCO Corporation, to sign any and
all amendments to same (including post-effective amendments), and to file same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, and/or any state securities department or
any other federal or state agency or governmental authority, granting unto such
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or any of them, whether substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
/s/ STEPHEN L. WAY
--------------------------------------
Stephen L. Way
<PAGE> 2
EXHIBIT 24.2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints STEPHEN L. WAY and FRANK J. BRAMANTI, and each of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution for him and in his name, place, and stead, in any and all
capacities, to sign the Form S-4 Registration Statement of HCC Insurance
Holdings, Inc. (the "Registrant") with respect to the proposed merger of a
subsidiary of the Registrant with and into AVEMCO Corporation, to sign any and
all amendments to same (including post-effective amendments), and to file same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, and/or any state securities department or
any other federal or state agency or governmental authority, granting unto such
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or any of them, whether substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
/s/ STEPHEN J. LOCKWOOD
-------------------------------------------
Stephen J. Lockwood
<PAGE> 3
EXHIBIT 24.3
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints STEPHEN L. WAY and FRANK J. BRAMANTI, and each of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution for him and in his name, place, and stead, in any and all
capacities, to sign the Form S-4 Registration Statement of HCC Insurance
Holdings, Inc. (the "Registrant") with respect to the proposed merger of a
subsidiary of the Registrant with and into AVEMCO Corporation, to sign any and
all amendments to same (including post-effective amendments), and to file same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, and/or any state securities department or
any other federal or state agency or governmental authority, granting unto such
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or any of them, whether substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
/s/ JAMES M. BERRY
-------------------------------------------
James M. Berry
<PAGE> 4
EXHIBIT 24.4
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints STEPHEN L. WAY and FRANK J. BRAMANTI, and each of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution for him and in his name, place, and stead, in any and all
capacities, to sign the Form S-4 Registration Statement of HCC Insurance
Holdings, Inc. (the "Registrant") with respect to the proposed merger of a
subsidiary of the Registrant with and into AVEMCO Corporation, to sign any and
all amendments to same (including post-effective amendments), and to file same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, and/or any state securities department or
any other federal or state agency or governmental authority, granting unto such
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or any of them, whether substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
/s/ PATRICK B. COLLINS
------------------------------------
Patrick B. Collins
<PAGE> 5
EXHIBIT 24.5
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints STEPHEN L. WAY and FRANK J. BRAMANTI, and each of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution for him and in his name, place, and stead, in any and all
capacities, to sign the Form S-4 Registration Statement of HCC Insurance
Holdings, Inc. (the "Registrant") with respect to the proposed merger of a
subsidiary of the Registrant with and into AVEMCO Corporation, to sign any and
all amendments to same (including post-effective amendments), and to file same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, and/or any state securities department or
any other federal or state agency or governmental authority, granting unto such
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or any of them, whether substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
/s/ J. ROBERT DICKERSON
------------------------------------
J. Robert Dickerson
<PAGE> 6
EXHIBIT 24.6
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints STEPHEN L. WAY and FRANK J. BRAMANTI, and each of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution for him and in his name, place, and stead, in any and all
capacities, to sign the Form S-4 Registration Statement of HCC Insurance
Holdings, Inc. (the "Registrant") with respect to the proposed merger of a
subsidiary of the Registrant with and into AVEMCO Corporation, to sign any and
all amendments to same (including post-effective amendments), and to file same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, and/or any state securities department or
any other federal or state agency or governmental authority, granting unto such
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or any of them, whether substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
/s/ EDWIN H. FRANK, III
------------------------------------
Edwin H. Frank, III
<PAGE> 7
EXHIBIT 24.7
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints STEPHEN L. WAY and FRANK J. BRAMANTI, and each of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution for him and in his name, place, and stead, in any and all
capacities, to sign the Form S-4 Registration Statement of HCC Insurance
Holdings, Inc. (the "Registrant") with respect to the proposed merger of a
subsidiary of the Registrant with and into AVEMCO Corporation, to sign any and
all amendments to same (including post-effective amendments), and to file same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, and/or any state securities department or
any other federal or state agency or governmental authority, granting unto such
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or any of them, whether substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
/s/ JOHN L. KAVANAUGH
------------------------------------
John L. Kavanaugh
<PAGE> 8
EXHIBIT 24.8
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints STEPHEN L. WAY and FRANK J. BRAMANTI, and each of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution for him and in his name, place, and stead, in any and all
capacities, to sign the Form S-4 Registration Statement of HCC Insurance
Holdings, Inc. (the "Registrant") with respect to the proposed merger of a
subsidiary of the Registrant with and into AVEMCO Corporation, to sign any and
all amendments to same (including post-effective amendments), and to file same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, and/or any state securities department or
any other federal or state agency or governmental authority, granting unto such
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or any of them, whether substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
/s/ WALTER J. LACK
------------------------------------
Walter J. Lack
<PAGE> 9
EXHIBIT 24.9
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints STEPHEN L. WAY and FRANK J. BRAMANTI, and each of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution for him and in his name, place, and stead, in any and all
capacities, to sign the Form S-4 Registration Statement of HCC Insurance
Holdings, Inc. (the "Registrant") with respect to the proposed merger of a
subsidiary of the Registrant with and into AVEMCO Corporation, to sign any and
all amendments to same (including post-effective amendments), and to file same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, and/or any state securities department or
any other federal or state agency or governmental authority, granting unto such
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or any of them, whether substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
/s/ HUGH T. WILSON
------------------------------------
Hugh T. Wilson
<PAGE> 1
EXHIBIT 99.1
SMITH BARNEY
A Member of TravelersGroup
The Board of Directors
HCC Insurance Holdings, Inc.
13403 Northwest Freeway
Houston, Texas 77040
Members of the Board:
We hereby consent to the inclusion of our opinion letter to the Board of
Directors of HCC Insurance Holdings, Inc. ("HCCH") as Appendix B to the Joint
Proxy Statement/Prospectus of HCCH and AVEMCO Corporation ("AVEMCO") relating to
the proposed merger transaction involving HCCH and AVEMCO. In giving such
consent, we do not admit that we come within the category of persons whose
consent is required under, and we do not admit that we are "experts" for
purposes of, the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.
By: /s/ SMITH BARNEY INC.
----------------------------------
SMITH BARNEY INC.
New York, New York
April 18, 1997
<PAGE> 1
EXHIBIT 99.2
The Board of Directors
of AVEMCO Corporation
411 Aviation Way
Frederick, MD 21701
Dear Members of the Board of Directors:
We hereby consent to the inclusion of our opinion date February 21, 1997 in
the joint proxy statement/prospectus of AVEMCO Corporation and HCC Insurance
Holdings, Inc. related to the Merger. In executing this consent, we do not admit
or acknowledge that Alex, Brown & Sons Incorporated is within the class of
persons whose consent is required by section 7 of the Securities Act of 1933, as
amended, or the rules and regulations promulgated thereunder.
ALEX, BROWN & SONS INCORPORATED
by:
-----------------------------------
Managing Director
<PAGE> 1
EXHIBIT 99.3
<TABLE>
<CAPTION>
<S> <C> <C>
- ----------------------------------------------------------------------------
HCC INSURANCE HOLDINGS, INC.
SPECIAL MEETING OF SHAREHOLDERS -- TO BE HELD MAY 29, 1997
THE BOARD OF DIRECTORS SOLICITS THIS PROXY
The undersigned hereby constitutes and appoints Stephen L.
Way and Frank J. Bramanti, and each of them, acting in the
absence of others, as proxies of the undersigned, with full
power of substitution in the premises to each of them, to
appear and vote, as designated herein, all shares of the
Common Stock of HCC Insurance Holdings, Inc. (the "Company")
held of record by the undersigned on April 24, 1997 at the
Special Meeting of Shareholders of the Company to be held at
the offices of the Company, 13403 Northwest Freeway,
Houston, Texas 77040, on May 29, 1997, at 9:00 a.m., local
time, and at any and all postponements or adjournments
thereof.
WHEN PROPERLY EXECUTED, THIS PROXY WILL BE VOTED AS
DESIGNATED BELOW BY THE UNDERSIGNED. IF NO CHOICE IS
SPECIFIED, THE PROXY WILL BE VOTED "FOR" PROPOSAL 1, AND,
ACCORDING TO THE DISCRETION OF THE PROXY HOLDERS, ON ANY
OTHER MATTERS THAT MAY PROPERLY COME BEFORE THE MEETING OR
ANY AND ALL POSTPONEMENTS OR ADJOURNMENTS THEREOF.
PLEASE MARK, SIGN, DATE, AND RETURN YOUR PROXY PROMPTLY IN
THE ENCLOSED ENVELOPE.
(continued on reverse side)
- ----------------------------------------------------------------------------
</TABLE>
<PAGE> 2
- ----------------------------------------------------------------------------
(continued from other side)
[X] Please mark your votes as in this example.
1. Proposal to approve and adopt the Agreement and Plan of
Reorganization (the "Plan") and all transactions
contemplated thereby, including the Merger and the issuance
of 9,119,412 shares of Common Stock, subject to
adjustment in accordance with the Plan, as defined and
described in the accompanying Proxy Statement/Prospectus.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. In their discretion, the proxies are authorized to vote
upon such business as may properly come before the Meeting
or any and all postponements of adjournments thereof.
IMPORTANT: In signing this proxy, please sign exactly as
your name(s) is (are) shown on the share certificate to
which the proxy applies. When signing as an attorney,
executor, administrator, trustee or guardian, please give
your full title as such. If a corporation, please sign full
corporate name by President or other authorized officer. If
a partnership, please sign in partnership name by an
authorized person. EACH JOINT TENANT MUST SIGN.
The undersigned hereby acknowledges receipt of the Notice of
Special Meeting of Shareholders and Proxy
Statement/Prospectus relating to the meeting.
--------------------------------------
SIGNATURE OF SHAREHOLDER
---------------------------------------
(Additional signature if held jointly)
DATED: , 1997
- ----------------------------------------------------------------------------
<PAGE> 1
EXHIBIT 99.4
<TABLE>
<CAPTION>
<S> <C> <C>
- ----------------------------------------------------------------------------
AVEMCO CORPORATION
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
SOLICITED BY THE BOARD OF DIRECTORS
MAY 29, 1997
The undersigned hereby appoints each of William P. Condon,
John R. Yuska and Thomas H. Chero proxies with full power of
substitution, with the powers (each having full power to act
without the other) the undersigned would possess if
personally present, to vote, as designated below, all shares
of the $.10 par value Common Stock held by the undersigned
in AVEMCO Corporation (the "Company") at the Special Meeting
of Shareholders to be held on May 29, 1997 (the "Special
Meeting"), and at any adjournments or postponements or
thereof.
This proxy is solicited on behalf of the Board of Directors
of the Company and will be voted FOR Proposal 1 below unless
otherwise indicated.
You are encouraged to specify your choices by marking the
appropriate box, SEE REVERSE SIDE. The Proxies cannot vote
your shares unless you sign and return this card.
(continued and to be SIGNED on the other side)
- ----------------------------------------------------------------------------
</TABLE>
<PAGE> 2
- ----------------------------------------------------------------------------
(continued from other side)
[X] Please mark your votes as in this example.
1. The approval and adoption of the Agreement and Plan of
Reorganization, dated as of February 28, 1997 by and among
the Company, HCC Insurance Holdings, Inc. and Merger Sub #4,
Inc.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. In their discretion, the Proxies are authorized to vote
upon any other matter that may come before the Special
Meeting or any adjournments or postponements thereof.
This Proxy, if properly executed, will be voted in
accordance with the undersigned's direction as set forth
herein. If no direction is made, this Proxy will be voted
FOR Proposal 1. This Proxy may be revoked in writing prior
to its exercise. The undersigned hereby revokes any proxies
heretofore given to vote upon or act with respect to such
shares.
NOTE: PLEASE SIGN EXACTLY AS YOUR NAME OR NAMES
APPEAR HEREON. JOINT OWNERS SHOULD EACH SIGN
PERSONALLY. WHEN SIGNING AS AN ATTORNEY, EXECUTOR,
TRUSTEE OR GUARDIAN, PLEASE GIVE YOUR FULL TITLE
AS SUCH.
Dated: , 1997
--------------------------------------------
Signature
--------------------------------------------
Signature (see note above)
IMPORTANT: PLEASE SIGN, DATE AND
RETURN PROMPTLY
- ----------------------------------------------------------------------------
