<PAGE> 1
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ X ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to section 240.14a-11(c) or
section 240.14a-12
THE TENERE GROUP, INC.
(Name of Registrant as Specified in its Charter)
Payment of Filing Fee (Check the appropriate box):
[ X ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies: N/A
2) Aggregate number of securities to which transaction applies: N/A
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined): N/A
4) Proposed maximum aggregate value of transaction: N/A
5) Total fee paid: N/A
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid: N/A
2) Form, Schedule or Registration Statement No.: N/A
3) Filing Party: N/A
4) Date Filed: N/A
<PAGE> 2
February 13, 1999
Dear Fellow Shareholder:
The Board of Directors cordially invites you to attend a
Special Meeting of Shareholders of The Tenere Group, Inc. ("Tenere") to be held
at 3:00 p.m. Central Time, on March 15, 1999, at the offices of Tenere located
at 1903 East Battlefield, Springfield, Missouri (the "Special Meeting"). At the
Special Meeting, you will be asked to consider and vote upon a proposal to
approve the Agreement and Plan of Merger, dated October 2, 1998, as amended by
that certain Amendment No. 1 to Agreement and Plan of Merger, dated as of
January 15, 1999 (collectively, the "Merger Agreement"), pursuant to which (i) a
wholly owned subsidiary of Florida Physicians Insurance Company, Inc. ("FPIC")
would be merged (the "Merger") with and into Tenere, (ii) the issued and
outstanding shares of common stock of Tenere (other than shares as to which
dissenters' rights are perfected pursuant to applicable law) would be converted
into the right to receive an amount in cash equal to $9.4416 per share (the "Per
Share Amount"), based upon aggregate merger consideration of $20.6 million
divided by the fully diluted number of shares of Tenere common stock outstanding
as of the record date of the Special Meeting, and (iii) each outstanding option
to purchase shares of the common stock of Tenere would be converted into the
right to receive an amount in cash equal to $3.991 per share, representing the
Per Share Amount minus the exercise price of each such option. You are also
being asked to vote on a proposal to adjourn the Special Meeting if required to
solicit additional votes.
Enclosed are the following items relating to the Special
Meeting and the Merger:
1. Proxy Statement;
2. Proxy card; and
3. A pre-addressed return envelope for the proxy card.
The Proxy Statement and related proxy materials set forth important information
relating to Tenere and the terms and conditions of the proposed Merger. The
Board of Directors requests that you carefully review these materials before
completing the enclosed proxy card or attending the Special Meeting.
THE BOARD OF DIRECTORS OF TENERE CAREFULLY CONSIDERED AND
APPROVED THE TERMS OF THE MERGER AGREEMENT AS BEING IN THE BEST INTEREST OF
TENERE AND ITS SHAREHOLDERS. THE TENERE BOARD UNANIMOUSLY RECOMMENDS THAT
SHAREHOLDERS VOTE FOR THE PROPOSAL TO APPROVE THE MERGER AGREEMENT AND FOR THE
PROPOSAL REGARDING ADJOURNMENT.
The investment banking firm ABN AMRO Incorporated has issued
its written opinion, dated as of the date hereof, to your Board of Directors
regarding the fairness from a financial point of view of the consideration to be
received by Tenere shareholders pursuant to the Merger Agreement. A copy of the
opinion is attached as Annex C to the Proxy Statement.
<PAGE> 3
APPROVAL OF THE MERGER AGREEMENT BY THE HOLDERS OF TWO-THIRDS
OF THE OUTSTANDING SHARES OF TENERE'S COMMON STOCK IS A CONDITION TO THE
CONSUMMATION OF THE MERGER. The approval of any proposed adjournment requires
the affirmative vote of a majority of the holders of Tenere's common stock
present at the Special Meeting in person or by proxy. Accordingly, it is
important that your shares be represented at the Special Meeting, whether or not
you plan to attend the Special Meeting in person. Please complete, date and sign
the enclosed proxy card and return it in the enclosed pre-addressed envelope,
which requires no postage if mailed within the United States. If you later
decide to attend the Special Meeting and vote in person, or if you wish to
revoke your proxy for any reason prior to the vote at the Special Meeting, you
may do so and your proxy will have no further effect. You may revoke your proxy
by delivering to the Secretary of Tenere a written notice of revocation or
another proxy relating to the same shares bearing a later date than the proxy
being revoked or by attending the Special Meeting and voting in person.
Attendance at the Special Meeting will not in itself constitute a revocation of
an earlier dated proxy. Your prompt attention will be greatly appreciated.
Sincerely,
/s/ Raymond A. Christy, M.D.
Raymond A. Christy, M.D.
President
<PAGE> 4
THE TENERE GROUP, INC.
1903 EAST BATTLEFIELD
SPRINGFIELD, MISSOURI 65804
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD
MARCH 15, 1999
TO THE SHAREHOLDERS OF THE TENERE GROUP, INC.:
Notice is hereby given that a special meeting of shareholders
(the "Special Meeting") of THE TENERE GROUP, INC., a Missouri corporation
("Tenere"), will be held at the offices of Tenere located at 1903 East
Battlefield, Springfield, Missouri on March 15, 1999, at 3:00 p.m. Central Time,
for the following purposes:
(1) To consider and vote upon a proposal to adopt and approve
the Agreement and Plan of Merger, dated October 2, 1998, as amended by that
certain Amendment No. 1 to Agreement and Plan of Merger, dated as of January 15,
1999 (collectively, the "Merger Agreement"), each by and among Florida
Physicians Insurance Company, Inc., a Florida corporation and wholly owned
subsidiary of FPIC Insurance Group, Inc. ("FPIC"), TGI Acquisition Corporation,
a Florida corporation and wholly owned subsidiary of FPIC ("Acquisition
Corporation"), and Tenere pursuant to which: (a) Acquisition Corporation would
be merged (the "Merger") with and into Tenere, (b) upon consummation of the
Merger, the shares of Tenere common stock then issued and outstanding (other
than shares with respect to which dissenters' rights are perfected pursuant to
Section 351.455 of the General and Business Corporation Law of Missouri) would
be converted into the right to receive an amount in cash equal to $9.4416 per
share (the "Per Share Amount"), based upon aggregate merger consideration of
$20.6 million divided by the fully diluted number of shares of Tenere common
stock outstanding as of the record date of the Special Meeting; and (c) each
outstanding option to purchase shares of the common stock of Tenere would be
converted into the right to receive an amount in cash equal to $3.991 per share,
representing the Per Share Amount minus the exercise price of each such option.
(2) To consider and vote upon a proposal to approve in advance
an adjournment of the Special Meeting in the event there are not sufficient
votes to constitute a quorum or approve the Merger Agreement at the scheduled
time of the Special Meeting, in order to permit further solicitation of proxies.
(3) To transact such other business as may properly come
before the Special Meeting or any adjournments or postponements thereof.
The record date for determining the shareholders entitled to
receive notice of, and to vote at, the Special Meeting or any adjournments or
postponements thereof has been fixed as of the close of business on February 8,
1999. On the record date, Tenere had 1,999,774 shares of common stock issued,
outstanding and entitled to vote. Each share will be entitled to one vote on
each matter submitted to a vote at the Special Meeting.
THE AFFIRMATIVE VOTE OF THE HOLDERS OF AT LEAST TWO-THIRDS OF
THE OUTSTANDING SHARES OF TENERE COMMON STOCK IS REQUIRED FOR APPROVAL OF THE
PROPOSAL TO APPROVE THE MERGER AGREEMENT AND THE AFFIRMATIVE VOTE OF AT LEAST A
MAJORITY OF THE SHARES OF TENERE COMMON STOCK
<PAGE> 5
PRESENT IN PERSON OR REPRESENTED BY PROXY AT THE SPECIAL MEETING IS REQUIRED FOR
APPROVAL OF THE PROPOSAL REGARDING ADJOURNMENT. YOUR VOTE IS IMPORTANT
REGARDLESS OF THE NUMBER OF SHARES YOU OWN.
WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING,
PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT IN THE
ACCOMPANYING ENVELOPE. THE PROXY MAY BE REVOKED AT ANY TIME PRIOR TO THE VOTE AT
THE SPECIAL MEETING BY FOLLOWING THE PROCEDURES SET FORTH IN THE ACCOMPANYING
PROXY STATEMENT. FAILURE TO RETURN THE ENCLOSED PROXY CARD OR TO VOTE AT THE
MEETING WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE MERGER.
If the Merger is not consummated, shareholders of Tenere who
did not vote in favor of the Merger Agreement and who otherwise comply with the
requirements of Section 351.455 of The General and Business Corporation Law of
Missouri (a copy of which is attached hereto as Annex B to the Proxy Statement)
are entitled to certain dissenters' rights under Missouri law. For a summary of
such dissenters' rights and the procedures required to perfect such rights, see
"Rights of Dissenting Shareholders of Tenere" in the Proxy Statement.
Please do not send in any stock certificates at this time. If
the Merger Agreement is approved, you will be sent instructions regarding the
exchange of your existing Tenere common stock certificates for the cash payment
to which you are entitled.
BY ORDER OF THE BOARD OF DIRECTORS
Michael D. Hoeman, M.D.
Secretary
Springfield, Missouri
February 13, 1999
<PAGE> 6
THE TENERE GROUP, INC.
1903 EAST BATTLEFIELD
SPRINGFIELD, MISSOURI 65804
PROXY STATEMENT
FOR
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD
MARCH 15, 1999
GENERAL INFORMATION
This Proxy Statement is being furnished to the shareholders of
The Tenere Group, Inc., a Missouri corporation ("Tenere"), in connection with
the solicitation of proxies by the Board of Directors of Tenere for use at a
special meeting of Tenere to be held on March 15, 1999, and any adjournments or
postponements thereof (the "Special Meeting"). At the Special Meeting, the
shareholders of Tenere will consider and vote upon (i) a proposal to approve the
Agreement and Plan of Merger dated October 2, 1998, as amended by that certain
Amendment No. 1 to Agreement and Plan of Merger, dated as of January 15, 1999
(collectively, the "Merger Agreement"), each by and among Florida Physicians
Insurance Company, Inc. ("FPIC"), a Florida corporation and wholly owned
subsidiary of FPIC Insurance Group, Inc. ("FIG"), TGI Acquisition Corporation, a
Florida corporation and wholly owned subsidiary of FPIC ("Acquisition
Corporation"), and Tenere, (ii) a proposal to approve in advance an adjournment
of the Special Meeting in order to permit further solicitation of proxies by
Tenere if insufficient shares are present at the Special Meeting to constitute a
quorum or to approve the Merger Agreement (the "Adjournment Proposal"), and
(iii) consider and vote upon any other business which may properly be brought
before the Special Meeting or any adjournments or postponements thereof. Each
copy of this Proxy Statement is accompanied by the Notice of Special Meeting of
Shareholders of Tenere, a proxy card and a return envelope for the proxy card.
This Proxy Statement, the Notice of Special Meeting and the
proxy card are being first mailed to shareholders of Tenere on or about February
13, 1999.
INFORMATION REGARDING SPECIAL MEETING
DATE, TIME AND PLACE
The Special Meeting will be held at the offices of Tenere
located at 1903 East Battlefield, Springfield, Missouri on March 15, 1999, at
3:00 p.m. Central Time.
RECORD DATE; VOTE REQUIRED
On February 8, 1999 (the "Record Date"), there were 1,999,774
shares of common stock, $.01 par value of Tenere (the "Tenere Common Stock")
outstanding and entitled to vote at the Special Meeting. To the knowledge of
Tenere, no person beneficially owned 5% or more of the outstanding Tenere Common
Stock as of the Record Date. Each such share is entitled to one vote on each
matter properly brought before the Special Meeting. The affirmative vote of the
holders of at least two-thirds of the outstanding shares of Tenere
-1-
<PAGE> 7
Common Stock is required to approve the Merger Agreement, and the approval of
the Adjournment Proposal requires a vote of a majority of the outstanding shares
of Tenere Common Stock present in person or by proxy and entitled to vote at the
Special Meeting. As to other matters which may properly come before the Special
Meeting, unless otherwise provided in the Articles of Incorporation or Bylaws of
Tenere or by statute, the matter will be approved if a majority of the votes
cast are in favor of the matter.
As of the Record Date, directors and executive officers of
Tenere and their affiliates owned beneficially, or controlled the voting of, an
aggregate of 224,710 shares of Tenere Common Stock, or approximately 10.3% of
the outstanding shares of Tenere Common Stock entitled to vote at the Special
Meeting. All directors and executive officers of Tenere have indicated their
intention to vote their shares FOR the approval of the Merger Agreement and FOR
the approval of the Adjournment Proposal at the Special Meeting.
VOTING AND REVOCATION OF PROXIES
Shares of Tenere Common Stock which are represented by a
properly executed proxy received prior to the vote at the Special Meeting will
be voted at such Special Meeting in the manner directed on the proxy card,
unless such proxy is revoked in the manner set forth herein in advance of such
vote. ANY TENERE SHAREHOLDER RETURNING AN EXECUTED PROXY CARD WHICH DOES NOT
PROVIDE INSTRUCTIONS TO VOTE AGAINST THE APPROVAL OF THE MERGER AGREEMENT WILL
BE DEEMED TO INDICATE INSTRUCTION TO VOTE FOR THE APPROVAL OF THE MERGER
AGREEMENT AND THE ADJOURNMENT PROPOSAL, EXCEPT THAT IF A PROXY IS VOTED AGAINST
THE APPROVAL OF THE MERGER AGREEMENT AND NO INSTRUCTION IS GIVEN IN CONNECTION
WITH THE ADJOURNMENT PROPOSAL, THE PROXY WILL NOT BE VOTED IN FAVOR OF THE
ADJOURNMENT PROPOSAL. Failure to return a properly executed proxy card or to
vote in person at the Special Meeting will have the practical effect of a vote
against the approval of the Merger Agreement.
Shares subject to abstentions will be treated as shares that
are present and voting at the Special Meeting for purposes of determining the
presence of a quorum. Such votes will have the effect of votes against the
approval of the Merger Agreement but will have no effect on whether the
Adjournment Proposal is approved. Broker "non-votes" (i.e., proxies from brokers
or nominees indicating that such persons have not received instructions from the
beneficial owners or other persons entitled to vote shares with respect to which
the brokers or nominees do not have discretionary power to vote without such
instructions) will be considered as present for the purposes of determining the
presence of a quorum but will not be considered as voting at the Special
Meeting. Broker non-votes will have the effect of votes against the approval of
the Merger Agreement, but will have no effect on whether the Adjournment
Proposal is approved. Proxies voting against the approval of the Merger
Agreement will not be used by the proxy holders to vote in favor of the
Adjournment Proposal unless the shareholder has voted FOR approval of the
Adjournment Proposal on the proxy card.
If a quorum is not obtained, or if fewer shares of Tenere
Common Stock are voted in favor of approval of the Merger Agreement than the
number required for approval, it is expected that, if a majority of the shares
voted at the Special Meeting, in person or by proxy, with respect to the
Adjournment Proposal have been voted in favor of the Adjournment Proposal, the
Special Meeting will be postponed or adjourned for the purpose of allowing
additional time for obtaining additional votes and, at any subsequent
reconvening of the Special Meeting, all proxies will be voted in the same manner
as such proxies would have been voted at the original convening of the Special
Meeting (except for any proxies which have theretofore effectively been revoked
or withdrawn).
Any shareholder of Tenere giving a proxy may revoke it at any
time prior to the vote at the Special Meeting. Shareholders of Tenere wishing to
revoke a proxy prior to the vote may do so by
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<PAGE> 8
delivering to the Secretary of Tenere at 1903 E. Battlefield, Springfield,
Missouri 65804, a written notice of revocation bearing a later date than the
proxy or a later dated proxy relating to the same shares, or by attending the
Special Meeting and voting such shares in person. Attendance at the Special
Meeting will not in itself constitute the revocation of a proxy.
The Board of Directors of Tenere is not currently aware of any
business to be brought before the Special meeting other than that described
herein. If, however, other matters are properly brought before such Special
Meeting, or any adjournments or postponements thereof, the persons appointed as
proxies will have discretionary authority to vote the shares represented by duly
executed proxies in accordance with their discretion and judgment as to the best
interest of Tenere.
SOLICITATION OF PROXIES
Proxies will initially be solicited by mail, but directors,
officers and selected other employees of Tenere may also solicit proxies in
person or by telephone. Directors, executive officers and any other employees of
Tenere who solicit proxies will not be specially compensated for such services.
Brokerage houses, nominees, fiduciaries and other custodians will be requested
to forward proxy materials to beneficial owners and will be reimbursed for their
reasonable expenses incurred in sending proxy materials to beneficial owners.
Tenere has also engaged D.F. King & Co., Inc. to assist in the solicitation of
proxies with respect to the Special Meeting for a fee estimated at $7,500, plus
reimbursement of reasonable and customary out-of-pocket expenses. Tenere will
bear the cost of mailing the proxy materials and the solicitation of proxies.
HOLDERS OF TENERE COMMON STOCK ARE REQUESTED TO COMPLETE, DATE
AND SIGN THE ACCOMPANYING PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED
POSTAGE-PREPAID ENVELOPE.
RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS
KPMG Peat Marwick LLP reported on Tenere's financial
statements for 1997. Tenere anticipates that one or more representatives of KPMG
Peat Marwick LLP will be present at the Special Meeting to respond to
appropriate questions from shareholders and to make a statement if they desire.
BACKGROUND INFORMATION
BUSINESS OF TENERE
Tenere, a Missouri corporation and insurance holding company,
was organized on April 27, 1995 in connection with the demutualization of RCA
Mutual Insurance Company, a non-assessable mutual property and casualty company
("RCA"). Pursuant to the demutualization, policyholders of RCA became
shareholders of Tenere in proportion to their premiums over the five-year period
prior to the demutualization.
Tenere operates through two principal subsidiaries: (i)
Intermed Insurance Co., a Missouri corporation and wholly owned subsidiary of
Tenere ("Intermed"), which markets professional liability insurance to
physicians, surgeons, dentists, oral surgeons and ancillary healthcare
professionals in Missouri and Kansas; and (ii) Interlex Insurance Co., a
Missouri corporation and wholly owned subsidiary of Intermed ("Interlex"), which
markets professional liability insurance to lawyers and judges in Missouri and
Kansas. Insurance Services, Inc., a Missouri corporation and wholly owned
subsidiary
-3-
<PAGE> 9
of Intermed ("ISI"), serves as the management company for Tenere in its
operations of Intermed and Interlex. Trout Insurance Services, Inc., a Missouri
corporation, is also a wholly owned subsidiary of Intermed ("Trout," and
together with Intermed, Interlex and ISI, the "Tenere Subsidiaries"). Intermed
also markets professional liability insurance to physicians in Texas through a
purchasing group, Intermedical of Texas, Inc., and to dentists in Texas through
a second purchasing group, Dental Defense Specialists, Inc. As of September 30,
1998, Tenere reported, on a consolidated basis, total assets of $68.2 million,
total reserves, including unearned premiums, of $42.0 million and shareholders'
equity of $19.9 million. See "INFORMATION REGARDING TENERE."
Tenere's principal executive offices are located at 1903 East
Battlefield, Springfield, Missouri 65804, and its telephone number is (417)
889-1010.
BUSINESS OF FIG
FIG, a Florida corporation located in Jacksonville, Florida,
was organized on June 11, 1996, following a reorganization pursuant to which
FPIC became a subsidiary of FIG. Through its three wholly owned subsidiaries,
FPIC, FPIC Insurance Agency, Inc. and McCreary Corporation, each Florida
corporations located in Jacksonville, Florida, FIG provides professional
liability insurance to physicians, dentists, hospitals and other healthcare
providers in Florida. As of September 30, 1998, FIG reported total assets of
$455.9 million, total reserves of $233.0 million and shareholders' equity of
$147.7 million.
FIG's principal executive offices are located at 1000
Riverside Avenue, Suite 800, Jacksonville, Florida 32204, and its telephone
number is (904) 354-5910.
MARKETS AND MARKET PRICES
Tenere Common Stock is not listed on any securities exchange
or quoted on any automated quotation system, such as the Nasdaq National Market.
There has been no independent market for Tenere Common Stock since inception. As
of September 30, 1998, there were approximately 1,132 holders of record of
shares of Tenere Common Stock. Tenere has not paid a dividend since inception.
SELECTED FINANCIAL DATA
The following table sets forth for the periods indicated
certain selected historical consolidated financial information for Tenere and
FIG. The balance sheet data and income statement data of Tenere as of and for
the years ended December 31, 1997, 1996 and 1995 and of its predecessor, RCA, as
of and for the years ended December 31, 1994 and 1993 included in the selected
financial data are taken from the audited consolidated financial statements of
each of Tenere and RCA. The balance sheet and income statement data of Tenere as
of and for the nine months ended September 30, 1998 and 1997 are taken from the
unaudited consolidated financial statements of Tenere. These data include all
adjustments which are, in the opinion of the management of Tenere, necessary to
present a fair statement of these periods and are of a normal recurring nature.
The balance sheet data and income statement data of FIG as of and for the
five-year period ended December 31, 1997 and as of and for the nine months ended
September 30, 1998 and 1997 are taken from the publicly available filings of FIG
made with the Securities and Exchange Commission (the "Commission"). The
following information should be read in conjunction with the audited
consolidated financial statements of Tenere and FIG, and the related notes
thereto, included in this Proxy Statement or otherwise publicly available in
filings made with the Commission.
-4-
<PAGE> 10
THE TENERE GROUP, INC.
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AS OF OR FOR THE
NINE MONTHS ENDED AS OF OR FOR THE
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- --------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Net premiums earned ......................... $ 4,983 $ 4,241 $ 4,498 $ 7,646 $ 11,901 $ 10,657 $ 8,154
Net investment income ....................... 2,150 1,937 2,623 2,627 2,654 2,639 2,754
Net realized investment gains (losses) ...... 62 -- (14) (17) (36) (423) 1,318
-------- -------- -------- -------- -------- -------- --------
Total revenues .......................... 7,195 6,178 7,107 10,256 14,519 12,873 12,226
Losses and loss adjustment expenses ......... 7,526 2,862 4,478 11,226 7,676 8,197 8,503
Dividends to policyholders .................. -- -- -- (14) 617 1,289 1,091
Amortization of net assets acquired in
excess of cost (1) ........................ -- -- -- -- -- -- (1,484)
Other expenses .............................. 2,355 2,882 3,991 3,543 2,393 2,488 2,865
-------- -------- -------- -------- -------- -------- --------
Total expenses .......................... 9,881 5,745 8,469 14,755 10,686 11,974 10,975
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes ........... (2,686) 432 (1,362) (4,499) 3,833 899 1,251
Income tax benefit (expense) ............ 895 (204) 409 1,564 (1,323) (102) 117
Cumulative effect of change in
accounting for income taxes ........... -- -- -- -- -- -- 67
-------- -------- -------- -------- -------- -------- --------
Net income (loss) ........................... $ (1,791) $ 228 $ (953) (2,935) 2,510 797 1,435
======== ======== ======== ======== ======== ======== ========
Basic net income (loss) per share ........... $ (0.90) $ 0.11 $ (0.48) (1.47) 1.26 N.A. N.A.
Diluted net income (loss) per share ......... $ (0.90) $ 0.10 $ (0.48) (1.47) 1.26 N.A. N.A.
CONSOLIDATED BALANCE SHEETS DATA:
Total assets ................................ $ 68,158 $ 59,491 $ 65,726 61,820 62,614 61,119 62,128
Reserve for losses and loss adjustment
expenses ................................ 34,099 28,030 31,030 32,887 26,623 26,280 25,553
Unearned premium reserve .................... 7,876 7,820 7,717 6,300 10,447 13,747 13,379
Stockholders' equity/policyholders' surplus . $ 19,912 $ 21,823 $ 20,980 $ 21,390 $ 24,537 $ 19,369 $ 20,845
======== ======== ======== ======== ======== ======== ========
</TABLE>
- --------------------------------------------
(1) On January 2, 1992, Intermed acquired all of the outstanding stock of
Insurance Risks, Ltd. for $2,500,048 in cash. The acquisition was recorded as a
purchase and, accordingly, the purchase price was allocated to the estimated
fair value of assets acquired and liabilities assumed as of the date of
acquisition. The fair value of the net assets acquired in excess of the purchase
price was $2,967,008 calculated as follows:
<TABLE>
<S> <C>
Fair value of assets acquired $14,833,461
Liabilities assumed (12,973,636)
Net cash from the purchase 1,107,183
-----------
Net assets acquired in excess of cost $ 2,967,008
===========
</TABLE>
Net assets acquired in excess of cost were amortized over the estimated period
of benefit of two years. The amortization caused a favorable non-recurring
impact on net income for the years ended 1993 and 1992 in the amount of
$1,483,500. If these amounts are excluded from net income before income taxes,
1993 net income before income tax would decrease 119% from $1,251,000 to
($232,500).
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<PAGE> 11
FPIC INSURANCE GROUP, INC.
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AS OF OR FOR THE
NINE MONTHS ENDED AS OF OR FOR THE
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Direct written premiums ..................... $ 83,429 $ 64,029 $ 77,771 $ 64,292 $ 56,641 $ 52,454 $ 51,568
Total revenues .............................. 86,778 68,355 93,216 76,982 69,531 52,306 52,685
Net income .................................. 15,312 11,979 16,557 13,324 11,686 5,877 8,541
Basic earnings per share .................... $ 1.65 $ 1.33 $ 1.83 $ 1.57 $ 1.47 $ 0.76 $ 1.10
Diluted earnings per share .................. $ 1.56 $ 1.28 $ 1.76 $ 1.53 $ 1.47 $ 0.76 $ 1.10
Cash dividend declared per share ............ -- -- -- $ .10 $ .10 $ .10 --
BALANCE SHEET DATA:
Total investments ........................... $344,438 $263,398 $268,300 $238,497 $221,604 $192,867 $180,721
Total assets ................................ 455,858 336,131 352,849 303,553 276,699 244,266 233,120
Loss and LAE reserves ....................... 232,954 184,664 188,086 172,738 164,506 152,268 138,745
Total liabilities ........................... 308,206 225,444 232,785 207,141 195,143 182,660 169,199
Shareholders' equity ........................ 147,652 110,687 120,064 96,411 81,556 61,606 63,921
</TABLE>
-6-
<PAGE> 12
PROPOSAL I - APPROVAL OF THE MERGER AGREEMENT
TERMS OF THE MERGER
The following is a summary of the material terms and
conditions of the Merger Agreement and is qualified in its entirety by reference
to the text of the Merger Agreement, a copy of which is attached as Annex A to
this Proxy Statement and is incorporated herein by reference. In addition to
reading the following summary, shareholders of Tenere are encouraged to read the
Merger Agreement in its entirety.
GENERAL DESCRIPTION OF THE MERGER
THE MERGER. Pursuant to the Merger Agreement, subject to
satisfaction or waiver of certain conditions precedent, including receipt of all
applicable regulatory approvals, Acquisition Corporation, a Florida corporation
and wholly owned subsidiary of FPIC, will be merged (the "Merger") directly with
and into Tenere. Pursuant to the Merger Agreement, upon consummation of the
Merger, Acquisition Corporation's separate corporate existence will terminate
and Tenere will continue as the surviving entity and will operate as a wholly
owned subsidiary of FPIC.
THE MERGER CONSIDERATION. At the effective time of the Merger
(the "Effective Time"), (i) each outstanding share (other than shares as to
which a Tenere shareholder has perfected dissenters' rights (the "Dissenting
Shares") pursuant to Section 351.455 of the General Business and Corporation Law
of Missouri (the "GBCLM")) of the common stock of Tenere, par value $.01 per
share (the "Tenere Common Stock"), will be converted into the right to receive
an amount in cash (the "Per Share Amount") equal to $9.4416 per share (the "Per
Share Amount"), based upon aggregate consideration to the shareholders of Tenere
of $20.6 million (the "Merger Consideration") divided by the fully diluted
number of shares of Tenere Common Stock. As of the Record Date, there were an
aggregate of 1,999,774 shares of Tenere Common Stock issued and outstanding and
182,052 shares of Tenere Common Stock subject to outstanding stock options.
CANCELLATION OF OPTIONS. Prior to the second business day
following the date upon which all of the conditions set forth in the Merger
Agreement have been (or can be) satisfied or have been waived by the party
permitted to do so (the "Closing Date"), Tenere will cancel and convert each
outstanding option to purchase shares of Tenere Common Stock (the "Tenere
Options") into the right to receive an amount in cash equal to $3.991 per share
subject to option (the "Per Option Share Amount"), calculated by subtracting the
exercise price per share for each Tenere Option from the Per Share Amount.
TENDER OF SHARES AND OPTIONS; RECEIPT OF MERGER CONSIDERATION.
At or prior to the Effective Time, FPIC or Acquisition Corporation shall deposit
with an exchange agent selected by FPIC and reasonably satisfactory to Tenere
(the "Exchange Agent") an amount (the "Exchange Fund") to be distributed to the
holders of record at the Effective Time of the Tenere Common Stock. Within five
business days following the Effective Time, the Exchange Agent will mail to each
Tenere shareholder and holder of a Tenere Option a letter of transmittal and
instructions for surrendering to the Exchange Agent, in the case of a Tenere
shareholder, the certificate(s) formerly representing Tenere Common Stock and,
in the case of the Optionees, the stock option agreement representing the Tenere
Option, in exchange for the cash payment to which each such holder is entitled.
In the case of a Tenere shareholder, such cash payment shall equal the product
of the number of shares of Tenere Common Stock represented by the Tenere
shareholder's certificate(s) and the Per Share Amount. In the case of an
Optionee, such
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cash payment shall be equal to the product of the Per Option Share Amount and
the number of shares of Tenere Common Stock subject to the Tenere Option. See
"TERMS OF THE PROPOSED MERGER - Surrender of Tenere Stock Certificates and
Tenere Options and Receipt of Merger Consideration."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
SEVERANCE PAYMENTS. Pursuant to the Merger Agreement, Tenere
has agreed to terminate prior to the Closing Date and upon the request of FPIC
the employment of any of the employees of Tenere or the Tenere Subsidiaries.
FPIC has requested the termination of Raymond A. Christy, M.D., President and
Chief Executive Officer of Tenere, and Joseph D. Williams, Vice President -
Finance and Chief Financial Officer of Tenere. Pursuant to existing employment
agreements between Tenere and Messrs. Christy and Williams, upon termination of
employment, Messrs. Christy and Williams will receive lump-sum cash payments
equal to approximately $664,069 and $354,701, respectively.
EMPLOYMENT AGREEMENTS. Tenere currently has separate
employment agreements with each of Andrew K. Bennett, Vice President - Claims
and General Counsel, Andrew C. Fischer, Vice President - Underwriting and Policy
Services, and Clifton R. Stepp, Vice President Marketing. Each agreement
provides for a term of employment through May 6, 2001 and is automatically
renewable thereafter for successive terms unless terminated by either party. The
agreements provide for minimum annual base salaries of $140,000, $112,980 and
$112,980 for Messrs. Bennett, Fischer and Stepp, respectively, and certain
severance benefits. FPIC has indicated that it intends to offer to Messrs.
Bennett, Fischer and Stepp employment agreements to replace such officers'
existing employment agreements with Tenere.
INDEMNIFICATION. From and after the Effective Time, FPIC has
agreed to assume all duties and obligations of indemnification of Tenere in
favor of the directors, agents, officers and employees of Tenere and the Tenere
Subsidiaries pertaining to periods prior to the Effective Time arising by virtue
of their respective Articles of Incorporation or Bylaws or by operation of
applicable law.
BACKGROUND OF AND REASONS FOR THE MERGER; BOARD RECOMMENDATIONS
BACKGROUND OF THE MERGER. Effective April 27, 1995, Tenere
became the holding company for RCA Mutual Insurance Company ("RCA"), upon its
conversion from mutual form to stock ownership. As part of the mutual-to-stock
conversion, Tenere distributed 1,999,774 shares of Tenere Common Stock, without
payment therefor, to its policyholders at the time. Also as part of the
conversion, RCA changed its name to Intermed Insurance Company.
Following the conversion, Tenere sought to improve shareholder
value through business initiatives. Tenere made investments in and actively
marketed its new legal professional liability product through Interlex, which
commenced operations in November 1994. In 1995 and 1996, Tenere converted its
"claims paid" policies to "claims made" policies and purchased a reinsurance
contract to help facilitate the "claims paid" policy conversion. Effective
January 1, 1996, Tenere purchased an insurance agency, which was then Tenere's
highest-producing agency. Also in 1996, Tenere embarked upon an initiative to
market its medical and dental professional liability products in Texas through
separate purchasing groups.
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In addition to the foregoing business initiatives, Tenere
periodically evaluated its strategic alternatives. In January 1996, the Tenere
Board held a strategic retreat to examine the then-current status of Tenere in
its markets, including its competitive position; its strengths and weaknesses as
a company; the opportunities available to Tenere; and the strategies that Tenere
should implement over a two-year period. The retreat resulted in the Board's
approval of a seven-point action plan to: (i) increase after-tax income, (ii)
develop additional products, (iii) actively seek opportunities to acquire other
complementary companies, (iv) defend against unsolicited takeover proposals that
were determined by the Board not to be in the best interests of Tenere or its
shareholders, (v) consider a share repurchase program, (vi) increase marketing
efforts, and (vii) retain key employees. While efforts were made to implement
these action points over the balance of 1996, the Board reviewed the progress of
the plan in January 1997 and determined that the plan would not result in
enhanced operating results for Tenere in the foreseeable future. Thus, at a
meeting of the Board on January 31, 1997, the Board authorized and directed
management of Tenere to explore the interest of third-party acquirers with
respect to Tenere and to report back to the Board with these findings.
In early December 1996, management of Tenere had been
informally contacted by a medical malpractice insurance company that had an
interest in pursuing a business combination with Tenere. After the Board
direction in January 1997, management contacted other companies in the medical
malpractice insurance business which Tenere believed might have an interest in
acquiring Tenere. During the course of these discussions, Tenere entered into
confidentiality agreements and exchanged preliminary due diligence materials
with five interested parties, including FPIC. In early March 1997, Dr. Raymond
Christy, President and Chief Executive Officer of Tenere, and William Russell,
President and Chief Executive Officer of FPIC, met in Phoenix, Arizona and
discussed generally the prospect of an acquisition of Tenere by FPIC. During the
period from April 1997 through late November 1997, the parties held several
discussions regarding the structure and financial terms of a possible
transactions and exchanged due diligence materials. During such period, Mr.
Russell visited Tenere in Springfield, Missouri on April 21, 1997, and Robert
Finch, Chief Financial Officer of FPIC, visited Tenere on August 7, 1997. Dr.
Christy visited FPIC's offices in Jacksonville, Florida on June 18, 1997 and
October 1, 1997. During December 1997, management and the Tenere Board
determined, on the basis of preliminary non-binding indications of interest by
certain interested parties, that FPIC's proposal had the greatest potential
value to the Tenere shareholders since the FPIC proposal indicated a
significantly higher valuation of Tenere than the other proposals and was
structured as an acquisition of the entire business of Tenere. Tenere also
engaged in discussions with other interested parties during this time and Tenere
offered such other parties similar due diligence opportunities with respect to
Tenere as had been made available to FPIC. In order to allow the process to
progress to a definitive agreement, on December 29, 1997, FPIC and Tenere
executed a non-binding letter of intent with respect to the acquisition by FPIC
of 100% of the Tenere Common Stock for $22,000,000 in cash or a combination of
cash and stock. Pursuant to such letter of intent, Tenere agreed to negotiate
exclusively with FPIC until February 26, 1998 with respect to a definitive
agreement for the acquisition of Tenere by FPIC. Following the execution of the
letter of intent, the parties continued to conduct due diligence with a view
toward the negotiation of a definitive agreement. In early March 1998, FPIC
indicated that in light of its due diligence and developments in Tenere's
business, FPIC would be unable to proceed with the transaction without a
reduction in the proposed purchase price. Tenere determined that pursuing the
transaction with a reduction in the proposed purchase price would not be in the
best interests of Tenere's shareholders and, on March 11, 1998 terminated
further negotiations with FPIC with respect to a definitive acquisition
agreement.
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In the course of the earlier negotiations with FPIC in
December 1997, management of Tenere had indicated as a bargaining position that
it would be supportive of entering into an exclusive negotiation arrangement
with FPIC if it increased the consideration being offered to at least the
then-current book value of Tenere. FPIC agreed to this condition at that time
and management of Tenere believes that these earlier negotiations led FPIC to
present this second proposal at the then-current book value. Tenere had no
specific discussions with FPIC in its discussions leading up to the second
proposal by FPIC with respect to valuing the aggregate consideration to be paid
in the Merger at book value, nor did it consider valuation in such manner;
therefore, management of Tenere made no attempt to have the Merger consideration
increase (and/or decrease) with Tenere's book value. Instead, Tenere's
management and Board considered FPIC's second proposal in the context of
Tenere's recent operating performance and its future prospects as well as the
other proposals received by Tenere from other third parties. Since FPIC's
proposal was again a significantly higher dollar amount than any other proposal
received by Tenere and the tentative structure of the transaction was as an
acquisition of the entire business of Tenere, the Tenere Board determined not to
negotiate further with respect to the financial terms of FPIC's proposal.
During the period from March 1998 through July 1998, Tenere
continued to actively pursue alternative business combinations and contacted or
was contacted by four parties interested in discussing a proposed transaction.
Tenere conducted limited due diligence and held preliminary negotiations with
two of such parties. In late July 1998, Tenere was contacted by Mr. Finch of
FPIC who indicated that FPIC would be interested in pursuing further discussions
with respect to an acquisition of Tenere. On July 31, 1998, Mr. Finch visited
Tenere's offices and, during such visit and during subsequent discussions by the
parties over the course of the next several weeks, indicated that FPIC would be
willing to acquire all of the outstanding stock of Tenere for an aggregate of
$20,600,000, which amount was then equal to the aggregate book value of the
Tenere Common Stock. Tenere, therefore, began negotiations with FPIC as to the
specific non-financial terms and conditions of the proposal and on August 25,
1998, Tenere entered into a letter agreement in which it agreed to negotiate
exclusively with FPIC with respect to the definitive agreements until September
15, 1998.
On September 2, 1998, Tenere engaged ABN AMRO Incorporated
("ABN AMRO") as financial advisor to render an opinion to the Tenere Board as to
the fairness to Tenere's shareholders from a financial point of view of the
Merger Consideration to the shareholders of Tenere. During September 1998 and
continuing through the date of the Merger Agreement, Tenere management, assisted
by its legal counsel, Thompson Coburn, negotiated the terms of the Merger
Agreement.
On October 2, 1998, the Tenere Board held a special meeting
that included the participation of ABN AMRO and Thompson Coburn. The meeting
included a detailed discussion of the proposed transaction and explanatory
materials previously furnished to members of the Tenere Board. ABN AMRO
summarized Tenere's history and its own independent review of Tenere, provided a
financial analysis of the proposed transaction, and expressed orally an opinion
that the Merger Consideration to be received by Tenere shareholders in the
Merger was fair to such shareholders from a financial point of view. ABN AMRO
confirmed this oral opinion in writing by letter dated October 2, 1998. At the
conclusion of this portion of the meeting, the Tenere Board determined that the
proposed transaction with FPIC was in the best interests of its shareholders and
unanimously approved the Merger Agreement, including the transactions
contemplated thereby.
REASONS FOR THE MERGER. Tenere's Board of Directors has
determined that the terms of the proposed Merger are fair to, and in the best
interests of, Tenere and its shareholders. In reaching its
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determination, the Tenere Board consulted with legal counsel with respect to:
(i) the legal duties of the Tenere Board, (ii) the Merger Agreement and related
issues, and (iii) tax matters. The Tenere Board also consulted with ABN AMRO,
its financial advisor, with respect to the fairness of the Merger Consideration
to Tenere's shareholders from a financial point of view. The Tenere Board
considered a number of factors, which included:
(i) Information concerning the business, earnings,
operations, financial condition, prospects, capital, and asset quality of
Tenere. This information, which was derived from Tenere's financial and
marketing records, indicated that the medical malpractice insurance markets were
becoming increasingly competitive, limiting Tenere's ability to set premiums at
levels at which Tenere could expect to attain profitability and/or increase
revenues in the foreseeable future. The Board recognized the need for liquidity
in the Tenere Common Stock as an additional reason to recommend the approval of
the Merger Agreement to the shareholders of Tenere. In addition to its own
knowledge of Tenere, the Tenere Board considered the detailed financial analyses
and other information with respect to Tenere presented to the Tenere Board by
ABN AMRO.
(ii) The current and prospective significant
consolidations within the insurance industry, nationally, in Missouri, Kansas
and Texas and in the medical professional liability segment of the insurance
industry in the jurisdictions and the regulatory environments in which Tenere
operates.
(iii) The challenges of remaining a smaller carrier,
including (1) competition for insurance coverage from existing competitors and
more intense competition from larger companies with greater financial resources
than Tenere, (2) technology costs to remain competitive as a smaller entity, (3)
continued growth challenges. Tenere's size, as reflected in its asset and
capital base, led the Board to conclude that Tenere's ability to compete with
larger medical malpractice insurance carriers, either currently writing policies
in or likely to enter Tenere's markets, would continue to be difficult.
(iv) Executive management succession.
(v) A review of the strategic options available to Tenere
and indications of interest from other prospective acquirers.
(vi) The terms, conditions, and course of negotiations
relating to the Merger Agreement.
(vii) The likelihood that the proposed Merger would be
consummated.
(viii) The recommendations of Tenere's executive management
with respect to the proposed Merger (which recommendations were considered in
light of certain interests of management in the proposed Merger-see "-Interests
of Certain Persons in the Merger").
(ix) The financial advice provided by ABN AMRO and the
opinion of ABN AMRO that the Merger Consideration to be received by Tenere
shareholders pursuant to the Merger is fair to such shareholders from a
financial point of view. The Tenere management and Board reviewed the ABN AMRO
analyses with representatives of ABN AMRO at the Board meeting held on October
2, 1997. At such meeting, the ABN AMRO representatives presented to the Board
information about the valuation methodologies employed, the assumptions, if any,
utilized in the analyses, and the conclusions reached. Tenere's Board believes
that the methodologies, assumptions and conclusions as presented by ABN
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AMRO were sound and reasonable, including the use of estimated future period
earnings to generate an estimated P/E ratios for Tenere for comparisons with the
P/E ratios of other medical malpractice insurance companies and transactions.
Tenere's Board believes that these comparisons are useful, even if the estimated
earnings utilized to generate the estimated P/E ratio for Tenere are based upon
optimistic assumptions that are not necessarily consistent with recent
historical performance of Tenere, because the estimated ratios generated in an
optimistic scenario are substantially more favorable to Tenere than for any
comparative company or transaction cited. If actual performance of Tenere is
less favorable than estimated, the conclusion that the Merger Consideration is
fair from a financial point of view to the shareholders of Tenere is further
bolstered.
In view of the wide variety of factors considered in
connection with its evaluation of the proposed Merger, the Tenere Board did not
find it practicable to, and did not, quantify or otherwise attempt to assign
relative weights to the specific factors considered in reaching its
determination. In addition, individual members of the Tenere Board may have
given different weights to different factors. However, based upon the Board's
conclusions with respect to Tenere's recent weak financial performance and its
unfavorable business and financial prospects for the foreseeable future, the
current negative competitive and regulatory environment for medical malpractice
insurance carriers of Tenere's asset and capital size, continuing trends towards
consolidation in the industry, concerns about management succession and
strategic options available to Tenere (other than the Merger), and management's
strong recommendation in favor of the Merger and the fairness analysis and
opinion of ABN AMRO with respect to the financial terms of the Merger, the Board
unanimously approved the Merger Agreement and recommends that the shareholders
of Tenere approve the Merger Agreement as well.
FOR THE REASONS DESCRIBED ABOVE, TENERE'S BOARD OF DIRECTORS
BELIEVES THE MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF, TENERE'S
SHAREHOLDERS. ACCORDINGLY, TENERE'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT HOLDERS OF TENERE COMMON STOCK VOTE FOR THE APPROVAL OF THE MERGER
AGREEMENT AND FOR THE APPROVAL OF THE ADJOURNMENT PROPOSAL.
OPINION OF TENERE'S FINANCIAL ADVISOR
Tenere retained ABN AMRO to act as financial advisor and agent
for Tenere to provide financial advisory and investment banking services in
connection with a potential transaction in which control or a material interest
in the stock or assets of Tenere would be transferred for consideration. In
connection with such engagement, Tenere requested that ABN AMRO render its
opinion as to the fairness to Tenere's shareholders of the Merger Consideration
to be received in the Merger. Tenere imposed no limitations upon the scope of
investigation or procedures followed by ABN AMRO in connection with its opinion,
nor did Tenere give ABN AMRO any specific instructions in connection therewith.
The Merger Consideration was determined through arm's-length negotiations
between Tenere and FPIC, although Tenere received legal advice from Thompson
Coburn during such negotiations and kept ABN AMRO abreast of the status of the
negotiations as they proceeded.
On October 2, 1998, in connection with the evaluation by the
Tenere Board of the transaction proposed by FPIC, ABN AMRO rendered an opinion
that, as of such date, and subject to certain assumptions, factors, and
limitations set forth in such written opinion as described below, the Merger
Consideration to be received by Tenere shareholders was fair to such
shareholders from a financial point of view. ABN AMRO has also delivered an
updated opinion to the Tenere Board, dated as of the date of this Proxy
Statement (the "Opinion"), to the same effect. The updated Opinion is based
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on a review of the financial and other information set forth in this Proxy
Statement and the financial results for Tenere since October 2, 1998.
THE FULL TEXT OF ABN AMRO'S OPINION, DATED AS OF THE DATE OF
THIS PROXY STATEMENT, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED,
AND LIMITATIONS ON THE REVIEW UNDERTAKEN IN CONNECTION WITH THE OPINION, IS
ATTACHED AT ANNEX C TO THIS PROXY STATEMENT AND SHOULD BE READ IN ITS ENTIRETY
FOR INFORMATION WITH RESPECT TO PROCEDURES FOLLOWED, ASSUMPTIONS MADE, AND
MATTERS CONSIDERED BY ABN AMRO IN RENDERING ITS OPINION. ABN AMRO'S OPINION WAS
PREPARED FOR THE TENERE BOARD AND ADDRESSES ONLY THE FAIRNESS OF THE MERGER
CONSIDERATION FROM A FINANCIAL POINT OF VIEW TO THE HOLDERS OF TENERE COMMON
STOCK. THE ABN AMRO OPINION DOES NOT ADDRESS TENERE'S UNDERLYING BUSINESS
DECISION TO ENTER INTO THE MERGER, NOR DOES IT CONSTITUTE A RECOMMENDATION TO
ANY TENERE SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE WITH RESPECT TO
THE PROPOSED MERGER. THE SUMMARY OF THE ABN AMRO OPINION SET FORTH IN THIS PROXY
STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE
OPINION.
In connection with its Opinion, ABN AMRO reviewed the Merger
Agreement, this Proxy Statement, and certain related documents. ABN AMRO held
discussions with certain senior officers, directors and other representatives
and advisors of Tenere concerning the business, operations and prospects of
Tenere. ABN AMRO examined certain publicly available business and financial
information relating to Tenere and FPIC as well as certain financial information
and other data for Tenere and certain financial information and other data
related to FPIC which were provided to or otherwise discussed with ABN AMRO by
the management of Tenere. ABN AMRO reviewed the financial terms of the Merger as
set forth in the Agreement in relation to: (i) current and historical market
prices and trading volumes of Tenere Common Stock; (ii) Tenere's financial and
other operating data; and (iii) the capitalization and financial condition of
Tenere. ABN AMRO also considered, to the extent publicly available, the
financial terms of certain other insurance industry transactions recently
effected which ABN AMRO 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 ABN
AMRO considered relevant in evaluating those of Tenere.
In rendering its Opinion, ABN AMRO assumed and relied upon the
accuracy and completeness of the financial and other information reviewed by it
and it did not make or obtain or assume any responsibility for independent
verification of such information. In addition, ABN AMRO did not make an
independent evaluation or appraisal of the assets and liabilities of Tenere or
any of its subsidiaries. With respect to the financial data of Tenere, ABN AMRO
assumed that they had been reasonably prepared on bases reflecting the best
currently available estimates and judgments of the management of Tenere as to
the future financial performance of Tenere. ABN AMRO assumed that the Merger
would be consummated in accordance with the terms of the Agreement. In
connection with the preparation of its Opinion, ABN AMRO was not authorized by
Tenere or the Tenere Board to solicit, nor did ABN AMRO solicit, third-party
indications of interest for the acquisition of all or any part of Tenere.
The following is a summary of the financial analyses ABN AMRO
employed and summarized for the Tenere Board in connection with its written
opinion to the Tenere Board dated as of October 2, 1998. In connection with its
updated Opinion, ABN AMRO performed procedures to update certain of its analyses
and reviewed the assumptions on which such analyses were based and the factors
considered in connection therewith. In updating its Opinion, ABN AMRO did not
utilize any method of analysis in addition to those described below.
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(a) Stock Trading History. ABN AMRO reviewed reports supplied
by Tenere management which indicated that since the conversion, Tenere Common
Stock had traded infrequently in private transactions within the range of $4.00
to $4.10 per share. ABN AMRO noted that the Merger Consideration amounted to
premiums to such limited trade range of 130.3% to 136.0%.
(b) Comparable Market-Value Analysis. ABN AMRO reviewed
selected historical financial and current trading market data of comparable
companies whose businesses ABN AMRO deemed to be relevant to Tenere. Financial
data were as of the date of the then most recently available financial
statements and for the twelve-month period then ended. Market price data were as
of September 21, 1998. For each company in the comparable group, ABN AMRO
calculated the multiples of each company's market price per share to: (i) latest
twelve-month operating earnings per share ("LTMO P/E"); (ii) the median
estimated earnings per share for the current fiscal year ("Current-Year P/E");
and (iii) the median estimated earnings per share for the next fiscal year
("Next-Year P/E"). "Estimated earnings per share" figures are those prepared by
securities analysts following each company. ABN AMRO also calculated the ratio
of each company's market price per share to book value (stockholders' equity)
per share ("P/BV").
The comparable companies for Tenere ("Comparable Companies")
consisted of publicly traded property/casualty insurance companies having
medical professional liability insurance as a principal or significant line of
business. The Comparable Companies included the following seven organizations:
FPIC Insurance Group Inc.; Frontier Insurance; Medical Assurance; MMI Companies,
Inc.; Professionals Group; SCPIE Holdings Inc.; and St. Paul Companies, Inc.
The analysis indicated the Comparable Companies traded at: (i)
a LTMO P/E multiple within a range of 8.2x to 15.0x and a median of 13.5x; (ii)
a Current-Year P/E within a range of 8.0x to 14.3x and a median of 12.5x; (iii)
a Next-Year P/E within a range of 6.9x to 12.6x and a median of 10.1x; and (iv)
a P/BV ratio within a range of 86% to 199% and a median of 110%.
ABN AMRO noted that Tenere's absence of profitability in
recent periods precluded a direct comparison to the earnings multiples of the
Comparable Companies. Using the earnings projected for 2001 estimated in
connection with the discounted cash flow analysis described below, ABN AMRO
noted that the Merger Consideration implied a P/E multiple of approximately
37.3x. ABN AMRO also noted that the Merger Consideration represented
approximately 100% of Tenere's book value. ABN AMRO noted that the P/BV ratio
implied by the Merger Consideration was above the minimum, yet below the median,
value of the Comparable Companies. ABN AMRO identified several factors, which it
believed to underlie the foregoing results, including Tenere's absence of
profitability in recent periods and Tenere's substantial "excess" capital.
(c) Discounted Cash Flow Analysis. ABN AMRO performed a
discounted cash flow ("DCF") analysis of Tenere on a "stand-alone" basis,
assuming Tenere would continue to operate as an independent company. In
preparing the DCF analysis, ABN AMRO studied Tenere's historical and present
earnings and growth patterns and then projected income statements and balance
sheets for a five-year period using a series of assumptions pertaining to
premium growth, premium ceding, premium earnings ratios, loss and loss
adjustment expenses, other underwriting expenses, investment yields, and income
taxes. ABN AMRO based its projections upon those of Tenere's management, and
provided the financial projections and underlying assumptions to Tenere's
management prior to completion. To estimate projected net cash flows, ABN AMRO
adjusted projected earnings for potential "liquidating" dividends (i.e., cash
dividends in excess of earnings) in recognition of Tenere's "excess" capital.
ABN
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AMRO noted that, qualitatively, the financial projections assumed a future
environment in which Tenere could, over the five projected years, return to
profitability, achieve meaningful premium growth, and rationalize its capital
position. ABN AMRO observed that the foregoing scenario was a more positive view
of the future than recent history would suggest. ABN AMRO calculated the
terminal value (the value of cash flows following the five-year projection
period) based upon a long-term growth-adjusted perpetuity of the fifth projected
year's estimated net cash flow. To estimate the present value of the five years'
projected net cash flows and terminal value, ABN AMRO used discount rates
ranging from 11% to 15% and long-term growth rates ranging from 1% to 3%. The
DCF analysis yielded imputed values for Tenere Common Stock ranging from $5.57
to $6.09 per share.
(d) Comparable Transactions Analysis. ABN AMRO reviewed the
financial terms of insurance industry mergers and acquisitions announced since
July 1, 1993 in which the acquired company had medical professional liability
insurance as a principal or significant line of business ("Comparable
Transactions"). Financial data for each acquired company and Tenere were at the
most-recent financial-statement date available at the date the transaction was
announced, and for the twelve-month period then ended. Merger prices and related
multiples and ratios were as of the respective transaction-announcement dates.
The 16 Comparable Transactions included: Midwest Medical Insurance Holding
Company/Iowa Physicians Mutual Insurance Trust; Mutual Assurance/WV Hospital
Insurance Company; PICOM Insurance Company/Associated Physicians Insurance
Company; MMI Companies, Inc./Health Providers Insurance Company; Mutual
Assurance/Physicians Insurance Company of Ohio; St. Paul Fire and Marine
Insurance Company/NML Insurance Company of Nevada; MI Physicians Mutual
Liability Company/Kentucky Medical Insurance Company; Midwest Medical Insurance
Company/Medical Liability Company of Nebraska; PICOM Insurance Company/American
Insurance Management Corp.; Markel Corporation/Investors Insurance Holding
Corp.; MAIC Holdings, Inc./MOMED Holding Company; Professionals Insurance
Company/Physicians Protective Trust Fund; Frontier Insurance Group, Inc./Western
Indemnity Insurance Company; MMI Companies, Inc./Unionamerica Holdings plc; FPIC
Insurance Group, Inc./Anesthesiologists' Professional Assurance Company; and
General Electric Company (Employers Re)/Medical Protective Corp. For Comparable
Transactions for which sufficient information was available, ABN AMRO calculated
the multiples of each Transaction's aggregate merger consideration to: (i)
latest twelve-month earnings ("LTM P/E"); (ii) latest twelve-month operating
earnings per share ("LTMO P/E"); and (iii) latest twelve-month statutory-basis
earnings ("LTMS P/E"). ABN AMRO also calculated the ratio of each Transaction's
aggregate merger consideration to book value (stockholders' equity) per share
("P/BV").
The analysis indicated the Comparable Transactions occurred
at: (i) a LTM P/E multiple within a range of 6.9x to 12.0x and a median of
11.2x; (ii) a LTMO P/E within a range of 6.5x to 19.8x and a median of 11.8x;
(iii) a LTMS P/E within a range of 7.6x to 18.9x and a median of 9.2x; and (iv)
a P/BV ratio within a range of 70% to 170% and a median of 105%.
ABN AMRO noted that Tenere's absence of profitability in
recent periods precluded a direct comparison to the earnings multiples of the
Comparable Transactions. Using the earnings projected for 2001 estimated in
connection with the discounted cash flow analysis described above, ABN AMRO
noted that the Merger Consideration implied a P/E multiple of approximately
37.3x. ABN AMRO also noted that the Merger Consideration represented
approximately 100% of Tenere's book value. ABN AMRO noted that the P/BV ratio
implied by the Merger Consideration was near the median of the Comparable
Transactions notwithstanding Tenere's recent profit performance and substantial
"excess" capital.
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The preparation of a fairness opinion is a complex process and
is not necessarily susceptible to partial analysis or summary description.
Selecting portions of the analyses or of the summary set forth above, without
considering the analyses as a whole, could create an incomplete view of the
process underlying ABN AMRO's Opinion. In arriving at its fairness
determination, ABN AMRO considered the results of all such analyses. No company
or transaction used in the above analyses as a comparison is identical to Tenere
or the Merger. The analyses were prepared solely for the purposes of ABN AMRO's
Opinion provided to Tenere's Board as to the fairness from a financial point of
view of the Merger Consideration to be received by the stockholders of Tenere
pursuant to the Merger and do not purport to be appraisals or necessarily
reflect the prices at which businesses or securities actually may be sold.
Analyses based upon projections of future results are not necessarily indicative
of actual future results, which may be significantly more or less favorable than
suggested by such analyses. Because such analyses are inherently subject to
uncertainty, being based upon numerous factors or events beyond the control of
the parties or ABN AMRO, none of Tenere, ABN AMRO, or any other person assumes
responsibility if future results are materially different from those projected.
ABN AMRO, as part of its investment banking business, is
continually engaged in the valuation of businesses in connection with mergers
and acquisitions, as well as initial and secondary offerings of securities and
valuations for other purposes. Tenere selected ABN AMRO as its financial advisor
because ABN AMRO is a nationally recognized investment banking firm that has
substantial experience in transactions similar to the Merger.
Tenere retained ABN AMRO as its financial advisor by letter
agreement dated August 25, 1998 ("Engagement Letter"). Pursuant to the terms of
the Engagement Letter, Tenere paid ABN AMRO: $25,000 upon execution of the
Engagement Letter, and $125,000 upon delivery of ABN AMRO's fairness opinion.
Further, in the Engagement Letter Tenere agreed to reimburse ABN AMRO for its
reasonable out-of-pocket expenses incurred in connection with its engagement,
and to indemnify ABN AMRO against certain liabilities, including liabilities
under securities laws. ABN AMRO will receive no additional compensation upon
successful completion of the Merger.
CONDITIONS OF THE MERGER
The obligations of FPIC and Acquisition Corporation to
consummate the transactions provided for in the Merger Agreement are subject to
the fulfillment, on or prior to the Closing Date, of the following conditions:
(i) The representations and warranties of Tenere set forth in
the Merger Agreement shall: (1) to the extent such representations and
warranties are not qualified by a materiality standard, be true and correct in
all material respects on the Closing Date as if made on and as of the Closing
Date; and (2) to the extent such representations and warranties are qualified by
a materiality standard, be true and correct in all respects on the Closing Date
as if made on and as of the Closing Date, and FPIC shall have received a
certificate to such effect executed on behalf of Tenere by its chief executive
officer and chief financial officer and dated as of the Closing Date.
(ii) Each of Tenere and the Tenere Subsidiaries shall have
performed in all material respects all of their respective obligations contained
in the Merger Agreement required to be performed on or prior to the Closing
Date, and FPIC shall have received a certificate to such effect, executed on
behalf of Tenere by its chief executive officer and chief financial officer and
dated as of the Closing Date.
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(iii) All corporate action necessary to authorize the
execution, delivery and performance by Tenere of the Merger Agreement, and the
consummation of the transactions contemplated thereby, shall have been duly and
validly taken by Tenere, and Tenere shall have furnished FPIC with copies of all
applicable resolutions adopted by the Board of Directors and shareholders of
Tenere and certified by the secretary or assistant secretary of Tenere.
(iv) No proceedings shall have been threatened or initiated by
any person to enjoin or restrain the consummation of the transactions
contemplated by the Merger Agreement or seeking damages or other relief as a
result thereof.
(v) The waiting period, if any, pursuant to the
Hart-Scott-Rodino Antitrust Improvements Act of 1986, as amended (the "HSR
Act"), shall have expired without objection or been terminated and any necessary
approval of the Missouri Department of Insurance (the "Missouri Department") or
the insurance departments of other states and jurisdictions, and all other
consents required to permit the consummation of the transactions contemplated by
the Merger Agreement without any violation by FPIC, Acquisition Corporation,
Tenere, Intermed, Interlex, or ISI of any law or obligation shall have been
obtained and such approvals and consents shall not contain any materially
burdensome conditions or requirements on or applicable to FPIC, Acquisition
Corporation, Tenere or any Tenere Subsidiary.
(vi) FPIC shall have received an opinion of Thompson Coburn,
counsel to Tenere, as to certain legal matters.
(vii) Since June 30, 1998, there shall not have been, occurred
or arisen any event, development, transaction, condition or state of facts of
any character (including without limitation any damage, destruction or loss
whether or not covered by insurance or reinsurance) that individually or in the
aggregate has or could have a Material Adverse Effect (as defined in the Merger
Agreement) on or with respect to Tenere or any Tenere Subsidiary.
(viii) FPIC shall have received from Tenere certificates dated
the Closing Date from the secretaries of each of Tenere, Intermed, Interlex, ISI
and Trout, attaching: (1) a copy of such entity's Articles of Incorporation
certified by the Secretary of State of the State of Missouri, which
certification shall be dated not more than ten days prior to the Closing Date;
(2) a copy of such entity's Bylaws; and (3) a good standing certificate for such
entity from the Secretary of State of the State of Missouri or the Missouri
Department of Insurance and the Kansas Department of Insurance, as the case may
be, which certificate shall be dated no more than ten days prior to the Closing
Date.
(ix) Tenere's shareholders shall have approved the Merger
Agreement and the Merger by the requisite vote and shareholders holding more
than ten percent of the outstanding shares of Tenere Common Stock shall not have
delivered to Tenere a written objection to the Merger pursuant Section 351.455
of the GBCLM.
(x) Tenere shall have received from ABN AMRO Incorporated, as
of the date of the mailing of this Proxy Statement to the Tenere shareholders
with respect to the Merger, its opinion that the Merger Consideration is fair to
the shareholders of Tenere from a financial point of view, and such opinion
shall not have been withdrawn between the date of its delivery and the Effective
Time.
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(xi) Each member of Tenere's Board of Directors shall have
executed and delivered a resignation from such Board, effective immediately
following the Effective Time.
The obligation of Tenere to consummate the transactions
provided for in the Merger Agreement are subject to the fulfillment, on or prior
to the Closing Date, of the following conditions:
(i) The representations and warranties of FPIC and Acquisition
Corporation set forth in the Merger Agreement shall, (1) to the extent such
representations and warranties are not qualified by a materiality standard, be
true and correct in all material respects on the Closing Date as if made on and
as of the Closing Date, and (2) to the extent such representations and
warranties are qualified by a materiality standard, be true and correct in all
respects on the Closing Date as if made on and as of the Closing Date, and
Tenere shall have received certificates to such effect, executed on behalf of
FPIC and Acquisition Corporation by their respective chief executive officers
and chief financial officers, and dated as of the Closing Date.
(ii) FPIC and Acquisition Corporation shall have performed in
all material respects all of their respective obligations contained in the
Merger Agreement to be performed on or prior to the Closing Date, and Tenere
shall have received certificates to such effect, executed on behalf of FPIC and
Acquisition Corporation by their respective chief executive officers and chief
financial officers, and dated as of the Closing Date.
(iii) No proceedings shall have been threatened or initiated
by any person to enjoin or restrain the consummation of the transactions
contemplated by the Merger Agreement or seeking damages or other relief as a
result thereof.
(iv) The waiting period, if any, pursuant to the HSR Act shall
have expired without objection or been terminated and any necessary approvals of
the Missouri Department or the insurance departments of other states or
jurisdictions and all other consents required to permit consummation of the
transactions contemplated by the Merger Agreement without any violation by
Tenere or the Tenere Subsidiaries of any law or obligation shall have been
obtained.
(v) Tenere shall have received the opinion of LeBoeuf, Lamb,
Greene & MacRae, L.L.P., counsel to FIG and FPIC, as to certain legal matters.
(vi) The Tenere shareholders shall have approved the Merger by
the requisite vote.
(vii) All corporate action necessary to authorize the
execution, delivery and performance by FPIC and Acquisition Corporation of the
Merger Agreement, and the consummation of the transactions contemplated thereby,
shall have been duly and validly taken by FPIC and Acquisition Corporation, and
FPIC and Acquisition Corporation shall have furnished to Tenere copies of all
applicable resolutions adopted by their respective Boards of Directors,
certified in each case by a secretary or assistant secretary of FPIC and
Acquisition Corporation, respectively.
(viii) There shall have been deposited with the Exchange
Agent the Exchange Fund.
(ix) Tenere shall have received from ABN AMRO, as of the date
of the mailing of this Proxy Statement to Tenere's shareholders with respect to
the Merger, its opinion that the Merger
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Consideration to be received was fair to the shareholders of Tenere from a
financial point of view, and such opinion shall not have been withdrawn between
the date of its delivery and the Effective Time.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains extensive representations and warranties
by FPIC, Acquisition Corporation and Tenere. These include, among other matters,
representations and warranties of Tenere as to: (i) the organization and good
standing of Tenere and the Tenere Subsidiaries; (ii) its authority relative to
the execution and delivery of, and performance of its obligations under, the
Merger Agreement; (iii) the absence of material conflicts between its
obligations under the Merger Agreement and the charter documents and material
agreements of Tenere or the Tenere Subsidiaries to which they are a party or by
which they are bound; (iv) the absence of undisclosed required consents or
approvals; (v) the capital structure of Tenere and the Tenere Subsidiaries; (vi)
the documents, including financial statements and other reports, filed by Tenere
and the Tenere Subsidiaries with the Commission and/or other applicable
regulatory authorities; (vii) the absence of undisclosed liabilities of Tenere
or the Tenere Subsidiaries; (viii) the intercompany accounts of Tenere and the
Tenere Subsidiaries; (ix) the absence of undisclosed litigation; (x) real
property; (xi) title to and condition of assets; (xii) loans, commitments and
contracts; (xiii) compliance with charter documents and laws; (xiv) certain
regulatory filings; (xv) the conduct of Tenere and the Tenere Subsidiaries from
and after June 30, 1998; (xvi) taxes; (xvii) directors' and officers' insurance;
(xviii) bank and brokerage accounts; (xix) the accuracy of the statements
contained in the Merger Agreement and related documents; (xx) employee benefit
plans and related matters; (xxi) labor matters; (xxii) intellectual property;
(xxiii) obligations to brokers and finders; (xxiv) the absence of surplus relief
obligations; (xxv) insurance issued; (xxvi) the absence of threatened
cancellations; (xxvii) Year 2000 compliance for computer software and hardware;
(xxviii) books and records; (xxix) the absence of investment company status;
(xxx) investment assets; (xxxi) the absence of discussions with regulators;
(xxxii) the absence of regulatory delays; and (xxxiii) the non-applicability of
certain anti-takeover laws.
The Merger Agreement also contains representations and
warranties of FPIC and Acquisition Corporation as to: (i) their respective
organization and good standing; (ii) their authority relative to the execution
and delivery of, and performance of their respective obligations under, the
Merger Agreement; (iii) the absence of material conflicts between their
respective obligations under the Merger Agreement and their charter documents
and contracts to which they are a party or by which they are bound; (iv) the
absence of undisclosed consent or approval requirements; (v) the accuracy of the
statements contained in the Merger Agreement and related documents; and (vi)
obligations to brokers and finders.
TERMINATION, WAIVER AND AMENDMENT OF THE MERGER AGREEMENT
TERMINATION. The Merger Agreement may be terminated as to all
parties thereto and the transactions contemplated therein abandoned prior to the
consummation of the transactions contemplated by the Merger Agreement (the
"Closing"): (i) by the mutual consent of FPIC, Acquisition Corporation and
Tenere; (ii) by FPIC at any time after February 15, 1999, if at such time the
conditions set forth in the Merger Agreement have not been satisfied through no
fault of FPIC or Acquisition Corporation and FPIC gives Tenere notice of such
termination; (iii) by FPIC if the holders of more than 10% of the outstanding
shares of Tenere Common Stock deliver to Tenere a written objection to the
Merger pursuant to Section 351.455 of the GBCLM; (iv) by Tenere at any time
after March 31, 1999, if at such time the conditions set forth in the Merger
Agreement have not been satisfied through no fault of Tenere or any
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<PAGE> 25
other party and Tenere gives FPIC notice of such termination; (v) by Tenere in
the event that Tenere receives a "Tenere Superior Proposal" (as defined in the
Merger Agreement); or (vi) by FPIC and Acquisition Corporation in the event that
Tenere or its Board of Directors withdraws its approval of the Merger or the
Merger Agreement or approves a "Tenere Takeover Proposal" (as defined in the
Merger Agreement and described below). See "--Non-Solicitation Agreement."
WAIVER AND AMENDMENT. The Merger Agreement provides that the
provisions of the Merger Agreement may only be waived or amended by execution of
a written document. The failure of FPIC, Acquisition Corporation or Tenere to
require performance of any provision will not affect the right of such party to
enforce that provision or any other provision of the Merger Agreement, and the
waiver of any condition or of the breach of any term contained in the Merger
Agreement in one instance will not constitute a further waiver of such condition
in subsequent instances. In addition, actions taken pursuant to the Merger
Agreement, other than proceeding with the Closing, will not constitute a waiver
by the party taking such action of the representations, warranties, covenants or
agreements contained in the Merger Agreement.
NON-SOLICITATION AGREEMENT
Pursuant to the Merger Agreement, Tenere has agreed that none
of Tenere, the Tenere Subsidiaries, nor any of their respective officers,
directors, employees, or other representatives will solicit, initiate any
negotiations regarding or furnish any information with respect to any proposal:
(i) for a merger or other business combination involving Tenere or any of the
Tenere Subsidiaries; (ii) to acquire from Tenere any of the capital stock of
Tenere or any of the Tenere Subsidiaries or 10% or more of the assets of Tenere
or any of the Tenere Subsidiaries; (iii) to acquire from the Tenere shareholders
by tender offer, exchange offer or otherwise any of the Tenere Common Stock; or
(iv) to acquire the right to vote 50% or more of the capital stock of Tenere or
any of the Tenere Subsidiaries (each, a "Tenere Takeover Proposal"). Tenere also
agreed that neither the Board of Directors of Tenere nor any committee thereof
will withdraw its approval of the Merger Agreement or announce or approve any of
Tenere Takeover Proposal; provided that the Board of Directors of Tenere may
furnish information to, or enter into negotiations with, any person that makes
an unsolicited Tenere Takeover Proposal if the Board of Directors of Tenere
determines in good faith that such action is necessary to comply with its
fiduciary duties to the Tenere shareholders under applicable law, receives an
executed confidentiality agreement from such person and discloses the
negotiations to FPIC. Tenere has also agreed that upon commencement of
discussions regarding or receipt of any Tenere Takeover Proposal, Tenere will
promptly advise FPIC of such discussions or proposal.
In the event that the Board of Directors of Tenere decides to
proceed with a Tenere Takeover Proposal, the Board of Directors of Tenere may
withdraw its approval of the Merger Agreement or the Merger and may terminate
the Merger Agreement after notifying FPIC of the principal terms and conditions
of the proposal and the identity of the person making the proposal. Similarly,
upon withdrawal by Tenere, the Board of Directors of Tenere or any committee
thereof of its approval of the Merger Agreement or the Merger or the
announcement or approval by Tenere of any Tenere Takeover Proposal, FPIC may
terminate the Merger Agreement. In the event that Tenere or its Board of
Directors withdraws its approval of the Merger Agreement or the Merger or
approves or recommends to the Tenere shareholders any Tenere Takeover Proposal,
and either (i) the shareholders of Tenere do not approve the Merger or (ii)
Tenere or FPIC terminates the Merger Agreement, Tenere will pay FPIC a fee of
$600,000 in cash.
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INDEMNIFICATION
From and after the Effective Time, FPIC has agreed to cause to
be maintained all duties and obligations of indemnification of Tenere and the
Tenere Subsidiaries pertaining to periods prior to the Effective Time in favor
of employees, agents, directors or officers of Tenere and each of the Tenere
Subsidiaries arising by virtue of the Articles of Incorporation or Bylaws of
Tenere or the Tenere Subsidiaries or arising by operation of applicable law, and
to cause such duties and obligations to continue in full force and effect for so
long as they would (but for the Merger) otherwise survive and continue in full
force and effect.
CLOSING DATE
The Closing Date shall occur on the second business day
following the date on which all of the conditions set forth in the Merger
Agreement have been (or can be at Closing) satisfied or have been waived by the
party permitted to do so.
SURRENDER OF STOCK CERTIFICATES; CANCELLATION OF OPTIONS; RECEIPT OF MERGER
CONSIDERATION
At the Effective Time, each share of Tenere Common Stock
issued and outstanding immediately prior to the Effective Time (other than
Dissenting Shares) will, by virtue of the Merger and without any action on the
part of the holder thereof, be converted into the right to receive and be
exchangeable for the Per Share Amount in cash. The Per Share Amount will equal
the quotient obtained by dividing: (i) the aggregate Merger Consideration,
$20,600,000, by (ii) the sum of the aggregate number of shares of Tenere Common
Stock outstanding immediately prior to the Effective Time and the aggregate
number of shares of Tenere Common Stock underlying all Options outstanding
immediately prior to the cancellation of Options contemplated by the Merger
Agreement. Prior to the Closing, Tenere shall cause each outstanding Option,
whether or not then exercisable, to be canceled and converted into the right to
receive an amount in cash equal to the product of the Option Per Share Amount
and the number of shares of Tenere Common Stock subject to the Option.
At or before the Effective Time, either FPIC or Acquisition
Corporation will deposit with the Exchange Agent the Exchange Fund to be
distributed to the holders of Tenere Common Stock and the Optionees. The
Exchange Fund will contain: (i) an aggregate amount to be distributed to each
holder of Tenere Common Stock as of the Effective Time that is equal to the
product of (x) the number of shares of Tenere Common Stock issued and
outstanding at the Effective Time multiplied by (y) the Per Share Amount; and
(ii) an aggregate amount to be distributed to the Optionees that is equal to (x)
the product of the Per Share Amount and the aggregate number of shares of Tenere
Common Stock underlying the Options, minus (y) the sum of the amounts obtained
for each Option by multiplying the exercise price per share of each Option by
the number of shares of Tenere Common Stock underlying each Option.
As promptly as practicable, but not later than five business
days, after the Effective Time, the Exchange Agent will mail to each holder of
record of Tenere Common Stock immediately prior to the Effective Time and
Optionee instructions and transmittal materials for use in exchanging such stock
certificates or option agreements representing Tenere Options ("Option
Agreements") for the consideration due. In the case of a Tenere shareholder,
upon surrender to the Exchange Agent of a stock certificate for cancellation
together with a duly executed letter of transmittal, the Exchange Agent shall
promptly pay to the person specified on the letter of transmittal an amount,
rounded to the nearest cent,
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determined by multiplying (x) the number of shares of Tenere Common Stock
represented by the stock certificate by (y) the Per Share Amount. In the case of
an Optionee, upon surrender to the Exchange Agent of the Option Agreement
representing an Option together with a duly executed letter of transmittal, the
Exchange Agent shall promptly pay out to the person specified on the letter of
transmittal the amount, rounded to the nearest cent, determined by multiplying
the Per Option Share Amount and the number of shares subject to such Option.
Following surrender of a stock certificate or Option Agreement to the Exchange
Agent, no interest will be paid or accrued on the cash payable in exchange for
the stock certificate or Option Agreement. Until properly surrendered to the
Exchange Agent, each stock certificate will represent only the right to receive,
upon surrender, an amount in cash equal to the Per Share Amount per share of
Tenere Common Stock converted, and each Option Agreement will represent only the
right to receive, upon surrender, an amount equal to the product, rounded to the
nearest cent, of (x) the amount by which the Per Share Amount exceeds the
exercise price per share of Tenere Common Stock subject to the Option and (y)
the number of Shares of Tenere Common Stock subject to the Option. In the event
any stock certificate or Option Agreement has been lost, stolen or destroyed, a
Tenere shareholder or Optionee may deliver to Tenere an affidavit of that fact
and such other documents and/or a bond or other security as Tenere may
reasonably request in exchange for the Merger Consideration payable in respect
of such lost, stolen or destroyed stock certificate or Option Agreement.
SHAREHOLDERS SHOULD NOT SEND IN THEIR TENERE STOCK
CERTIFICATES UNTIL THEY RECEIVE TRANSMITTAL MATERIALS FROM THE EXCHANGE AGENT.
REGULATORY APPROVAL
ANTITRUST. Under the HSR Act and the rules promulgated
thereunder by the Federal Trade Commission (the "FTC"), the Merger may not be
consummated until notifications have been given and certain information has been
furnished to the FTC and the Antitrust Division of the Department of Justice
(the "Antitrust Division") and specified waiting period requirements have been
satisfied. Tenere and FPIC filed notification and report forms under the HSR Act
with the FTC and the Antitrust Division on October 15, 1998. The required
waiting period under the HSR Act was terminated on November 3, 1998. At any time
before or after the consummation of the Merger, and notwithstanding that the HSR
Act waiting period has been terminated, the Antitrust Division of 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 FPIC and Tenere. At any time
before or after the consummation of the Merger, and notwithstanding that the HSR
Act waiting period has been terminated, any state could take such action under
the antitrust laws as it deems necessary or desirable in the public interest.
Such action could include seeking to enjoin the consummation of the Merger or
seeking divestiture of Tenere or businesses of FPIC or Tenere. Private parties
may also seek to take legal action under the antitrust laws under certain
circumstances.
Tenere and FPIC believe that the Merger can be effected in
compliance with federal and state antitrust laws. However, there can be no
assurance that a challenge to the consummation of the Merger on antitrust
grounds will not be made or that, if such a challenge were made, Tenere and FPIC
would prevail or would not be required to accept certain conditions, possibly
including certain divestitures, in order to consummate the Merger.
INSURANCE. As an insurance holding company, Tenere is subject
to regulation by the Missouri Department and various other state or local
insurance departments in the jurisdictions in which it does business. The
Missouri insurance laws provide that a person seeking to merge with a Missouri
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insurance company, or with a person controlling a Missouri insurance company
(such as Tenere), must generally file with the Missouri Department of Insurance
(the "Department") a statement of acquisition (commonly known as a "Form A")
containing certain information required by the Missouri insurance laws and
regulations promulgated thereunder, and must obtain the prior approval of the
Director of Insurance (the "Director") of the Department. Under the Missouri
insurance laws, approval will be granted unless, after a public hearing, the
Director determines that the proposed acquisition would result in adverse
consequences to the financial stability of the insurance company, its
policyholders, its operations or its ability to met licensing requirements,
decreased competition in the insurance industry in Missouri or material changes
in the insurance company's business that are unfair or unreasonable to
policyholders and not in the best interests of the public.
FPIC and Acquisition Corporation filed a Form A with the
Department on October 29, 1998 and a public hearing was held December 16, 1998.
On January 8, 1999, the Director issued a Findings of Fact, Conclusions of Law
and Order approving the Merger.
Tenere is not aware of any other governmental approvals or
actions that may be required for consummation of the Merger other than as
described above. Should any other approval or action be required, it is
presently contemplated that such approval or action would be sought. There can
be no assurance that any necessary regulatory approvals or actions will be
timely received or taken, that no action will be brought challenging such
approval or action or, if such a challenge is brought, as to the result thereof,
or that any such approval or action will not be conditioned in a manner that
would cause the parties to abandon the Merger.
ACCOUNTING TREATMENT
It is intended that the Merger will be accounted for under the
purchase method of accounting.
BUSINESS PENDING THE MERGER
From the date of the Merger Agreement through the Closing
Date, Tenere has agreed to and to cause the Tenere Subsidiaries to:
(a) upon reasonable notice, give FPIC and its attorneys,
accountants, agents and representatives full access to all the properties,
books, records, contracts, commitments, employee benefit plans, documents,
instruments and other records of or pertaining to Tenere and the Tenere
Subsidiaries and permit FPIC and its attorneys, accountants, agents and
representatives to consult with and ask questions of the officers and employees
of Tenere and the Tenere Subsidiaries; deliver to FPIC all audited or unaudited
quarterly or annual financial statements of Tenere and the Tenere Subsidiaries
prepared subsequent to the date of the Merger Agreement; and cooperate with and
assist FPIC in discussions with insurance regulators regarding the financial
condition of Tenere and the Tenere Subsidiaries and compliance with insurance
laws and regulations;
(b) keep the books and records of Tenere and the Tenere
Subsidiaries consistent in all material respects with prior periods and, with
respect to Intermed and Interlex, in accordance with SAP and, with respect to
the consolidated group consisting of Tenere and the Tenere Subsidiaries, in
accordance with GAAP, and conduct their respective businesses and corporate
affairs in the ordinary course consistent in all material respects with past
practices, and will not:
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(i) issue or sell any of their respective capital stock, or any
options, warrants, calls or securities convertible into such capital stock, or
enter into any agreement to do any of the foregoing, or make any change in its
capital structure either by way of stock split, stock dividend or otherwise;
(ii) declare or pay any dividends or make any distribution in
respect of capital stock, or purchase, redeem or otherwise acquire or retire any
capital stock;
(iii) other than in the ordinary course of business, without the
prior written consent of FPIC, enter into or assume any contract or commitment,
or terminate or amend any existing contract or commitment, or incur or prepay
any indebtedness for borrowed money;
(iv) make any loans or advance any funds to anyone or extend
credit;
(v) except as contemplated in the Merger Agreement, enter into,
amend or accelerate any payment or contribution under any employment, agency or
consulting agreements or any plans, funds and programs as defined in Section
3(3) of the Employment Retirement Income Security Act of 1974, as amended, any
deferred compensation agreements, employment contracts, severance pay agreements
and any other agreements, plans or programs relating to employment ("Benefit
Plans");
(vi) other than in the ordinary course of business, without the
prior consent of FPIC, which consent shall not be unreasonably withheld, hire
any new employees or make any changes affecting the rates of compensation of, or
pay any bonuses to (other than accrued bonuses under current Benefit Plans), or
grant any other benefit to, their respective current directors, officers, agents
or employees;
(vii ) other than in the ordinary course of business, create or
assume any mortgage or other lien or encumbrance on, or dispose of, any of their
respective assets or properties;
(viii) other than in the ordinary course of business, acquire any
assets or any properties or make any investments, or enter into any agreements
to acquire any assets or properties or to make any investments;
(ix) except as permitted in the Merger Agreement, merge or
consolidate with any other corporation, or acquire or agree to acquire any stock
(except investments in the ordinary course of business) of any person, firm,
association, corporation or other business organization;
(x) make any change in their respective Articles of
Incorporation or Bylaws;
(xi) without the prior written consent of FPIC, enter into any
arrangement with any person with respect to any United States or foreign
patents, patent applications, trademarks, service marks, applications for
registration of trademarks or service marks, trade names, fictitious names,
copyrights, know-how or trade secrets owned by any of them, or in any way
relating to their respective businesses;
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<PAGE> 30
(xii) without the prior written consent of FPIC, make any
election with respect to the computation of taxes or take any position in any
tax return that could have an adverse effect on Tenere or any of the Tenere
Subsidiaries;
(xiii) other than in the ordinary course of business, without the
prior written consent of FPIC, make any other change in their respective
businesses, business practices or operations; or
(xiv) enter into any agreement to do any of the foregoing;
(c) confer and consult with FPIC on all material business
decisions affecting the future performance of each of Tenere and the Tenere
Subsidiaries, other than decisions made in the ordinary course of business
consistent in all material respects with past practices, including in particular
with respect to Intermed and Interlex on all material business decisions
involving (i) increases or decreases in the credited rate of insurance products
issued by Intermed or Interlex and (ii) Intermed's and Interlex' respective
investment policies;
(d) With respect to Tenere, not dispose of, encumber or grant
any rights regarding any of the capital stock of any Tenere Subsidiary;
(e) At least five days before the Closing, deliver to FPIC a
complete and correct list and summary description of all intercompany accounts
between Tenere, Intermed, Interlex and/or ISI, or any affiliate of Tenere;
(f) Use all reasonable efforts to (i) preserve intact each of
Tenere and the Tenere Subsidiaries' present business organization, reputation,
employees, agents, customers and suppliers, and with respect to Intermed and
Interlex, relations with policyholders, (ii) maintain all licenses of each of
Tenere and the Tenere Subsidiaries to do business in each jurisdiction in which
they are so licensed, (iii) maintain in full force and effect all agreements of
each of Tenere and the Tenere Subsidiaries (except as otherwise contemplated by
the Merger Agreement) and (iv) maintain all assets and properties of each of
Tenere and the Tenere Subsidiaries in good working order and condition, ordinary
wear and tear excepted;
(g) Notify and obtain the written approval of FPIC, which
approval shall not be unreasonably withheld, prior to making any changes to
Intermed's or Interlex' respective investment portfolios or investment assets
that are not in the ordinary course of business or that are inconsistent in any
material respect with Intermed's or Interlex' present or past investment
practices and policies;
(h) Take no actions other than in the ordinary course of
business as contemplated by the Merger Agreement or as required by law, without
the prior written consent of FPIC, that could cause or result in a reduction in
the amount of either Intermed's or Interlex' aggregate statutory capital,
surplus, asset valuation reserve and interest maintenance reserve, as set forth
in the Intermed's and Interlex' Quarterly Statements for the quarter ended June
30, 1998;
(i) Notify FPIC promptly in writing of, and contemporaneously
provide FPIC with complete and correct copies of any and all information or
documents relating to, and use all reasonable efforts to cure before the
Closing, any event, development, transaction or circumstance occurring after the
date of the Merger Agreement that causes or could cause any covenant or
agreement of Tenere under
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<PAGE> 31
the Merger Agreement to be breached, or that renders or could render untrue any
representation or warranty of Tenere contained in the Merger Agreement as if the
same were made on or as of the date of such event, development, transaction or
circumstance; and use all reasonable efforts to cure, before the Closing, any
violation or breach of any representation, warranty, covenant or agreement made
by Tenere in the Merger Agreement, whether occurring or arising before or after
the date of the Merger Agreement;
(j) Execute, acknowledge and deliver any further documents,
including, but not limited to, any financial statements of Intermed and Interlex
filed with the Missouri Department after the date of the Merger Agreement,
reasonably requested by FPIC consistent with the terms of the Merger Agreement;
(k) Use its reasonable efforts to fulfill, as soon as
practicable, all of the conditions contained in the Merger Agreement; and
(l) If requested by FPIC, fund any and all actuarial deficits
existing in any Benefit Plans except to the extent that such funding could (i)
cause the Benefit Plan to fail to qualify under section 401(a) of the Internal
Revenue Code of 1986, as amended (the "Code") with respect to some or all
persons with beneficial interests in the Benefit Plan (determined without regard
to any modification to the Benefit Plan's benefit formula that could be made to
prevent such disqualification) or (ii) cause the imposition of an excise tax
under section 4972 of the Code.
From the date of the Merger Agreement through the Closing
Date, each of FPIC and Acquisition Corporation have agreed to:
(a) Execute, acknowledge and deliver any further documents
reasonably requested by Tenere consistent with the terms of the Merger
Agreement;
(b) Use their reasonable efforts to fulfill, as soon as
practicable, all of the conditions contained in the Merger Agreement; and
(c) Notify Tenere promptly in writing of, and
contemporaneously provide Tenere with complete and correct copies of, any and
all information or documents relating to, and use all reasonable efforts to cure
before the Closing, any event, development, transaction or circumstance
occurring after the date of the Merger Agreement that causes or could cause any
covenant or agreement of FPIC or Acquisition Corporation under the Merger
Agreement to be breached, or that renders or could render untrue any
representation or warranty of FPIC or Acquisition Corporation contained in the
Merger Agreement as if the same were made on or as of the date of such event,
development, transaction or circumstance; and use all reasonable efforts to
cure, before the Closing, any violation or breach of any representation,
warranty, covenant or agreement made by FPIC or Acquisition Corporation in the
Merger Agreement, whether occurring or arising before or after the date of the
Merger Agreement.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following discussion is a general description of the material
United States federal income tax ("federal income tax") consequences to the
Tenere shareholders of participating in the Merger and does not purport to be a
complete analysis or listing of all potential tax considerations or consequences
relevant to a decision whether to participate in the Merger. The discussion does
not address the material federal income tax consequences to the Optionees of
participating in the Merger. With respect to the
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<PAGE> 32
Tenere shareholders, the discussion does not address all aspects of federal
income taxation that may be applicable to Tenere shareholders in light of their
status or personal investment circumstances, nor does it address the federal
income tax consequences of the Merger that are applicable to Tenere shareholders
subject to special federal income tax treatment including (without limitation)
foreign persons, insurance companies, tax-exempt entities, retirement plans,
dealers in securities, persons who acquired their shares of Tenere Common Stock
pursuant to the exercise of employee stock options or otherwise as compensation,
and persons who hold their shares of Tenere Common Stock as part of a
"straddle," "hedge" or "conversion transaction." In addition, the discussion
does not address the effect of any applicable state, local or foreign tax laws,
or the effect of any federal tax laws other than those pertaining to the federal
income tax. AS A RESULT, EACH TENERE SHAREHOLDER IS URGED TO CONSULT HIS OR HER
OWN TAX ADVISOR TO DETERMINE THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO SUCH
TENERE SHAREHOLDER. The discussion assumes that shares of Tenere Common Stock
are held as capital assets (within the meaning of Section 1221 of the Code) at
the Effective Time and that the Tenere shareholder does not own any capital
stock of FIG and is not related (or considered to be related for federal income
tax purposes) to any person who owns such FIG stock.
An exchange of shares of Tenere Common Stock pursuant to the
Merger will be a taxable transaction. Each Tenere shareholder will realize gain
or loss for federal income tax purposes in an amount equal to the differences
between (x) the Per Share Amount and (y) such shareholder's tax basis for the
shares surrendered in exchange therefor. Any such gain or loss will be
recognized for federal income tax purposes, and will be treated as capital gain
or loss. Capital losses are allowable to corporations only to the extent of
capital gains, and, to taxpayers other than corporations, only to the extent of
such gains plus the lower of $3,000 ($1,500 for a married individual filing a
separate return), or the excess of such loss over such gains.
The receipt by a Tenere shareholder of the Per Share Amount
pursuant to the Merger may be subject to a "backup" withholding tax of 31% of
the amount of cash received unless the Tenere shareholder provides his or her
correct taxpayer identification number on the Substitute Form W-9. Any amounts
withheld will be allowed as a credit against the shareholder's federal income
tax or, in general, will be refunded by the Internal Revenue Service.
Consummation of the Merger is not conditioned upon the receipt
by any person of an opinion of counsel with respect to the tax consequences of
the Merger. The preceding description was prepared by Tenere after consultation
with tax counsel, but no opinion of tax counsel or other tax expert has been
obtained.
THE FOREGOING DESCRIPTION OF FEDERAL INCOME TAX CONSEQUENCES
IS INCLUDED HEREIN FOR GENERAL INFORMATION ONLY AND IS BASED UPON CURRENT LAW.
SUCH DESCRIPTION DOES NOT ADDRESS THE FEDERAL INCOME TAX CONSEQUENCES TO
OPTIONEES OR TO ALL TENERE SHAREHOLDERS. EACH SHAREHOLDER AND OPTIONEE SHOULD
CONSULT HIS OR HER OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES OF
THE MERGER TO SUCH SHAREHOLDER OR OPTIONEE, INCLUDING THE APPLICATION AND EFFECT
OF FEDERAL, STATE, LOCAL AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES
IN FEDERAL AND OTHER TAX LAWS.
RIGHTS OF DISSENTING SHAREHOLDERS OF TENERE
Each holder of Tenere Common Stock has the right to dissent
from the Merger and receive the fair value of such holder's shares of Tenere
Common Stock in cash if the shareholder follows the procedures set forth under
Section 351.455 of the GBCLM, as set forth as Annex B hereto and the
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<PAGE> 33
material provisions of which are summarized herein. Under Section 351.455 of the
GBCLM, a holder of Tenere Common Stock may dissent and Tenere, as the surviving
corporation, will pay to such shareholder the fair value of such shareholder's
shares of Tenere Common Stock as of the day prior to the Special Meeting if such
shareholder: (1) files with Tenere prior to or at the Special Meeting a written
objection to the Merger; (2) does not vote in favor of the approval of the
Merger Agreement; and (3) within 20 days after the Closing Date, makes written
demand to Tenere for payment of the fair value of the shares held by such
shareholder as of the day prior to the date of the Special Meeting. A demand by
a dissenting shareholder shall state the number and class of shares owned by
such dissenting shareholder. Any shareholder failing to make demand within the
20-day period shall be conclusively presumed to have consented to the Merger and
shall be bound by the terms thereof. A PROXY OR VOTE AGAINST THE APPROVAL OF THE
MERGER AGREEMENT WILL NOT, BY ITSELF, BE REGARDED AS A WRITTEN OBJECTION FOR
PURPOSES OF ASSERTING DISSENTERS' RIGHTS.
If, within 30 days after the Closing Date, the value of such
shares is agreed upon between the dissenting shareholder and Tenere, payment
therefor shall be made within 90 days after the Closing Date upon the surrender
by such shareholder of the certificate or certificates representing said shares.
Upon payment of the agreed value, the dissenting shareholder shall cease to have
any interest in such shares or in Tenere.
If, within 30 days after the Closing Date, the dissenting
shareholder and Tenere do not agree as to the value of such shares, then the
dissenting shareholder may, within 60 days after the expiration of such 30-day
period, file a petition in any court of competent jurisdiction within the county
in which the registered office of Tenere is situated, asking for a finding and
determination of the fair value of such shares, and shall be entitled to
judgment against Tenere for the amount of such fair value as of the day prior to
the date of the Special Meeting, together with interest thereon to the date of
such judgment. The "fair value" determined by the court may be more or less than
the amount offered to each of the Tenere shareholders under the Merger
Agreement. The judgment shall be payable only upon and simultaneously with the
surrender to Tenere of the certificate(s) representing said shares. Upon the
payment of the judgment, the dissenting shareholder shall cease to have any
interest in such shares or in Tenere. Unless a dissenting shareholder shall file
such petition within such 60-day period, such shareholder and all persons
claiming under such shareholder shall be conclusively presumed to have approved
and ratified the Merger, and shall be bound by the terms thereof.
Failure to comply strictly with these procedures will cause
the shareholder to lose his or her dissenters' rights. Consequently, any
shareholder who desires to exercise his or her dissenters' rights is urged to
consult a legal advisor before attempting to exercise such rights.
THE PRECEDING DISCUSSION IS A SUMMARY OF THE PROVISIONS
REGARDING DISSENTERS' RIGHTS UNDER THE GBCLM AND IS QUALIFIED IN ITS ENTIRETY BY
THE TEXT OF SECTION 351.455 OF THE GBCLM WHICH IS ATTACHED HERETO AS ANNEX B.
TENERE SHAREHOLDERS WHO ARE INTERESTED IN PERFECTING DISSENTERS' RIGHTS PURSUANT
TO THE GBCLM IN CONNECTION WITH THE MERGER SHOULD CONSULT WITH THEIR COUNSEL FOR
ADVICE AS TO THE PROCEDURES REQUIRED TO BE FOLLOWED.
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<PAGE> 34
INFORMATION REGARDING TENERE
BUSINESS
GENERAL. Tenere was organized in 1995. Tenere's wholly owned
subsidiary, Intermed, was organized in 1976 as "Risk Control Associates, Inc.,"
an assessable mutual property and casualty insurance company which provided
professional liability coverage to physicians and dentists practicing in the
State of Missouri. In 1991, Risk Control Associates, Inc. reorganized, changed
its name to "RCA Mutual Insurance Company" and became a non-assessable mutual
property and casualty insurance company. In 1995, RCA Mutual Insurance Company
converted from a mutual to a stock property and casualty insurance company and
changed its name to "Intermed Insurance Co." The policyholders of RCA Mutual
Insurance Company became the shareholders of Tenere, a Missouri holding company
formed during the demutualization process.
Tenere has two principal operating subsidiaries, Intermed,
which writes medical and dental malpractice insurance and Interlex, which writes
legal malpractice insurance. Tenere operates through a wholly owned management
company, ISI, pursuant to a management contract between Intermed, Interlex and
ISI. Neither Tenere, Intermed nor Interlex have employees and all persons
conducting the businesses of Tenere, Intermed and Interlex are employees of ISI.
The management contract with ISI is, in effect, a cost reimbursement so that ISI
makes neither a profit nor a loss.
PRODUCTS. Intermed currently writes medical and dental
malpractice insurance in the States of Missouri and Kansas and, through two
purchasing groups, in the State of Texas. Since the formation in 1976 of a
predecessor company, medical and dental malpractice insurance has been its only
line of business. Insurance is written on two policy forms, occurrence and
claims-made. Prior to September 1, 1995, Intermed also wrote business on a
claims-paid policy form. Estimates of losses and loss adjustment expenses on
occurrence coverages are charged to income as claims are incurred. Estimates of
losses and loss adjustment expenses on claims-made coverages are charged to
income as claims are reported. Claims-paid coverages insures against claims
which were reported and paid during the period the policy was in effect.
Intermed's obligation to defend and pay claims ended upon expiration of a
claims-paid policy. Claims-paid losses were incurred at the time of payment so
no reserves were required on open claims. Intermed, however, was contractually
liable for claims that had been reported during the claims-paid policy period if
Intermed chose not to renew a claims-paid policy.
Intermed ceased writing claims-paid policies effective
September 1, 1995. As these policies expired over the twelve-month period ending
August 31, 1996, claims-paid policyholders were given the opportunity to convert
to a claims-made policy. Reserves for all reported claims on claims-paid
policies which were non-renewed during the period September 1, 1995 through
August 31, 1996 totaled $995,000 at December 31, 1997, and $585,100 as September
30, 1998, net of reinsurance.
At September 30, 1998, Intermed had 1670 insureds; 565
occurrence and 1105 claims-made. This was an increase of 194 from 1997 year end.
Interlex writes legal malpractice insurance on a claims-made
policy form. At September 30, 1998, Interlex had 921 insureds, an increase of
228 over 1997 year end.
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<PAGE> 35
MARKETING. Intermed sells its products through salaried
employees and independent agents. For the calendar year 1997, salaried employees
wrote 63% and agents wrote 37% of total premiums written.
During 1996, Intermed formed a purchasing group, Intermedical
of Texas, Inc., and commenced operations offering medical malpractice insurance
to physicians in the State of Texas. An employee of ISI staffs the purchasing
group from an office in Dallas, Texas. During the first quarter of 1997, a
second purchasing group, Dental Defense Specialists, Inc., was organized for the
purpose of marketing malpractice insurance to dentists in Texas.
Interlex also markets legal malpractice insurance through
salaried employees and independent agents. In calendar year 1997, salaried
employees produced 87% of total premiums written and agents 13%. A purchasing
group for lawyers, Lawyers' Liability Association, Inc., has been organized but
has not commenced operations.
COMPETITION. The insurance business is highly competitive. In
both Missouri and Kansas, Intermed and Interlex compete with both regional and
national companies. In 1996, the last year for which statistics are available
from the Missouri Department, there were 54 companies writing medical
malpractice insurance in the state. The top five writers had 60.54% of the
market. The largest market share was 20.07%. Intermed, the seventh largest
writer in 1996 in the state, had a market share of 6.08%.
Ten companies wrote legal malpractice insurance in the State
of Missouri in 1996 according to the Missouri Department. One company, sponsored
by the Missouri Bar Association, had a market share of 71.75%; Interlex, which
commenced operations in October 1994, had a market share of 4.26% and was the
fifth largest writer.
A number of hospitals in Missouri have begun purchasing the
medical practices of fee-for-service physicians and hiring the physicians as
employees of the hospital or a corporate entity affiliated with the hospital. A
number of such physicians formerly purchased their own professional liability
insurance through smaller insurance companies such as Intermed. As a result of
the consolidation, many of the hospitals purchasing the practices of physicians
have self-insured or seek professional liability insurance from professional
liability carriers with capital and surplus greater than that of Intermed and at
premiums lower than those currently offered by Intermed.
The insurance industry is impacted by legislative changes,
judicial interpretations, market competition, inflation and other statutory
requirements. The insurance industry is subject to cyclical patterns varying
between "hard" and "soft" markets. The usual duration of the cycle from one
"hard" market through a "soft" market to another "hard" market is approximately
six to seven years. During the "hard" part of the cycle, insurance is more
difficult to obtain and the price of the product is higher. It is possible to
characterize this segment as a "seller's" market. The "soft" part of the cycle
is characterized with ready availability of insurance products and
commensurately lower prices for the product. This segment could be characterized
as a "buyer's" market. During the soft portion of the cycle there is a downward
pressure on pricing, thereby subjecting Intermed to increased pricing pressures
which may have an adverse impact on its business and operations. At the present
time, the insurance industry has generally been in the soft portion of the cycle
for approximately ten years. While the industry has been in the soft portion of
the cycle for an unusually long period, no assurance can be given
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<PAGE> 36
that the industry will enter a hard market in the near future. Intermed
currently has excess capacity and could double its current premium volume while
maintaining required premium to surplus ratios.
UNDERWRITING. Underwriting for both Intermed and Interlex is
performed by an experienced staff at the Company's home office in Springfield,
Missouri. This is augmented by Underwriting Committees composed of physicians
and dentists for Intermed and lawyers for Interlex. Because these Committees are
geographically broad-based, there is, in most instances, personal knowledge of
applicants and renewals. This structure has enabled Intermed and Interlex to
maintain uniformly high underwriting standards.
REGULATION. The activities of Intermed and Interlex are
regulated by the Missouri Department of Insurance. The companies are subject to
examination by the Missouri Department on a periodic basis. Such examinations
pertain to many aspects of the companies' operations and financial condition,
including loss reserves, investments, licensing and rates.
A financial examination and a limited market conduct
examination were conducted by the Missouri Department during 1998. There were no
material adverse findings or material recommendations for changes in Intermed's
or Interlex's business operations.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES. Loss reserves are
the amounts reserved by Intermed and Interlex to provide funds for payment of
policyholders' claims in the future. An insurance company must accumulate
substantial loss reserves because policies provide for payments of substantial
amounts in the future for claims that have occurred in prior contract periods.
These loss reserves are established as balance sheet liabilities representing
estimates of future amounts needed to pay claims and related expenses with
respect to insured events which have occurred, including events that have not
yet been reported.
Loss reserves associated with professional liability coverage
tend to be relatively higher than other types of property and casualty insurance
for primarily two reasons: the "tail" and the "trend." The time between the
occurrence and settlement of a claim is the "tail." Property coverage is
generally a "short tail" line of business where loss reserves represent only
those claims in the adjustment or reporting stages of the claim and which will,
for the most part, be settled within the next year. Liability coverage is
generally a "long tail" line and the reserves represent claims that can take up
to five to seven years to settle due to the fact that discovery of the injury
can take several years and because of the complexity of the issues inherent in
the claims. This means that while property loss reserves may represent as little
as a few months to a year of losses, professional liability loss reserves may
represent five to seven or more years of losses at any one time. Also,
professional liability loss reserves, due to the length of time before
settlement, are more sensitive than property lines to changes in external
factors such as increased medical costs, increased jury awards and changes in
the litigation environment. These external factors are used to calculate the
"trend," which is the yearly change in the overall costs of coverage. The trend
is factored into the calculation of the loss reserves and has generally
contributed to higher reserves for professional liability coverages.
Intermed employs an independent consulting actuary to make
recommendations in the establishment of loss reserves and to render an opinion
regarding the adequacy of Intermed's statutory loss reserves. The quantification
of reserves is complex and subjective as a result of the need to project future
contingent events and other factors previously mentioned which are related to
medical professional liability claims. In determining reserve levels, the
actuaries rely primarily on historical loss
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<PAGE> 37
experience, adjusted for changing circumstances as deemed appropriate. This
reliance is based on the assumption that historical loss experience provides a
good indication of future loss experience despite uncertainties in loss cost
trends and delays in reporting and settling claims. These uncertainties are
increased by changes in normal inflation, changing propensities of individuals
to file claims and new causes of action. Despite these uncertainties in the
determination of reserve levels, management believes that the methods used by
Intermed and Interlex in establishing reserves are reasonable and appropriate.
As additional information becomes available and is reviewed,
estimates reflected in earlier reserves may be revised upward or downward. Any
such increases could have an adverse effect on results for the period in which
adjustments are made. The uncertainties inherent in estimating ultimate losses
on the basis of past experience have grown significantly in recent years as a
result of judicial expansion of liability standards and expansive
interpretations of insurance contracts.
Reserves for losses and loss adjustment expenses are estimated
based on Tenere's consolidated historical loss and loss adjustment expense
experience supplemented by insurance industry loss data. The reserves are
reported on a present value basis discounted at the rate of 2% in 1997, 3% in
1996, 4% in 1995 and 5% in 1994. At the direction of the Missouri Department of
Insurance, the discount will be eliminated ratably over the five-year period
ending December 31, 1998.
The table that follows presents the development of net balance
sheet liabilities of Tenere and subsidiaries for reserves for losses and loss
adjustment expenses for 1988 and 1998:
o NET LIABILITY. The first row of data shows the estimated
net liability for reserves for losses and loss adjustment
expenses at December 31 for each year from 1988 to 1998.
The liability includes both case and IBNR reserves as of
each year-end date, net of anticipated recoveries from
reinsurers. The rows immediately following the first row
of data show cumulative paid data at December 31, as of
one year, two years, etc., through up to 10 years of
subsequent payments.
o NET LIABILITY RE-ESTIMATED. The middle rows of data show
the re-estimated amount for previously reported net
liability based on experience as of the end of each
subsequent calendar year's results. This estimate is
changed as more information becomes known about the
underlying claims for individual years. The cumulative
redundancy (deficiency) shown in the table is the
aggregate net change in estimates over the period of years
subsequent to the calendar year reflected at the top of
the respective columns. The amount in the line titled
"Redundancy (Deficiency) at September 30, 1998,"
represents for each calendar year (the "Base Year") the
aggregate change in (i) the Company's original estimate of
net liability for reserves for losses and loss adjustment
expenses for all years prior to and including the Base
Year compared to (ii) the Company's re-estimate as of
September 30, 1998 of net liability for reserves for
losses and loss adjustment expenses for all years prior to
and including the Base Year. A redundancy means that the
original estimate was greater than the re-estimate and a
deficiency means that the original estimate was less than
the re-estimate. By way of example, the deficiency for the
year 1990, calculated as of September 30, 1998, represents
a deficiency in the Company's original estimate of unpaid
claims and claim expenses for 1990 and prior years.
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<PAGE> 38
o GROSS LIABILITY. The last seven lines of data present the
development of reserves on a "gross of reinsurance" basis,
reconciled to the "net of reinsurance" basis shown in the
immediately preceding tables.
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<PAGE> 39
CHANGES IN HISTORICAL RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
FOR THE LAST TEN YEARS - GAAP BASIS AS OF SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1988 1989 1990 1991 1992 1993
---------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net liability for losses and
loss adjustment expenses............... $ 27,120 29,389 21,737 17,070 25,021 25,304
Paid (cumulative) as of:
One year later............................. 2,893 6,787 7,771 6,598 5,740 4,761
Two years later............................ 9,546 14,200 14,060 12,093 9,830 9,088
Three years later.......................... 16,636 19,851 18,030 15,096 13,476 14,375
Four years later........................... 21,949 23,262 20,433 18,160 18,441 17,003
Five years later........................... 24,731 24,523 21,863 21,922 20,388 18,257
Six years later............................ 25,251 25,250 23,926 23,228 21,383
Seven years later.......................... 25,738 27,258 24,648 23,811
Eight years later.......................... 26,542 27,972 24,926
Nine years later........................... 27,103 28,167
Nine years, nine months later.............. 27,180
Net liability re-estimated as of:
One year later............................. 26,765 28,186 22,351 26,877 26,277 25,850
Two years later............................ 26,217 26,147 28,462 28,436 27,023 23,824
Three years later.......................... 24,660 28,835 28,711 28,861 25,280 23,253
Four years later........................... 26,899 30,947 29,360 27,309 24,303 22,060
Five years later........................... 30,275 31,136 28,567 26,094 24,070 22,165
Six years later............................ 30,131 30,822 26,883 25,790 23,764
Seven years later.......................... 29,201 29,592 26,292 25,412
Eight years later.......................... 28,101 29,317 26,158
Nine years later........................... 28,119 29,167
Nine years, nine months later.............. 27,965
Redundancy (Deficiency)
At September 30, 1998.................. (845) 222 (4,421) (8,342) 1,257 3,139
Gross liability-end of year................ 27,120 29,389 21,737 17,070 25,021 25,304
Reinsurance recoverables................... - - - - - -
Net liability-end of year.................. 27,120 29,389 21,737 17,070 25,021 25,304
Gross re-estimated liability-latest........ 27,965 29,167 26,158 25,412 23,964 22,525
Re-estimated reinsurance recoverables...... - - - - 200 360
Net re-estimated liability-latest.......... 27,965 29,167 26,158 25,412 23,764 22,165
Gross redundancy (deficiency).............. (845) 222 (4,421) (8,342) 1,057 2,779
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1994 1995 1996 1997 1998*
------ ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net liability for losses and
loss adjustment expenses............... 25,695 25,461 25,788 21,080 23,488
Paid (cumulative) as of:
One year later............................. 4,720 8,399 8,773 4,824
Two years later............................ 11,342 14,263 12,968
Three years later.......................... 14,924 17,778
Four years later........................... 17,403
Five years later...........................
Six years later............................
Seven years later..........................
Eight years later..........................
Nine years later...........................
Nine years, nine months later..............
Net liability re-estimated as of:
One year later............................. 23,759 26,876 24,627 22,428
Two years later............................ 23,550 25,236 25,162
Three years later.......................... 22,149 27,960
Four years later........................... 24,304
Five years later...........................
Six years later............................
Seven years later..........................
Eight years later..........................
Nine years later...........................
Nine years, nine months later..............
Redundancy (Deficiency)
At September 30, 1998.................. 1,391 (2,499) 626 (1,348)
Gross liability-end of year................ 26,280 26,623 32,887 31,030 34,099
Reinsurance recoverables................... 585 1,162 7,099 9,950 10,611
Net liability-end of year.................. 25,695 25,461 25,788 21,080 23,488
Gross re-estimated liability-latest........ 25,766 30,697 35,408 31,386
Re-estimated reinsurance recoverables...... 1,462 2,737 10,246 8,958
Net re-estimated liability-latest.......... 24,304 27,960 25,162 22,428
Gross redundancy (deficiency).............. 514 (4,074) (2,521) (356)
</TABLE>
* Data are based on September 30, 1998 analysis
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<PAGE> 40
A summary of reserves for losses and loss adjustment expenses
follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ ------------------
<S> <C> <C>
Undiscounted reserves for losses and loss
adjustment expenses............................... $ 34,621,635 $ 31,990,412
Less discount (see note 1)........................... (522,241) (960,000)
--------------- ----------------
Discounted reserves for losses and loss
adjustment expenses............................... $ 34,099,394 $ 31,030,412
============== ===============
</TABLE>
Following is the activity in the reserves for losses and loss adjustment
expenses:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------ ---------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Balance at January 1........................... $ 31,030,412 $ 32,887,407 $ 26,623,138
Less reinsurance recoverable on reserves for
losses and loss adjustment expenses............ (9,950,512) (7,099,463) (1,162,495)
------------- ------------- -------------
21,079,900 25,787,944 25,460,643
------------ ------------ ------------
Incurred related to:
Current year................................ 6,177,648 5,646,863 9,812,694
Prior year.................................. 1,347,941 (1,168,439) 1,413,767
------------ ------------- ------------
Total incurred.............................. 7,525,589 4,478,424 11,226,461
------------ ------------ ------------
Paid related to:
Current year................................ 293,957 413,191 2,499,788
Prior year.................................. 4,823,539 8,773,277 8,399,372
------------ ------------ ------------
Total paid.................................. 5,117,496 9,186,468 10,899,160
------------ ------------ ------------
Net balance at end of period................... 23,487,993 21,079,900 25,787,944
Plus reinsurance recoverable on reserves for
losses and loss adjustment expenses......... 10,611,401 9,950,512 7,099,463
------------ ------------ ------------
Balance end of period.......................... $ 34,099,394 $ 31,030,412 $ 32,887,407
============ ============ ============
</TABLE>
The reserves for losses and loss adjustment expenses are
estimated based on development information available at each reporting date. As
a result of the nature of the risks underwritten, claims development may occur
over an extended period of time. The changes in the incurred amounts disclosed
above related to prior years are the result of utilizing improved claim
development information as that information becomes available.
Tenere's claim philosophy is to defend fully all claims in
which an evaluation reveals little or no negligence. For those claims in which
liability exists, Tenere moves promptly to settle the claim early in order to
minimize indemnity and loss adjustment expenses.
The Claim Department is staffed with experienced claims
specialists and is supervised by the Vice President-Claims/General Counsel of
Tenere. The case load per claim specialist is approximately 200 cases. This
allows for intensive scrutiny of each claim, close tracking of the progress of
each claim and containment of loss adjustment expenses through constant
monitoring.
-35-
<PAGE> 41
Through September 30, 1998, 80% of the claims closed by
Intermed were without the payment of indemnity and 20% were closed with payments
averaging $126,525. Average allocated loss adjustment expenses for claims closed
in the nine months ended September 30, 1998.
In 1997, 83% of the claims closed by Intermed were without the
payment of indemnity and 17% were closed with payments averaging $177,500.
Average allocated loss adjustment expenses for claims closed in 1997 was
$11,900. In 1996, 80% of claims closed by Intermed were without payment of
indemnity and 20% were closed with payments averaging $165,000. Average
allocated loss adjustment expenses for claims closed in 1996 was approximately
$11,000.
Interlex completed its third full year of operation in 1997
and claims statistics for that company are not comparable due to its limited
history.
REINSURANCE. Intermed had three reinsurance treaties in place
during 1997:
(1) Effective October 1, 1996, Intermed renewed a multi-year
excess of loss reinsurance agreement through September 30, 1999. This agreement
provides excess of loss coverage on Intermed's claims-paid, occurrence and
claims-made policies up to $1,600,000 in excess of $400,000 on each claim, with
an aggregate recoverable of 300% of the ceded premiums earned. The maximum
premium ceded under the contract, assuming the contract remains in effect for
the full three-year period, is 20% of direct premiums earned. In addition to the
above, the treaty provides coverage for the difference between $2,000,000 each
loss and/or $4,000,000 in the aggregate and $1,000,000 and/or $3,000,000 in the
aggregate each policy where applicable, with an aggregate recoverable of
$5,000,000. In 1997, Intermed ceded earned premiums of approximately $3,294,000
and losses and allocated loss adjustment expenses of approximately $2,682,000.
In the nine months ended September 30, 1998, Intermed ceded earned premiums of
approximately $1,752,000 and losses and allocated loss adjustment expenses of
approximately $1,444,700. This type of reinsurance provides protection during
periods when losses are both frequent and severe and is not intended to cover
all losses.
(2) A "catastrophic awards made" excess of loss reinsurance
with Lloyd's Underwriters of London with limits of $5,000,000 in excess of
$250,000 over original policy limits for claims made after October 1, 1993 and
excess of $1,000,000 for claims made prior to that date, net of all other
reinsurance. The period covered by the treaty is through September 30, 1999 at
an annual premium of 1.5% of gross net premiums written. In 1997, ceded earned
premiums were approximately $146,000 and losses were $-0-. In the nine months
ended September 30, 1998, ceded earned premiums were approximately $101,000 and
losses were $-0-. This type of reinsurance covers the reassured for awards made
in excess of policyholder's original policy limit for which the policyholder is
able to hold the reassured responsible. It also covers claims related to
extra-contractual obligations.
(3) Effective January 1, 1996, Intermed entered into an
Accident Year Excess of Loss Reinsurance Agreement with American Re-Insurance
Company. Under Section A of this Agreement, the reinsurer is responsible for
100% of Intermed's aggregate ultimate net loss from claims-paid coverages in
1996 in excess of $4,176,000. The reinsurers' maximum liability is limited to
$4,800,000. In 1997, and the nine months ended September 30, 1998, ceded earned
premiums were $-0-. At December 31, 1997 and September 30, 1998, Intermed had
ceded cumulative loss and allocated loss adjustment expenses of $3,707,600 and
$4,604,000, respectively.
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<PAGE> 42
Under Section B of this Agreement, the reinsurer also agreed
to indemnify Intermed for the aggregate ultimate net loss on occurrence and
claims-made coverages in excess of Intermed's accident year loss ratio for the
four years commencing January 1,1996 and ending December 31, 1999. The accident
year loss ratio for 1996 was 75%, 85% for 1997 and 107% for 1998. For subsequent
years, the loss ratio is a weighted average loss ratio for the three accident
years immediately preceding the accident year for which the computation is being
made plus 2%-5% as mutually agreed to by the reinsurer and Intermed. Intermed
ceded losses of $2,000,000, $310,266 and $929,000 in 1996, 1997, and the nine
months ended September 30, 1998, respectively, under this section of the
agreement. Intermed ceded premiums of $800,000 and $900,000 in 1997 and the nine
months ended September 30, 1998, respectively.
Interlex had three reinsurance treaties in place during 1997:
(1) A primary excess of loss reinsurance treaty with Lloyd's
Underwriters of London. The treaty covers the period October 1, 1998 through
September 30, 1999 with limits of $700,000 excess of $300,000 subject to a
maximum recoverable of $2,100,000. However, if the ceded premiums written exceed
$500,000, the maximum recoverable shall increase to $3,500,000. The premium is
7.5% of gross net premiums written for policy limits of $300,000 or less, 16.5%
of gross net premiums written for policies with limits of $500,000 and 36% of
gross net written premiums for policies with limits of $1,000,000. In 1997,
Interlex ceded earned premiums of approximately $261,000 and losses of $-0-. In
the nine months ended September 30, 1998, Interlex ceded earned premiums of
approximately $246,100 and losses of $-0-.
(2) A prior agreement excess of loss reinsurance treaty with
Lloyd's Underwriters of London covering the period October 1, 1998 through
September 30, 1999. Limits of the treaty are $5,000,000 with a minimum
underlying of $1,000,000 for each insured and $3,000,000 in the aggregate each
policy where applicable. Ceded premium is equal to 100% of the policy premium
less a 10% ceding commission. In 1997, and the nine months ended September 30,
1998, Interlex ceded earned premiums of approximately $128,000 and $106,400,
respectively.
(3) Effective October 1, 1996, the "catastrophic awards made"
treaty with Lloyd's Underwriters of London was expanded to include Interlex
under the same terms outlined above.
Management has confidence in the financial strength of the
Lloyd's syndicates and American Re-Insurance Company with which it reinsures,
and believes that amounts shown as due from reinsurers are fully recoverable.
INVESTMENTS. Both Intermed and Interlex employ United Missouri
Bank, N.A. ("UMB"), headquartered in Kansas City, Missouri, to manage their
investment portfolios. UMB operates under general investment guidelines which
are adopted by the Boards of Directors of Intermed and Interlex and reviewed
periodically to assure that they are consistent with the companies' philosophy
and income requirements. Under the companies' current guidelines, investments
will be in U.S. Treasuries, U.S. Agencies, high grade (Moody's and Standard &
Poor's rated A or better) corporate debt, and municipal tax-exempt debt rated Aa
or better by Moody's and Standard & Poor's. No security purchased shall have a
final maturity longer than ten years. Additionally, the following guidelines are
followed to ensure diversification of the portfolio:
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<PAGE> 43
- direct or guaranteed obligations of the U.S. Government
and its agencies may be held without limit.
- corporate debt shall not exceed 10% of the portfolio. No
more than 2% will be invested in any one issuer.
- municipal (tax-exempt) debt shall not exceed 15% of the
portfolio. No more than 2% will be invested in any one
issuer.
- portfolio investments are limited to U.S. dollar
denominated securities.
At September 30, 1998 investments totaled $48,462,000. The
fair value of bonds held available-for-sale and carried at market was
$39,761,871 and there was a net unrealized gain of $2,158,000. The fair value of
bonds held available for sale was $1,068,000 above amortized cost at December
31, 1997.
TRENDS. Tenere's most significant costs are losses and loss
adjustment expenses and the impacts of regulatory changes, increases in medical
costs and jury awards and changes in the litigation environment as discussed
above.
EFFECT OF INFLATION. Inflation has an effect on Tenere's
general and administration expenses through higher wages and the costs of goods
and services. Inflation also impacts loss adjustment expenses as attorneys and
other consultants pass on their increased costs through increased fees.
EMPLOYEES. Neither Tenere, Intermed nor Interlex had employees
during 1997. ISI had 21 employees at September 30, 1998 and these employees
provided all services required by Tenere and its two insurance subsidiaries
under management contracts approved by each company's Board of Directors.
PROPERTIES
Neither Tenere nor any of its subsidiaries owned any real
estate at December 31, 1997. ISI, a wholly owned subsidiary of Intermed, leases
the Tenere's home office for approximately $90,000 per year to June 30, 2000 and
approximately $95,000 per year thereafter through June 30, 2002. The lease
commenced on July 1, 1995 for a period of seven years with an option to renew
for an additional three years. ISI also leases office space in Dallas, Texas at
a current rate of $835 per month through June 1999.
LEGAL PROCEEDINGS
Neither Tenere nor any of its subsidiaries are subject to any
material pending legal proceedings other than ordinary routine litigation
incidental to its business.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following sections present an analysis of the consolidated
financial condition and results of operations of Tenere and the Tenere
Subsidiaries as of and for the nine-month periods ending
-38-
<PAGE> 44
September 30, 1998 and 1997 and the three-year period ending December 31, 1997.
The analysis should be read in conjunction with the consolidated financial
statements, notes to consolidated financial statements and other financial data
presented elsewhere in this Proxy Statement.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Direct premiums written were $8.3 million in the nine months
ended September 30, 1998, a decrease of $69,000, or less than 1%, from the
comparable prior year period.
Results by product were:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------------------------
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 CHANGE
------------------ ------------------ ------
<S> <C> <C> <C>
Medical malpractice $ 7,245,700 7,526,900 -3.7%
Legal malpractice 1,015,700 803,500 +26.4%
------------ --------- -----
Total $ 8,261,400 8,330,400 -0.8%
</TABLE>
Legal malpractice premiums written in the nine months ended
September 30, 1998 were 26.4% above the comparable prior year period, while
medical malpractice premiums written showed a decline of 3.7%. The decline in
medical malpractice premiums written occurred in the State of Missouri where
Tenere continues to encounter fierce rate competition. Medical malpractice
production by state was:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------------------------
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 CHANGE
------------------ ------------------ ------
<S> <C> <C> <C>
Missouri $ 4,836,000 5,636,300 -14.2%
Kansas 147,000 66,900 +119.7%
Texas 2,262,700 1,823,700 +24.1%
------------ --------- ------
Total $ 7,245,700 7,526,900 -3.7%
</TABLE>
Premiums ceded to reinsurers in the nine months ended
September 30, 1998 were $3.0 million, $680,200 higher than the comparable prior
year period. The increase was primarily attributable to an increase in losses
ceded to reinsurers in the nine months ended September 30, 1998.
There was a $289,200 increase in the unearned premium reserve
(UPR) in the nine months ended September 30, 1998, compared to an increase of
$1.8 million in the comparable period of 1997.
Due primarily to a smaller increase in the unearned premium
reserve, net premiums earned in the nine months ended September 30, 1998 were
$741,800 higher than in the comparable period of 1997.
Net investment income in the nine months ended September 30,
1998 was $2.2 million, an increase of $213,600 ,or 11.0%, compared to the
comparable prior year period. The primary reason
-39-
<PAGE> 45
for the increase was due to having a larger percentage of the portfolio invested
long-term in the comparable 1998 period.
The net realized investment gain of $61,300 in the nine months
ended September 30, 1998 was from sales and calls of several long-term bonds.
Due to the increases in net premiums earned and investment
income and to the net realized investment gain discussed above, total revenues
in the nine months ended September 30, 1998 were $7.2 million, an increase of
$1.0 million, or 16.5%, higher than in the comparable period of 1997.
Losses and loss adjustment expenses totaled $7.5 million in
the nine months ended September 30, 1998, $4.7 million higher than in the same
period of 1997. The direct 1998 accident year loss ratio was 104.6%. The period
ended September 30, 1997 reflected favorable adjustments to prior accident year
loss reserves and there were no corresponding adjustments in the comparable 1998
period. The net 1998 calendar loss ratio was 151.0%. Tenere continues to
experience high severity and there was a significant increase in frequency in
the comparable 1998 period.
General and administrative expenses totaled $2.4 million in
the nine months ended September 30, 1998, a decrease of $528,100, or 18.3%, from
the comparable prior year period. The 1997 period included an accrual of
$597,800 for the post-retirement benefits of the Board of Directors and the
Chief Executive Officer of Tenere, compared to $42,900 in 1998. The expense
ratio for the nine months ended September 30, 1998 was 28.5% compared to 34.6%
in the comparable 1997 period.
Due primarily to the significant increase in losses and loss
adjustment expenses in the 1998 period, there was a loss before income taxes of
approximately $2.7 million compared to income before income taxes of $432,500 in
the same period of 1997.
The nine months ended September 30, 1998 resulted in an income
tax benefit of $895,000 which resulted in a net loss of $1.8 million or $.90 per
share. In the comparable period of 1997, there was an income tax expense of
$204,400, which resulted in net income of $228,100, or $.11 per share ($.10 per
diluted share).
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Direct premiums written in 1997 totaled $10,541,000, an
increase of $2,417,000, or approximately 30%, over the prior year:
<TABLE>
<CAPTION>
1997 1996 CHANGE
----------- ----------- -----------
<S> <C> <C> <C>
Medical malpractice premiums written
Missouri.................................... $ 6,707,000 $ 7,176,000 $ (469,000)
Kansas...................................... 77,000 77,000
Texas....................................... 2,60,000 250,000 2,370,000
----------- -----------
Total medical.......................... $ 9,404,000 $ 7,503,000 $ 1,901,000
----------- ----------- -----------
Legal malpractice premiums written
Missouri.................................... $ 1,082,000 $ 588,000 $ 494,000
Kansas...................................... 55,000 33,000 22,000
----------- ----------- -----------
Total legal............................ $ 1,137,000 $ 621,000 $ 516,000
----------- ----------- -----------
Total premiums written.......................... $10,541,000 $ 8,124,000 $ 2,417,000
=========== =========== ===========
</TABLE>
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<PAGE> 46
The significant increase in premiums written occurred in
Texas, where Intermed markets professional liability insurance to physicians and
dentists through two purchasing groups, Intermedical of Texas, Inc. and Dental
Defense Specialists, Inc., and in Missouri, where Interlex markets professional
liability insurance to lawyers. The medical malpractice market in Missouri
continues to suffer from intense competitive pressure due to the large number of
companies active in the state, several of whom engage in extremely aggressive
pricing in order to gain market share. Tenere has continued its long-standing
policy of actuarially sound premium rates even though this has resulted in a
loss of market share. One of Tenere's principal competitors, which built market
share over the past decade by charging inadequate rates, failed in 1997 and is
now under state supervision. While this competitor is no longer present in the
Missouri market, several other companies have stepped in with premium rates as
aggressive as those of the company which failed. Intermed continues to price its
products responsibly and to provide outstanding defense when its insureds are
sued. This has enabled Tenere to hold our attrition rate to approximately 10%.
Tenere's management believes that the Missouri market for
medical malpractice insurance will continue to be extremely competitive in 1998
and the growth of Intermed will be in Texas where Tenere expects to write an
additional $3,000,000 in premiums. The prospects for Interlex in Missouri in
1998 appear to be extremely positive and Tenere expects to write an additional
$500,000 in premiums.
Premiums ceded to reinsurers totaled $4,739,000 in 1997,
compared to $4,655,000 in 1996. Net premiums written were $5,802,000 in 1997,
compared to $3,469,000 in the prior year, an increase of $2,333,000, or 67%.
Due primarily to the 30% increase in direct premiums written
in 1997, there was an increase of $1,304,000 in the unearned premium reserve
compared to a decrease of $4,178,000 in 1996. The decrease in the UPR in 1996
was due to the decrease in premiums written in 1996, compared to 1995 and to a
release of $3,128,000 from the death, disability and retirement component of the
reserve caused by the conversion of claims-paid policyholders to claims-made
coverages in 1996.
As a result of the significant changes in the UPR in 1997 and
1996, net premiums earned in 1997 were $4,498,000, compared to $7,646,000 in
1996. However, the significant increase in the UPR in 1997 will result in an
increase in premiums earned in 1998 as these premiums are taken into income.
Net investment income in 1997 was approximately level with
prior years, $2,623,000, compared to $2,627,000 in 1996 and $2,654,000 in 1995.
Net investment losses of $14,000 in 1997, $17,000 in 1996 and $36,000 in 1995
were attributable to Tenere's portfolio yield improvement project.
Sales, marketing and other underwriting expenses totaled
$3,990,000 in 1997, $3,543,000 in 1996 and $2,393,000 in 1995. The growth in
expenses over the three-year period was due to expansion of the direct marketing
staff of Intermed, start-up costs of Interlex, the establishment of a sales
office in Austin, Texas to support the marketing efforts of Tenere's two
purchasing groups and the accrual of certain post-retirement benefits for
Tenere's Directors and Chief Executive Officer.
Losses and loss adjustment expenses totaled $4,478,000 in
1997, compared to $11,226,000 in 1996 and $7,676,000 in 1995. Loss ratios were
99.6% in 1997, 146.8% in 1996 and 64.5% in 1995. Losses and loss adjustment
expenses in 1996 were significantly impacted by the
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<PAGE> 47
establishment of reserves for reported claims on claims-paid policies that were
non-renewed during the eight-month period ended August 31, 1996. The impact on
1996 earnings was $2,119,000.
Primarily because of the non-renewal of claims-paid policies
in 1995 and 1996, there were significant variations in operating results between
years:
o Total losses and expenses were $8,468,000 in 1997,
$14,755,000 in 1996 and $10,686,000 in 1995.
o There was a loss before income taxes of $1,362,000 in
1997, compared to a loss before income taxes of $4,499,000
in 1996 and income before income taxes of $3,833,000 in
1995.
o There was an income tax benefit of $409,000 in 1997 and
$1,564,000 in 1996. There was a tax expense of $1,323,000
in 1995.
o There was a net loss of $953,000 in 1997 compared to a net
loss of $2,934,000 in 1996 and net income of $2,510,000 in
1995.
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Direct premiums written were $12,368,000 in 1994, $9,874,000
in 1995 and $8,124,000 in 1996. The decline of $2,494,000 from 1994 to 1995 was
due to a net loss of 96 insureds for Intermed, primarily due to individual
practices being purchased by larger groups or self-insured hospitals and to the
implementation of a claims-free discount program effective September 1, 1995.
The decline of $1,750,000 from 1995 to 1996 was due to the full year impact of
the claims-free discount program and to other market-driven discounts
necessitated by competitive conditions in the medical malpractice market in
Missouri. In 1996, claims-free discounts approximated 20% of gross premiums and
market-driven discounts approximated another 10%.
Interlex increased its number of insureds from 196 to 428 in
1996.
Premiums ceded to reinsurers increased from $1,344,000 in 1994
to $1,505,000 in 1995 to $4,655,000 in 1996. The significant increase of
$3,150,000 in 1996 was due to:
(1) A new accident year aggregate excess of loss reinsurance
treaty effective January 1, 1996 under which premiums of $2,050,000 were ceded.
This treaty covered losses incurred in calendar year 1996 in excess of
$4,176,000 on claims-paid policies and losses incurred in 1996 on occurrence and
claims-made coverages in excess of 75% of premiums earned on those coverages.
(2) Losses ceded to a reinsurer under the Company's experience
rated primary excess of loss treaty resulted in $1,702,000 of ceded premiums.
As a result of the significant increase in premiums ceded to
reinsurers, net premiums written in 1996 were $3,469,000, compared to $8,369,000
in 1995 and $11,024,000 in 1994.
There was an increase of $367,000 in the unearned premium
reserve (UPR) in 1994 due to the increase in premiums written that year. The UPR
decreased $3,532,000 in 1995 and $4,178,000 in
-42-
<PAGE> 48
1996. The primary reason for the large decreases in 1995 and 1996 was the
conversion of claims-paid policyholders to claims-made coverages over the
twelve-month period beginning September 1, 1995 and ending August 31, 1996. The
death, disability and retirement (DD&R) component of the UPR required for
claims-made coverages is substantially less than that required for claims-paid
coverages, hence the large releases in 1995 and 1996.
Net investment income was $2,627,000 in 1996, compared to
$2,654,000 in 1995 and $2,639,000 in 1994.
Total revenues increased from $12,873,000 in 1994 to
$14,519,000 in 1995 and decreased to $10,256,000 in 1996.
Sales and marketing expenses increased from $857,000 in 1994
to $955,000 in 1995 and $1,758,000 in 1996. The increase in 1995 was due to
expansion of the home office marketing staff. The significant increase in 1996
was due to continued expansion of the home office marketing staff and to
start-up costs for a new sales office in Austin, Texas. As discussed above,
Intermed was recognized by Texas as an authorized surplus lines carrier in 1996
and Intermed opened a sales office staffed by employees of Insurance Services,
Inc.
Losses and loss adjustment expenses (LAE) declined from
$8,197,000 in 1994 to $7,676,000 in 1995. The loss ratios were 77% in 1994 and
65% in 1995. The 1995 period benefited from a net release of $1,935,000 in loss
reserves related to prior accident years. Losses and LAE in 1996 totaled
$11,226,000, producing a calendar year loss ratio of 140%. The reasons for the
unfavorable loss experience in 1996 were:
(1) Medical malpractice indemnity and LAE payments totaled
$10,768,000 in 1996 compared with $7,060,000 in the prior year, an increase of
$3,708,000. Management believed that this significant increase was an aberration
and that paid losses in 1997 would return to the level experienced in prior
years. Because individual indemnity payments in 1996 on prior year claims
exceeded the reserves established for those claims, there was a charge against
current year operations of $1,446,000.
(2) It was necessary to establish reserves of $2,527,000, net
of reinsurance, for reported claims on claims-paid policies that converted to
claims-made coverages during 1996.
Primarily because of the factors discussed above, there was a
net loss before income taxes of $4,499,000 in 1996, compared with net income
before taxes of $3,833,000 in 1995 and $899,000 in 1994.
There was an income tax expense of $102,000 in 1994 and
$1,323,000 in 1995 due to profitable operations in those years. There was an
income tax benefit of $1,564,000 in 1996 due to the net loss incurred.
Net income in 1994 was $797,000, increasing to $2,510,000
in 1995. There was a net loss of $2,934,000 in 1996.
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<PAGE> 49
FINANCIAL CONDITION
NINE MONTHS ENDED SEPTEMBER 30, 1998
ASSETS. Total assets at September 30, 1998 were $68.2 million,
an increase of $2.4 million over the prior year end. Significant changes in
asset categories are discussed below:
o The investment portfolio increased from $43.7 million at
December 31, 1997 to $48.5 million at September 30, 1998,
an increase of $4.7 million or 10.8%. The increase was due
to (a) the transfer of approximately $3.0 million from the
cash account and (b) a $1.1 million increase in the market
value of bonds during the first nine months of 1998. There
was an unrealized gain of $2.2 million in the bond
portfolio at September 30, 1998 compared to $1.1 million
at December 31, 1997. Short-term investments totaled $8.7
million at September 30, 1998 compared to $2.8 million at
the prior year end, an increase of $5.9 million. The
increase was due to the call in August of two bonds with
par values of $3.0 million. A total of $3.0 million was
reinvested long-term in September but the remaining $3.0
million remains invested in short-term securities until
long-term rates improve above current levels. The current
target for short-term investments is 10% of the investment
portfolio or $5.0 million.
o There was a $3.0 million decrease in cash from December
31, 1997 to September 30, 1998 due to the transfer to the
investment account discussed above. The cash balance of
$3.8 million at December 31, 1997 was unusually high due
to several year-end transactions. The excess cash was
subsequently transferred to the investment account. Cash
balances are invested overnight.
o The increase in premiums receivable at September 30, 1998
over the prior year end was due to the significant
percentage of annual renewals that take place during the
third quarter of each year, many of which involve monthly
and quarterly premium plans.
o Reinsurance recoverable from reinsurers increased from
$10.4 million at December 31, 1997 to $10.7 million at
September 30, 1998 due to an increase in ceded losses
during the nine months ended September 30, 1998.
o Deferred income taxes increased from $2.3 million at the
prior year end to approximately $2.8 million at September
30, 1998, due primarily to an increase of $477,200 in the
net operating loss carryforward.
LIABILITIES. Total liabilities increased from $44.7 million at
December 31, 1997 to $48.2 million at September 30, 1998, an increase of $3.5
million or approximately 8.0%. Significant variances in liability accounts are
discussed below:
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<PAGE> 50
o Reserves for losses and loss adjustment expenses increased
$3.1 million or approximately 10.0% in the nine months
ended September 30, 1998, from $31.0 million at December
31, 1997 to $34.1 million. Changes in total reserves are
summarized below:
<TABLE>
<C> <S>
$ 31,030,400 Discounted loss and loss adjustment
expense reserves at December 31, 1997.
+ 901,700 Impact of change in discount rate.
- 7,745,700 Indemnity and expense payments during nine
months ended September 30, 1998.
+ 2,081,600 Increase in loss and loss adjustment
expense reserve for prior accident years.
+ 7,831,400 Reserves established for accident year
1998.
-------------
$ 34,099,400 Discounted loss and loss adjustment
expense reserves at September 30, 1998.
</TABLE>
o The discount rate was reduced from 2% to 1% during the
nine months ended September 30, 1998.
o UPR increased $158,900, or 2.1%, from $7.7 million at
December 31, 1997 to $7.9 million at September 30, 1998.
EQUITY. Total stockholders' equity decreased from
approximately $21.0 million at December 31, 1997 to $19.9 million at September
30, 1998. The $1.1 million decline was due to the following factors:
<TABLE>
<C> <S>
$(1,791,200) net loss from operations
723,800 increase in unrealized investment gains,
net of income taxes.
$(1,067,400) decrease in stockholders' equity.
</TABLE>
Book value of Tenere's Common Stock at September 30, 1998 was
$9.96 per share, $9.13 per diluted share.
There were no changes in the capital structure of Tenere in
the nine months ended September 30, 1998. The accumulated deficit increased from
$1.7 million at December 31, 1997 to approximately $3.5 million at September 30,
1998, due to the net loss of $1.8 million during the nine month period then
ended. Accumulated other comprehensive income increased from $709,100 to $1.4
million over the nine months ended September 30, 1998, due to the increase in
unrealized gains in the investment portfolio, net of income taxes.
YEAR ENDED DECEMBER 31, 1997
ASSETS. Tenere's investment portfolio increased from
$44,260,000 at December 31, 1996 to $47,386,000 at the current year end, an
increase of $3,126,000, or 7%. $10,811,000 held in short-term investments at the
prior year end was reinvested in long-term bonds during 1997. Over a three-year
period beginning in the spring of 1995, Tenere sold $35,100,000 of low-yielding
bonds and held the proceeds in short-term investments until interest rates
improved. At December 31, 1997, $30,219,000 had been reinvested in long-term
bonds with an improvement of approximately 160 basis points in portfolio yield.
The one remaining low-yielding bond was sold in January 1998. Approximately
$5,000,000 currently held in short-term investments will be reinvested long-term
when interest rates improve above current levels.
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<PAGE> 51
The bond portfolio is invested solely in U.S. Treasury Notes,
obligations of U.S. government agencies and high-grade state and municipal
bonds. There are no known credit risks in the portfolio. At December 31, 1997,
the portfolio (including short-term investments) had an average
yield-to-maturity of 6.2% and there was an unrealized gain of $1,068,000,
compared to an average yield of 5.9% and an unrealized gain of $252,000 at
December 31, 1996. At the current year end, approximately 34% of the portfolio
will mature in one to five years and 66% in five to ten years.
Cash decreased from $2,045,000 at December 31, 1996 to
$102,000 at December 31, 1997, due to changes in cash management practices in
December 1997 when there was a change in banking relationships.
The reinsurance recoverable increased from $7,198,000 at
December 31, 1996 to $10,414,000 at December 31, 1997, primarily due to an
increase in ceded losses over the prior year.
The federal income tax recoverable decreased from $1,680,000
at December 31, 1996 to $300,000 at December 31, 1997, due to net cash
recoveries of $1,304,000 in 1997.
Primarily as a result of the increase in reinsurance
recoverable, total assets increased from $61,820,000 at December 31, 1996 to
$65,726,000 at December 31, 1997, an increase of $3,906,000, or approximately 6%
over the prior year end.
LIABILITIES. Reserves for losses and loss adjustment expenses
declined slightly in 1997, from $32,887,000 at the prior year end to $31,030,000
at December 31, 1997. The decrease of $1,857,000, or approximately 6%, was
primarily attributable to a re-evaluation of and release from reserves held for
prior years. Management and Tenere's consulting actuarial firm believe that
reserves at December 31, 1997 are adequate to meet claims and defense costs
attributable to 1997 and prior years.
Premiums are earned over the one-year lives of policies
written by Tenere's insurance subsidiaries and unearned premiums are held in a
reserve account. The reserve for unearned premiums increased from $6,300,000 at
December 31, 1996 to $7,717,000 at the current year end. The increase of
$1,417,000, or 22%, was due to the substantial increase in premiums written in
1997.
The reinsurance payable increased from $506,000 at December
31, 1996 to $4,435,000 at December 31, 1997, due to the increase in premiums and
losses ceded to Tenere's reinsurers in 1997 compared to cessions in the prior
year.
Other liabilities increased from $737,000 at December 31, 1996
to $1,563,000 at December 31, 1997, due primarily to the accrual of retirement
benefits for Tenere's Board of Directors and Chief Executive Officer.
Due to the factors discussed above, total liabilities
increased from $40,430,000 at December 31, 1996 to $44,746,000 at the current
year end, an increase of $4,316,000, or approximately 11%.
STOCKHOLDERS' EQUITY. Stockholders' equity declined from
$21,390,000 at December 31, 1996 to $20,980,000 at December 31, 1997. The
components of the $410,000 decrease were:
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<PAGE> 52
<TABLE>
<C> <S>
$ (953,000) Net loss
543,000 Change in unrealized gains on investment
securities, net of federal income taxes
----------
$ (410,000) Decrease in Stockholders' Equity
</TABLE>
YEAR ENDED DECEMBER 31, 1996
ASSETS. Total assets declined slightly in 1996, from
$62,614,000 at December 31, 1995 to $61,820,000 at December 31, 1996.
Investments in bonds held available for sale increased from $22,404,000 at prior
year end to $29,370,000 at December 31, 1996 due to the reinvestment of
$13,689,000 in long-term bonds with an average yield of 7.18%. Bonds with a book
value of $6,294,000 and an average yield of 4.26% were sold or matured during
1996. All bonds owned at December 31, 1996 were U.S. Treasury, U.S. Agency or
high-quality state obligations. The market value of bonds exceeded amortized
cost by $252,000 compared to an unrealized gain of $562,000 at the prior year
end. The maturity distribution of bonds held at December 31, 1996 was $1,451,000
(5%) with a maturity of less than one year, $6,552,000 (22%) with a maturity of
over one through five years and $21,115,000 (73%) with a maturity of over five
years through ten years.
Cash and cash equivalents totaled $16,935,000 at December 31,
1996, compared to $31,181,000 at the prior year end. The decrease was primarily
due to the net reinvestment of $7,395,000 in long-term bonds in 1996 as
discussed above and a negative cash flow from operations of $5,811,000.
Premiums receivable decreased from $3,720,000 at December 31,
1995 to $2,581,000 at December 31, 1996 due to a decline in net premiums
written.
There was a significant increase in the reinsurance
recoverable at December 31, 1996 from $1,162,000 at the prior year end to
$7,198,000. The increase was primarily due to an additional reinsurance treaty
that was effective January 1, 1996 under which $4,886,000 of losses and loss
adjustment expenses were ceded. The remainder of the increase was due to losses
ceded under Tenere's primary excess of loss treaty.
Deferred income taxes at December 31, 1996 were $2,099,000,
compared to $1,772,000 at the prior year end. The income tax recoverable of
$1,680,000 is taxes paid in early 1996 and prior profitable years that could
have been recouped because of losses subsequently incurred. Other assets of
$1,085,000 at December 31, 1996 consisted principally of computer software of
$480,000, furniture and equipment of $191,000 and company-owned automobiles of
$94,000.
LIABILITIES. Reserves for losses and loss adjustment expenses
increased from $26,623,000 at December 31, 1995 to $32,887,000 at December 31,
1996, an increase of $6,264,000, or 24%. Of the increase, $6,172,000 was
attributable to reserves established for reported claims on policyholders who
converted from claims-paid to claims-made coverages during 1996. Claims-paid
losses are incurred at the time of payment so no reserves are required on open
claims. However, when Tenere ceased renewing claims-paid policies effective
September 1, 1995, it was required to establish reserves for all open, reported
claims at the time of non-renewal.
UPR declined from $10,447,000 at the prior year end to
$6,300,000 at December 31, 1996. There was a decrease of $3,140,000 in the
death, disability and retirement component (DD&R) of
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<PAGE> 53
the UPR due to the conversion of 267 claims-paid policyholders to claims-made
coverages during 1996. The remainder of the decline was attributable to the
lower level of premiums written in 1996.
Total liabilities increased from $38,077,000 at December 31,
1995 to $40,430,000 at December 31, 1996 due primarily to an increase in
reserves.
STOCKHOLDERS' EQUITY. Stockholders' equity declined from
$24,537,000 at December 31, 1995 to $21,390,000 at December 31, 1996, a decline
of $3,147,000. The decline was attributable to a net loss of $2,934,000 and a
$213,000 decrease in the net unrealized gain on bonds at December 31, 1996
compared to December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
NINE MONTHS ENDED SEPTEMBER 30, 1998
There was a positive cash flow from operations of $553,100 in
the nine months ended September 30, 1998 compared to a negative cash flow of
$2.5 million in the comparable period of 1997. The $3.1 million improvement was
attributable to the following factors:
<TABLE>
<C> <S>
+ $ 1,001,700 increase in premium receipts
+ 2,581,900 increase in recoveries from reinsurers
+ 93,300 decrease in payments to reinsurers
+ 182,600 increase in investment income received
- 33,100 increase in loss and LAE payments
- 400,700 increase in commissions and other general and
administrative expenses
- 335,100 no FIT recoveries in 1998 period
---------
+ $ 3,090,600 improvement in cash flow from operations
</TABLE>
The cash position of $713,700 and short-term investments of
$8.7 million at September 30, 1998 provide reasonable assurance regarding the
adequacy of Tenere's current and foreseeable liquidity.
Inflation has an impact on Tenere's general and administrative
expenses through higher wages and the costs of goods and services. Inflation
also impacts loss adjustment expenses as attorneys and other consultants pass on
their increased costs through increased fees.
YEAR ENDED DECEMBER 31, 1997
There was a positive cash flow from operations of $476,000 in
1997, compared to a negative cash flow of $5,811,000 in 1996 and a positive cash
flow of $1,175,000 in 1995. The significant improvement in 1997 compared to 1996
was primarily attributable to the following factors:
o An increase of $870,000 in premium receipts in 1997.
o Net payments to reinsurers of $751,000 in 1997, compared
to $3,315,000 in 1996.
o A reduction of $147,000 in dividends to policyholders in
1997.
o A reduction of $1,446,000 in loss and loss adjustment
expenses in 1997.
o Net cash recoveries of $1,304,000 of federal income taxes
in 1997.
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<PAGE> 54
Cash and short-term investments of $6,550,000 at December 31,
1997 and projected net investment income of $2,600,000 in 1998 provide ample
assurance that bonds will not have to be sold to meet unexpected cash
requirements in the coming year.
YEAR ENDED DECEMBER 31, 1996
Due to the continued restructuring of the bond portfolio and
to a negative cash flow from operations of $5,811,000, cash and cash equivalents
totaled $16,935,000 at December 31, 1996, compared to $31,181,000 at December
31, 1995. At December 31, 1996, approximately $14,000,000 invested short-term
will be re-invested in long-term bonds when interest rates improve above the
current level.
Normal operations are financed by premium and investment
income. To provide a margin of safety against unexpected cash calls, the
maturity distribution of the bond portfolio is carefully monitored to preclude
forced liquidations which could result in realized losses.
YEAR 2000
The Year 2000 issue is the result of older computer programs
being written using two digits rather than four to define the applicable year.
This could result in system failures or miscalculations due to a computer
program's inability to recognize a date using "00" as the year 2000 rather than
1900. There are similar potential problems with microprocessors embedded within
computers and other operating equipment.
Management of Tenere initiated a Year 2000 project in May 1998
to identify and resolve issues and risks posed by the Year 2000. The project was
divided into three distinct segments -- internal IT systems, non-IT systems and
external or third party exposures, which includes both insureds and suppliers of
services. The segment dealing with internal IT systems was headed by Joseph D.
Williams, Vice President -- Finance and Chief Financial Officer, and Andrew C.
Fischer of Tenere, Vice President -- Underwriting, and Clifford R. Stepp, Vice
President -- Marketing, headed the segments dealing with non-IT systems and
third party exposures.
INTERNAL IT SYSTEMS. Work on the internal segment commenced in
May 1998. To insure adequate technical expertise, Tenere employed a consultant,
NetWorks, Inc. of Springfield, Missouri ("NetWorks") to assist internal staff.
All of Tenere's internal IT systems have been analyzed on three different
levels: hardware, software applications and operating systems. The review of
Tenere's internal IT systems consisted of four phases:
INVENTORY PHASE: Documentation was gathered on each piece
of equipment including manufacturer, model and description. All
software was documented as to manufacturer and version. This provided
the necessary information to assess the scope of the project.
ANALYSIS PHASE: NetWorks performed a thorough
investigation of all hardware, software and operating systems. As a
first step, NetWorks examined each piece of equipment and documented
its Year 2000 compliance status. Second, NetWorks checked and
documented each operating system. Third, NetWorks checked the
application software. Finally, NetWorks wrote reports stating the
status of all items
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<PAGE> 55
tested and the corrective actions necessary to meet the
manufacturer's recommended Year 2000 compliance. The result of this
phase was a detailed plan for updating all equipment and software to
be Year 2000 compliant.
CONVERSION PHASE: NetWorks' engineers implemented the
updates necessary to bring all hardware, application software and
operating systems up to date with Year 2000 compliant updates.
TESTING PLAN: NetWorks conducted thorough testing of each
component to ensure the conversion plan was completed properly.
NetWorks provided to Tenere written reports to document Year 2000
compliance.
All phases of the internal IT systems review were materially
completed at December 31, 1998. The few remaining issues regarding hardware and
software have been identified and will be resolved by March 31, 1999.
NON-IT SYSTEMS. Non-IT systems were analyzed to identify risks
and exposures. These included Tenere's internal telephone system, internal
security system, climate control system, automated files, automated file
management system, copiers, facsimile machine and postage meter. Tenere
contacted the equipment manufacturers and requested them to warrant that the
equipment is Year 2000 compliant. If their responses are not satisfactory,
Tenere will consider new business relationships with alternative suppliers or
vendors where alternatives are available.
THIRD PARTIES. In October 1998, Intermed sent a newsletter to
all insureds of Intermed advising them of the risks posed by the Year 2000 and
recommending actions to reduce exposure to lawsuits.
In January 1999, Interlex sent a supplemental application
dealing with Year 2000 issues to all insureds of Interlex. In the event an
insured indicates that it is not Year 2000 compliant, Interlex will encourage
the insured to immediately begin the process of becoming compliant, and provide
any available to the insured. Ideally, Interlex would like every insured to be
Year 2000 compliant by the end of the second quarter of 1999. In the event an
insured cannot meet this target date, Interlex will require the insured to
demonstrate that they have appropriate contingency plans, particularly regarding
docket control systems and conflict of interest systems. If Interlex is not
fully satisfied with the contingency plan, Interlex may, at its discretion, add
a Year 2000 exclusion to such insured's policy. Any insured who refuses to
demonstrate Year 2000 compliance or, at minimum, develop an acceptable
contingency plan, will be non-renewed.
Costs incurred by Tenere and the Tenere Subsidiaries to date
on the Year 2000 project total $35,000. Management believes that any additional
costs incurred in resolving the few remaining issues will be insignificant (less
than $5,000).
Management does not believe that Tenere will face significant
risks from internal IT systems as a result of the steps described above. The
most likely risks will be from non-IT systems and service providers whose
equipment fails to be Year 2000 compliant despite the assurances that Tenere has
received.
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<PAGE> 56
Tenere does not at this time have a contingency plan, but
plans to develop one during the first six months of 1999.
FORWARD-LOOKING INFORMATION
The foregoing analysis contains forward-looking statements
with respect to Tenere's future operations, including statements with respect to
increases in premiums written by Intermed in Texas and by Interlex in Missouri.
Tenere's actual results may vary materially from those projected in the
forward-looking statements due to risks and uncertainties that exist in Tenere's
operations and in the business environment generally.
GENERAL
In June 1995, Tenere received a B+ (very good) rating from
A.M. Best Company, the premier rating agency of insurance companies. Best
ratings are divided into two groups, "Secure" and "Vulnerable" and the B+ rating
is classified as "Secure".
In 1996, A.M. Best increased Tenere's rating from B+ to B++.
In May 1998, A.M. Best decreased Tenere's rating to B+.
EFFECT OF NEW FINANCIAL ACCOUNTING STANDARDS
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION. In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard 131, Disclosures about Segments of an
Enterprise and Related Information (SFAS 131), which establishes standards for
the way that public enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim reports issued to shareholders.
SFAS 131 is effective for financial statements for periods beginning after
December 15, 1997. Since SFAS 131 is a disclosure requirement, there will be no
effect on Tenere's financial position or results of operations.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard 133, Accounting for Derivative Instruments and
Hedging Activities (SFAS 133), which establishes standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires an entity to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS 133 is effective for
all fiscal years beginning after June 15, 1999. Earlier application of SFAS 133
is encouraged but should not be applied retroactively to financial statements of
prior periods. Management believes SFAS 133's requirements will have no impact
on Tenere's consolidated financial position or results of operations.
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<PAGE> 57
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of the Record Date, Tenere did not have knowledge of any
beneficial owner of more than five percent of the outstanding shares of Tenere
Common Stock. The following table indicates, as of the Record Date, the
beneficial ownership of Tenere Common Stock by each director of Tenere and by
all directors and executive officers of Tenere as a group:
<TABLE>
<CAPTION>
AMOUNT OF NATURE OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS(1)
- ------------------------ -------------------- -------------------
<S> <C> <C>
Thomas E. Ashley, M.D. 15,000(2) (7)
Gary O. Baker, D.D.S. 16,284(3) (7)
Albert J. Bonebrake, M.D. 29,230(3) 1.45%
Raymond A. Christy, M.D. -- --
Harry O. Cole, M.D. 21,234(3) 1.08%
C. Richard Gulick, M.D. 16,786(3) (7)
Michael D. Hoeman, M.D. 10,892(3) (7)
Christopher H. Jung, M.D. 17,406(3) (7)
Carroll Wetzel, D.O. 10,000(3) (7)
Andrew C. Fischer 20,730(4) 1.02%
Joseph D. Williams 20,730(4) 1.02%
Andrew K. Bennett 25,688(5) 1.26%
Clifton R. Stepp 20,730(4) 1.02%
All directors and executive officers as a group (13 persons) 224,710(6) 10.3%
</TABLE>
- -----------------
(1) Based upon 1,999,774 shares of Tenere's Common Stock issued and outstanding
as of the Record Date, and, for each director and executive officer and the
group, the number of shares subject to options that may be acquired within
60 days upon exercise of the option.
(2) Total reflects 15,000 shares subject to stock options which are presently
exercisable.
(3) Total includes 10,000 shares subject to stock options which are presently
exercisable.
(4) Total reflects 20,730 shares subject to stock options which are presently
exercisable.
(5) Total reflects 25,688 shares subject to stock options which are presently
exercisable.
(6) Total includes 172,878 shares subject to stock options which are presently
exercisable.
(7) Less than one percent.
ADDITIONAL INFORMATION
Tenere is subject to the information requirements of the
Securities Exchange Act of 1934, as amended, and, in accordance therewith, files
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). These reports, proxy statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 10549, and at the Commission's regional offices located at Room 1400,
Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661-2511, and
Suite 1300, Seven World Trade Center, New York, New York 10048. Copies of such
material also can be obtained from the Public Reference Section of the
Commission, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. Information regarding the operation of
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<PAGE> 58
the Public Reference Section of the Commission may be obtained by calling the
Commission at 1-800-SEC-0330. The Commission also maintains an Internet
worldwide website that contains the reports, proxy statements and other
information about issuers, like Tenere, who file electronically with the
Commission. The address of that website is http://www.sec.gov.
PROPOSAL II - ADJOURNMENT OF SPECIAL MEETING
In the event there are not sufficient votes to constitute a quorum or
to approve the Merger Agreement at the time of the Special Meeting, the Merger
Agreement could not be approved unless the Special Meeting were adjourned in
order to permit further solicitation of proxies. In order to allow proxies that
have been received by Tenere at the time of the Special Meeting to be voted for
such adjournment, if necessary, Tenere has submitted the question of adjournment
under the circumstances to its shareholders as a separate matter for their
consideration. In order to approve any such adjournment more votes must be cast
in favor of Proposal II than against. Tenere recommends that shareholders vote
their proxies in favor of such Adjournment Proposal so that their proxies may be
used for purposes of adjourning the Special Meeting in the event it should
become necessary. Properly executed proxies will be voted in favor of any such
adjournment unless otherwise indicated thereon. If it is necessary to adjourn
the Special Meeting, no notice of the time and place of the adjourned meeting is
required to be given to shareholders other than an announcement of such time and
place at the Special Meeting unless such adjournment exceeds 90 days.
SHAREHOLDER PROPOSALS
If the Merger is not consummated, Tenere plans to hold its 1999 Annual
Meeting of Shareholders no later than June 30, 1999. If the Merger is not
consummated before such date, any shareholder who wishes to present a proposal
for inclusion in the proxy materials for Tenere's 1999 Annual Meeting of
Shareholders must have submitted such proposal to the offices of Tenere, c/o
Michael D. Hoeman, Secretary, 1903 East Battlefield, Springfield, Missouri 65804
by not later than January 14, 1999. Any such proposals are subject to the
requirements of the proxy rules adopted under the Exchange Act.
The By-Laws of Tenere provide the shareholder proposals which do not
appear in the proxy statement may be considered at a meeting of shareholders
only if written notice of the proposal is received by the Secretary of Tenere
not less than 30 and not more than 90 days before the prior year's annual
meeting; provided, however, that, in the event that less than 40 days notice or
prior public disclosure of the date of the meeting is given or made to
shareholders, notice by the shareholder to be timely must be received not later
than the close of business on the tenth day following the day on which such
notice of the date of the annual meeting was mailed or such public disclosure
was made. Any such notice of a shareholder proposal by a shareholder to the
Secretary of Tenere must be accompanied by (a) a brief description of the
business desired to be brought before the annual meeting and the reasons for
conducting such business at the annual meeting, (b) the name and address of the
shareholder who intends to present the proposal for a vote, (c) the class and
number of shares of Tenere Common Stock which are beneficially owned by the
shareholder and (d) a description of any material interest of the shareholder in
such business.
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<PAGE> 59
OTHER MATTERS
The Board of Directors of Tenere, at the date hereof, is not
aware of any business to be presented at the Special Meeting other than that
referred to in the Notice of Special Meeting and discussed herein. If any other
matter should properly come before the Special Meeting, the persons named as
proxies will have discretionary authority to vote the shares represented by
proxies in accordance with their discretion and judgment as to the best
interests of Tenere.
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<PAGE> 60
FINANCIAL STATEMENTS
INDEX
<TABLE>
<S> <C>
Independent Auditors' Report........................................................... F-1
Consolidated Balance Sheets as of December 31, 1997 and 1996........................... F-2
Consolidated Statements of Operations for years ended
December 31, 1997, 1996 and 1995....................................................... F-3
Consolidated Statements of Stockholder's Equity/Policyholders'
Surplus for the years ended December 31, 1997, 1996 and 1995........................... F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995....................................................... F-5
Notes to Consolidated Financial Statements............................................. F-6 To F-18
Statement of Management's Responsibility............................................... F-19
Consolidated Balance Sheets as of September 30, 1998 (Unaudited)....................... F-20
Consolidated Statements of Operations for the nine months
ended September 30, 1998 and 1997 (Unaudited).......................................... F-21
Consolidated Statements of Stockholder's Equity/Policyholders' Surplus
for the nine months ended September 30, 1998 and 1997 (Unaudited)...................... F-22
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 and 1997 (Unaudited)................................... F-23
Condensed Notes to Unaudited Consolidated Financial Statements.........................F-24 To F-29
</TABLE>
<PAGE> 61
INDEPENDENT AUDITORS' REPORT
The Board of Directors
The Tenere Group, Inc.:
We have audited the accompanying consolidated balance sheets of The Tenere
Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity/policyholders'
surplus and cash flows for each of the years in the three-year period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Tenere Group,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Kansas City, Missouri
March 17, 1998
F-1
<PAGE> 62
THE TENERE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
Assets 1997 1996
- ------ ------------ -----------
<S> <C> <C>
Investments:
Bonds held available for sale, at fair value (amortized cost -
$39,863,330 in 1997; $29,117,835 in 1996) ................ $ 40,930,956 29,370,067
Common stock, at fair value .................................. 7,057 340
Short-term investments, at cost which approximates fair value 6,447,758 14,889,744
------------ -----------
Total investments ........................................ 47,385,771 44,260,151
Cash, primarily compensating balances ............................. 102,175 2,045,378
Premiums receivable ............................................... 3,124,660 2,580,691
Reinsurance recoverable ........................................... 10,413,593 7,197,901
Ceded unearned premiums ........................................... 369,727 260,397
Accrued investment income ......................................... 674,843 527,139
Deferred policy acquisition costs ................................. 183,253 84,550
Deferred income taxes ............................................. 2,304,087 2,098,792
Income taxes recoverable .......................................... 300,000 1,680,190
Other ............................................................. 867,543 1,084,992
------------ -----------
Total assets ................................................. $ 65,725,652 61,820,181
============ ===========
Liabilities and Stockholders' Equity
Liabilities:
Reserves for losses and loss adjustment expenses ............. $ 31,030,412 32,887,407
Unearned premium reserve ..................................... 7,717,308 6,300,111
Reinsurance premiums payable ................................. 4,435,317 506,381
Other ........................................................ 1,563,056 736,579
------------ -----------
Total liabilities ........................................ 44,746,093 40,430,478
Stockholders' equity:
Common stock, $.01 par value; 7,000,000 shares authorized;
1,999,774 shares issued and outstanding .................. 19,998 19,998
Contributed capital .......................................... 21,940,828 21,940,828
Accumulated deficit .......................................... (1,690,370) (737,596)
Unrealized gain on investment securities, net of tax ......... 709,103 166,473
Commitments and contingencies (see notes 8 & 10)
------------ -----------
Total stockholders' equity ............................... 20,979,559 21,389,703
------------ -----------
Total liabilities and stockholders' equity ............... $ 65,725,652 61,820,181
============ ===========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE> 63
THE TENERE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Revenues:
Direct premiums written ............... $ 10,541,048 8,124,319 9,874,270
Premiums ceded to reinsurers .......... (4,739,209) (4,655,382) (1,505,427)
------------ ----------- -----------
Net premiums written .............. 5,801,839 3,468,937 8,368,843
(Increase) decrease in unearned
premium reserve ................... (1,304,002) 4,177,545 3,532,480
------------ ----------- -----------
Net premiums earned ............... 4,497,837 7,646,482 11,901,323
Net investment income ................. 2,623,033 2,626,983 2,654,037
Net realized investment losses ........ (14,049) (17,135) (36,263)
------------ ----------- -----------
Total revenues .................... 7,106,821 10,256,330 14,519,097
Losses and expenses:
Losses and loss adjustment expenses ... 4,478,424 11,226,461 7,676,488
Sales and marketing expenses .......... 1,790,215 1,758,312 955,021
Other underwriting expenses ........... 2,199,776 1,784,354 1,437,718
Dividends to policyholders ............ -- (13,921) 616,948
------------ ----------- -----------
Total losses and expenses ......... 8,468,415 14,755,176 10,686,175
------------ ----------- -----------
Income (loss) before income taxes . (1,361,594) (4,498,846) 3,832,922
Income tax benefit (expense) ..... 408,820 1,564,360 (1,323,066)
------------ ----------- -----------
Net income (loss) ................. $ (952,774) (2,934,486) 2,509,856
============ =========== ===========
Basic and diluted net income (loss)
per share ...................... $ (0.48) (1.47) 1.26
============ =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 64
THE TENERE GROUP, INC.
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY/POLICYHOLDERS' SURPLUS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
UNREALIZED
RETAINED GAIN (LOSS)
EARNINGS/ ON INVESTMENT
COMMON CONTRIBUTED (ACCUMULATED SECURITIES, NET UNASSIGNED
STOCK CAPITAL DEFICIT) OF TAX SURPLUS TOTAL
------- ----------- ------------ --------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 ......... $ -- -- -- (2,279,304) 21,647,860 19,368,556
Demutualization (note 1) ............. 19,998 21,940,828 (312,966) -- (21,647,860) --
Change in unrealized investment gains -- -- -- 2,658,866 -- 2,658,866
Net income ........................... -- -- 2,509,856 -- -- 2,509,856
------- ---------- ---------- ---------- ----------- -----------
Balance at December 31, 1995 ......... 19,998 21,940,828 2,196,890 379,562 -- 24,537,278
Change in unrealized investment losses -- -- -- (213,089) -- (213,089)
Net loss ............................. -- -- (2,934,486) -- -- (2,934,486)
------- ---------- ---------- ---------- ----------- -----------
Balance at December 31, 1996 ......... 19,998 21,940,828 (737,596) 166,473 -- 21,389,703
Change in unrealized investment gains -- -- -- 542,630 -- 542,630
Net loss ............................. -- -- (952,774) -- -- (952,774)
------- ---------- ---------- ---------- ----------- -----------
Balance at December 31, 1997 ......... $19,998 21,940,828 (1,690,370) 709,103 -- 20,979,559
------- ---------- ---------- ---------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 65
THE TENERE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Net income (loss) ........................ $ (952,774) (2,934,486) 2,509,856
Adjustments to reconcile net income (loss)
from operating activities:
Net realized investment losses .. 14,049 17,135 36,263
Depreciation and amortization
expense ....................... 170,374 187,418 160,364
Net change in deferred policy
acquisition costs ............. (98,703) 55,900 147,172
Deferred income tax expense
(benefit) ..................... (484,833) (216,705) 487,427
Net amortization of discount on
bonds ......................... 51,714 105,218 516,508
Change in operating assets and
liabilities
Premiums receivable ........... (543,969) 1,139,511 423,063
Reinsurance balances .......... 603,914 (4,752,048) (1,308,346)
Accrued investment income ..... (147,704) 40,167 795,427
Income taxes recoverable ...... 1,380,190 (1,894,634) 650,715
Other assets .................. 94,441 241,485 1,208
Reserve for losses and loss
adjustment expenses ........ (1,856,995) 6,244,114 245,816
Unearned for premium reserve .. 1,417,197 (4,146,895) (3,299,570)
Policyholder dividends payable -- (152,042) (277,596)
Other liabilities ............. 828,579 254,507 86,240
------------ ----------- -----------
Net cash provided by (used in)
Operating activities ....... 475,579 (5,811,355) 1,174,817
Cash flows from investing activities:
Maturity of bonds held to maturity or
available for sale .............. 1,450,000 1,700,000 1,360,000
Sale of bonds held to maturity ...... -- 1,826,094 --
Sale of bonds available for sale .... 4,269,066 2,750,826 27,246,304
Purchase of bonds held to maturity or
available for sale .............. (16,530,324) (13,688,573) --
Redemption on stock rights .......... 56 -- --
Purchase of intangible asset ........ -- (400,000) --
Purchase of furniture and equipment . (49,566) (622,795) (250,255)
------------ ----------- -----------
Net cash provided by (used in)
investing activities .......... (10,860,768) (8,434,448) 28,356,049
Net increase (decrease) in cash and
short-term investments .......... (10,385,189) (14,245,803) 29,530,866
Cash and short-term investments
at beginning of year .......... 16,935,122 31,180,925 1,650,059
------------ ----------- -----------
Cash and short-term investments
at end of year ................ $ 6,549,933 16,935,122 31,180,925
============ =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 66
THE TENERE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of The Tenere Group,
Inc. (Tenere, the Company) and its wholly-owned subsidiaries, Intermed
Insurance Company (Intermed), Interlex Insurance Company (Interlex) and
Insurance Services, Inc. (ISI), is presented to assist in understanding
the Company's consolidated financial statements. The consolidated
financial statements herein represent the operations of Intermed and
its subsidiaries, Interlex and ISI. Tenere, the holding company,
currently has no operations other than ownership of Intermed.
The consolidated financial statements and notes thereto are
representations of the Company's management; which is responsible for
their integrity and objectivity. The consolidated financial statements
have been prepared on the basis of generally accepted accounting
principles. All significant intercompany transactions and accounts have
been eliminated in consolidation. Certain reclassifications to 1996 and
1995 amounts were made to conform with 1997 presentation.
DESCRIPTION OF COMPANY
Effective April 27, 1995, RCA Mutual Insurance Company (RCA), a
non-assessable mutual property and casualty insurance company,
completed the demutualization process which began in 1993 and became a
stock property and casualty insurance company. The Company's name was
changed from RCA Mutual Insurance Company to Intermed Insurance
Company. Also effective April 27, 1995, Intermed became a wholly-owned
subsidiary of The Tenere Group, Inc., an insurance holding company
organized under the laws of the State of Missouri, and the
policyholders of RCA became the stockholders of Tenere. This
transaction was accounted for using policyholders' equity as of April
1, 1995. Issued in exchange for $21,960,826 of membership interests
were 1,999,774 shares of Tenere Group stock which approximated one
share of $.01 par value Tenere Group stock for every $10.98 of
policyholder surplus attributable to the policyholder.
Intermed writes medical and dental professional liability insurance on
occurrence and claims-made bases in the States of Missouri and Kansas.
Prior to September 1, 1995, the Company also wrote coverages on a
claims-paid basis in the State of Missouri. Effective August 1, 1996
Intermed was recognized as a surplus lines carrier in the State of
Texas and began writing professional liability insurance on physicians
through a physician-sponsored purchasing group, Intermedical of Texas,
Inc. In 1997, the Company began to write professional liability
insurance on dentists in Texas through a second physician-sponsored
purchasing group, Dental Defense Specialists, Inc. Coverages in Texas
are written on both occurrence and claims-made policy forms. Interlex
writes legal professional liability insurance on a claims-made basis in
the States of Missouri and Kansas. Since operations are currently
conducted in only three states, they are subject to changes in the
legal and economic climates of those states.
F-6
<PAGE> 67
CASH
Cash balances are primarily compensating balances required to pay for
banking services. Excess cash is reinvested in a variety of short-term
investments.
INVESTMENTS
Investments in bonds and common stocks are classified as "available for
sale" and are accordingly reported at fair value. Unrealized gains and
losses are included as a separate component of stockholders' equity,
net of income tax. Short-term investments are reported at cost which
approximates fair value. Gains and losses from the sale of investments
are calculated using the specific identification method.
EARNINGS (LOSS) PER SHARE
The Company has adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share," which
requires the presentation of basic and diluted earnings per share
(EPS). Basic EPS is computed by dividing income (loss) available to
common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock
were exercised, unless there is a net loss and the exercise would be
anti-dilative. Implementation of SFAS No. 128 resulted in no change in
EPS for prior periods.
PREMIUMS RECEIVABLE
Premiums receivable represent unpaid premium balances due from the
insured and are substantially offset by the related unearned premiums.
The Company cancels all policies with receivable balances outstanding
more than 90 days.
PREMIUMS
Premium income is recognized on a pro rata basis over the terms of the
respective policy contracts. The unearned premium reserve represents
the portion of premiums written which are applicable to the unexpired
terms of policies in force. The Company reserves for future utilization
of the death, disability and retirement waiver benefit as a component
of the unearned premium reserve. This reserve was estimated to be
$1,966,977 at December 31, 1997 and $1,647,682 at December 31, 1996.
POLICY ACQUISITION COSTS
Policy acquisition costs, consisting primarily of commissions , are
deferred and amortized in proportion to the premium revenue recognized.
Amortization of policy acquisition costs were $263,000, $340,000 and
S43 1,000 in 1997, 1996 and 1995, respectively.
RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
Reserves for losses and loss adjustment expenses represent the
estimated liabilities for reported claims plus those incurred but not
yet reported and the related estimated loss adjustment expenses. The
reserves for losses and loss adjustment
F-7
<PAGE> 68
expenses are determined using case-basis evaluations and statistical
analyses, including insurance industry loss data, and represent
estimates of the ultimate cost of all claims incurred through December
31 of each year. Although considerable variability is inherent in such
estimates, management believes that the reserves for losses and loss
adjustment expenses are adequate. The estimates are continually
reviewed and adjusted as necessary; such adjustments are included in
current operations and are accounted for as changes in estimates. The
reserves for losses and loss adjustment expenses are reported on a
present value basis discounted at the rate of 2% in 1997 and 3% in
1996 as permitted by the Missouri Department of Insurance. The
discount will be 1% in 1998 and will be eliminated effective January
1, 1999. (See note 4)
Estimates of losses and loss adjustment expenses on occurrence
coverages are charged to income as claims are incurred. Estimates of
losses and loss adjustment expenses on claims-made coverages are
charged to income as claims are reported. Claims-paid coverages insured
against claims which were reported and paid during the period the
policy was in effect. The Company's obligation to defend and pay claims
ended upon expiration of a claims-paid policy. Claims-paid losses were
incurred at the time of payment so no reserves were required on open
claims. The Company discontinued writing claims-paid policies effective
September 1, 1995. As these policies expired over the twelve-month
period ending August 31, 1996, claims-paid policyholders were given the
opportunity to convert to claims-made coverage. Upon nonrenewal of the
claims-paid contract, the Company became contractually liable for
reported claims. Reserves for all reported claims on claims-paid
policies which non-renewed during the period September 1, 1995 through
August 31, 1996 totaled $995,141 at December 31, 1997, net of
reinsurance.
FEDERAL INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax
return. Current federal income taxes are charged or credited to
operations based upon amounts estimated to be payable or recoverable as
a result of taxable operations for the current year. Deferred income
tax assets and liabilities are recognized based on the difference
between financial statement carrying amounts and income tax bases of
assets and liabilities using enacted income tax rates and laws.
ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates. The reserves for losses and loss adjustment
expenses represent the most significant estimate in the accompanying
financial statements.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, "Reporting Comprehensive Income" requires companies to
classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in-
F-8
<PAGE> 69
capital in the equity section of the statement of financial
position. The change in unrealized investment gains and losses is the
most significant component of other comprehensive income for the
Company. This statement is effective for financial statements issued
for fiscal years beginning after December 15, 1997.
(2) RELATED PARTIES
Insurance Services, Inc. has management contracts with two purchasing
groups, Intermedical of Texas, Inc. and Dental Defense Specialists,
Inc. The Company and the two purchasing groups have certain members in
common on their respective Boards of Directors. In 1997 the two
purchasing groups produced written premiums of $2,619,000 in the State
of Texas for Intermed Insurance Company.
(3) INVESTMENTS
The amortized cost and estimated fair value of investments in bonds and
common stock as of December 31, 1997 and December 31, 1996 are
presented below. The estimated fair values presented in this footnote
were determined using quoted market prices, where available, or
independent pricing services.
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
TYPE OF INVESTMENT BASIS GAINS LOSSES VALUE
----------- ---------- --------- -----------
<S> <C> <C> <C> <C>
December 31, 1997
Bonds:
United State government,
Government agencies and
authorities ...................... $38,003,757 $1,012,229 $(7,020) $39,008,966
State municipalities and political
subdivisions ..................... 1,859,573 62,417 -- 1,921,990
----------- ---------- ------- -----------
Total bonds ...................... 39,863,330 1,074,646 (7,020) 40,930,956
Common stock ............................ 284 6,773 -- 7,057
Short-term investments .................. 6,447,758 -- -- 6,447,758
----------- ---------- ------- -----------
Total investments ................ $46,311,372 $1,081,419 $(7,020) $47,385,771
=========== ========== ======= ===========
</TABLE>
F-9
<PAGE> 70
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
TYPE OF INVESTMENT BASIS GAINS LOSSES VALUE
----------- ---------- --------- -----------
<S> <C> <C> <C> <C>
December 31, 1996
Bonds:
United State government,
Government agencies and
authorities ...................... $27,246,527 $364,640 $(136,238) $27,474,929
State municipalities and political
subdivisions ..................... 1,871,308 23,830 -- 1,895,138
----------- -------- --------- -----------
Total bonds ...................... 29,117,835 388,470 (136,238) 29,370,067
Common stock ............................ 304 -- -- 340
Short-term investments .................. 14,889,744 -- -- 14,889,744
----------- -------- --------- -----------
Total investments ................ $44,007,919 $388,470 $(136,238) $44,260,151
=========== ======== ========= ===========
</TABLE>
The amortized cost and estimated fair value of investments in bonds at
December 31, 1997 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 FAIR
COST VALUE
------------- ------------
<S> <C> <C>
Due in one year or less........................ $ 50,091 $ 50,141
Due after one year through five years.......... 13,468,709 13,649,437
Due after five years through ten years......... 26,344,530 27,231,378
------------- ------------
$ 39,863,330 $ 40,930,956
============= ============
</TABLE>
Proceeds from sales of available-for-sale securities were $4,269,066 in
1997, $2,750,826 in 1996 and $27,246,304 in 1995. Gross gains and
losses on those sales were: $0 and $14,049 in 1997; $2,120 and $19,255
in 1996; and $383,816 and $420,079 in 1995.
Net investment income for the years ended December 31, 1997, 1996 and
1995 is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Investment income:
Interest on short-term
Investments .............. $ 742,735 $ 1,115,565 $ 616,621
Interest on bonds ............ 2,056,416 1,695,754 2,217,427
----------- ----------- -----------
Gross investment income .. 2,799,151 2,811,319 2,834,048
Investment expenses ...... (176,118) (184,336) (180,011)
----------- ----------- -----------
Net investment income .... $ 2,623,033 $ 2,626,983 $ 2,654,037
=========== =========== ===========
</TABLE>
F-10
<PAGE> 71
Bonds with an estimated fair value of $1,878,081 at December 31, 1997
and $1,846,866 at December 31, 1996 were on deposit with the Missouri
Department of Insurance.
The net changes in unrealized investment gains (losses) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1997 1996 1995
-------- ------------ ----------
<S> <C> <C> <C>
Unrealized investment gains (losses)........... $822,167 $ (322,862) $4,028,585
Federal income (taxes) benefit
at 34%.................................... (279,537) 109,773 (1,369,719)
-------- ---------- ----------
Net unrealized investment gains
(losses).................................. $542,630 $ (213,089) $2,658,856
======== ========== ==========
</TABLE>
The carrying values of cash, short-term investments, premiums
receivable, other assets and other liabilities approximate their fair
values at December 31, 1997 and 1996.
(4) RESERVES FOR LOSSES AND LOST ADJUSTMENT EXPENSES
A summary of the reserves for losses and loss adjustment expenses
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Undiscounted reserves for losses and loss
adjustment expenses.................................. $31,990,412 $35,051,777
Less discount (see note 1)................................ (960,000) (2,164,370)
----------- -----------
Discounted reserves for losses and loss
adjustment expenses.................................. $31,030,412 $32,887,407
=========== ===========
</TABLE>
Following is the activity in the reserves for losses and loss
adjustment expenses:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Balance at January 1 ............ $ 32,887,407 $ 26,623,138 $ 26,279,977
Less reinsurance recoverable on
reserves for losses and loss
adjustment expenses ........ (7,099,463) (1,162,495) (584,913)
------------ ------------ ------------
25,787,944 25,460,643 25,695,064
------------ ------------ ------------
Incurred related to:
Current year ............... 5,646,863 9,812,694 9,612,075
Prior Year ................. (1,168,439) 1,413,767 (1,935,587)
------------ ------------ ------------
Total incurred ......... 4,478,424 44,226,461 7,676,488
------------ ------------ ------------
Paid related to:
Current year ............... 413,191 2,499,788 3,190,397
Prior Year ................. 8,773,277 8,399,372 4,720,512
------------ ------------ ------------
Total paid ............. 9,186,468 10,899,160 7,910,909
------------ ------------ ------------
Net balance at December 31 ...... 21,079,900 25,787,944 25,460,643
Plus reinsurance recoverable on
reserves for losses and loss
adjustment expenses ........ 9,950,512 7,099,463 1,162,495
------------ ------------ ------------
Balance at December 31 .......... $ 31,030,412 $ 32,887,407 $ 26,623,138
============ ============ ============
</TABLE>
The reserves for losses and loss adjustment expenses are estimated
based on development information available at each reporting date. As a
result of the nature of the risks underwritten, claims development may
occur over an extended period of time. The changes in the incurred
F-11
<PAGE> 72
amounts disclosed above related to prior years are the result of
utilizing improved claim development information as that information
becomes available.
(5) REINSURANCE
As is customary in the insurance industry, the Company reinsures
portions of certain insurance policies it writes, thereby providing a
greater diversification of risk and minimizing exposure on larger
risks. The Company remains contingently at risk with respect to any
reinsurance ceded and would incur an additional loss if an assuming
company were unable to meet its obligation under the reinsurance
treaty.
The Company monitors the financial condition of its reinsurers to
minimize its exposure to significant losses from reinsurer
insolvencies. Amounts recoverable from one reinsurer at December 31,
1997 represented 58% of total reserves for losses and loss adjustment
expenses ceded.
Effective January 1, 1996, Intermed entered into a multi-year aggregate
excess of loss reinsurance agreement through December 31, 1999. This,
agreement provides excess of loss coverage on Intermed's claims-paid,
occurrence and claims-made policies. Aggregate coverage provided by the
agreement is $4,800,000 in excess of $4,176,000 on claims-paid policies
and up to $2,000,000 per accident year or $6,000,000 in aggregate for
all incurred losses in excess of an annual accident year loss ratio for
occurrence and claims-made policies. Ceded earned premiums under this
agreement were $800,000 in 1997 and $2,050,000 in 1996. Ceded incurred
losses under this agreement were $1,131,403 in 1997 and $4,886,463 in
1996.
Effective October 1, 1996, Intermed renewed a multi-year excess of loss
reinsurance agreement through September 30, 1999. This agreement
provides excess of loss coverage on Intermed's claims-paid, occurrence
and claims-made policies up to $1,600,000 in excess of $400,000 on each
claim, with an aggregate recoverable of 300% of the ceded premiums
earned. This agreement also provides coverage for the difference
between $2,000,000 each loss and/or $4,000,000 in the aggregate and
$1,000,000 and/or $3,000,000 in the aggregate each policy where
applicable, with an aggregate recoverable of $5,000,000. Ceded earned
premiums under this agreement were $3,294,126, $2,207,681 and
$1,134,208 in 1997, 1996 and 1995, respectively. Ceded incurred losses
under this agreement were $2,681,760, $1,674,075 and $577,582 in 1997,
1996 and 1995, respectively.
Effective October 1, 1997:
o Intermed and Interlex renewed a "catastrophic awards made"
excess of loss reinsurance agreement through September 30,
1998. This agreement provides excess of loss coverage on
claims-paid, occurrence and claims-made policies. Aggregate
coverage provided by the agreement is $5,000,000 in excess of
$250,000 per occurrence on awards made on policies in excess
of their original policy limit or on extra-contractual
obligations, with an aggregate recoverable of $5,000,000.
Ceded earned premiums were $146,251, $144,000 and $132,480 in
1997, 1996 and 1995, respectively. There are no ceded incurred
losses under this agreement.
F-12
<PAGE> 73
o Interlex renewed an excess of loss reinsurance agreement
through September 30, 1998. This agreement provides excess of
loss coverage on Interlex's claims-made policies up to
$700,000 in excess of $300,000 on each claim, with an
aggregate recoverable of $2,100,000. However, if ceded
premiums written exceed $500,000, the maximum recoverable
shall increase to $3,500,000. Ceded earned premiums under this
agreement were $261,210, $161,389 and $23,791 in 1997, 1996
and 1995, respectively. There are no ceded incurred losses
under this agreement.
o Interlex renewed a facultative excess of loss reinsurance
agreement through September 30, 1998. This agreement provides
excess coverage on claims-made policies for limits exceeding
$1,000,000/3,000,000 up to $5,000,000/5,000,000 with an
aggregate recoverable of $5,000,000. Ceded earned premiums
under this agreement were $128,292, $64,825 and $2,554 in
1997, 1996 and 1995, respectively. There were no ceded
incurred losses under this agreement.
Premiums and losses related to reinsurance amounts for the years ended
December 31, 1997, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Ceded premiums written............................ $4,739,209 $4,655,382 $1,505,427
Ceded premiums earned............................. $4,629,879 $4,627,895 $1,343,578
Ceded losses and loss adjustment expenses......... $3,813,163 $6,560,538 $ 577,582
</TABLE>
(6) STOCKHOLDERS' EQUITY
The National Association of Insurance Commissioners (NAIC) requires a
risk-based capital (RBC) calculation as part of the information filed
with the annual statutory statement of insurance companies. This
risk-based capital calculation and analysis is an attempt to measure
the theoretical capital and surplus needs of an insurance company
compared with its adjusted capital and surplus. The capital and surplus
of Intermed and Interlex substantially exceeds the NAIC's RBC
requirements for Property and Casualty companies at the end of 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
----------- -------------
<S> <C> <C>
Intermed Insurance Company
Total adjusted capital.......................... $17,062,404 $ 17,104,149
Authorized control level risk-based capital..... $ 3,212,711 $ 3,526,130
Interlex Insurance Company
Total adjusted capital.......................... $ 5,861,150 $ 5,903,754
Authorized control level risk-based capital..... $ 212,475 $ 159,125
</TABLE>
Dividends paid to the Company by its insurance subsidiaries are
restricted by regulatory requirements of the subsidiaries' state of
domicile. The maximum amount of dividends which can be paid to
stockholders by insurance companies domiciled in the State of Missouri
without prior approval of the Insurance Director is limited to the
lesser of (a) 10% of a company's statutory capital and surplus as of
December 31 of the preceding year or (b) net investment income for the
twelve-month period ending December 31 of the preceding year. At
F-13
<PAGE> 74
December 31, 1997 statutory capital and surplus of Intermed was
$17,830,404 and net investment income of Intermed was $2,336,958. The
maximum dividend which can be paid in 1998 by Intermed without the
prior approval of the Missouri Insurance Director is, therefore,
$1,783,040.
(7) FEDERAL INCOME TAXES
The Company files a consolidated federal income tax return. Income tax
expense varies from the amount which would be provided by applying the
federal income tax rates to income before income taxes. The following
reconciles the expected provision for income tax expense using the
federal statutory tax rate of 34% to the provision for income tax
expense (benefit) reported herein for the years ended December 31,
1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
Expected tax expense (benefit) using
statutory rates................................. $ (462,942) $(1,529,607) $1,303,787
Other, net....................................... 54,122 (34,753) 19,279
---------- ----------- ----------
Income tax expense (benefit)..................... $ (408,820) $(1,564,360) $1,323,066
========== =========== ==========
</TABLE>
Income taxes consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- ----------
<S> <C> <C> <C>
Current expense (benefit)........................ $ 76,013 $(1,347,655) $ 835,639
Deferred expense (benefit)....................... (484,833) (216,705) 487,427
---------- ----------- ----------
Income tax expense (benefit).............. $ (408,820) $(1,564,360) $1,323,066
========== =========== ==========
</TABLE>
Deferred income taxes arise from temporary differences resulting from
income and expense items reported for financial accounting and tax
purposes in different periods. The sources of these differences and the
tax effect of each are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
Losses and loss adjustment expenses incurred for
financial reporting purposes but not deductible
for tax purposes ............................... $ 773,171 $(348,223) 70,676
Unearned premiums not deductible for tax purposes ... (88,673) 284,074 240,209
Deferred compensation ............................... (102,642) (88,400) --
Deferred retirement benefit ......................... (201,246) -- --
Net operating loss carryforward ..................... (868,852) (86,660) --
Other, net .......................................... 3,409 22,504 176,542
--------- --------- --------
Deferred tax expense (benefit) ................. $(484,833) $(216,705) $487,427
========= ========= ========
</TABLE>
F-14
<PAGE> 75
The tax effects of a temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 1997 and December 31, 1996 are presented
below:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Discounted unpaid loss reserves ............ $ 1,080,048 $ 1,853,219
Discounted unearned premium reserves ....... 499,158 410,485
Deferred compensation ...................... 191,042 88,400
Deferred retirement benefit ................ 201,246 --
Deferred commissions payable ............... 47,465 26,916
Net operating loss carryforward ............ 1,115,423 246,571
----------- -----------
Total gross deferred tax assets .... 3,134,382 2,625,591
Less valuation allowance ........... (390,400) (400,000)
----------- -----------
Net deferred tax assets ............ 2,743,982 2,225,591
Deferred tax liabilities:
Investments adjusted to market value ....... (365,295) (85,758)
Deferred acquisition costs ................. (62,306) (28,747)
Other ...................................... (12,294) 12,294)
----------- -----------
Total gross deferred tax liabilities (439,895) (126,799)
----------- -----------
Net deferred tax asset ............. $ 2,304,087 $ 2,098,792
=========== ===========
</TABLE>
The valuation allowance for deferred tax assets at December 31, 1997
was $390,400, a decrease of $9,600 from a balance of $400,000 at
December 31, 1996. Based on the Company's historical earnings, future
expectations of adjusted taxable income, its ability to change its
investment strategy, as well as reversing gross deferred tax
liabilities, management believes it is more likely than not that the
Company will fully realize the gross deferred tax assets less the
valuation allowance. However, there can be no assurances that the
Company will generate the necessary adjusted taxable income in any
future period.
Net cash payments (recoveries for federal income taxes were
($1,304,177), $546,983 and $184,925 in 1997, 1996 and 1995,
respectively.
Amounts and expiration dates of the net operating loss carryforward are
as follows:
<TABLE>
<CAPTION>
YEAR OF NET OPERATING LOSS NET OPERATING LOSS EXPIRATION DATE
-------------------------- ------------------ ---------------
<C> <C> <C>
1992 $ 597,617 2007
1996 $ 98,077 2011
1997 $ 2,584,962 2012
</TABLE>
(8) STOCK OPTIONS
In 1996, the shareholders of the Company adopted the 1996 Long Term
Incentive Plan. The Plan was designed to encourage certain employees,
officers and directors of the Company and its subsidiaries to acquire
Common Stock of the Company or to receive monetary payments based on
the value of such stock or based upon achieving certain goals on a
basis mutually advantageous to such employees and the Company. The
authorized number of shares of Common Stock reserved for issuance under
the Plan is 350,000.
F-15
<PAGE> 76
On January 31, 1997, the compensation committee of the board of
directors granted options to purchase 182,052 shares of common stock to
certain officers of the Company and non-employee directors. The fair
market value of the Company's stock, as determined by the Board of
Directors using factors they deemed relevant, was $5.35 and the
exercise price was $5.45 per share. The options became fully
exercisable on July 31, 1997 and were all outstanding and exercisable
at December 31, 1997.
The term of the options is ten years ending January 31, 2007. The
options shall terminate earlier in the event of the death, retirement
or disability of the optionee or after termination of the optionee's
employment with the Company or its subsidiaries.
The Company has chosen not to adopt the accounting provisions on SFAS
No. 123, "Accounting for Stock-Based Compensation," and, accordingly,
there has been no expense recognized in the accompanying financial
statements. If the Company had recorded expense based on the fair value
of the stock options at the grant date under SFAS No. 123, the Company
would have recognized $470,210 as compensation expense in 1997. The
resulting pro forma net loss for the year would have been ($1,263,113)
and the resulting pro forma basic and diluted loss per share would have
been ($0.63) in 1997. The fair value of the options granted in 1997 was
estimated using an option pricing model that utilized the following
assumptions: annual risk-free interest rate of 7%, option term of 10
years, volatility of 0% and dividend yield of 0%. The preceding
dividend and volatility assumptions were utilized based on the
historical and future intentions of the Company to not pay regular
dividends and the non-volatile nature of the Company stock.
(9) BENEFIT PLANS
The Company sponsors a defined contribution pension plan that covers
substantially all employees, the Insurance Services, Inc. Employees'
Money Purchase Pension Plan. Contributions to the Plan by the Company
are discretionary, but may not exceed 15% of the participants annual
compensation.
The Company also sponsors a profit sharing plan, the Insurance
Services, Inc. Employees' 401(k) Profit Sharing Plan, to which
employees may contribute up to 10% of their annual compensation. The
Company also makes annual discretionary contributions to the plan.
The Company's total contributions to the two pension plans was $201,415
in 1997, $178,068 in 1996 and $141,325 in 1995.
Effective May 17, 1996 the Company established The Tenere Group, Inc.
Retirement Plan for Directors. The purpose of the Plan is to provide
retirement benefits to Directors who have rendered extended service to
the Company as a Director. A Director shall be eligible to receive a
benefit under this Plan if he retires after May 17, 1996 and has five
or more years of service at the time of his retirement. The annual
benefit paid under this plan shall be equal to the retainer at the date
of his retirement multiplied by 10% for each year of service as a
Director. The maximum annual benefit is limited to the Directors'
annual retainer at the time of retirement and will be paid quarterly
during his lifetime for a maximum of ten years. All current Directors
are vested in the Plan and the estimated cost to the Company of
$591,901 was included as expense in 1997 and is reflected in other
liabilities. Such amount has been discounted using a rate of 7%.
F-16
<PAGE> 77
The Company provides a retirement plan for the chief executive officer
of the Company. The agreement entities the executive or the estate of
the executive to receive an $80,000 annual payment for ten years upon
retirement and after attainment by the executive of 70 years of age.
The Company accrued retirement costs of $301,887 in 1997 and $260,000
in 1996. Such amounts have been discounted using a rate of 7%.
(10) COMMITMENTS AND CONTINGENCIES
The Company has non-cancelable operating leases for office space which
expire in June 1999 and June 2002. Future minimum lease payments are
$95,000 in 1999, $92,000 in 2000, $95,000 in 2001, and $47,000 in 2002.
The Company is involved in claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a materially adverse effect
on its financial condition or results of operations.
On May 6, 1996, the Company entered into three-year employment
agreements with five executives and one key employee which include
severance provisions granting the executives the right to receive
certain benefits, including among others, their annual base salary and
bonus if terminated (as defined in the respective agreements) within
the term of the agreements. The agreements also contain a provision
whereby the executives, in the event of termination after a change in
control, would receive severance payments in an amount 2.99 times their
then current base salaries. As of December 31, 1997, the maximum
contingent liability under the severance provisions of the agreements
was approximately $2,300,000.
(11) STATUTORY ACCOUNTING
Intermed and its subsidiary Interlex are domiciled in Missouri and
prepare their statutory-basis financial statements in accordance with
accounting practices prescribed or permitted by the Missouri Department
of Insurance. "Prescribed" statutory accounting practices include state
laws, regulations and general administrative rules, as well as a
variety of publications of the NAIC. "Permitted" statutory accounting
practices encompass all accounting practices that are not prescribed;
such practices may differ from state to state, may differ from company
to company within a state, and may change in the future. Intermed and
its subsidiary Interlex have no significant permitted accounting
practices that vary from prescribed accounting practices, except for
discounting of loss reserves.
F-17
<PAGE> 78
Stockholder's equity and net income (loss), as reported to the
domiciliary state insurance departments in accordance with its
prescribed or permitted statutory accounting practices, for the
Company's insurance subsidiaries are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996
---------- ----------
<S> <C> <C>
Statutory capital and surplus:
Intermed....................... 17,830,404 18,402,549
Interlex....................... 5,861,150 5,903,754
Net income (loss):
Intermed....................... (498,840) (2,812,009)
Interlex....................... (45,604) 74,797
</TABLE>
F-18
<PAGE> 79
STATEMENT OF MANAGEMENT'S RESPONSIBILITY
The financial statements and related information of The Tenere Group, Inc. and
Subsidiaries presented in this Report were prepared by management, which has
sole responsibility for their integrity and objectivity. The statements were
prepared in conformity with generally accepted accounting principles and include
estimates and judgments based upon the best available information and
management's view of current conditions and circumstances. Management believes
that these statements present fairly the Company's financial position and
results of operations and that the other information contained in the annual
report is consistent with the financial statements.
Management has developed and maintains a system of internal accounting control
designed to provide reasonable assurance that the Company's assets are protected
from improper use and that accounting records provide a reliable basis for the
preparation of financial statements. This system is continually reviewed,
improved and modified in response to changing business conditions and operations
and to recommendations made by the Company's independent auditors. While no
system of internal control can provide absolute assurance that irregularities
will not take place, management believes that Tenere's internal control system
provides reasonable assurance that assets are safeguarded and financial
information is reliable.
The Company's independent auditors, KPMG Peat Marwick LLP, have audited the
consolidated financial statements. Their audit was conducted in accordance with
generally accepted auditing standards, which includes the consideration of
Tenere's internal controls to the extent necessary to form an independent
opinion on the consolidated financial statements prepared by management. During
the course of their audit, the independent auditors were given unrestricted
access to all financial records and related data. Management believes that all
representations made to the independent auditors were accurate and complete.
/s/ Joseph D. Williams
Joseph D. Williams, CPA
Vice President -- Finance
and Chief Financial Officer
Springfield, Missouri
March 27, 1998
F-19
<PAGE> 80
THE TENERE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
Assets UNAUDITED
1998 1997
----------- -----------
<S> <C> <C>
Investments:
Bonds held available for sale, at fair value (amortized
cost - $37,604,144 in 1998; $39,863,330 in 1997) .......... $ 39,761,871 40,930,956
Common stock, at fair value .................................... 13,643 7,057
Short-term investments, at cost which approximates fair value .. 8,686,500 2,788,476
----------- -----------
Total Investments .......................................... 48,462,014 43,726,489
Cash ................................................................ 713,693 3,761,457
Premiums receivable ................................................. 3,412,742 3,124,660
Reinsurance recoverable ............................................. 10,686,262 10,413,593
Ceded unearned premiums ............................................. 239,423 369,727
Accrued investment income ........................................... 593,767 674,843
Deferred policy acquisition costs ................................... 207,129 183,253
Deferred income taxes ............................................... 2,826,263 2,304,087
Income taxes recoverable ............................................ 300,000 300,000
Other ............................................................... 716,859 867,543
------------ -----------
Total assets ............................................... $ 68,158,152 65,725,652
============ ===========
Liabilities and Stockholders' Equity
Liabilities:
Reserves for losses and loss adjustment expenses ............... $ 34,099,394 31,030,412
Unearned premium reserve ....................................... 7,876,170 7,717,308
Reinsurance premiums payable ................................... 4,949,193 4,435,317
Other .......................................................... 1,321,238 1,563,056
------------ -----------
Total liabilities .......................................... 48,245,995 44,746,093
Stockholders' equity:
Common Stock, $.01 par value; 7,000,000 shares
authorized; 1,999,774 shares issued and outstanding ........ 19,998 19,998
Contributed capital ............................................ 21,940,828 21,940,828
Accumulated deficit ............................................ (3,481,586) (1,690,370)
Accumulated other comprehensive income, net of tax ............. 1,432,917 709,103
------------ -----------
Total stockholders' equity ................................. 19,912,157 20,979,559
------------ -----------
Total liabilities and stockholders' equity ................. $ 68,158,152 65,725,652
============ ===========
</TABLE>
See condensed notes to consolidated financial statements.
F-20
<PAGE> 81
THE TENERE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
UNAUDITED
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Revenues:
Direct premiums written .................. $ 8,261,356 8,330,362
Premiums ceded to reinsurers ............. (2,988,987) (2,308,816)
----------- ----------
Net premiums written ................. 5,272,369 6,021,546
Increase in unearned premium reserve ..... (289,166) (1,780,186)
----------- ----------
Net premiums earned .................. 4,983,203 4,241,360
Net investment income .................... 2,150,088 1,936,459
Net realized investment gains ............ 61,320 --
----------- ----------
Total revenues ....................... 7,194,611 6,177,819
Losses and expenses:
Losses and loss adjustment expenses ...... 7,525,589 2,861,880
General and administrative expenses ...... 2,355,287 2,883,434
----------- ----------
Total losses and expenses ............ 9,880,876 5,745,314
----------- ----------
(Loss) income before income taxes .... (2,686,265) 432,505
Income tax benefit (expense) ......... 895,049 (204,356)
----------- ----------
Net (loss) income .................... $(1,791,216) 228,149
=========== ==========
Basic net (loss) income per share .... $ (0.90) 0.11
=========== ==========
Diluted net (loss) income per share .. $ (0.90) 0.10
=========== ==========
</TABLE>
See condensed notes to consolidated financial statements.
F-21
<PAGE> 82
THE TENERE GROUP, INC.
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY/POLICYHOLDERS' SURPLUS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
RETAINED ACCUMULATED
EARNINGS/ OTHER
COMMON CONTRIBUTED (ACCUMULATED COMPREHENSIVE COMPREHENSIVE
STOCK CAPITAL DEFICIT) INCOME TOTAL INCOME
----------- ---------- ------------ ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 .......... $ 19,998 21,940,828 2,196,890 379,582 24,537,278
Comprehensive loss
Net loss ......................... (2,934,486) (2,934,486) (2,934,486)
Other comprehensive loss,
net of tax
Net unrealized investment loss ... (213,089) (213,089) (213,089)
----------
Total comprehensive loss ......... (3,147,575)
==========
Balance at December 31, 1995 .......... 19,998 21,940,828 (737,596) 166,473 21,389,703
Comprehensive loss
Net loss ......................... (952,774) (952,774) (952,774)
Other comprehensive income,
net of tax ...................
Net unrealized investment gain ... 542,630 542,630 542,630
----------
Total comprehensive loss ......... (410,144)
==========
Balance at December 31, 1997 .......... 19,998 21,940,828 (1,690,370) 709,103 20,979,559
Comprehensive loss
Net loss ......................... (1,791,215) (1,791,215) (1,791,216)
Other comprehensive income,
net of tax ...................
Unrealized investment gain, net of
reclassification adjustment .. 723,814 723,814 723,814
----------
Total comprehensive loss ......... (1,067,402)
==========
Balance at September 30, 1998 ......... $ 19,998 21,940,828 (3,481,588) 1,432,917 19,912,157
=========== =========== ========== ========== ==========
Disclosure of reclassification amount
Unrealized holding gains arising during the period $ 785,134
Less: reclassification adjustment for net realized gains included in net loss (61,320)
----------
Unrealized gain on securities $ 723,814
==========
</TABLE>
See notes to consolidated financial statements.
F-22
<PAGE> 83
THE TENERE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
UNAUDITED
<TABLE>
<CAPTION>
1998 1997
------------ ----------
<S> <C> <C>
Cash flows from operating activities
Premiums received from policyholders ................... $ 7,967,870 6,966,187
Premiums paid to reinsurers ............................ (2,431,560) (2,524,828)
Recoveries received from reinsurers .................... 2,997,482 415,573
Losses and loss adjustment expenses paid ............... (7,726,539) (7,693,483)
Commissions paid ....................................... (328,540) (173,011)
Cash paid to suppliers and employees ................... (2,286,042) (2,040,825)
Interest received ...................................... 2,360,424 2,177,812
Income taxes received .................................. -- 335,089
------------ -----------
Net cash provided by (used in) operating
activities .................................... 553,095 (2,537,486)
Cash flows from investing activities
Maturity of bonds available for sale ................... 10,250,000 1,450,000
Sale of bonds available for sale ....................... 4,569,164
Redemption on stock rights ............................. 56
Purchase of bonds available for sale ................... (12,495,207) (5,014,094)
Purchase of furniture and equipment .................... (26,792) (43,108)
------------ -----------
Net cash from (used in) investing activities .. 2,297,165 (3,607,146)
Net increase (decrease) in cash and short-term
Investments ................................... 2,850,260 (6,144,632)
Cash and short-term investments at beginning
of period ..................................... 6,549,933 16,935,122
------------ -----------
Cash and short-term investments at end
of period ..................................... $ 9,400,193 10,790,490
============ ===========
Reconciliation of net (loss) income to net cash provided by (used
in) operating activities
Net (loss) income ...................................... $ (1,791,216) 228,149
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Net realized investment gains ................. (61,320)
Depreciation and amortization expense ......... 96,984 123,248
Net change in deferred acquisition costs ...... (23,876) (80,743)
Deferred income tax benefit ................... (895,049) (160,258)
Net amortization of discount on bonds ......... (3,451) 40,824
Change in operating assets and liabilities
Premiums receivable ....................... (288,082) (1,269,633)
Reinsurance balances ...................... 371,511 360,143
Accrued investment income ................. 81,076 69,233
Income taxes recoverable .................. 699,703
Other assets .............................. 80,491 60,530
Reserve for losses and loss adjustment
expenses .............................. 3,068,982 (4,857,225)
Unearned premium reserve .................. 158,862 1,708,679
Other liabilities ......................... (241,817) 539,864
------------ -----------
Net cash provided by (used in) operating activities .... $ 553,095 (2,537,486)
============ ===========
</TABLE>
See condensed notes to consolidated financial statements.
F-23
<PAGE> 84
THE TENERE GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements are
prepared in accordance with the rules and regulations of the Securities
and Exchange Commission with regard to interim financial statements. In
the opinion of management, all adjustments necessary for a fair
presentation of such financial statements have been made. Such
adjustments consisted of only normal recurring items. The results of
operations for the nine months ended September 30, 1998 are not
necessarily indicative of the results which may occur for the full
year. The accompanying unaudited financial statements should be read in
conjunction with the consolidated financial statements and notes
thereto included in the 1997 Annual Report.
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income"
(Statement 130). Statement 130 requires a company to classify items of
other comprehensive income by their nature in a financial statement and
display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in-capital in the
equity section of the statement of financial position. The change in
unrealized investment gains and losses is the only component of other
comprehensive income for the Company.
(2) INVESTMENTS
The amortized cost and estimated fair values of investments in bonds
and common stock as of September 30, 1998 and December 31, 1997 are
presented below. The estimated fair values presented in this footnote
were determined using quoted market prices, where available, or
independent pricing services.
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
TYPE OF INVESTMENT BASIS GAINS LOSSES VALUE
------------------ --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
September 30, 1998
Bonds:
United State government,
Government agencies and
authorities...................... $ 34,588,337 $ 2,033,110 $ -- $ 36,621,447
Corporate........................ 3,015,807 124,617 -- 3,140,424
------------ ----------- ---------- -------------
Total bonds...................... 37,604,144 2,157,727 -- 39,761,871
Common stock ........................... 284 13,359 -- 13,643
Short-term investments.................. 8,686,500 -- -- 8,686,500
------------ ----------- ---------- -------------
Total investments................ $ 46,290,928 $ 2,171,086 $ -- $ 48,462,014
============ =========== ========== =============
</TABLE>
F-24
<PAGE> 85
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
TYPE OF INVESTMENT BASIS GAINS LOSSES VALUE
------------------ --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
December 31, 1997
Bonds:
United State government,
Government agencies and
authorities...................... $ 38,003,757 $ 1,012,229 $ (7,020) $ 39,008,966
State municipalities and political
subdivisions..................... 1,859,573 62,417 -- 1,921,990
------------ ----------- ---------- -------------
Total bonds...................... 39,863,330 1,074,646 (7,020) 40,930,956
Common stock ........................... 284 6,773 -- 7,057
Short-term investments.................. 2,788,476 -- -- 2,788,476
------------ ----------- ---------- -------------
Total investments................ $ 42,652,090 $ 1,081,419 $ (7,020) $ 43,726,489
============ =========== ========== =============
</TABLE>
The amortized cost and estimated fair value of investments in bonds at
September 30, 1998 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 FAIR
COST VALUE
------------- ------------
<S> <C> <C>
Due after one year through five years............. 16,374,478 17,012,549
Due after five years through ten years............ 21,229,666 22,749,322
------------- ------------
$ 37,604,144 $ 39,761,871
============= ============
</TABLE>
Proceeds from sales of available for sale securities for the nine
months ended September 30, 1998 were $4,569,164. Gross gains
and losses on those sales were $44,789 and $2,204 in 1998,
respectively.
Net investment income for the nine months ended September 30, 1998 and
1997 is comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------------
1998 1997
------------ -------------
<S> <C> <C>
Investment income:
Interest on short-term
Investments.......................... $ 336,067 $ 639,047
Interest on bonds........................ 1,943,731 1,428,707
------------ -------------
Gross investment income.............. 2,279,798 2,067,754
Investment expenses.................. (129,710) (131,295)
------------ -------------
Net investment income................ $ 2,150,088 $ 1,936,459
============ =============
</TABLE>
Bonds with an estimated fair value of $1,944,283 at September 30,
1998 and $1,878,081 at December 31, 1997 were on deposit with
the Missouri Department of Insurance.
F-25
<PAGE> 86
The net changes in unrealized investment gains (losses) in the
nine months ended September 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net unrealized investment gains................ $ 1,096,687 $ 311,497
Federal income taxes at 34%.................... (372,873) (105,908)
------------ -------------
Net unrealized investment gains................ $ 723,814 $ 205,589
============ ============
</TABLE>
(3) RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES AND REINSURANCE
A summary of the reserves for losses and loss adjustment
expenses follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
----------- -----------
<S> <C> <C>
Undiscounted reserves for losses and loss
adjustment expenses.................................. $34,621,635 $31,990,412
Less discount............................................. (522,241) (960,000)
----------- -----------
Discounted reserves for losses and loss
adjustment expenses.................................. $34,099,394 $31,030,412
=========== ===========
</TABLE>
Following is the activity in the reserves for losses and loss
adjustment expenses:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Balance at January 1..................................... $31,030,412 $32,887,407
Less reinsurance recoverable on
reserves for losses and loss
adjustment expenses................................. (9,950,512) (7,099,463)
----------- -----------
21,079,900 25,787,944
----------- -----------
Incurred related to:
Current year........................................ 6,177,648 4,566,620
Prior Year.......................................... 1,347,941 (1,704,740)
----------- ------------
Total incurred.................................. 7,525,589 2,861,880
----------- -----------
Paid related to:
Current year........................................ 298,957 359,378
Prior Year.......................................... 4,823,539 6,751,834
----------- -----------
Total paid...................................... 5,117,496 7,111,212
----------- -----------
Net balance at September 30.............................. 23,487,993 21,538,612
Plus reinsurance recoverable on
reserves for losses and loss
adjustment expenses................................. 10,611,401 6,491,570
----------- -----------
Balance at September 30.................................. $34,099,394 $28,030,182
=========== ===========
</TABLE>
The reserves for losses and loss adjustment expenses are estimated
based on development information available at each reporting date. As a
result of the nature of the risks underwritten, claims development may
occur over an extended period of time. The changes in the incurred
amounts disclosed above related to prior years are the result of
utilizing improved claim development information as that information
becomes available.
Reserves were discounted by 2% and 1% in the financial statements for
the periods ended December 31, 1997 and September 30, 1998,
respectively. As directed by the Missouri Department of Insurance, the
discount will be completely eliminated after December 31, 1998.
F-26
<PAGE> 87
Premiums and losses related to reinsurance amounts for the
nine months ended September 30, 1998 and 1997 are summarized as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Ceded premiums written............................ $ 2,128,298 $ 2,308,817
Ceded premiums earned............................. $ 2,258,603 $ 2,283,985
Ceded losses and loss adjustment
expenses (benefit)............................. $ 3,270,151 $ (25,620)
</TABLE>
(4) FEDERAL INCOME TAXES
The Company files a consolidated federal income tax return. Income tax
expense (benefit) varies from the amount which would be provided by
applying the federal income tax rates to income (loss) before income
taxes. The following reconciles the expected provision for income tax
expense (benefit) using the federal statutory tax rate of 34% to the
provision for income tax expense (benefit) reported herein for the nine
months ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
1998 1997
---------- -----------
<S> <C> <C>
Expected tax expense (benefit) using
statutory rates............................... $ (913,330) $ 147,052
Other, net....................................... 18,281 57,304
---------- -----------
Income tax expense (benefit)..................... $ (895,049) $ 204,356
========== ===========
</TABLE>
Income taxes consist of the following at September 30:
<TABLE>
<CAPTION>
1998 1997
---------- -----------
<S> <C> <C>
Current expense.................................. $ -- $ 364,614
Deferred expense................................. (895,049) (160,258)
---------- -----------
Income tax (benefit) expense.............. $ (895,049) $ 204,356
========== ===========
</TABLE>
Deferred income taxes arise from temporary differences resulting from
income and expense items reported for financial accounting and tax
purposes in different periods. The sources of these differences and the
tax effect of each are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
1998 1997
---------- -----------
<S> <C> <C>
Losses and loss adjustment expenses incurred for
financial reporting purposes but not deductible
for tax purposes............................. $ (266,446) $ 61,670
Unearned premiums not deductible for tax purposes. (20,142) (120,817)
Deferred compensation............................. -- (102,642)
Deferred retirement benefit....................... (14,583) (100,623)
Net operating loss carryforward................... (481,944) 105,163
Other, net........................................ (111,934) (3,009)
----------- ------------
Deferred tax benefit......................... $ (895,049) $ (160,258)
=========== ============
</TABLE>
F-27
<PAGE> 88
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
September 30, 1998 and December 31, 1997 are presented below:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Discounted unpaid loss reserves..................... $ 1,346,494 $ 1,080,048
Discounted unearned premium reserves................ 519,298 499,158
Deferred compensation............................... 191,042 191,042
Deferred retirement benefit......................... 215,829 201,246
Deferred commissions payable........................ 44,224 47,465
Net operating loss carryforward..................... 1,597,368 1,115,423
----------- -----------
Total gross deferred tax assets............. 3,914,255 3,134,382
Less valuation allowance.................... (279,400) (390,400)
----------- -----------
Net deferred tax assets..................... 3,634,855 2,743,982
Deferred tax liabilities:
Investments adjusted to market value............ (738,168) (365,295)
Deferred acquisition costs...................... (70,424) (62,306)
Other........................................... -- (12,294)
----------- -----------
Total gross deferred tax liabilities.... (808,592) (439,895)
----------- -----------
Net deferred tax asset.................. $ 2,826,263 $ 2,304,087
=========== ===========
</TABLE>
The valuation allowance for deferred tax assets at September 30, 1998
was $279,400. Based on the Company's historical earnings, future
expectations of adjusted taxable income, its ability to change its
investment strategy, as well as reversing gross deferred tax
liabilities, management believes it is more likely than not that the
Company will fully realize the gross deferred tax assets less the
valuation allowance. However, there can be no assurances that the
Company will generate the necessary adjusted taxable income in any
future period.
(5) STATUTORY ACCOUNTING
Intermed and its subsidiary Interlex are domiciled in Missouri and
prepare their statutory-basis financial statements in accordance with
accounting practices prescribed or permitted by the Missouri Department
of Insurance. "Prescribed" statutory accounting practices include state
laws, regulations and general administrative rules, as well as a
variety of publications of the NAIC. "Permitted" statutory accounting
practices encompass all accounting practices that are not prescribed;
such practices may differ from state to state, may differ from company
to company within a state, and may change in the future. Intermed and
its subsidiary Interlex have no significant permitted accounting
practices that vary from prescribed accounting practices, except for
discounting of loss reserves.
F-28
<PAGE> 89
Reconciliations of statutory net (loss) income, as determined using
statutory accounting principles, to the amounts included in the
accompanying consolidated financial statements for the nine months
ended September 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998 1997
--------- ---------
<S> <C> <C>
Net (loss) income of insurance
subsidiaries............................ $ (2,543,102) 658,544
Increase (decrease):
Deferred policy acquisition costs... 23,876 80,743
Deferred income taxes............... 895,049 160,258
Deferred compensation............... -- (301,887)
Deferred retirement benefit......... (42,891) (295,951)
Other adjustments, net.............. (124,148) (73,558)
------------ ---------
Net (loss) income as reported herein.... (1,791,216) 228,149
</TABLE>
Reconciliations of statutory capital and surplus, as determined using
statutory accounting principles, to stockholders' equity included in
the accompanying consolidated financial statements at September 30,
1998 and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ----------
<S> <C> <C>
Statutory capital and surplus of
Intermed Insurance Company.............. $ 15,262,440 17,830,404
Increase (decrease):
Deferred policy acquisition costs... 207,129 183,253
Deferred income taxes............... 2,826,264 2,304,087
Net unrealized gain (loss) on
investments booked at market........ 2,157,727 1,067,627
Deferred compensation............... (561,887) (561,887)
Accrued retirement.................. (634,792) (591,901)
Non-admitted assets and other
adjustments, net.................... 655,276 747,976
------------ --------------
Stockholders' equity as reported herein. 19,912,157 20,979,559
</TABLE>
F-29
<PAGE> 90
ANNEX A
-------
AGREEMENT AND PLAN OF MERGER
<PAGE> 91
===============================================================================
AGREEMENT AND PLAN OF MERGER
among
THE TENERE GROUP, INC.
and
FLORIDA PHYSICIANS INSURANCE COMPANY, INC.
and
TGI ACQUISITION CORPORATION
-----------------
October 2, 1998
-----------------
===============================================================================
<PAGE> 92
TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C>
ARTICLE 1
THE MERGER ........................................................................1
Section 1.1 Surviving Corporation...................................................1
Section 1.2 Articles of Incorporation...............................................1
Section 1.3 Bylaws..................................................................1
Section 1.4 Directors...............................................................2
Section 1.5 Officers................................................................2
Section 1.6 Effective Time..........................................................2
ARTICLE 2
EFFECT OF THE MERGER ON SHAREHOLDERS AND OPTION HOLDERS....................................2
Section 2.1 Conversion of Tenere's Common Stock and
Options and Acquisition Corporation's Common Stock......................2
Section 2.2 Dissenting Shares.......................................................3
Section 2.3 Exchange of Shares and Options..........................................3
Section 2.4 No Further Rights.......................................................5
Section 2.5 Closing of Tenere's Stock Transfer Books................................5
ARTICLE 3
CERTAIN AGREEMENTS ........................................................................5
Section 3.1 Due Diligence...........................................................5
Section 3.2 Communications With Agents, Employees or Policyholders..................5
Section 3.3 Shareholder Approval....................................................6
Section 3.4 No Solicitation.........................................................6
Section 3.5 Employee Matters........................................................8
Section 3.6 Certain Adjustments.....................................................8
Section 3.7 Reinsurance Agreements..................................................8
Section 3.8 List of Shareholders and Optionees......................................9
Section 3.9 Directors' and Officers' Indemnification................................9
ARTICLE 4
REPRESENTATIONS AND WARRANTIES.............................................................9
Section 4.1 Representations and Warranties of Tenere................................9
Section 4.2 Representations and Warranties of FPIC and Acquisition
Corporation............................................................29
</TABLE>
i
<PAGE> 93
<TABLE>
<S> <C> <C> <C>
ARTICLE 5
COVENANTS .......................................................................30
Section 5.1 Covenants of Tenere....................................................30
Section 5.2 Covenants of FPIC and Acquisition Corporation..........................33
ARTICLE 6
CONDITIONS PRECEDENT......................................................................34
Section 6.1 FPIC and Acquisition Corporation.......................................34
Section 6.2 Conditions to the Obligations of Tenere................................36
ARTICLE 7
CLOSING .......................................................................37
Section 7.1 Closing................................................................37
Section 7.2 Filings at the Closing.................................................37
ARTICLE 8
TERMINATION .......................................................................38
Section 8.1 Termination............................................................38
ARTICLE 9
CONFIDENTIALITY .......................................................................38
Section 9.1 Confidentiality........................................................38
ARTICLE 10
MISCELLANEOUS .......................................................................39
Section 10.1 Consent to Jurisdiction and Service of Process.........................39
Section 10.2 Expenses...............................................................39
Section 10.3 Notices................................................................40
Section 10.4 Amendment..............................................................41
Section 10.5 Counterparts...........................................................41
Section 10.6 Governing Law..........................................................41
Section 10.7 Entire Agreement.......................................................41
Section 10.8 Waivers................................................................41
Section 10.9 Interpretation.........................................................41
Section 10.10 No Assignment..........................................................42
Section 10.11 No Survival of Representations and Warranties..........................42
</TABLE>
ii
<PAGE> 94
AGREEMENT AND PLAN OF MERGER
----------------------------
This Agreement and Plan of Merger is made this 2nd day of October,
1998, among FLORIDA PHYSICIANS INSURANCE COMPANY, INC., a Florida corporation
("FPIC"), TGI ACQUISITION CORPORATION, a Florida corporation ("Acquisition
Corporation"), and THE TENERE GROUP, INC., a Missouri corporation ("Tenere").
P R E A M B L E
---------------
The Board of Directors of FPIC, Acquisition Corporation and Tenere deem
it in the best interests of each corporation, and in the best interest of their
respective shareholders that FPIC acquire all of the outstanding stock of Tenere
through the merger of Acquisition Corporation into Tenere in accordance with the
terms and conditions hereinafter set forth (the "Merger").
ACCORDINGLY, FPIC, Acquisition Corporation and Tenere hereby agree as
follows:
ARTICLE 1
THE MERGER
----------
Section 1.1 Surviving Corporation. In accordance with the provisions of
this Agreement, the General and Business Corporation Law of Missouri (the
"GBCLM") and the Florida Business Corporation Act (the "FBCA"), at the Effective
Time (as defined in Section 1.6), Acquisition Corporation shall be merged with
and into Tenere, and Tenere shall be the surviving corporation (hereinafter
sometimes referred to as the "Surviving Corporation") and shall continue its
corporate existence under the laws of the State of Missouri. The name of the
Surviving Corporation shall be "The Tenere Group, Inc." At the Effective Time,
the separate existence of Acquisition Corporation shall cease.
Section 1.2 Articles of Incorporation. The Articles of Incorporation of
Tenere, as in effect immediately prior to the Effective Time, shall be the
Articles of Incorporation of the Surviving Corporation until thereafter amended
as provided by law.
Section 1.3 Bylaws. The Bylaws of Tenere, as in effect immediately
prior to the Effective Time, shall be the Bylaws of the Surviving Corporation
until thereafter amended as provided by law.
Section 1.4 Directors. The persons who are serving as directors of
Tenere immediately prior to the Effective Time shall be the directors of the
Surviving Corporation and shall hold office from the Effective Time until their
resignation or their respective successors are duly elected or appointed and
qualify in the manner provided in the Articles of Incorporation and Bylaws of
the Surviving Corporation, or as otherwise provided by law.
<PAGE> 95
Section 1.5 Officers. The persons who are serving as officers of
Acquisition Corporation immediately prior to the Effective Time shall continue
in their respective offices as the officers of the Surviving Corporation and
shall hold such offices from the Effective Time until their respective
successors are duly elected or appointed and qualify in the manner provided in
the Articles of Incorporation and Bylaws of the Surviving Corporation, or as
otherwise provided by law.
Section 1.6 Effective Time. The Merger shall become effective at the
time of filing of Articles of Merger (substantially in the form of Exhibit 1.6
hereto) (the "Articles of Merger") with the Secretary of State of Missouri and
the Department of State of the State of Florida, in accordance with the
provisions of Section 351.440 of the GBCLM and Section 607.1105 of the FBCA,
respectively, or at the time specified as the effective time in the Articles of
Merger. The date and time when the Merger becomes effective are herein referred
to as the "Effective Time".
ARTICLE 2
EFFECT OF THE MERGER ON SHAREHOLDERS AND OPTION HOLDERS
--------------------------------------------------------
Section 2.1 Conversion of Tenere's Common Stock and Options and
Acquisition Corporation's Common Stock.
(a) Tenere's Common Stock. At the Effective Time, each share
of common stock, $.01 par value per share, of Tenere ("Tenere's Stock") issued
and outstanding immediately prior to the Effective Time shall, by virtue of the
Merger and without any action on the part of the holder thereof, be converted
into the right to receive and be exchangeable for the Per Share Amount in cash.
For purposes of this Agreement, the "Per Share Amount" shall mean the quotient,
rounded to four decimal places, obtained by dividing (i) $20,600,000 by (ii) the
sum of the aggregate number of shares of Tenere's Stock outstanding immediately
prior to the Effective Time and the aggregate number of shares of Tenere's Stock
underlying all Options (as defined in Section 2.1(c) hereof) outstanding
immediately prior to the cancellation of Options contemplated by Section 2.1(c)
hereof.
(b) Acquisition Corporation's Common Stock. At the Effective
Time, each share of common stock, $.01 par value per share, of Acquisition
Corporation ("Acquisition Corporation's Stock") issued and outstanding
immediately prior to the Effective Time shall, by virtue of the Merger and
without any action on the part of the holder thereof, be converted into and
exchangeable for one share of issued, outstanding, fully paid and nonassessable
share of common stock, $.01 par value per share, of the Surviving Corporation.
All certificates that immediately prior to the Effective Time represented the
outstanding common stock of Acquisition Corporation shall be deemed for all
purposes to represent the number of shares of common stock of the Surviving
Corporation into which such common stock of Acquisition Corporation has been
converted pursuant to this Section 2.1(b).
2
<PAGE> 96
(c) Tenere Options. Prior to the Closing, Tenere shall cause
each outstanding option to purchase shares of Tenere's Stock (an "Option"),
whether or not then exercisable, to be canceled and converted into the right to
receive an amount in cash equal to the product, rounded to four decimal places,
of (i) the amount by which the Per Share Amount exceeds the exercise price per
share subject to the Option and (ii) the number of shares subject to the Option.
Section 2.2 Dissenting Shares. Notwithstanding anything in this
Agreement to the contrary, shares of Tenere's Stock that are issued and
outstanding immediately prior to the Effective Time and that are held by a
Tenere shareholder who (i) does not vote such shares in favor of the Merger and
(ii) files with Tenere a written objection to the Merger pursuant to the rights
granted a dissenting shareholder under the GBCLM (the "Dissenting Shares") shall
not be converted into the Per Share Amount as provided for in Section 2.1 (a)
hereof but, rather, shall be converted into the right to receive such
consideration as may be determined to be due with respect to such Dissenting
Shares in accordance with the GBCLM; provided however, that if any holder of
Dissenting Shares shall subsequently be deemed to not be entitled to dissenter's
rights, any of the Dissenting Shares held by such shareholder shall thereupon be
deemed to have been converted into the Per Share Amount as provided for in
Section 2.1(a) hereof.
Section 2.3 Exchange of Shares and Options.
(a) Exchange Agent. At or before the Effective Time, FPIC
shall, or FPIC shall cause Acquisition Corporation to, deposit in immediately
available funds with an exchange agent for Tenere's Stock and the Options, which
exchange agent shall be selected by FPIC and shall be reasonably satisfactory to
Tenere (the "Exchange Agent"), an amount (the "Exchange Fund") to be distributed
to the Shareholders and the Optionees (as such terms are defined in Section
2.3(b)) that shall equal and be divided for payment with respect to Tenere's
Stock and the Options as follows: (i) an aggregate amount for Tenere's Stock
that is equal to the product of (x) the number of shares of Tenere's Stock
issued and outstanding at the Effective Time (the "Tenere Stock Outstanding")
multiplied by (y) the Per Share Amount, plus (ii) an aggregate amount for the
Options that is equal to (x) the product of the Per Share Amount and the
aggregate number of shares of Tenere's Stock underlying all of the Options,
minus (y) the sum of the amounts obtained for each Option by multiplying the
exercise price per share of each Option by the number of shares of Tenere's
Stock underlying each Option (the "Aggregate Option Exercise Price"). The
parties shall use the information and amounts designated on Schedule 4.1(e) (as
revised pursuant to Section 3.9) as in effect at the Closing Date to determine
the Shareholders, the Optionees, the Tenere Stock Outstanding, the Options and
the Aggregate Option Exercise Price. The exchange agreement to be entered into
by FPIC or Acquisition Corporation with the Exchange Agent shall provide that
out of the Exchange Fund, the Exchange Agent shall, pursuant to irrevocable
instructions, make the payments referred to in Sections 2.1(a) and 2.2 and 2.3
to each Shareholder and Optionee listed on Schedule 4.1(e), as such Schedule may
be revised in accordance with Section 3.9. Any amount remaining in the Exchange
Fund after one year after the Effective Time may be transferred to the Surviving
Corporation at its option; provided, however, that the Surviving Corporation
shall thereafter be liable for the cash payments required by Sections 2.1(a),
3
<PAGE> 97
2.2 and 2.3. FPIC shall, or shall cause the Exchange Agent or the Surviving
Corporation, as the case may be, to, make the payments required by Sections
2.1(a), 2.2 and 2.3 solely to the Shareholders and the Optionees listed on
Schedule 4.1(e) (as revised pursuant to Section 3.9) as in effect at the
Effective Time.
(b) Payment Procedure. As promptly as practicable, but not
later than five business days, after the Effective Time, the Exchange Agent
shall mail and make available to each holder of record ("Shareholder") of a
certificate or certificates that immediately prior to the Effective Time
represented outstanding shares of Tenere's Stock (a "Certificate") and to each
holder of record of an Option (an "Optionee"), a letter of transmittal that
shall specify that delivery shall be effected, and risk of loss and title to the
Certificates and Options shall pass, only upon delivery of the Certificates and
the Options. Upon surrender to the Exchange Agent of a Certificate for
cancellation together with such letter of transmittal, duly executed, the
Exchange Agent shall promptly pay out to the persons entitled thereto the
amount, rounded to the nearest cent, determined by multiplying (x) the number of
shares of Tenere's Stock represented by the Certificate by (y) the Per Share
Amount. Upon surrender to the Exchange Agent of an Option together with such
letter of transmittal, duly executed, the Exchange Agent shall promptly pay out
to the Optionee the amount, rounded to the nearest cent, determined by
multiplying (x) the amount by which the Per Share Amount exceeds the exercise
price per share subject to such Option and (y) the number of shares subject to
such Option. No interest shall be paid or accrued on the cash payable upon the
surrender of a Certificate or an Option. If a Shareholder or an Optionee
requests that payment be made to a person other than the one in whose name the
Certificate or Option surrendered, as the case may be, is registered, it shall
be a condition of payment that the Certificate or Option so surrendered shall be
properly endorsed or otherwise in proper form for transfer and that the person
requesting such payment shall pay any transfer or other taxes required by reason
of the payment to a person other than the registered holder of the Certificate
or Option surrendered or establish to the satisfaction of the Surviving
Corporation that such tax has been paid or is not applicable. Until surrendered
in accordance with the provisions of this Section 2.3(b), (i) each Certificate
shall represent for all purposes only the right to receive, upon such surrender,
an amount in cash rounded to the nearest cent, equal to the Per Share Amount per
share of Tenere's Stock being converted and (ii) each Option shall represent for
all purposes only the right to receive, upon such surrender, an amount equal to
the product, rounded to the nearest cent, of (x) the amount by which the Per
Share Amount exceeds the exercise price per share subject to the Option and (y)
the number of shares subject to the Option.
(c) Lost, Stolen or Destroyed Certificates or Options. In the
event any Certificate or Option shall have been lost, stolen or destroyed, upon
delivery to the Surviving Corporation of an affidavit of that fact by the person
claiming such Certificate or Option to be lost, stolen or destroyed and the
delivery of such other documents as the Surviving Corporation may reasonably
request, the Surviving Corporation shall deliver or cause to be delivered the
amount of money deliverable in respect of such lost, stolen or destroyed
Certificate or Option as determined in accordance with this Article 2; provided,
however, that the Board of Directors of the Surviving Corporation may, as a
condition precedent to the delivery thereof, require the owner
4
<PAGE> 98
of such lost, stolen or destroyed Certificate or Option to provide to the
Surviving Corporation a bond in favor of the Surviving Corporation, from an
issuer satisfactory to the Surviving Corporation and in an amount equal to the
value of the shares of Tenere's Stock represented by such Certificate or the
value of such Option, as the case may be, at the Effective Time or such other
security as the Surviving Corporation shall reasonably deem necessary, as
indemnity against any claim that may be made against the Surviving Corporation
with respect to the Certificate or Option alleged to have been lost, stolen or
destroyed.
Section 2.4 No Further Rights. From and after the Effective Time, the
holders of Certificates shall cease to have any rights as shareholders of the
Surviving Corporation, except as provided herein or by law.
Section 2.5 Closing of Tenere's Stock Transfer Books. After the
Effective Time, there shall be no transfers on the stock transfer books of the
Surviving Corporation of any shares of Tenere's Stock that were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation, they shall be canceled
and exchanged for the consideration payable pursuant to this Article 2.
ARTICLE 3
CERTAIN AGREEMENTS
------------------
Section 3.1 Due Diligence. FPIC shall have the right from the date
hereof and continuing until the Closing Date to inspect the books and records
and assets of Tenere and the Subsidiaries, and Tenere shall cooperate, and cause
the Subsidiaries to cooperate, with such investigation in accordance with
Section 5.1(a) hereof.
Section 3.2 Communications With Agents, Employees or Policyholders.
Tenere shall not, and shall cause the Subsidiaries and any other Affiliates (as
defined in Section 3.4(a)) not to, communicate with any insurance agents or
policyholders of Intermed, Interlex or any employees of ISI regarding this
Agreement or the transactions contemplated herein, other than communications
that are approved by FPIC or oral responses to unsolicited inquiries and, with
respect to communications with employees, those communications necessary in
connection with the consummation of the transactions contemplated by this
Agreement. FPIC shall have the right to participate in the communications
permitted by this Section.
Section 3.3 Shareholder Approval. As soon as reasonably practicable,
Tenere shall send notice to the Shareholders and conduct a Shareholders meeting
or otherwise obtain Shareholder approval for this Agreement and the Merger in
accordance with the Securities Exchange Act of 1934, as amended, and the rules
and regulations thereunder (collectively, the "Exchange Act"), the GBCLM and any
other applicable laws. Tenere shall permit FPIC to review all materials to be
sent to the Shareholders in connection with obtaining such Shareholder approval.
All such materials and the methods of solicitation shall be submitted to FPIC
for approval, which approval
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shall not be unreasonably withheld. Subject to Section 3.4, Tenere shall
recommend to the Shareholders that the Shareholders approve this Agreement and
the Merger. Tenere shall from time to time notify FPIC of the percentage of the
outstanding shares of Tenere's Stock as to which Shareholders have delivered to
Tenere written objection to the Merger pursuant to their dissenters' rights
under Section 351.455 of the GBCLM and shall immediately notify FPIC if
Shareholders holding more than ten percent of the outstanding shares of Tenere's
Stock deliver such written objection.
Section 3.4 No Solicitation.
(a) No Solicitation by Tenere. Subject to Section 3.4(c)
hereof, Tenere shall not, nor shall it permit any of the Subsidiaries or its
other Affiliates to, nor shall it authorize or permit any officer, director,
employee, investment banker, attorney or other advisor, agent or representative
of Tenere or any of the Subsidiaries to, directly or indirectly, (i) solicit,
initiate or encourage the submission of any Tenere Takeover Proposal (as
hereinafter defined), (ii) enter into any agreement with respect to any Tenere
Takeover Proposal, (iii) initiate any discussions or negotiations regarding any
proposal that constitutes, or may reasonably be expected to lead to, any Tenere
Takeover Proposal or (iv) furnish any information with respect to the making of
any proposal that constitutes, or may reasonably be expected to lead to, any
Tenere Takeover Proposal. For purposes of this Agreement, a "Tenere Takeover
Proposal" means (i) any proposal or offer, other than a proposal or offer by
FPIC or any of its Affiliates (as defined below), for a merger or other business
combination involving Tenere or any of the Subsidiaries, directly or indirectly,
(ii) any proposal or offer, other than a proposal or offer by FPIC or any of its
Affiliates, to acquire from Tenere or any of its Affiliates in any manner,
directly or indirectly, any of the capital stock of Tenere or any of the
Subsidiaries or 10% or more of the assets of Tenere or any of the Subsidiaries,
(iii) any proposal or offer, other than a proposal or offer by FPIC or any of
its Affiliates, to acquire from the shareholders of Tenere by tender offer,
exchange offer or otherwise any of Tenere's Stock or (iv) any proposal or offer,
other than a proposal or offer by FPIC or any of its Affiliates, to acquire the
right to vote 50% or more of the capital stock of Tenere or any of the
Subsidiaries. For purposes of this Agreement, an "Affiliate" of any person or
entity means any other person or entity that directly or indirectly controls, is
controlled by or is under common control with such person or entity, whether
through equity ownership, voting rights or otherwise.
(b) No Change of Approval. Subject to Section 3.4(c) hereof,
neither Tenere, the Board of Directors of Tenere nor any committee thereof shall
(i) withdraw or modify, or propose to withdraw or modify, the approval or
recommendation by Tenere, the Board of Directors of Tenere or any committee
thereof of this Agreement or the Merger or take any action having such effect or
(ii) announce, approve or recommend any Tenere Takeover Proposal.
(c) Tenere Superior Proposal. Notwithstanding the foregoing,
nothing contained in this Agreement shall prohibit the Board of Directors of
Tenere from furnishing information to, or entering into discussions or
negotiations with, any person or entity that makes
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an unsolicited Tenere Takeover Proposal if: (A) the Board of Directors of
Tenere, after consultation with and receiving the advice of its outside legal
counsel, determines in good faith that such action is necessary or required for
the Board of Directors of Tenere to comply with its fiduciary duties to the
Shareholders under applicable law, (B) prior to furnishing such information to,
or entering into discussions or negotiations with, such person or entity, Tenere
discloses to FPIC that it is furnishing information to, or entering into
discussions or negotiations with, such person or entity, which notice shall
describe the terms thereof, (C) prior to furnishing such information to such
person or entity, Tenere receives from such person or entity an executed
confidentiality agreement with terms not more favorable to such person than the
terms contained in the Confidentiality Agreement between FPIC Insurance Group,
Inc. and Tenere and (D) Tenere keeps FPIC informed promptly of the status
(including the terms) of any such discussions or negotiations. In addition,
notwithstanding the foregoing, if the Board of Directors of Tenere receives an
unsolicited Tenere Takeover Proposal that, in the exercise of its fiduciary
obligations (as determined in good faith after consultation with outside legal
counsel), it determines to be a Tenere Superior Proposal (as hereinafter
defined), the Board of Directors of Tenere may withdraw or modify its approval
or recommendation of this Agreement or the Merger and may (subject to the
following sentence) terminate this Agreement, in each case at any time after the
fifth business day following FPIC's receipt of written notice (a "Tenere Notice
of Superior Proposal") advising FPIC that the Board of Directors of Tenere has
received a Tenere Takeover Proposal that it has determined to be a Tenere
Superior Proposal, specifying the principal terms and conditions of such Tenere
Superior Proposal and identifying the person making such Tenere Superior
Proposal. For purposes of this Agreement, a "Tenere Superior Proposal" means any
bona fide Tenere Takeover Proposal to merge or combine with Tenere or to
acquire, directly or indirectly, more than 50% of Tenere's Stock or of
Intermed's and Interlex' voting stock then outstanding or a material amount of
the assets of Tenere and the Subsidiaries, taken as a whole, on terms that the
Board of Directors of Tenere determines in its good faith reasonable judgment
(based on the written advice of a financial advisor of nationally recognized
reputation) to be materially more favorable to the Shareholders than the Merger.
(d) Termination Upon Change. If Tenere, the Board of Directors
of Tenere or any committee thereof shall (i) withdraw or modify the approval or
recommendation by Tenere, the Board of Directors of Tenere or any such committee
of this Agreement or the Merger or take any action having such effect, or (ii)
announce, approve or recommend any Tenere Takeover Proposal, FPIC may terminate
this Agreement.
(e) Notification by Tenere. In addition to the other
obligations of Tenere set forth in this Section 3.4, Tenere shall promptly
advise FPIC orally and in writing of the receipt of any Tenere Takeover Proposal
or any proposal, discussion or overture that might lead to a Tenere Takeover
Proposal.
(f) Breakup Fee. In the event Tenere, its Board of Directors
or a committee thereof or any representative or Affiliate of Tenere shall (i)
withdraw or modify the approval or recommendation of approval of this Agreement
or the Merger by Tenere or its Board of Directors,
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or a committee thereof, or take any action having such effect, or (ii) approve
or recommend, or propose to approve, recommend, present or otherwise disclose in
any manner to the Tenere shareholders (including any recommendation,
presentation, disclosure or approval contemplated by Rule 14e-2(a) of the
Exchange Act), any Tenere Takeover Proposal, and either (i) the shareholders of
Tenere do not approve the Merger or (ii) Tenere or FPIC terminates this
Agreement pursuant to this Section 3.4, then Tenere shall immediately thereafter
pay FPIC a fee of $600,000 in cash.
Section 3.5 Employee Matters. Prior to the Closing, Tenere shall (i)
terminate or cause to be terminated the employment of such of the Companies'
employees as FPIC shall specify to Tenere and (ii) (a) pay or cause to be paid
to any such terminated employees who have Employment Agreements with a Company
(as specified in Schedule 4.1(ff) to this Agreement) the amounts required to be
paid to such employees arising from such terminations under such Employment
Agreements or the Companies' existing benefit plans or arrangements or otherwise
required by applicable law and (b) pay or cause to be paid to any such
terminated employees who do not have employment agreements with a Company the
amounts, if any, required to be paid to such employees arising from such
terminations under the Companies' existing policies, benefit plans or
arrangements or otherwise required by applicable law. All amounts required to be
paid pursuant to the immediately preceding sentence shall be reflected on the
Companies' books prior to the Closing. Tenere shall use commercially reasonable
efforts to cause each employee of a Company who FPIC desires to remain employed
by that Company following the Closing to agree prior to the Closing (which
agreement shall be pursuant to a written agreement if FPIC so elects) to remain
so employed subsequent to the Closing.
Section 3.6 Certain Adjustments. Prior to the Closing, Tenere shall
cause Intermed and Interlex to make such conforming adjustments to their loss
reserves and shall make or cause to be made such other adjustments to its and
the Subsidiaries books and financial statements as FPIC and its advisors deem
appropriate; provided, that such adjustments shall not violate generally
accepted accounting principles ("GAAP").
Section 3.7 Reinsurance Agreements. FPIC and Tenere shall in good faith
attempt to agree upon terms pursuant to which Intermed's and Interlex' existing
reinsurance agreements shall be terminated as of the Closing Date and replaced
with mutually acceptable alternative reinsurance arrangements. In the event FPIC
and Tenere so mutually agree, they shall cooperate in good faith to effect such
termination of Intermed's and Interlex' existing reinsurance agreements and the
implementation of such alternative arrangements as of the Closing Date.
Section 3.8 List of Shareholders and Optionees. At the Closing, Tenere
shall cause its transfer agent to provide to FPIC a certified list of the
Shareholders and the Optionees as of the Closing.
Section 3.9 Directors' and Officers' Indemnification. From and after
the Effective Time, FPIC shall cause to be maintained all duties and obligations
of indemnification of Tenere
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and the Subsidiaries pertaining to the period prior to the Effective Time in
favor of employees, agents, directors or officers of Tenere and each of the
Subsidiaries arising by virtue of its Articles of Incorporation or Bylaws or
arising by operation of applicable law, and shall cause such duties and
obligations to continue in full force and effect for so long as they would (but
for the Merger) otherwise survive and continue in full force and effect.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
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Section 4.1 Representations and Warranties of Tenere. Tenere
represents, warrants and, to the extent that an item relates to a future time
period, covenants to FPIC and Acquisition Corporation as follows:
(a) Tenere Organization and Good Standing; Authority to
Conduct Business. Tenere is a corporation duly organized, validly existing and
in good standing under the laws of the State of Missouri. Tenere has all
requisite corporate power and authority to carry on its businesses as presently
conducted and to own or lease and to operate its properties as currently
operated. The copies of the Articles of Incorporation and all amendments thereto
and the Bylaws and all amendments thereto of Tenere, which have heretofore been
delivered to FPIC, are true and complete. Tenere is not in violation of any term
of its Articles of Incorporation or Bylaws.
(b) Power and Authority. Tenere has all requisite power and
authority to execute, deliver and, subject to the approval of this Agreement by
the Shareholders, perform this Agreement, the Articles of Merger and any other
agreements or instruments contemplated hereby to be executed by it. The
execution, delivery and performance by Tenere of this Agreement, the Articles of
Merger and any other agreements or instruments contemplated hereby to be
executed by it have been duly authorized by all requisite corporate action on
behalf of Tenere and except for obtaining the approval of this Agreement by the
Shareholders, no other authorizations or approvals by the Board of Directors or
Shareholders are necessary to authorize this Agreement or to consummate the
transactions contemplated hereby. This Agreement constitutes, and each of any
other agreements or instruments contemplated hereby to be executed by Tenere
will constitute when executed and delivered, valid and legally binding
obligations of Tenere enforceable against it in accordance with its terms,
except as enforceability may be limited by bankruptcy, reorganization,
insolvency, moratorium or other laws affecting creditors rights generally and
general principles of equity.
(c) No Conflicts. The execution and delivery of this Agreement
and any other agreements and instruments contemplated hereby and the
consummation of the transactions contemplated hereby and thereby by Tenere in
accordance with the terms hereof and thereof, upon receipt of the consents and
approvals contemplated by Section 4.1(d), will not violate any existing
provision of the Articles of Incorporation, Bylaws or any other organizational
documents of Tenere, Intermed, Interlex, ISI or any other Subsidiary or of any
law or violate any existing term
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or provision of any order, writ, judgment, injunction or decree of any court or
any other governmental department, commission, board, bureau, agency or
instrumentality applicable to Tenere, Intermed, Interlex, ISI or any other
Subsidiary or conflict with or result in a breach of any of the terms,
conditions or provisions of any agreement to which Tenere, Intermed, Interlex,
ISI or any other Subsidiary is a party, or by which any of their respective
properties are bound, or constitute an event that might permit an early
termination of or otherwise materially affect any such agreement.
(d) Consents and Approvals. Except as set forth on Schedule
4.1(d), no consent, license, approval, order or authorization of, or
registration, declaration or filing with, any governmental authority, agency,
bureau or commission, or any third party is required to be obtained or made by
Tenere, Intermed, Interlex, ISI or any other Subsidiary in connection with the
execution, delivery, performance, validity and enforceability of this Agreement
or any other agreements and instruments contemplated hereby or the conversion of
the shares of Tenere's Stock.
(e) Capital Structure of Tenere. The authorized capital stock
of Tenere consists solely of 7,000,000 shares of Common Stock, par value $.01
per share, of which 1,999,774 shares are issued and outstanding (the
"Outstanding Tenere Shares"), and 500,000 shares of Preferred Stock, par value
$.01 per share, none of which shares are issued and outstanding. The Outstanding
Tenere Shares constitute the only issued and outstanding capital stock of
Tenere. All of the Outstanding Tenere Shares are owned of record as of the date
of this Agreement by the shareholders listed on Schedule 4.1(e) to this
Agreement. All of the Outstanding Tenere Shares have been duly authorized and
are validly issued, fully paid and nonassessable, and, except as listed on
Schedule 4.1(e), there are no existing or outstanding securities convertible
into capital stock of Tenere, or options, warrants, calls, commitments, or
agreements, other than this Agreement, of any character that relate to the
authorization, issuance, delivery, sale, purchase or redemption by Tenere of
shares of capital stock of Tenere or that require any payments in any manner
indexed or otherwise pertaining to capital stock of Tenere.
(f) Subsidiaries. Each corporation, partnership, joint venture
or other entity in which Tenere owns directly or indirectly a voting or other
equity interest (each a "Subsidiary") is set forth on Schedule 4.1(f), and
except as set forth therein, Tenere has no Subsidiaries. Tenere owns
beneficially and of record all of the outstanding capital stock of each
Subsidiary. The authorized capital stock of Intermed consists solely of 800,000
shares of Common Stock, par value $1.00 per share, all of which shares are
issued and outstanding and owned beneficially and of record by Tenere. The
authorized capital stock of Interlex consists solely of 800,000 shares of Common
Stock, par value $1.00 per share, all of which shares are issued and outstanding
and owned beneficially and of record by Intermed. The authorized capital stock
of ISI consists solely of 300 shares of Common Stock, par value $100.00 per
share, of which Five shares are issued and outstanding and owned beneficially
and of record by Intermed. There are no outstanding rights or options to
acquire, nor any outstanding securities convertible into capital stock of any
class of any Subsidiary. The authorized capital stock of Trout Insurance
Services, Inc. ("Trout") consists solely of 30,000 shares of common stock, par
value $1.00 per share, of which 500 shares are
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issued and outstanding and all of which 500 shares are owned beneficially and of
record by Intermed. All of the issued and outstanding shares of capital stock of
each Subsidiary have been duly authorized and validly issued and are fully paid
and nonassessable. All such shares are free and clear of any and all liens,
charges, security interests and other encumbrances and claims and none of such
shares is the subject of any agreement under which any such lien, charge,
security interest or other encumbrance or claim might arise. The copies of the
Articles of Incorporation and all amendments thereto and of the Bylaws and all
amendments thereto of each Subsidiary, which have heretofore been delivered to
FPIC, are true and complete. No Subsidiary is in violation of any term of its
Articles of Incorporation or Bylaws.
(g) Organization and Good Standing of ISI; Authority to
Conduct Business. ISI is a corporation duly organized, validly existing and in
good standing under the laws of the State of Missouri. ISI has all requisite
corporate power and authority to carry on its business as presently conducted
and to own or lease and to operate its properties as currently operated.
(h) Organization and Good Standing of Intermed; Authority to
Conduct Business. Intermed is a stock insurance company, duly organized, validly
existing and in good standing under the laws of the State of Missouri. Intermed
has all requisite corporate power and authority to carry on its business as
presently conducted and to own or lease and to operate its properties as
currently operated. Intermed is duly licensed and in good standing to write the
lines of insurance and otherwise to do business in the states and jurisdictions
as set forth in Schedule 4.1(h) hereto. Tenere has delivered to FPIC correct and
complete copies of all of the insurance licenses of Interlex certified by the
Secretary of Intermed, all of which are in full force and effect. Intermed has
full power and authority to write all the lines of insurance shown on the
insurance licenses of Intermed. Intermed is not transacting any insurance or
reinsurance or other business in any state requiring a license therefor in which
it is not so licensed.
(i) Organization and Good Standing of Interlex; Authority to
Conduct Business. Interlex is a stock insurance company, duly organized, validly
existing and in good standing under the laws of the State of Missouri. Interlex
has all requisite corporate power and authority to carry on its business as
presently conducted and to own or lease and to operate its properties as
currently operated. Interlex is duly licensed and in good standing to write the
lines of insurance and otherwise to do business in the states and jurisdictions
as set forth in Schedule 4.1(i) hereto. Tenere has delivered to FPIC correct and
complete copies of all of the insurance licenses of Intermed certified by the
Secretary of Interlex, all of which are in full force and effect. Interlex has
full power and authority to write all the lines of insurance shown on the
insurance licenses of Interlex. Interlex is not transacting any insurance or
reinsurance or other business in any state requiring a license therefor in which
it is not so licensed.
(j) Organization and Good Standing of Trout. Trout is a
corporation duly organized, validly existing, and in good standing under the
laws of the State of Missouri. Trout has no assets, no liabilities, and conducts
no business in Missouri or elsewhere.
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(k) Tenere Financial Statements. Tenere has delivered to FPIC
complete and correct copies of (i) the audited consolidated balance sheets of
Tenere and the Subsidiaries as of December 31, 1997 and 1996, and the related
audited consolidated statements of income, changes in shareholders' equity and
cash flows for the fiscal years 1997 and 1996, inclusive, together with the
notes thereto, as reported in Tenere's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997 filed with the Securities and Exchange Commission
(the "SEC") under the Exchange Act, in each case accompanied by the audit
reports of KPMG Peat Marwick LLP, independent public accountants with respect to
Tenere (the "Audited Financial Statements"), and (ii) the unaudited consolidated
balance sheet of Tenere and the Subsidiaries and the related unaudited
consolidated statements of income and cash flows as reported in Tenere's
Quarterly Reports on Form 10-Q for the quarters ended March 31 and June 30, 1998
(the "Quarterly Financial Statements" and collectively with the Audited
Financial Statements, the "Tenere Financial Statements"). Prior to the Closing,
Tenere will deliver to FPIC complete and correct copies of the unaudited
consolidated balance sheet of Tenere and the Subsidiaries and the related
unaudited consolidated statements of income and cash flows as reported in
Tenere's Quarterly Report on Form 10-Q for each subsequent quarter ended at
least 45 days prior to the Closing (the "Additional Financial Statements"). The
Tenere Financial Statements (including the notes thereto) have been (and all
Additional Financial Statements delivered to FPIC pursuant to this Agreement
will be), in each such case, prepared in accordance with GAAP applied on a
consistent basis throughout the periods involved (except in the case of the
Quarterly Financial Statements and the Additional Financial Statements, as
permitted by Form 10-Q). The Tenere Financial Statements (including the notes
thereto) present fairly in all material respects (and the Additional Financial
Statements will present fairly in all material respects) the financial position,
the assets and the liabilities (whether absolute, accrued, contingent, or
otherwise) of Tenere and the Subsidiaries as of the respective dates thereof and
the results of operations and changes in shareholders' equity and cash flows for
the respective periods then ended, all in accordance with GAAP (except in the
case of the Quarterly Financial Statements and the Additional Financial
Statements, as permitted by Form 10-Q). The Tenere Financial Statements
(including the notes thereto) comply in all material respects (and the
Additional Financial Statements will comply in all material respects) with
applicable accounting requirements and, with respect to form, with the rules,
regulations and requirements of the SEC with respect thereto. The books and
records of Tenere and the Subsidiaries have been, and are being, maintained in
all material respects in accordance with GAAP and any other applicable legal and
accounting requirements and reflect only actual transactions. Except as
disclosed in the Tenere Financial Statements and reports delivered pursuant to
this Section, neither Tenere nor any of the Subsidiaries has any debts,
obligations or liabilities, contingent or otherwise, that could result in a
Material Adverse Effect with respect to Tenere or any of the Subsidiaries. As
used in this Agreement, the term "Material Adverse Effect" means with respect to
any person, any circumstance, event, change or occurrence that (i) is material
and adverse to the assets, liabilities, operations, financial condition, results
of operations or business of such person, or (ii) materially impairs the ability
of such person to perform its obligations under this Agreement; provided,
however, that Material Adverse Effect shall not be deemed to include the impact
of (a) changes in generally accepted accounting principles, (b)
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changes directly resulting from actions required by this Agreement or (c) any
additional amounts of loss reserves recorded by Tenere or its Subsidiaries prior
to the Closing.
(l) Tenere Undisclosed Liabilities. Neither Tenere nor any
Subsidiary has any liabilities, whether absolute, accrued, contingent, matured,
unmatured, or otherwise, except (a) as and to the extent reflected or reserved
against on the Quarterly Financial Statements dated as of June 30, 1998, and (b)
liabilities of a nature similar to those currently reflected on such financial
statements incurred by Tenere solely in the ordinary course of business and
consistent with prior practices that in the aggregate would not result in a
Material Adverse Effect with respect to Tenere or any of the Subsidiaries, since
the date of such financial statements.
(m) Intermed Financial Statements. Tenere has delivered to
FPIC complete and correct copies of the Quarterly Statements of Intermed filed
with the Missouri Department of Insurance (the "Missouri Department") for the
quarters ended March 31 and June 30, 1998 (the "Intermed Quarterly Statements"),
the Annual Statements of Intermed filed with the Missouri Department for the
years ended December 31, 1995, 1996 and 1997, together with the exhibits and
schedules thereto (the "Intermed Annual Statements"), and the audited statutory
financial statements of Intermed for the years ended December 31, 1995, 1996 and
1997, together with the notes thereto (the "Intermed Audited Statutory
Statements"). Tenere will promptly deliver to FPIC all additional quarterly or
annual statements of Intermed filed with the Missouri Department prior to the
Closing.
The (i) statutory financial statements (the "Intermed
Statutory Statements") of Intermed contained in the Intermed Annual Statements
and the Intermed Quarterly Statements and any additional quarterly or annual
Statements of Intermed filed with the Missouri Department and (ii) Intermed
Audited Statutory Statements, and any additional audited financial statements of
Intermed delivered to FPIC, have been (or, if not yet delivered, will be), in
each such case, prepared in accordance with statutory accounting practices
prescribed or permitted by the National Association of Insurance Commissioners,
the Missouri Department and any other applicable regulatory authorities ("SAP"),
and such accounting practices have been applied on a consistent basis throughout
the periods involved. The Intermed Audited Statutory Statements and each of the
Intermed Statutory Statements present (or if not yet delivered, will present)
fairly in all material respects the financial position, the assets and the
liabilities (whether absolute, accrued, contingent, or otherwise) of Intermed as
of the respective dates thereof and the results of operations and changes in
capital and surplus and in cash flows for the respective periods then ended, all
in accordance with SAP.
Since June 30, 1998, there has been no material adverse change
in the composition, nature or risk characteristics (credit quality or otherwise)
of Intermed's investment portfolio. Except as disclosed in the financial
statements and reports delivered pursuant to this Section, Intermed has no
debts, obligations or liabilities, contingent or otherwise, that could result in
a Material Adverse Effect with respect to Intermed.
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All reserves, due and uncollected premiums and other related
items with respect to insurance and annuity contracts as established or
reflected in the Intermed Statutory Statements (i) were determined in accordance
with commonly accepted actuarial standards consistently applied, (ii) were
fairly stated in accordance with sound actuarial principles, (iii) were based on
actuarial assumptions which produce reserves as great as those called for in any
contract provision as to reserve basis and method, and are in accordance with
all other contract provisions and the related reinsurance, coinsurance, and
other similar contracts, (iv) met the requirements of the insurance laws and
regulations of each applicable jurisdiction, and of the National Association of
Insurance Commissioners model regulations and actuarial guidelines, and all
appropriate standards of practice as promulgated by the Actuarial Standards
Board, (v) were computed on the basis of assumptions consistent with those used
in computing the corresponding items in the Intermed Statutory Statements for
the immediately preceding comparable period, and (vi) made good and sufficient
provisions for the total amount of all matured and actuarially anticipated
unmatured benefits, dividends, losses, claims, expenses and any other
obligations and liabilities (whether absolute, accrued, contingent, or
otherwise) of Intermed under all outstanding insurance and annuity contracts and
reinsurance, coinsurance, and other similar contracts pursuant to which Intermed
has or could have any obligation or liability (whether absolute, accrued,
contingent or otherwise) as of the date of such Intermed Statutory Statements.
Intermed owns assets that qualify as legal reserve assets under the insurance
laws and regulations of each applicable jurisdiction in an amount at least equal
to all such required reserves and other similar amounts.
(n) Intermed Undisclosed Liabilities. Intermed does not have,
and as of the Closing Date will not have, any liabilities, whether absolute,
accrued, contingent, matured, unmatured or otherwise, except (a) as and to the
extent reflected or reserved against on the Intermed Quarterly Statement for the
quarter ended June 30, 1998 and (b) liabilities of a nature similar to those
currently reflected on such Intermed Quarterly Statement incurred by Intermed
solely in the ordinary course of business and consistent with prior practices
that except for liabilities incurred in connection with insurance polices, would
not result in a Material Adverse Effect with respect to Intermed, since the date
of such Intermed Quarterly Statement.
(o) Interlex Financial Statements. Tenere has delivered to
FPIC complete and correct copies of the Quarterly Statements of Interlex filed
with the Missouri Department for the quarters ended March 31 and June 30, 1998
(the "Interlex Quarterly Statements"), the Annual Statements of Interlex filed
with the Missouri Department for the years ended December 31, 1995, 1996 and
1997, together with the exhibits and schedules thereto (the "Interlex Annual
Statements"), and the audited statutory financial statements of Interlex for the
years ended December 31, 1995, 1996 and 1997, together with the notes thereto
(the "Interlex Audited Statutory Statements"). Tenere will promptly deliver to
FPIC all additional quarterly or annual statements of Interlex filed with the
Missouri Department prior to the Closing.
The (i) statutory financial statements (the "Interlex
Statutory Statements") of Interlex contained in the Interlex Annual Statements
and the Interlex Quarterly Statements and any additional quarterly or annual
Statements of Interlex filed with the Missouri Department and (ii)
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Interlex Audited Statutory Statements any additional audited financial
statements of Intermed delivered to FPIC, have been (or, if not yet delivered,
will be), in each such case, prepared in accordance with SAP, and such
accounting practices have been applied on a consistent basis throughout the
periods involved. The Interlex Audited Statutory Statements and each of the
Interlex Statutory Statements present (or if not yet delivered, will present)
fairly in all material respects the financial position, the assets, and the
liabilities (whether absolute, accrued, contingent, or otherwise) of Interlex as
of the respective dates thereof and the results of operations and changes in
capital and surplus and in cash flows for the respective periods then ended, all
in accordance with SAP.
Since June 30, 1998, there has been no material adverse change
in the composition, nature or risk characteristics (credit quality or otherwise)
of Interlex' investment portfolio. Except as disclosed in the financial
statements and reports delivered pursuant to this Section, Interlex has no
debts, obligations or liabilities, contingent or otherwise, that could result in
a Material Adverse Effect with respect to Interlex.
All reserves, due and uncollected premiums and other related
items with respect to insurance and annuity contracts as established or
reflected in the Interlex Statutory Statements (i) were determined in accordance
with commonly accepted actuarial standards consistently applied, (ii) were
fairly stated in accordance with sound actuarial principles, (iii) were based on
actuarial assumptions that produce reserves as great as those called for in any
contract provision as to reserve basis and method, and are in accordance with
all other contract provisions and the related reinsurance, coinsurance, and
other similar contracts, (iv) met the requirements of the insurance laws and
regulations of each applicable jurisdiction, and of the National Association of
Insurance Commissioners model regulations and actuarial guidelines, and all
appropriate standards of practice as promulgated by the Actuarial Standards
Board, (v) were computed on the basis of assumptions consistent with those used
in computing the corresponding items in the Interlex Statutory Statements for
the immediately preceding comparable period, and (vi) made good and sufficient
provisions for the total amount of all matured and actuarially anticipated
unmatured benefits, dividends, losses, claims, expenses and any other
obligations and liabilities (whether absolute, accrued, contingent, or
otherwise) of Interlex under all outstanding insurance and annuity contracts and
reinsurance, coinsurance, and other similar contracts pursuant to which Interlex
has or could have any obligation or liability (whether absolute, accrued,
contingent or otherwise) as of the date of such Interlex Statutory Statements.
Interlex owns assets that qualify as legal reserve assets under the insurance
laws and regulations of each applicable jurisdiction in an amount at least equal
to all such required reserves and other similar amounts.
(p) Interlex Undisclosed Liabilities. Interlex does not have,
and as of the Closing Date will not have, any liabilities, whether absolute,
accrued, contingent, matured, unmatured or otherwise, except (a) as and to the
extent reflected or reserved against on the Interlex Quarterly Statement for the
quarter ended June 30, 1998, and (b) liabilities of a nature similar to those
currently reflected on such Interlex Quarterly Statement and incurred by
Interlex solely in the ordinary course of business and consistent with prior
practices that, except for liabilities
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incurred in connection with insurance polices, would not result in a Material
Adverse Effect with respect to Interlex, since the date of such Interlex
Quarterly Statement.
(q) SEC Reports. Tenere has delivered to FPIC a complete copy
of each (i) registration statement, prospectus, report (including but not
limited to reports on Forms 10-K, 8-K and 10-Q), schedule and definitive proxy
statement filed since March 1995 by Tenere with the SEC pursuant to the
Securities Act of 1933, as amended, and the rules and regulations thereunder
(collectively, the "Securities Act"), or the Exchange Act (collectively, the
"Tenere Reports") and (b) communication mailed by Tenere to its shareholders
since March 1995 ("Shareholder Communication"). Tenere will promptly deliver to
FPIC a complete copy of each registration statement, prospectus, report,
schedule and definitive proxy statement filed by Tenere with the SEC pursuant to
the Securities Act or the Exchange Act prior to the Closing and each
communication mailed by Tenere to its shareholders prior to the Closing
(collectively, the "Additional Documents"). No such Tenere Report, Shareholder
Communication or Additional Document contained (or will contain) any untrue
statement of a material fact or omitted (or will omit) to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances in which they were (or are) made, not
misleading. Tenere has timely filed all Tenere Reports and other documents
required to be filed by it under the Securities Act or the Exchange Act and
through the Closing Date will timely file all Additional Documents required to
be filed by it under the Securities Act or the Exchange Act. As of their
respective dates, all Tenere Reports complied (and all Additional Documents will
comply) in all material respects with the rules, regulations and requirements of
the SEC with respect thereto.
(r) Intercompany Accounts. Set forth in Schedule 4.1(r) is a
complete and correct list and summary description of all intercompany accounts
payable and receivable ("Intercompany Accounts") as June 30, 1998, between or
among Tenere, Intermed, Interlex, ISI or any Affiliate thereof.
(s) Litigation. Except as set forth in Schedule 4.1(s) hereto,
there is no judicial, administrative or regulatory action, proceeding,
investigation or inquiry or administrative charge or complaint pending or, to
the best of the knowledge of Tenere, threatened, that might have a Material
Adverse Effect (as defined below) on Tenere or any Subsidiary (Tenere and the
Subsidiaries each being sometimes individually referred to herein as a "Company"
and sometimes collectively referred to herein as the "Companies"), or that might
materially adversely affect any registration or insurance license, or the value
or marketability of any of the insurance products of Intermed or Interlex, or
that questions the validity of this Agreement or any action taken or to be taken
by any party pursuant hereto or in connection with the transactions contemplated
hereby.
(t) Real and Personal Property. Tenere has provided to FPIC a
list and summary description of all real and, as June 30, 1998, tangible
personal property owned by each of the Companies, whether or not used or
proposed to be used in any of the Companies' business (which together with the
additions and deletions thereto in the ordinary course of business as permitted
by this Agreement are hereinafter called the "Assets"). Each Company has, or
prior to
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the Closing Date will have, good and indefeasible title to the Assets owned by
such Company, free and clear of all liens, security interests and other
encumbrances and claims, except for inchoate liens, liens for taxes not yet due
and statutory liens as to which to the best knowledge of Tenere no dispute
exists. None of the Companies uses or proposes to use any real or tangible
personal property except as set forth in Schedule 4.1(t) or covered by a lease
set forth in Schedule 4.1(u). All of the Assets are or will be, as the case may
be, suitable for their intended use and are in good condition and repair,
subject to ordinary wear and tear. The Assets constitute all of the real and
tangible personal property necessary to conduct the business of each of the
Companies as presently conducted. No real property owned or leased by any of the
Companies is now, nor to Tenere's best knowledge has such property ever been,
used for the generation, storage or disposal of hazardous wastes, hazardous
substances, toxic wastes, petroleum products or other pollutants.
(u) Leases and Rental Contracts. Set forth in Schedule 4.1(u)
hereto is a list and summary description of all leases and contracts under which
any of the Companies leases, as lessor or lessee, or rents, any real or personal
property. All such leases and contracts are in full force and effect without any
existing default or breach thereunder.
(v) Contracts. Set forth in Schedule 4.1(v) hereto (with
Section references corresponding to those set forth below) is a complete and
correct list as of the date hereof of all written or oral agreements, contracts
and commitments, with an annual cost or benefit to any of the Companies of,
unless otherwise indicated, $10,000 or more (the "Contracts"), to which any of
the Companies is a party or by which any of the Companies is bound or otherwise
affected as of the date hereof (other than insurance contracts sold by Intermed
or Interlex in the ordinary course of business), including: (i) mortgages,
indentures, security agreements, loan and credit agreements and other agreements
and instruments relating to the borrowing of money or evidence of credit where
any of the Companies is debtor, (ii) agreements or other arrangements with
insurance agents and agencies and third party administrators pursuant to which
Intermed or Interlex or an Affiliate thereof has paid $10,000 or more in
commissions or other consideration during the calendar year 1996, 1997 or 1998,
(iii) contracts for the provision of data-processing services, (iv) finder's,
franchise, distribution, sales or brokerage agreements, (v) contracts or options
to purchase or sell real property, (vi) contracts for the purchase of materials,
supplies or equipment, or for providing services, (vii) contracts, arrangements
or treaties with any party regarding reinsurance, excess insurance, ceding of
insurance, assumption of insurance, or indemnification with respect to insurance
currently being provided directly or indirectly by Intermed or Interlex or
regarding the management of any portion of Intermed's or Interlex' business or
regarding the sale by Intermed or Interlex of its products through any other
company or the sale by any other company of its products through it, (viii)
contracts with any entity that is an Affiliate of the Companies or with any
officer or director of any of the Companies or any officer or director of any
other entity that is an Affiliate of the Companies, or to the best knowledge of
Tenere any corporation controlled by such officer or director, (ix) agreements
and instruments representing loans or commitments to loan to officers,
directors, employees or agents (other than insurance agents) of any of the
Companies or of any entity that is an Affiliate of any of the Companies, (x)
contracts of any kind to which the United States government or any of its
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agencies is a party, or under any federal, state or local law, regulation or
executive order, (xi) partnership, joint venture or strategic alliance
agreements of any kind and (xii) other agreements, contracts and commitments.
Tenere has delivered or made available to FPIC complete and correct copies of
all written Contracts together with all amendments thereto and waivers and
consents with respect thereto. In addition, Tenere has made available to FPIC
complete and correct copies of (i) all insurance policy forms used for products
currently marketed by either Intermed or Interlex in its business and that are
currently in force, and (ii) all forms of agreements or other arrangements with
insurance agents and agencies and third party administrators used by either
Intermed or Interlex in its business. All of such Contracts are in full force
and effect and each party thereto has performed in all material respects all of
the obligations required to be performed by it to date and is not in default
thereunder in any material respect. Except as specified on Schedule 4.1(v), all
of such Contracts may be terminated by a Company on thirty days' or less notice
with no penalty to any of the Companies. No Contract to which any of the
Companies is a party, or by which any of the Companies or any of its respective
properties is bound, specifically limits any of the Companies' freedom to
compete in any line of business or with any person or entity. None of the
Companies has outstanding any power of attorney. All contracts, arrangements or
treaties to which either Intermed or Interlex is a party regarding reinsurance,
excess insurance, ceding of insurance, assumption of insurance or
indemnification with respect to insurance are set forth on Schedule 4.1(v)
hereto.
(w) Compliance with Other Instruments and Laws. None of the
Companies is in violation of any term of its charter, articles of incorporation
or bylaws, or of any statute, law, ordinance, rule or regulation applicable to
it or any of its respective properties or of any material regulatory filing or
undertaking of or affecting it or of any judgment, decree or order in which any
such Company is named, or in any violation of any mortgage, indenture,
instrument or agreement relating to indebtedness for borrowed money or other
material instrument, agreement, contract, permit, concession, grant, franchise,
license or other governmental authorization or approval applicable to it or any
of its respective properties. All insurance licenses referred to in Schedule
4.1(h) and Schedule 4.1(i) hereto and all material permits, concessions, grants,
franchises, other licenses and other governmental authorizations and approvals
necessary for the conduct of the business of each of the Companies have been
duly obtained and are in full force and effect, and, there are no proceedings
pending or, to the best knowledge of Tenere, threatened, that may result in the
revocation, cancellation, or suspension, or any adverse modification, of any
thereof. The execution, delivery and performance of, and compliance with, this
Agreement, and the consummation of the transactions contemplated hereby by
Tenere in accordance with the terms hereof, will not result in any such
violation or be in conflict with or result in any default under any of the
foregoing referred to in this Section 4.1(w), or result in the creation of any
mortgage, pledge, lien, charge or encumbrance upon any of the properties or
assets of any of the Companies or the loss, revocation, cancellation, suspension
or modification of any insurance license listed in Schedule 4.1(h) and Schedule
4.1(i) hereto, other licenses or material contractual rights held by any of the
Companies pursuant to any of the foregoing or result in any such revocation,
cancellation, suspension or modification.
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(x) Regulatory Filings. The Companies have filed or otherwise
provided all reports, data, other information and applications required to be
filed with or otherwise provided to the Missouri Department, the SEC and all
other federal, state or local governmental authorities (including, without
limitation, insurance departments) with jurisdiction over any of the Companies
and all required regulatory approvals in respect thereof are in full force and
effect on the date hereof. Tenere has furnished or made available to FPIC
complete and correct copies of (i) the most recent reports of examination issued
by state insurance regulatory authorities in respect of Intermed and Interlex,
(ii) the most recent insurance holding company registrations and annual reports
filed with respect to Intermed and Interlex, (iii) all other regulatory filings
by or undertakings of any of the Companies and (iv) all complaints filed by any
regulatory agency and other regulatory proceedings initiated or pending with
respect to any of the Companies at any time within the preceding five years.
Since December 31, 1992, no deficiencies material to the financial condition or
operations of Intermed or Interlex or any of the other Companies have been
asserted by any state regulatory authorities with respect to any reports or
filings made by or with respect to any of the Companies. Tenere has furnished to
FPIC copies of all written responses submitted by each of Intermed and Interlex
(i) in respect of the most recent examination report of such Company made by a
state insurance regulatory authority and (ii) to the National Association of
Insurance Commissioners regarding such Company's Insurance Regulatory
Information System (IRIS) ratings. Each of the Companies on the Closing Date
will have substantially completed, in the ordinary course of its business,
consistent with its past practices and to the extent practicable, the
preparation of all reports, data, other information and applications that it
will be required to file with any federal, state or local governmental authority
(including, without limitation, insurance departments) within 60 days following
the Closing Date and such unmade filings will be in form and substance
sufficient to enable the Companies to complete and make such filings on a timely
basis following the Closing Date.
(y) Absence of Certain Changes. Since June 30, 1998, none of
the Companies has (i) issued, sold or delivered or agreed to issue, sell or
deliver any additional shares of its capital stock or any options, warrants or
rights to acquire any such capital stock, or securities convertible into or
exchangeable for such capital stock, (ii) incurred any obligations or
liabilities, whether absolute, accrued, contingent or otherwise (including,
without limitation, liabilities as guarantor or otherwise with respect to
obligations of others), other than obligations and liabilities relating to the
issuance of insurance policies in the ordinary course of Intermed's and
Interlex' business, or incurred in the ordinary course of Tenere's business, or
obligations and liabilities otherwise reflected on financial statements
delivered by Tenere to FPIC, (iii) mortgaged, pledged or subjected to any lien,
lease, security interest or other charge or encumbrance, any of its assets,
tangible or intangible, (iv) acquired or disposed of any assets or properties,
or entered into any agreement or other arrangements for any such acquisition or
disposition, except for assets acquired or disposed of in the ordinary course of
business, (v) declared, made, paid or set apart any sums for any dividend or
other distribution to its shareholders or any other Affiliate or purchased or
redeemed any shares of its capital stock or granted any option, warrant or right
to purchase any such capital stock, or reclassified such capital stock, (vi)
except as set forth on a schedule hereto, paid or become obligated to pay any
service fees or other sums to Tenere or any of its Affiliates,
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(vii) forgiven or canceled any debts or claims or waived any statutory,
contractual or common law rights of material value, (viii) entered into any
transaction other than in the ordinary course of business, (ix) granted any
rights or licenses under any of their respective trade names or entered into
general agency arrangements, (x) entered into any agreement regarding
reinsurance, surplus relief obligations, excess insurance, ceding of insurance,
assumption of insurance or indemnification with respect to insurance or
management of business, (xi) suffered any adverse change in their respective
operations, financial condition, income, assets or liabilities, (xii) suffered
any damage, destruction or loss, whether or not covered by insurance or
reinsurance, materially adversely affecting, in any case or in the aggregate,
their respective businesses, financial condition, properties or assets or (xiii)
suffered any strike, picketing, boycott or other labor trouble materially
adversely affecting their respective businesses, financial condition or
operations.
(z) Taxes. All Tax returns and information returns, reports,
statements, and forms (including estimated Tax and information returns, reports,
statements, and forms) (collectively, the "Returns") of each of the Companies
and of any member of any affiliated group of corporations (within the meaning of
section 1504 of the Internal Revenue Code of 1986, as amended (the "Code"), as
in effect at the time of the due date for the filing of such Returns) of which
any of the Companies is or was a member that are required by law to be filed
with any Taxing Authority have been timely filed and are accurate, true and
complete in all material respects. Except as set forth on Schedule 4.1(z), all
Returns filed with respect to Tax years of the Companies through the Tax year
ended December 31, 1994 have been examined and closed or are Returns with
respect to which the applicable period for assessment under applicable law has
expired. None of the Returns filed by or on behalf of any of the Companies is
currently being audited by any Taxing Authority. All Taxes upon each of the
Companies or for which any of the Companies may be liable, or in respect of any
of the assets, income or franchises of any of the Companies, have been paid by
such Company or have been paid on such Company's behalf, or adequate accruals,
reserves and provisions have been established on the books of the Companies for
the payment of such Taxes. There are no requests for rulings or determinations
in respect of any Tax or Tax Asset pending between any of the Companies and any
Taxing Authority. There are no Tax liens upon any of the properties or assets of
any of the Companies. No Taxing Authority has provided any of the Companies or
any member of any affiliated group of corporations of which any of the Companies
is or was a member with any notice of any audit, investigation, proceeding or
claim with respect to any Taxes for which any of the Companies may be liable.
None of the Companies nor any member of any affiliated group of corporations (as
defined above) of which any of the Companies is or was a member has granted or
been requested to grant any waiver of any statute of limitations applicable to
any claim for Taxes or has agreed to any extension of time with respect to any
Tax assessment or deficiency for Taxes for which any of the Companies may be
liable. All information set forth in the notes to the Tenere Financial
Statements relating to Tax matters is true and complete in all material
respects. The accruals and reserves for Taxes (A) reflected in the Tenere
Financial Statements, as to Tenere and the Subsidiaries, in the Intermed
Quarterly Statement for the quarter ended June 30, 1998 as to Intermed, and in
the Interlex Quarterly Statement for the quarter ended June 30, 1998 as to
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Interlex, are adequate to cover all liabilities for all accrued or unpaid Taxes
for which each of the respective Companies has any liability or, as to contested
claims, any reasonably estimated liability for Taxes relating to such claims
with respect to the periods covered thereby, and (B) established or to be
established on the books of each of the Companies for the period beginning June
30, 1998, through the Effective Time will be adequate to cover all such
liabilities and reasonably estimated liabilities with respect to such period,
all in accordance with (i) GAAP applied on a basis consistent with prior periods
as to Tenere and the Subsidiaries and (ii) SAP on a basis consistent with prior
periods as to Intermed and Interlex. All ceding commissions paid or accrued by
either Intermed or Interlex (for any period as to which any applicable statute
of limitations remains open) in connection with any reinsurance, coinsurance, or
other similar contract have been capitalized and amortized over the respective
life of each such contract in accordance with all applicable Tax laws. Except as
set forth on Schedule 4.1(z), none of the Companies is a party to or bound by
any contractual obligation to pay any Tax, including any Tax indemnity, Tax
sharing, Tax allocation or similar agreement, arrangement, contract, or plan.
All elections with respect to Taxes affecting each of the Companies are set
forth in Schedule 4.1(z). Since January 1, 1993, none of the Companies nor any
Affiliate of any of them has made or changed any Tax election, changed any
annual Tax accounting period, or adopted or changed any method of Tax accounting
(to the extent that any such action may materially affect any of the Companies).
None of the Companies is a party to any agreement, contract, arrangement or plan
that has resulted or could result, separately or in the aggregate, in the
payment of any "excess parachute payments" within the meaning of Section 280G of
the Code. None of the Companies owns any material property subject to a lease
that is not a "true" lease for federal income Tax purposes. Each of the
Companies has withheld and paid in a timely manner to the proper Taxing
Authority all Taxes required to have been withheld and paid in connection with
amounts paid or owing to any employee, independent contractor, creditor,
Shareholder, or other third party, and has complied with all information
reporting and backup withholding requirements. None of the Companies has nor has
had a permanent establishment in any foreign country, as defined in any
applicable Tax treaty or convention between the United States and such foreign
country. For purposes of this Agreement, the term "Tax" means (i) any tax, or
other like assessment or charge of any kind whatsoever (including, but not
limited to, withholding on amounts paid to or by any person or entity and
premium taxes), together with any interest, penalty, addition to tax or
additional amount imposed by any federal, state, local, foreign or other
governmental authority (a "Taxing Authority") responsible for the imposition of
any such Tax, (ii) liability of any Company for the payment of any amount
described in (i) as a result of being a member of an affiliated, consolidated,
combined or unitary group, or being a party to any agreement or arrangement as a
result of which liability of any of the Companies to a Taxing Authority is
determined or taken into account with reference to the liability of any other
Person, and (iii) liability of any of the Companies for the payment of any
amount as a result of being party to any tax sharing, allotment, allocation or
similar agreement or with respect to the payment of any amount of the type
described in (i) or (ii) as a result of any express or implied obligation
(including, but not limited to, an indemnification obligation). For purposes of
this Agreement, the term "Tax Asset" means any operating loss, net capital loss,
investment tax credit, foreign tax credit, charitable deduction or any other
credit or
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tax attribute that could reduce Taxes (including, without limitation, deductions
and credits related to alternative minimum Taxes).
(aa) Insurance Policies. Set forth in Schedule 4.1(aa) hereto
is a complete and correct list as of the date hereof of the insurance policies
maintained by or for the benefit of any of the Companies or their Affiliates or
other officers or directors. Such policies are in full force and effect, all
premiums due thereon have been paid and the insured has complied in all material
respects with the provisions of such policies.
(bb) Transactions with Interested Persons. Except as set forth
on Schedule 4.1(bb), no officer or director, or to the best of Tenere's
knowledge any employee, agent or broker (or spouse or any child of any thereof)
of any of the Companies, or of any corporation that is an Affiliate of any of
the Companies, owns, directly or indirectly, on an individual or joint basis,
any material interest in, or serves as an officer, employee or director of, any
customer, insurance agency, competitor or supplier of any of the Companies or
any person or entity that has a material contract or arrangement with any of the
Companies.
(cc) Bank and Brokerage Accounts. Tenere has provided FPIC
with a complete and accurate list of each bank or trust company, other financial
institution, mutual fund or stock brokerage firm in which each of the Companies
has an account or safe deposit box and each custodial account maintained by each
of the Companies and, in each case, the names of such accounts, the account
numbers and the names of all persons authorized to draw thereon or to have
access thereto. Tenere has provided FPIC with a complete and accurate list of
all credit cards issued to any present or past officer, employee or agent of any
of the Companies under which any of the Companies has any current or potential
future liability.
(dd) Disclosure. Neither this Agreement nor any written
document, statement, list, schedule, exhibit, certificate or other instrument
furnished or to be furnished to FPIC or Acquisition Corporation by or on behalf
of any of the Companies in connection with the transactions contemplated hereby
contains or will contain when made or delivered any untrue statement of a
material fact, or fails to state or will fail to state when made or delivered a
material fact necessary to make the statements contained herein and therein not
misleading. There is no fact known to Tenere that materially adversely affects,
or in the future may materially adversely affect, the condition (financial or
otherwise), properties, assets, liabilities, capitalization, ownership, business
or operations of any of the Companies.
(ee) Employee Benefit Plans.
(i) All plans, funds and programs as defined in Section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
any deferred compensation agreements, employment contracts, severance pay
agreements and any other agreements, plans or programs relating to employment
whether written or oral ("Benefit Plans") currently maintained, or to which
contributions are made, by any of the Companies, or previously
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maintained, or to which contributions have been made, by any of the Companies
for which any of the Companies may be subject to current or potential future
liability, are listed and described in Schedule 4.1(ee) hereto. None of the
Companies has any obligation to establish, maintain or contribute to any Benefit
Plan other than as listed on Schedule 4.1(ee).
(ii) Each of the Companies has provided to FPIC complete and
correct copies of all plan documents of the Benefit Plans listed in Schedule
4.1(ee), including but not limited to, trust agreements, insurance contracts,
advance determination letters from the IRS, summary plan descriptions, employee
oral communications, the last five years' Form 5500s and the most recent
actuarial statements and financial statements.
(iii) All assets of the Benefit Plans listed in Schedule
4.1(ee) are held in trust or under an insurance contract.
(iv) Other than as set forth in Schedule 4.1(ee), none of
the Companies nor any other corporation, trade or business under common control
with any of the Companies (as determined under Code Sections 414(b) and (c))
(the "Control Group") has established, maintained or contributed to any employee
benefit plan subject to Title IV of ERISA or the funding requirements of Section
412 of the Code.
(v) Each of the Companies and each of the Benefit Plans has
been and presently is in compliance, both in form and operation, with the
applicable provisions of ERISA, the Code and all other applicable laws and the
regulations issued thereunder. Each of the Benefit Plans listed in Schedule
4.1(ee) hereto that is intended to be a qualified plan pursuant to Code Section
401(a) is so qualified and has received a favorable determination letter to such
effect within the last two years and no action or amendment has been taken or
made to adversely effect such determination letter. Each such determination
letter is attached hereto as Exhibit 4.1(ee). All reports required by any
governmental agency and disclosures required to be made to participants and
beneficiaries with respect to the Benefit Plans listed in Schedule 4.1(ee) have
been timely filed or made.
(vi) No litigation is pending or, to the best of the
knowledge of Tenere, threatened with respect to any of the Benefit Plans listed
in Schedule 4.1(ee) hereto. There is no outstanding request for information
concerning any of the Benefit Plans listed in Schedule 4.1(ee) hereto by
participants, beneficiaries or governmental agencies. None of the Companies nor
any Benefit Plan fiduciary (as defined in ERISA Section 3(21)) has engaged in
any transaction in violation of ERISA Section 406(a) or (b) (for which no
exemption exists under ERISA Section 408) or any "prohibited transaction" (as
defined in Section 4975(c)(2) or Section 4975(d) of the Code).
(vii) All contributions, premiums or other payments for the
Benefit Plans listed in Schedule 4.1(ee) hereto attributable to all periods
prior to the Closing Date have been made. Each of the Benefit Plans listed in
Schedule 4.1(ee) is fully funded or reserves are established and listed therefor
on the most recent financial statements of the Companies,
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respectively. If any Benefit Plan listed in Schedule 4.1(ee) were to be
terminated the day following the Closing Date, the assets of such Benefit Plan
are, and would be, sufficient to provide all promised benefits including, if
necessary, to pay for the purchase of annuities from an A++ (Superior) Best
rated insurance company at the then prevailing annuity purchase rates.
(viii) None of the Companies nor any member of the Control
Group has contributed to, has been obligated to contribute to, or otherwise
participated in any multiemployer plan, as defined in Section 4001(a)(3) of
ERISA nor in any multiemployer plan as defined in Section 413(c) of the Code.
(ix) None of the Companies has provided, nor has any
obligation to provide, any medical, life of similar benefits to employees
following termination of employment except as required in ERISA Section 601.
Each of the Companies has complied with ERISA Section 601. None of the Companies
has contributed to a nonconforming group health plan (as defined in Code Section
5000(c) and no member of the Control Group has incurred a tax under Code Section
5000(a) that is or could be a liability of the Companies.
(x) All Benefit Plans listed in Schedule 4.1(ee) hereto and
related Contracts, trusts and agreements are legally valid and binding and in
full force and effect.
(xi) No individual shall accrue or receive additional
benefits, service or accelerated vesting or rights to the payment as a direct
result of the transactions contemplated by this Agreement. No payment or benefit
accrued under any Benefit Plan or other agreement or arrangement will be subject
to Code Section 280G.
(ff) Employees. Set forth in Schedule 4.1(ff) hereto is a
list of all employees, agents (other than insurance agents), consultants and
similar persons retained by each of the Companies together with their present
rate of compensation (including bonuses) and a description of any existing or
proposed written or oral agreements with any of them regarding such employment
or engagement. None of the Companies is a party to any collective bargaining or
other labor union contract applicable to persons employed by such Company. No
Company has breached or otherwise failed to comply in any material respect with
any provision of any such agreement or contract and there are no formally filed
grievances outstanding against any Company or, to Tenere's knowledge,
threatened, against any Company, under any such agreement or contract. There are
no unfair labor practice complaints pending or, to the best knowledge of Tenere,
threatened, against any of the Companies nor any judicial or regulatory
proceeding, investigation or inquiry or employee complaint currently pending or,
to the best knowledge of Tenere, threatened, against any of the Companies
relating to union representation or otherwise. Tenere is not aware of any
current activities or proceedings of any labor union (or representatives
thereof) to organize any unorganized employees of any of the Companies, nor of
any strikes, slowdowns, work stoppages, lockouts or written threats thereof, by
or with respect to any employees of any of the Companies. During the past five
years, there have not been any formally filed grievances involving employees of
any of the Companies.
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(gg) Intellectual Property. There are no United States or
foreign patents or patent applications needed by any of the Companies to operate
their respective businesses. Set forth in Schedule 4.1(gg) hereto is a complete
list and summary description of all trademarks, trade names, service marks,
copyrights (whether registered or as to which registration has been applied for
in any jurisdiction) and fictitious names relating to the business of each of
the Companies and all common law trademarks, trade names, service marks and
other intellectual property used by each of the Companies, none of which is
owned by or licensed to anyone other than the Companies. There is no existing
or, to the best knowledge of Tenere, threatened infringement, misuse or
misappropriation by others or pending or threatened claims by any of the
Companies against others for infringement, misuse or misappropriation of any
patent, trademark, trade name, service mark, fictitious name, copyright, trade
secret, know-how or other intellectual property relating to the business of any
of the Companies.
(hh) Brokers. All activities of the Companies relating to
this Agreement and the transactions contemplated hereunder have been carried on
by the Companies in such manner so as not to give rise to any valid claim by any
person for a finder's fee, brokerage commission or other like payment other than
the fee payable to ABN AMRO Incorporated in connection with the fairness opinion
to be issued as contemplated in Section 6.1(k) of this Agreement.
(ii) Surplus Relief. At December 31, 1997, neither Intermed
or Interlex was, currently is, or on the Closing Date will be, subject to any
surplus relief obligations or reinsurance contracts or arrangements involving
financings or otherwise.
(jj) Insurance Issued by Intermed and Interlex.
(i) All insurance or annuity contract benefits payable by
Intermed and Interlex and, to the knowledge of Tenere, by any other person that
is a party to or bound by any reinsurance, coinsurance, or other similar
contract with Intermed or Interlex have been paid in accordance with the terms
of the insurance and other contracts under which they arose.
(ii) No outstanding insurance issued, reinsured, or
underwritten by Intermed or Interlex entitles the holder thereof or any other
person to receive dividends, distributions, or other benefits based on the
revenues or earnings of any company or any other person.
(iii) All insurance and annuity contracts offered, issued,
reinsured or underwritten by Intermed and Interlex have been duly approved under
all applicable insurance laws and regulations and have been fully reserved for
as prescribed under such laws and regulations.
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(iv) The respective underwriting standards utilized and
ratings applied by Intermed and Interlex and, to the best knowledge of Tenere,
by any other person that is a party to or bound by any reinsurance, coinsurance
or other similar contracts with Intermed or Interlex conform in all material
respects to industry-accepted practices and to the standards and ratings
required pursuant to the terms of the respective reinsurance, coinsurance, or
other similar contracts.
(v) All amounts (including without limitation amounts based
on paid and unpaid losses) to which each of Intermed and Interlex is entitled
under reinsurance, coinsurance, assumption fronting or other similar contracts
by which Intermed or Interlex insures, or is insured by, a third person against
loss or liability from risks assumed, are fully collectible.
(vi) Each insurance agent or general agent employed by any
of the Companies, and to the best knowledge of Tenere, each other insurance
agent or general agent, at the time such agent offered, wrote, sold or produced
business for Intermed or Interlex, was duly licensed as an insurance agent for
the business offered, written, sold or produced by such agent in the particular
jurisdiction in which such agent offered, wrote, sold or produced such business
for Intermed or Interlex. Except as set forth on Schedule 4.1(jj), no such
insurance agent, general agent or any group of affiliated agents has written 5%
or more of Intermed's or Interlex' total in-force premium.
(vii) To the best of Tenere's knowledge, no insurance agent
or general agent of Intermed or Interlex has violated (or with or without notice
or lapse of time or both, will or would have violated) any term or provision of
any law or any writ, judgment, decree, injunction or similar order applicable
to, or engaged in any misrepresentation with respect to, the writing, sale or
production of business for Intermed or Interlex.
(viii) Neither Intermed nor Interlex has ever issued any
individual retirement annuity (within the meaning of section 408(b) of the Code)
or any annuity contract intended to satisfy the requirements of section 403(b)
of the Code. Neither Intermed nor Interlex serves or has sponsored or maintained
any master, prototype, volume submitter, mass submitter or similar type of
retirement plan intended to qualify under section 401(a) of the Code for the
benefit of employees of another employer. Neither Intermed nor Interlex serves
or has served as plan administrator or plan recordkeeper for any employee
benefit program for the benefit of employees of another employer.
(ix) The tax treatment under the Code of all Products (as
hereinafter defined) is and at all times has been the same or more favorable to
the purchaser, policyholder or intended beneficiaries thereof as the tax
treatment under the Code for which such Products qualify or purported to qualify
at the time of their offer, issuance or purchase. Neither Intermed nor Interlex
has ever issued any ERISA Product (as hereinafter defined). For purposes of this
Agreement, (i) the term "Products" means all insurance, annuity or investment
contracts, financial products, employee benefit plans, individual retirement
accounts or annuities or any
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similar or related contracts or products, whether individual, group or
otherwise, at any time offered, issued or underwritten by Intermed or Interlex
and (ii) the term "ERISA Product" means any Product that constitutes an
arrangement that is intended to satisfy the requirements of section 79, 105,
401(a), 403(a), 403(b) or 408 of the Code.
(x) None of the Products constitute "life insurance"
contracts as that term is defined in Code Section 7702(a).
(xi) All reinsurance agreements between either Intermed or
Interlex and any non-licensed or non-approved insurer are secured by letters of
credit or other security meeting applicable statutory requirements sufficient to
allow Intermed or Interlex, as the case may be, to take full credit in its
accounting and financial statements for such reinsurance.
(kk) No Threatened Cancellation. Since January 1, 1997, no
policyholder, group of policyholder Affiliates or persons writing, selling or
producing insurance business that individually or in the aggregate accounted for
5% or more of the premium or annuity income determined in accordance with SAP of
either Intermed or Interlex for the year ended December 31, 1996, has terminated
or, to the best knowledge of Tenere, threatened to terminate, its relationship
with Intermed or Interlex.
(ll) Computer Software. Set forth on Schedule 4.1(ll) hereto
is a complete and correct list and summary description of all computer hardware,
software and programs owned by or licensed to each of the Companies or being
utilized in connection with the business, operations or affairs of any of the
Companies. The computer hardware, software, programs and similar systems set
forth on Schedule 4.1(ll) hereto are all of the computer hardware, software,
programs and similar systems necessary to enable each of the Companies to
conduct their respective businesses as presently conducted. Each of the
Companies has, and at all times after Closing will have, the right to use, free
and clear of any royalty or other payment obligations (except as disclosed in
Schedule 4.1(ll)), to the best knowledge of the Companies claims of infringement
or alleged infringement or other liens all computer hardware, software, programs
and similar systems disclosed in Schedule 4.1(ll) hereto. To the best knowledge
of the Companies, none of the Companies is in conflict with or in violation or
infringement of, nor has any of the Companies received any notice of any
conflict with or violation or infringement of or any claimed conflict with, any
asserted rights of any other person with respect to any computer hardware,
software or programs, including without limitation any such item disclosed on
Schedule 4.1(ll) hereto. The hardware, software and all related systems and
applications (collectively, the "Computer Systems") of each Company include
design, performance and functionality so that the Companies do not reasonably
expect to experience invalid or incorrect results or abnormal hardware or
software operation related to calendar year 2000.
(mm) Books and Records. The minute books and other similar
records of each of the Companies contain a complete and correct record, in all
material respects, of all actions taken at all meetings and by all written
consents in lieu of meetings of the shareholders and
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board of directors of each of the Companies, respectively and of each committee
thereof. The books and records of each of the Companies accurately reflect in
all material respects the business or condition of each of the Companies,
respectively, and have been maintained in all material respects in accordance
with good business and bookkeeping practices.
(nn) No Investment Company. None of the Companies is, and
none of the Companies has registered as, an investment company within the
meaning of the Investment Company Act of 1940, as amended. None of the Companies
maintains any separate account or similar fund for the benefit of any
policyholder or annuitant.
(oo) Investment Portfolio. Tenere has provided FPIC with a
complete and correct list as of June 30, 1998, of all stocks, notes, debentures,
bonds, mortgage loans, policy loans and other securities and investments owned
of record or beneficially by each of Intermed and Interlex, which as of such
date constituted the entire investment portfolio of each of Intermed and
Interlex (which portfolio with additions and deletions thereto in the ordinary
course of business as permitted by this Agreement is hereafter called the
"Investment Assets"). Each of Intermed and Interlex has good and indefeasible
title to its Investment Assets, and all of its Investment Assets are in
compliance with the requirements of all applicable laws and insurance
regulations. As of the Closing, the investment portfolios of Intermed and
Interlex shall consist of the Investment Assets, and each of Intermed and
Interlex shall own and have good and indefeasible title to its Investment
Assets.
(pp) Discussions with Regulators. No employee, agent or
representative of any of the Companies has had any discussions or communications
with any regulators regarding an adverse change in Intermed's or Interlex' or
any of the other Companies' condition (financial or otherwise) or regarding a
material breach of market conduct requirements of Intermed or Interlex or any of
the other Companies.
(qq) Regulatory Matters. No Company or any Affiliate thereof
has taken or agreed to take any action, and Tenere does not have any knowledge
of any fact or circumstance, that is reasonably likely to materially impede or
delay receipt of any consents of regulatory authorities referred to in Section
4.1(d).
(rr) State Takeover Laws. Each Company has taken all necessary
actions to exempt the transactions contemplated by this Agreement from any
applicable "moratorium", "fair price", "business combination", "control share"
or other anti-takeover laws, including, without limitation, Sections 351.410
through 351.464 of the GBCLM.
Section 4.2 Representations and Warranties of FPIC and Acquisition
Corporation. Each of FPIC and Acquisition Corporation represents, warrants and,
to the extent that an item relates to a future time period, covenants to Tenere
as follows:
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(a) Organization and Good Standing. Each of FPIC and
Acquisition Corporation is a Florida corporation, validly existing and in good
standing under the laws of the State of Florida.
(b) Power and Authority. Each of FPIC and Acquisition
Corporation has all requisite power and authority to execute, deliver and
perform this Agreement and any other agreements or instruments contemplated
hereby to be executed by it. The execution, delivery and performance by FPIC and
Acquisition Corporation of this Agreement and any other agreements or
instruments contemplated hereby to be executed by FPIC and Acquisition
Corporation have been duly authorized by all requisite action on behalf of FPIC
and Acquisition Corporation and, except for obtaining the approval of this
Agreement by FPIC (as the sole shareholder of Acquisition Corporation) (which
approval FPIC shall give prior to the Closing Date), no other authorization or
approval by the Board of Directors or shareholder of FPIC or Acquisition
Corporation or any other Affiliate of FPIC is necessary to consummate the
transactions contemplated hereby. This Agreement constitutes, and each other
agreement contemplated hereby to be executed by FPIC or Acquisition Corporation
will constitute when executed and delivered, a valid and legally binding
obligation of FPIC and Acquisition Corporation enforceable against it in
accordance with their respective terms, except as enforceability may be limited
by bankruptcy, reorganization, insolvency, moratorium or other laws affecting
creditors rights generally and general principles of equity.
(c) No Conflicts. The execution and delivery of this Agreement
and any other agreements and instruments contemplated hereby by FPIC and
Acquisition Corporation and the consummation of the transactions contemplated
hereby, in accordance with the terms hereof and thereof, upon receipt of the
consents and approvals contemplated by Section 4.2(d), will not violate any
existing provision of the Articles of Incorporation, Bylaws or other
organizational documents of FPIC or Acquisition Corporation or of any law or
violate any existing term or provision of any order, writ, judgment, injunction
or decree of any court or any other governmental department, commission, board,
bureau, agency or instrumentality applicable to either FPIC or Acquisition
Corporation or conflict with or result in a breach of any of the terms,
conditions or provisions of any agreement to which FPIC or Acquisition
Corporation is a party, or by which any of their respective properties are
bound, or constitute an event that might permit an early termination of or
otherwise materially affect any such agreement.
(d) Consents and Approvals. No consent, license, approval,
order or authorization of, or registration, declaration or filing with, any
governmental authority, agency, bureau or commission or any third party is
required to be obtained or made by FPIC or Acquisition Corporation in connection
with the execution, delivery, performance, validity, and enforceability of this
Agreement, except for (i) filings to be made with, and approvals to be obtained
from, the Missouri Department and the insurance departments of other states or
jurisdictions, (ii) filings under the pre-merger notification requirements of
the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR") and (iii)
registrations, declarations or filings required to be made subsequent to the
Closing Date with any governmental entity or third party
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not entailing any requirement of consent, license, approval, order or
authorization on the part of such governmental entity or third party.
(e) Disclosure. Neither this Agreement nor any written
document, statement, list, schedule, exhibit, certificate or other instrument
furnished or to be furnished to Tenere by or on behalf of FPIC or Acquisition
Corporation in connection with the transactions contemplated hereby contains or
will contain when made or delivered any untrue statement of a material fact, or
fails to state or will fail to state when made or delivered a material fact
necessary to make the statements contained herein and therein not misleading.
There is no fact known to FPIC or Acquisition Corporation that materially
adversely affects, or in the future may materially adversely affect, the
condition (financial or otherwise), properties, assets, liabilities,
capitalization, ownership, business or operations of FPIC or Acquisition
Corporation.
(f) Brokers. All activities of FPIC and Acquisition
Corporation relating to this Agreement and the transactions contemplated
hereunder have been carried on by FPIC and Acquisition Corporation in such
manner so as not to give rise to any valid claim by any person against Tenere
for a finder's fee, brokerage commission or other like payment.
ARTICLE 5
COVENANTS
---------
Section 5.1 Covenants of Tenere. From the date hereof through the
Closing Date, Tenere will and will cause the Subsidiaries to:
(a) Access to Information. Upon reasonable notice, give FPIC
and its attorneys, accountants, agents and representatives full access to all
the properties, books, records, contracts, commitments, employee benefit plans,
documents, instruments and other records of or pertaining to each of the
respective Companies and permit FPIC and its attorneys, accountants, agents and
representatives to consult with and ask questions of the officers and employees
of each Company; deliver to FPIC all audited or unaudited quarterly or annual
financial statements of each such Company prepared subsequent to the date of
this Agreement; and cooperate with and assist FPIC in discussions with insurance
regulators regarding each of the Companies' financial condition and compliance
with insurance laws and regulations.
(b) Conduct of Business. Keep the books and records of each
Company consistent in all material respects with prior periods and, with respect
to Intermed and Interlex, in accordance with SAP and, with respect to the
consolidated group consisting of Tenere and the Subsidiaries, in accordance with
GAAP, and conduct their respective businesses and corporate affairs in the
ordinary course consistent in all material respects with past practices, and
will not:
(i) issue or sell any of their respective capital stock, or
any options, warrants, calls or securities convertible into such capital stock,
or enter into any agreement to do
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any of the foregoing, or make any change in its capital structure either by
way of stock split, stock dividend or otherwise;
(ii) declare or pay any dividends or make any distribution
in respect of capital stock, or purchase, redeem or otherwise acquire or retire
any capital stock;
(iii) other than in the ordinary course of business, without
the prior written consent of FPIC enter into or assume any contract or
commitment, or terminate or amend any existing contract or commitment, or incur
or prepay any indebtedness for borrowed money;
(iv) make any loans or advance any funds to anyone or extend
credit;
(v) except as contemplated in this Agreement, enter into,
amend or accelerate any payment or contribution under any employment, agency or
consulting agreement or Benefit Plan;
(vi) other than in the ordinary course of business, without
the prior consent of FPIC, which consent shall not be unreasonably withheld,
hire any new employees or make any changes affecting the rates of compensation
of, or pay any bonuses to (other than accrued bonuses under current Benefit
Plans), or grant any other benefit to, their respective current directors,
officers, agents or employees;
(vii) other than in the ordinary course of business, create
or assume any mortgage or other lien or encumbrance on, or dispose of, any of
their respective assets or properties;
(viii) other than in the ordinary course of business,
acquire any assets or any properties or make any investments, or enter into any
agreements to acquire any assets or properties or to make any investments;
(ix) except as permitted under Section 3.4, merge or
consolidate with any other corporation, or acquire or agree to acquire any stock
(except investments in the ordinary course of business) of any person, firm,
association, corporation or other business organization;
(x) make any change in their respective Articles of
Incorporation or Bylaws;
(xi) without the prior written consent of FPIC, enter into
any arrangement with any person with respect to any United States or foreign
patents, patent applications, trademarks, service marks, applications for
registration of trademarks or service marks, trade names, fictitious names,
copyrights, know-how or trade secrets owned by any of them, or in any way
relating to their respective businesses;
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(xii) without the prior written consent of FPIC, make any
election with respect to the computation of taxes or take any position in any
tax return that could have an adverse effect on any of the Companies;
(xiii) other than in the ordinary course of business,
without the prior written consent of FPIC make any other change in their
businesses, business practices or operations; or
(xiv) enter into any agreement to do any of the foregoing.
(c) Consultation with FPIC Pending Closing. Confer and consult
with FPIC on all material business decisions affecting the future performance of
each of the Companies, other than decisions made in the ordinary course of
business consistent in all material respects with past practices, including in
particular with respect to Intermed and Interlex on all material business
decisions involving (i) increases or decreases in the credited rate of insurance
products issued by Intermed or Interlex and (ii) Intermed's and Interlex'
investment policy.
(d) Disposition of Shares. With respect to Tenere, not dispose
of, encumber or grant any rights regarding any of the capital stock of any
Subsidiary.
(e) Intercompany Accounts. At least five days before the
Closing, deliver to FPIC a complete and correct list and summary description of
all intercompany accounts between Tenere, Intermed, Interlex and/or ISI, or any
Affiliate of Tenere.
(f) Preservation of Business. Use all reasonable efforts to
(i) preserve intact each of the Companies' present business organization,
reputation, employees, agents, customers and suppliers, and with respect to
Intermed and Interlex, relations with policyholders, (ii) maintain all licenses
of each of the Companies to do business in each jurisdiction in which they are
so licensed, (iii) maintain in full force and effect all agreements of each
Company (except as otherwise contemplated by this Agreement) and (iv) maintain
all assets and properties of each Company in good working order and condition,
ordinary wear and tear excepted.
(g) Investment Portfolio Requirements. Notify and obtain the
written approval of FPIC, which approval shall not be unreasonably withheld,
prior to making any changes to Intermed's or Interlex' investment portfolio or
the Investment Assets that are not in the ordinary course of business or that
are inconsistent in any material respect with Intermed's or Interlex' present or
past investment practices and policies.
(h) Surplus Items. Take no actions other than in the ordinary
course of business as contemplated by this Agreement or as required by law,
without the prior written consent of FPIC, that could cause or result in a
reduction in the amount of Intermed's or Interlex' aggregate statutory capital,
surplus, asset valuation reserve and interest maintenance reserve, as set forth
in the Intermed's Interlex' Quarterly Statements for the quarter ended June 30,
1998.
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(i) Notice and Cure. Notify FPIC promptly in writing of, and
contemporaneously provide FPIC with complete and correct copies of any and all
information or documents relating to, and use all reasonable efforts to cure
before the Closing, any event, development, transaction or circumstance
occurring after the date of this Agreement that causes or could cause any
covenant or agreement of Tenere under this Agreement to be breached, or that
renders or could render untrue any representation or warranty of Tenere
contained in this Agreement as if the same were made on or as of the date of
such event, development, transaction or circumstance; and use all reasonable
efforts to cure, before the Closing, any violation or breach of any
representation, warranty, covenant or agreement made by Tenere in this
Agreement, whether occurring or arising before or after the date of this
Agreement.
(j) Further Actions. Execute, acknowledge and deliver any
further documents, including, but not limited to, any financial statements of
Intermed and Interlex filed with the Missouri Department after the date hereof,
reasonably requested by FPIC consistent with the terms of this Agreement.
(k) Reasonable Efforts. Use its reasonable efforts to fulfill,
as soon as practicable, all of the conditions contained in Section 6.1 hereof.
(l) Fund Plan Deficits. If requested by FPIC fund any and all
actuarial deficits existing in any Benefit Plan listed on Schedule 4.1(ee ) of
this Agreement except to the extent that such funding could (i) cause the
Benefit Plan to fail to qualify under section 401(a) of the Code with respect to
some or all persons with beneficial interests in the Benefit Plan (determined
without regard to any modification to the Benefit Plan's benefit formula that
could be made to prevent such disqualification) or (ii) cause the imposition of
an excise tax under section 4972 of the Code.
Section 5.2 Covenants of FPIC and Acquisition Corporation. From the
date hereof through the Closing Date, FPIC and Acquisition Corporation will
each:
(a) Further Actions. Execute, acknowledge and deliver any
further documents reasonably requested by Tenere consistent with the terms of
this Agreement.
(b) Reasonable Efforts. Use their reasonable efforts to
fulfill, as soon as practicable, all of the conditions contained in Section 6.2
hereof.
(c) Notice and Cure. Notify Tenere promptly in writing of,
and contemporaneously provide Tenere with complete and correct copies of, any
and all information or documents relating to, and use all reasonable efforts to
cure before the Closing, any event, development, transaction or circumstance
occurring after the date of this Agreement that causes or could cause any
covenant or agreement of FPIC or Acquisition Corporation under this Agreement to
be breached, or that renders or could render untrue any representation or
warranty of FPIC or Acquisition Corporation contained in this Agreement as if
the same were made on or as of the date of such event, development, transaction
or circumstance; and use all reasonable
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efforts to cure, before the Closing, any violation or breach of any
representation, warranty, covenant or agreement made by FPIC or Acquisition
Corporation in this Agreement, whether occurring or arising before or after the
date of this Agreement.
ARTICLE 6
CONDITIONS PRECEDENT
--------------------
Section 6.1 FPIC and Acquisition Corporation. The obligations of FPIC
and Acquisition Corporation to consummate the transactions provided for in this
Agreement shall be subject to the fulfillment, on or prior to the Closing Date,
of the following conditions:
(a) Representations and Warranties. The representations and
warranties of Tenere set forth in this Agreement shall, (i) to the extent such
representations and warranties are not qualified by a materiality standard, be
true and correct in all material respects on the Closing Date as if made on and
as of the Closing Date and (ii) to the extent such representations and
warranties are qualified by a materiality standard, be true and correct in all
respects on the Closing Date as if made on and as of the Closing Date, and FPIC
shall have received a certificate to such effect executed on behalf of Tenere by
its Chief Executive Officer and Chief Financial Officer and dated as of the
Closing Date.
(b) Performance of Obligations. Tenere and the Subsidiaries
shall have performed in all material respects all of their obligations contained
in this Agreement to be performed on or prior to the Closing Date, and FPIC
shall have received a certificate to such effect, executed on behalf of Tenere
by its Chief Executive Officer and Chief Financial Officer and dated as of the
Closing Date.
(c) Authorization. All corporate action necessary to
authorize the execution, delivery and performance by Tenere of this Agreement,
and the consummation of the transactions contemplated hereby, shall have been
duly and validly taken by Tenere and Tenere shall have furnished FPIC with
copies of all applicable resolutions adopted by the Board of Directors and
shareholders of Tenere certified by the Secretary or Assistant Secretary of
Tenere.
(d) Threatened or Pending Proceedings. No proceedings shall
have been threatened or initiated by any person to enjoin or restrain the
consummation of the transactions contemplated hereby or seeking damages or other
relief as a result thereof.
(e) Approvals and Consents. The waiting period, if any,
pursuant to HSR shall have expired without objection or been terminated and any
necessary approval of the Missouri Department and the insurance departments of
other states and jurisdictions, and all other consents of any person required to
permit the consummation of the transactions contemplated by this Agreement
without any violation by FPIC, Acquisition Corporation, Tenere or the
Subsidiaries of any law or obligation shall have been obtained and such
approvals and consents shall not
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contain any materially burdensome conditions or requirements on or applicable to
FPIC, Acquisition Corporation, Tenere or any Subsidiary.
(f) Legal Opinions. FPIC shall have received the opinion of
Thompson Coburn, substantially in the form attached hereto as of Exhibit 6.1(f).
(g) No Adverse Change. Since June 30, 1998, there shall not
have been, occurred or arisen any event, development, transaction, condition or
state of facts of any character (including without limitation any damage,
destruction or loss whether or not covered by insurance or reinsurance) that
individually or in the aggregate has or could have a Material Adverse Effect on
or with respect to any Company.
(h) Secretary's Certificates. FPIC shall have received from
Tenere (i) a certificate dated the Closing Date from Tenere's Secretary
attaching (A) a copy of Tenere's Articles of Incorporation certified by the
Secretary of State of Missouri, which certification shall be dated not more than
ten days prior to the Closing Date, (B) a copy of Tenere's Bylaws, and (C) a
Good Standing Certificate for Tenere from the Secretary of State of Missouri,
which Certificate shall be dated no more than ten days prior to the Closing
Date, (ii) a certificate dated the Closing Date from Intermed's Secretary
attaching (A) a copy of Intermed's Articles of Incorporation, certified by the
Missouri Secretary of State, which certification shall be dated not more than
ten days prior to the Closing Date, (B) a copy of Intermed's Bylaws, (C) a Good
Standing Certificate for Intermed from the Missouri Secretary of State, which
Certificate shall be dated not more than ten days prior to the Closing Date, and
(D) Certificates of Status and Authority for Intermed from the Missouri
Department and the Kansas Department of Insurance, (iii) a certificate dated the
Closing Date from Interlex' Secretary attaching (A) a copy of Interlex' Articles
of Incorporation, certified by the Missouri Secretary of State, which
certification shall be dated not more than ten days prior to the Closing Date,
(B) a copy of Interlex' Bylaws, (C) a Good Standing Certificate for Interlex
from the Missouri Secretary of State, which Certificate shall be dated not more
than ten days prior to the Closing Date and (D) Certificates of Status and
Authority for Interlex from the Missouri Department and the Kansas Department,
(iv) a certificate dated the Closing Date from ISI's Secretary attaching (A) a
copy of ISI's Certificate of Incorporation, certified by the Missouri Secretary
of State, which certification shall be dated not more than ten days prior to the
Closing Date, (B) a copy of ISI's Bylaws and (C) a Good Standing Certificate for
ISI from the Missouri Secretary of State, which Certificate shall be dated not
more than ten days prior to the Closing Date, and (v) a certificate dated the
Closing Date from Trout's Secretary attaching (A) a copy of Trout's Articles of
Incorporation, certified by the Missouri Secretary of State, which certification
shall be dated not more than ten days prior to the Closing Date, (B) a copy of
Trout's bylaws, and (C) a Good Standing Certificate for Trout from the Missouri
Secretary of State, which Certificate shall be dated not more than ten days
prior to the Closing Date.
(i) Shareholder Approval. Tenere's shareholders shall have
approved this Agreement and the Merger and Tenere shareholders holding more than
ten percent of the
35
<PAGE> 129
outstanding Tenere's Stock shall not have delivered to Tenere a written
objection to the Merger pursuant Section 351.455 of the GBCLM.
(j) Fairness Opinion. Tenere shall have received from ABN
AMRO Incorporated, as of the date of the mailing of the proxy statement of
Tenere to its shareholders with respect to the Merger, its opinion that the
terms of the Merger are fair to the shareholders of Tenere from a financial
point of view, and such opinion shall not have been withdrawn between the date
of its delivery and the Effective Time.
(k) Resignation of Directors. Each member of Tenere's Board
of Directors shall have executed and delivered a resignation from such Board,
effective immediately following the Effective Time.
Section 6.2 Conditions to the Obligations of Tenere. The obligation of
Tenere to consummate the transactions provided for in this Agreement shall be
subject to the fulfillment, on or prior to the Closing Date, of the following
conditions:
(a) Representations and Warranties. The representations and
warranties of FPIC and Acquisition Corporation set forth in this Agreement
shall, to the extent such representations and warranties are not qualified by a
materiality standard, be true and correct in all material respects on the
Closing Date as if made on and as of the Closing Date, and the representations
and warranties of FPIC and Acquisition Corporation set forth in this Agreement
shall, to the extent such representations and warranties are qualified by a
materiality standard, be true and correct in all respects on the Closing Date as
if made on and as of the Closing Date, and Tenere shall have received
certificates to such effect, executed on behalf of FPIC and Acquisition
Corporation by their respective Chief Executive Officers and Chief Financial
Officers, and dated as of the Closing Date.
(b) Performance of Obligations. FPIC and Acquisition
Corporation shall have performed in all material respects all of their
respective obligations contained in this Agreement to be performed on or prior
to the Closing Date, and Tenere shall have received certificates to such effect,
executed on behalf of FPIC and Acquisition Corporation by their respective Chief
Executive Officers and Chief Financial Officers, and dated as of the Closing
Date.
(c) Threatened or Pending Proceedings. No proceedings shall
have been threatened or initiated by any person to enjoin or restrain the
consummation of the transactions contemplated hereby or seeking damages or other
relief as a result thereof.
(d) Approvals and Consents. The waiting period, if any,
pursuant to HSR shall have expired without objection or been terminated and any
necessary approvals of the Missouri Department and the insurance departments of
other states or jurisdictions and all other consents listed on Schedule 4.1(d)
required to permit consummation of the transactions contemplated by this
36
<PAGE> 130
Agreement without any violation by Tenere or the Subsidiaries of any law or
obligation shall have been obtained.
(e) Legal Opinion. Tenere shall have received the opinion of
LeBoeuf, Lamb, Greene & MacRae, L.L.P., substantially in the form attached
hereto as Exhibit 6.2(e).
(f) Shareholder Approval. The Tenere shareholders shall have
approved the Merger.
(g) Authorization. All corporate action necessary to
authorize the execution, delivery and performance by FPIC and Acquisition
Corporation of this Agreement, and the consummation of the transactions
contemplated hereby, shall have been duly and validly taken by FPIC and
Acquisition Corporation, and FPIC and Acquisition Corporation shall have
furnished Tenere with copies of all applicable resolutions adopted by their
respective Boards of Directors, certified in each case by a Secretary or
Assistant Secretary of FPIC and Acquisition Corporation, respectively.
(h) Deposit with Exchange Agent. There shall have been
deposited with the Exchange Agent the Exchange Fund in accordance with Section
2.3(a).
(i) Fairness Opinion. Tenere shall have received from ABN
AMRO Incorporated, as of the date of the mailing of the proxy statement of
Tenere to its shareholders with respect to the Merger, its opinion that the
terms of the Merger are fair to the shareholders of Tenere from a financial
point of view, and such opinion shall not have been withdrawn between the date
of its delivery and the Effective Time.
ARTICLE 7
CLOSING
-------
Section 7.1 Closing. A closing (the "Closing") for the consummation of
the transactions contemplated herein shall be held at the offices of LeBoeuf,
Lamb, Greene & MacRae, L.L.P., Jacksonville, Florida, at 10:00 A.M., local time,
on the second business day following the date on which all of the conditions set
forth in Article 6 have been (or can be at the Closing) satisfied or have been
waived by the party permitted to do so (the "Closing Date").
Section 7.2 Filings at the Closing. Subject to the provisions of
Article 6 hereof, FPIC and Tenere shall at the Closing cause the Articles of
Merger to be filed and recorded in accordance with the provisions of Section
607.1105 of the FBCA and Sections 351.410 and 351.458 of the GBCLM and shall
take any and all other lawful actions and do any and all other lawful things
necessary to cause the Merger to become effective.
37
<PAGE> 131
ARTICLE 8
TERMINATION
-----------
Section 8.1 Termination. This Agreement, other than the obligations
contained in Section 3.5(f), Article 9 and Section 10.2, which shall survive any
termination of this Agreement, may be terminated as to all parties hereto and
the transactions contemplated herein abandoned prior to the Closing:
(a) by the mutual consent of the parties hereto;
(b) by FPIC at any time after February 15, 1999, if at such
time the conditions set forth in Section 6.1 hereof have not been satisfied
through no fault of FPIC or Acquisition Corporation and FPIC gives Tenere notice
of such termination;
(c) by FPIC at any time after holders of greater than ten
percent of the outstanding Tenere's Stock have delivered to Tenere a written
objection to the Merger pursuant to the provisions for dissenters' rights
provided by the GBCLM;
(d) by Tenere at any time after February 15, 1999, if at such
time the conditions set forth in Section 6.2 hereof have not been satisfied
through no fault of Tenere or any other party and Tenere gives FPIC notice of
such termination;
(e) by Tenere in accordance with the provisions of Section
3.4; and
(f) by FPIC and Acquisition Corporation in accordance with
the provisions of Section 3.4.
Termination of this Agreement as provided in this Agreement
shall not affect any other rights or remedies any party may have at law, in
equity or otherwise for breach of this Agreement or otherwise, including, but
not limited to, any right FPIC and Acquisition Corporation may have to receive
the fee specified in Section 3.4(e) hereof.
ARTICLE 9
CONFIDENTIALITY
---------------
Section 9.1 Confidentiality. From and after the date hereof, unless
otherwise agreed to by the parties, each of the parties shall keep, and shall
ensure that its directors, officers, employees, contractors, consultants and
agents keep, confidential all information acquired from another party pursuant
to this Agreement or otherwise, including the contents of this Agreement and any
document delivered pursuant thereto or in connection therewith, except that the
foregoing restriction shall not apply to any information that: (i) is or
hereafter becomes generally available
38
<PAGE> 132
to the public other than by reason of any default with respect to a
confidentiality obligation under this Agreement, (ii) was already known to the
recipient party as evidenced by prior written documents in its possession
(unless the information is covered by a prior confidentiality agreement between
the parties), (iii) is disclosed to the recipient party by a third party who is
not in default of any confidentiality obligation to the disclosing party
hereunder, (iv) is developed by or on behalf of the receiving party, without
reliance on confidential information received hereunder, (v) is submitted by the
recipient party to governmental authorities or regulatory bodies to facilitate
the issuance of approvals necessary or appropriate for the operation of their
businesses, provided that reasonable measures shall be taken to assure
confidential treatment of such information, (vi) is provided by the recipient
party to third parties under appropriate terms and conditions, including
confidentiality provisions substantially equivalent to those in this Agreement
and with the consent of the other party or (vii) is otherwise required to be
disclosed in compliance with applicable laws or regulations or order by a court
or other government authority or regulatory body having competent jurisdiction.
Without limiting the generality of the foregoing, no press release or similar
public announcement or disclosure concerning this Agreement or the transactions
contemplated herein shall be made by any party hereto without the prior consent
of the other parties unless the party making the announcement or disclosure is
informed by such party's counsel that such information is required to be
disclosed in compliance with applicable laws or regulations or order by a court
or other government authority or regulatory body having competent jurisdiction.
Any party shall be entitled, in addition to any other right or remedy it may
have, at law or in equity, to an injunction, without the posting of any bond or
other security, enjoining or restraining the other parties from any violation or
threatened violation of this Section.
ARTICLE 10
MISCELLANEOUS
-------------
Section 10.1 Consent to Jurisdiction and Service of Process. Any legal
action, suit or proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby may be instituted in any state or federal court
sitting in Duval County, Florida or Greene County, Missouri, and each party
agrees not to assert as a defense in any such action, suit or proceeding, any
claim that it is not subject personally to the jurisdiction of such court, that
the action, suit or proceeding is brought in an inconvenient forum, that the
venue of the action, suit or proceeding is improper or that this Agreement or
the subject matter hereof may not be enforced in or by such court. Any and all
service of process and any other notice in any such action, suit or proceeding
shall be effective against a party if given properly pursuant to the United
States Federal Rules of Civil Procedure or other applicable rules.
Section 10.2 Expenses. Each party shall bear its respective legal and
other costs and expenses incurred in connection with the preparation, execution,
delivery and performance of this Agreement and the transactions contemplated
hereby without right of reimbursement from any other party.
39
<PAGE> 133
Section 10.3 Notices. All notices and other communications hereunder
shall be in writing and shall be delivered personally, telegraphed, telexed
(with appropriate answerback received), sent by facsimile transmission (with
immediate confirmation thereafter) or sent by registered, certified or express
mail, postage prepaid, return receipt requested, or sent by a nationally
recognized overnight courier service, marked for overnight delivery. Any such
notice shall be deemed given when so delivered personally, telegraphed, telexed
(provided the correct answerback is received) or sent by facsimile transmission
(provided confirmation is received immediately thereafter); or if mailed, upon
receipt or rejection by the addressee; or if sent by overnight courier, one
business day after the date of delivery to the courier service marked for
overnight delivery; in each case addressed as follows:
(a) If to FPIC or Acquisition Corporation, to:
Florida Physicians Insurance Company, Inc.
1000 Riverside Avenue, Suite 800
Jacksonville, Florida 32204
Attention: William R. Russell
Telephone: (904)354-5910
Facsimile: (904)350-1049
with a copy to:
John R. Byers, Esq.
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
50 North Laura Street, Suite 2800
Jacksonville, FL 32202-3650
Telephone: 904/354-8000
Facsimile: 904/353-1673
(b) If to Tenere, to:
The Tenere Group, Inc.
1903 E. Battlefield
Springfield, Missouri 65804-3801
Attention: Raymond A. Christy, M.D.
Telephone: (417) 889-1010
Facsimile: (417) 889-1099
40
<PAGE> 134
with a copy to:
Robert M. LaRose, Esq.
Thompson Coburn
One Mercantile Center
St. Louis, Missouri 63101
Telephone: 314/552-6000
Facsimile: (314) 552-7000
or to such other address as the parties hereto may specify from time to time by
notice given as provided herein.
Section 10.4 Amendment. This Agreement may be amended only by an
instrument in writing executed by each of the parties hereto.
Section 10.5 Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
Section 10.6 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Florida, without regard to
principles of conflicts of laws.
Section 10.7 Entire Agreement. This Agreement, together with the
Exhibits and Schedules hereto, sets forth the entire agreement and understanding
among the parties hereto with respect to the subject matter hereof and
supersedes any prior negotiations, agreements, understandings or arrangements
between the parties hereto with respect to the subject matter hereof.
Section 10.8 Waivers. The provisions of this Agreement may only be
waived by an instrument in writing executed by the party granting the waiver.
The failure of a party at any time or times to require performance of any
provision hereof in any instance shall in no manner affect the right of such
party at a later time to enforce the same or any other provision of this
Agreement in respect of any subsequent instance. No waiver of any condition or
of the breach of any term contained in this Agreement in one or more instances
shall be deemed to be or construed as a further or continuing waiver of such
condition in respect of any subsequent instance or breach or a waiver of any
other condition or of the breach of any other term of this Agreement. Without
limiting the generality of the foregoing, no action taken pursuant to this
Agreement, other than proceeding with the consummation of the transactions
contemplated herein, shall be deemed to constitute a waiver by the party taking
such action or of compliance with any representations, warranties, covenants or
agreements contained in this Agreement.
Section 10.9 Interpretation. When a reference is made in this Agreement
to Articles, Sections, Exhibits or Schedules, such reference shall be to an
Article, Section, Exhibit or
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<PAGE> 135
Schedule, respectively, of this Agreement unless otherwise indicated. The table
of contents and the headings contained in this Agreement are for reference
purposes only and shall not affect the meaning or interpretation hereof.
Section 10.10 No Assignment. This Agreement and the rights, interests
and obligations hereunder may not be assigned by any party hereto, by operation
of law or otherwise, without the prior written consent of the other parties,
except that FPIC may assign all of its rights, interests and obligations
hereunder to FPIC Insurance Group, Inc., provided that FPIC Insurance Group,
Inc. agrees in writing to be bound by all of the terms, conditions and
provisions contained herein.
Section 10.11 No Survival of Representations and Warranties. The
respective representations and warranties, obligations, covenants and agreements
contained in this Agreement or in any Schedule, certificate or letter delivered
pursuant hereto shall expire and be terminated and extinguished at the Effective
Time.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
THE TENERE GROUP, INC.
By /s/ Raymond A. Christy
-----------------------------------
Raymond A. Christy, M.D., President
and Chief Executive Officer
FLORIDA PHYSICIANS INSURANCE
COMPANY, INC.
By /s/ Robert B. Finch
-----------------------------------
TGI ACQUISITION CORPORATION
By /s/ Robert B. Finch
-----------------------------------
42
<PAGE> 136
AMENDMENT NO. 1
TO
AGREEMENT AND PLAN OF MERGER
----------------------------
This AMENDMENT NO. 1 TO AGREEMENT AND PLAN OF MERGER (this
"Amendment No. 1") is entered into as of this 15th day of January, 1999 by and
among FLORIDA PHYSICIANS INSURANCE COMPANY, INC., a Florida corporation
("FPIC"), TGI ACQUISITION CORPORATION, a Florida corporation (the "Acquisition
Corporation"), and THE TENERE GROUP, INC., a Missouri corporation ("Tenere").
RECITALS:
--------
WHEREAS, on October 2, 1998, each of FPIC, Acquisition
Corporation and Tenere executed and delivered an Agreement and Plan of Merger
(the "Merger Agreement"), pursuant to which FPIC would acquire all of the
outstanding stock of Tenere through the merger of Acquisition Corporation with
and into Tenere in accordance with the Merger Agreement; and
WHEREAS, FPIC, Acquisition Corporation and Tenere now desire
to modify and amend the Merger Agreement as set forth herein.
NOW, THEREFORE, in consideration of the Merger Agreement and
the mutual covenants and agreements herein contained and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto covenant and agree as follows:
1. Capitalized Terms. Unless otherwise defined herein, all
capitalized terms used herein shall have the meanings ascribed thereto in the
Merger Agreement.
2. Amendment. Article 8 of the Merger Agreement shall be
deleted in its entirety and replaced with the following:
ARTICLE 8
TERMINATION
-----------
Section 8.1 Termination. This Agreement, other than the obligations
contained in Section 3.4(f), Article 9 and Section 10.2, which shall survive any
termination of this Agreement, may be terminated as to all parties hereto and
the transactions contemplated herein abandoned prior to the Closing:
(a) by the mutual consent of the parties hereto;
<PAGE> 137
(b) by FPIC at any time after March 31, 1999, if at such time
the conditions set forth in Section 6.1 hereof have not been satisfied through
no fault of FPIC or Acquisition Corporation and FPIC gives Tenere notice of such
termination;
(c) by FPIC at any time after holders of greater than ten
percent of the outstanding Tenere's Stock have delivered to Tenere a written
objection to the Merger pursuant to the provisions for dissenters' rights
provided by the GBCLM;
(d) by Tenere at any time after March 31, 1999, if at such
time the conditions set forth in Section 6.2 hereof have not been satisfied
through no fault of Tenere or any other party and Tenere gives FPIC notice of
such termination;
(e) by Tenere in accordance with the provisions of Section
3.4; and
(f) by FPIC and Acquisition Corporation in accordance with
the provisions of Section 3.4.
Termination of this Agreement as provided in this Agreement
shall not affect any other rights or remedies any party may have at law, in
equity or otherwise for breach of this Agreement or otherwise, including, but
not limited to, any right FPIC and Acquisition Corporation may have to receive
the fee specified in Section 3.4(e) hereof.
3. Ratification of Merger Agreement. Except as specifically
provided herein, the Merger Agreement shall remain in full force and effect and
is expressly ratified hereby.
4. Counterparts. This Amendment No. 1 may be executed in any
number of counterparts each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
5. Governing Law. This Amendment No. 1 shall be governed by and
construed in accordance with the laws of the State of Florida, without regard to
principles of conflicts of laws.
-2-
<PAGE> 138
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives on the day and year first
above written.
FLORIDA PHYSICIANS INSURANCE COMPANY, INC.
By /s/ Robert B. Finch
--------------------------------------
Name: Robert B. Finch
Title: Senior Vice President and
Chief Financial Officer
TGI ACQUISITION CORPORATION
By /s/ Robert B. Finch
--------------------------------------
Name: Robert B. Finch
Title: Senior Vice President and
Chief Financial Officer
THE TENERE GROUP, INC.
By /s/ Raymond A. Christy
--------------------------------------
Name: Raymond A. Christy, M.D.
Title: President and Chief Executive
Officer
-3-
<PAGE> 139
ANNEX B
-------
SECTION 351.455 OF THE GENERAL AND BUSINESS CORPORATION LAW OF MISSOURI
<PAGE> 140
The following is the text of the statutory dissenters' right
as set forth at Section 351.455 of the General and Business Corporation Law of
Missouri:
351.455 SHAREHOLDER WHO OBJECTS TO MERGER MAY DEMAND VALUE OF
SHARES, WHEN--
1. If a shareholder of a corporation which is a party to a
merger or consolidation shall file with such corporation, prior to or at the
meeting of shareholders at which the plan of merger or consolidation is
submitted to a vote, a written objection to such plan of merger or
consolidation, and shall not vote in favor thereof, and such shareholder, within
twenty days after the merger or consolidation is effected, shall make written
demand on the surviving or new corporation for payment of the fair value of his
shares as of the day prior to the date on which the vote was taken approving the
merger or consolidation, the surviving or new corporation shall pay to such
shareholder, upon surrender of his certificate or certificates representing said
shares, the fair value thereof. Such demand shall state the number and class of
the shares owned by such dissenting shareholder. Any shareholder failing to make
demand within the twenty day period shall be conclusively presumed to have
consented to the merger or consolidation and shall be bound by the terms
thereof.
2. If within thirty days after the date on which such merger
or consolidation was effected the value of such shares is agreed upon between
the dissenting shareholder and the surviving or new corporation, payment
therefor shall be made within ninety days after the date on which such merger or
consolidation was effected, upon the surrender of his certificate or
certificates representing said shares. Upon payment of the agreed value the
dissenting shareholder shall cease to have any interest in such shares or in the
corporation.
3. If within such period of thirty days the shareholder and
the surviving or new corporation do not so agree, then the dissenting
shareholder may, within sixty days after the expiration of the thirty day
period, file a petition in any court of competent jurisdiction within the county
in which the registered office of the surviving or new corporation is situated,
asking for a finding and determination of the fair value of such shares, and
shall be entitled to judgment against the surviving or new corporation for the
amount of such fair value as of the day prior to the date on which such vote was
taken approving such merger or consolidation, together with interest thereon to
the date of such judgment. The judgment shall be payable only upon and
simultaneously with the surrender to the surviving or new corporation of the
certificate or certificates representing said shares. Upon the payment of the
judgment, the dissenting shareholder shall cease to have any interest in such
shares, or in the surviving or new corporation. Such shares may be held and
disposed of by the surviving or new corporation as it may see fit. Unless the
dissenting shareholder shall file such petition within the time herein limited,
such shareholder and all persons claiming under him shall be conclusively
presumed to have approved and ratified the merger or consolidation, and shall be
bound by the terms thereof.
4. The right of a dissenting shareholder to be paid the fair
value of his shares as herein provided shall cease if and when the corporation
shall abandon the merger or consolidation.
<PAGE> 141
ANNEX C
-------
OPINION OF FINANCIAL ADVISOR
<PAGE> 142
February 13, 1999
Board of Directors
The Tenere Group, Inc.
1903 East Battlefield
Springfield, MO 65804
Members of the Board:
We understand that The Tenere Group, Inc. ("Tenere") and Florida
Physicians Insurance Company, Inc. ("FPIC") have entered into an Agreement and
Plan of Merger dated October 2, 1998 (the "Agreement") pursuant to which Tenere
will be merged with and into a first-tier subsidiary of FPIC in a transaction
(the "Merger") in which each issued and outstanding share of common stock of
Tenere, $0.01 par value per share ("Tenere Common Stock"), will be converted
into the right to receive cash consideration equal to $9.4416 and each option
issued by Tenere to purchase Tenere Common Stock will be converted into the
right to receive cash consideration equal to $9.4416 net of its exercise price (
the "Consideration").
You have asked us whether, in our opinion, the Consideration to be
received by the holders of Tenere Common Stock in the Merger is fair to such
stockholders from a financial point of view.
In connection with this opinion, we have reviewed Tenere's Proxy
Statement of even date herewith as well as the Agreement and certain related
documents. We have held discussions with certain senior officers, directors and
other representatives and advisors of Tenere concerning the business, operations
and prospects of Tenere. We examined certain publicly available business and
financial information relating to Tenere and FPIC as well as certain financial
information and other data for Tenere and certain financial information and
other data related to FPIC which were provided to or otherwise discussed with us
by the management of Tenere. We reviewed the financial terms of the Merger as
set forth in the Agreement in relation to: (i) current and historical market
prices and trading volumes of Tenere Common Stock; (ii) Tenere's financial and
other operating data; and (iii) the capitalization and financial condition of
Tenere. We also considered, to the extent publicly available, the financial
terms of certain other insurance-industry 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 Tenere.
In rendering our opinion, we have assumed and relied upon the accuracy
and completeness of the financial and other information reviewed by us and we
have not made or obtained or assumed any responsibility for independent
verification of such information. In addition, we have not made an independent
evaluation or appraisal of the assets and liabilities of Tenere or any of its
subsidiaries. With respect to the financial data of Tenere, we have assumed that
it has been reasonably prepared on bases reflecting the best currently available
estimates and
<PAGE> 143
Board of Directors
February 13, 1999
Page 2
judgements of the management of Tenere as to the future financial performance of
Tenere. We have assumed that the Merger will be consummated in accordance with
the terms of the Agreement. In connection with the preparation of this opinion,
we have not been authorized by Tenere or the Board of Directors to solicit, nor
have we solicited, third-party indications of interest for the acquisition of
all or any part of Tenere.
ABN AMRO Incorporated ("ABN AMRO"), as part of its investment-banking
business, is continually engaged in the valuation of businesses in connection
with mergers and acquisitions, as well as initial and secondary offerings of
securities and valuations for other purposes. We have acted as financial advisor
to the Board of Directors of Tenere in connection with this transaction and have
received a fee for our services.
It is understood that this letter is for the benefit and use of the
Board of Directors of Tenere in its consideration of the Merger and may not be
used for any other purpose or reproduced, disseminated, quoted or referred to at
any time, in any manner or for any purpose without our prior written consent,
except that this letter may be used as part of any proxy statement relating to
the Merger. This letter does not address Tenere's underlying business decision
to enter into the Merger or constitute a recommendation to any stockholder as to
how such stockholder should vote with respect to the proposed Merger. Finally,
our opinion is necessarily based on economic, monetary, market and other
conditions as in effect on, and the information made available to us, as of the
date hereof, and we assume no responsibility to update or revise our opinion
based upon circumstances or events occurring after the date hereof.
Based upon and subject to the foregoing, we are of the opinion that, as
of the date hereof, the Consideration to be received by Tenere stockholders
pursuant to the Merger is fair to such stockholders from a financial point of
view.
Sincerely,
/s/ ABN AMRO Incorporated
--------------------------------
ABN AMRO INCORPORATED
<PAGE> 144
PROXY
THE TENERE GROUP, INC.
1903 EAST BATTLEFIELD
SPRINGFIELD, MISSOURI 65804
FOR THE SPECIAL MEETING OF SHAREHOLDERS TO BE HELD MARCH 15, 1999
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
The undersigned shareholder(s) of THE TENERE GROUP, INC. ("Tenere"),
does hereby nominate, constitute and appoint Raymond A. Christy, M.D. and Andrew
K. Bennett., or each of them (with full power to act alone), true and lawful
proxies and attorneys-in-fact, with full power of substitution, for the
undersigned and in the name, place and stead of the undersigned to vote all of
the shares of Common Stock, $.01 par value, of Tenere standing in the name of
the undersigned on its books at the close of business on February 8, 1999, at
the Special Meeting of Shareholders to be held at the offices of Tenere, 1903
East Battlefield, Springfield, Missouri, on March 15, 1999, at 3:00 p.m. Central
Time, and at any adjournments or postponements thereof, with all the powers the
undersigned would possess if personally present, as follows:
1. To consider and vote upon the adoption and approval of the
Agreement and Plan of Merger dated October 2, 1998, as amended by that certain
Amendment No. 1 to Agreement and Plan of Merger, dated as of January 15, 1999
(collectively, the "Merger Agreement"), pursuant to which TGI Acquisition
Corporation ("Acquisition Corporation"), a Florida corporation and wholly owned
subsidiary of Florida Physicians Insurance Company, Inc., will be merged (the
"Merger") with and into Tenere and pursuant to which, upon consummation of the
Merger, each share of Tenere Common Stock will be converted into the right to
receive an amount in cash to be determined pursuant to the Merger Agreement, as
set forth in detail in the accompanying Proxy Statement.
FOR __ AGAINST __ ABSTAIN __
2. To consider and vote upon the approval in advance on adjournment
of the Special Meeting in the event that there are not sufficient votes to
constitute a quorum or approve the Merger Agreement at the scheduled time of the
Special Meeting, in order to permit further solicitation of proxies.
FOR __ AGAINST __ ABSTAIN __
3. To transact such other business as may properly come before the
Special Meeting or any adjournments or postponements thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL AND ADOPTION OF
THE MERGER AGREEMENT AND FOR APPROVAL OF THE PROPOSAL REGARDING ADJOURNMENT.
The undersigned hereby revokes any other proxies to vote at such
meeting and hereby ratifies and confirms all that the proxies and
attorneys-in-fact, or each of them, appointed hereunder may lawfully do by
virtue hereof. Said proxies and attorneys-in-fact, without limiting their
general authority, are specifically authorized to vote in accordance with their
best judgment with respect to all matters incident to the conduct of the Special
Meeting.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER(S). IF NO DIRECTION IS GIVEN
HEREIN, THIS PROXY WILL BE VOTED "FOR" THE PROPOSALS LISTED ABOVE, EXCEPT THAT
IF A PROXY IS VOTED AGAINST THE APPROVAL OF THE MERGER AGREEMENT AND NO
INSTRUCTION IS GIVEN IN CONNECTION WITH THE ADJOURNMENT PROPOSAL, THE PROXY WILL
NOT BE VOTED IN FAVOR OF THE ADJOURNMENT PROPOSAL.
Dated: _________________________
___________________________
Signature of Shareholder
___________________________
Signature of Shareholder
When signing as an attorney, executor, administrator, trustee or guardian,
please give full title. If more than one person holds the power to vote the same
shares, all must sign. All joint owners must sign. The undersigned hereby
acknowledges receipt of the Notice of Special meeting and the Proxy Statement
(with all enclosures and attachments) dated February 13, 1999, relating to the
Special Meeting.
PLEASE MARK, DATE, SIGN AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED
ENVELOPE.
