1
SCHEDULE 14A
(RULE 14A-101)14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c)Rule 14a-11(c) or sec. 240.14a-12Rule 14a-12
AMERICAN EAGLE GROUP, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in itsIts Charter)
- --------------------------------------------------------------------------------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X][ ] No fee required.
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[ ][X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) 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:
- --------------------------------------------------------------------------------$11,000,000
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ]$2,200
[X] 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:
- --------------------------------------------------------------------------------previously paid:
---------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- -----------------------------------------------------------------------------------------------------------------------------------
(3) Filing Party:
- -----------------------------------------------------------------------------------------------------------------------------------
(4) Date Filed:
- -----------------------------------------------------------------------------------------------------------------------------------
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[AMERICAN EAGLE LOGO]
AMERICAN EAGLE GROUP, INC.
12801 N. CENTRAL EXPRESSWAY, SUITE 800
DALLAS, TEXAS 75243
December , 1996
Dear Stockholder:
You are cordially invited to attend a special meeting (the "Special
Meeting") of the stockholders of American Eagle Group, Inc. (the "Company") to
be held on December 30, 1996 at 9:00 a.m. local time at
, Dallas, Texas .
At the Special Meeting, you will be asked to approve a transaction in which
the Company will issue convertible preferred stock to American Financial Group,
Inc. for $35 million in cash. The transaction will provide the Company with a
significant capital infusion that will enable the Company to contribute capital
to its subsidiary, American Eagle Insurance Company, and to pay down bank debt;
the remainder, after transaction expenses, will be used for general corporate
purposes. In addition to the capital investment, the transaction embodies a
strategic alliance that will allow the Company to market and underwrite both new
and expanded aviation insurance product lines, and permit the Company to offer
products to its insureds providing the financial security of an insurer rated
"A" (Excellent) by A.M. Best Company. The attached Proxy Statement describes the
transaction in detail and you are urged to review the Proxy Statement carefully.
CS First Boston Corporation, the investment banking firm retained by the
Company to act as financial advisor in connection with the transaction, has
rendered its written opinion to the Board of Directors of the Company to the
effect that, as of November 5, 1996 and based upon and subject to certain
matters stated in such opinion, the cash consideration to be received by the
Company in the sale of the securities issued in the transaction is fair to the
Company from a financial point of view.
THE BOARD OF DIRECTORS OF THE COMPANY HAS UNANIMOUSLY APPROVED THE
TRANSACTION AND HAS DETERMINED THAT IT IS FAIR TO AND IN THE BEST INTERESTS OF
THE COMPANY AND ITS STOCKHOLDERS. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT STOCKHOLDERS VOTE FOR THE PROPOSAL TO BE CONSIDERED AT THE SPECIAL MEETING.
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AND VOTED AT THE SPECIAL
MEETING. THEREFORE, PLEASE COMPLETE, SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED
PROXY CARD. IF YOU ATTEND THE MEETING AND VOTE IN PERSON, YOUR VOTE WILL
SUPERSEDE YOUR PROXY.
Sincerely,
/s/ M. PHILIP GUTHRIE
M. PHILIP GUTHRIE
Chairman of the Board, Chief
Executive Officer and President
3
[AMERICAN EAGLE LOGO]
AMERICAN EAGLE GROUP, INC.
12801 N. CENTRAL EXPRESSWAY, SUITE 800
DALLAS, TEXAS 75243
NOTICE OF SPECIALANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBERJULY 30, 19961997
TO THE STOCKHOLDERS OF AMERICAN EAGLE GROUP, INC.:
NOTICE IS HEREBY GIVEN that a specialthe 1997 annual meeting (the "Special"Annual
Meeting") of stockholders of American Eagle Group, Inc., a Delaware corporation
(the "Company"), will be held on DecemberJuly 30, 1996,1997, commencing at 9:00 a.m., local
time, at ,the AmeriSuites Hotel, 12411 North Central Expressway, Dallas, Texas
75243, to consider and act upon the following matters which are described in
more detail in the accompanying Proxy Statement:
1. To consider and vote upon a proposal (the "Proposal") to approve (i) the
sale of the general aviation insurance business (the "Aviation
Division") of American Eagle Insurance Company, a Securitieswholly-owned
subsidiary of the Company ("AEIC"), to Great American Insurance
Company ("Purchaser"), for the consideration and upon the terms set
forth in the Purchase Agreement dated as of November 5, 1996 (the "Securities
Purchase Agreement") betweenApril 11, 1997 among the
Company, AEIC and Purchaser, and (ii) the amendment of the Company's
Restated Certificate of Incorporation to change the name of the
Company to "___________", effective upon consummation of such sale;
2. To elect two directors of the Company to serve until the
1999 and 2000 annual meeting, respectively, of stockholders or until
their successors are duly elected and qualified;
3. To ratify the appointment of Arthur Andersen LLP as the
independent auditors for the Company and American Financial Group,
Inc., an Ohio corporation ("AFG"),its subsidiaries for the
fiscal year ending December 31, 1997; and
the performance by the Company of
all transactions and acts contemplated thereby (collectively, the
"Transaction"), including, among other things, (a) the sale and issuance to
AFG for an aggregate purchase price of $35 million of 350,000 shares of the
Company's Series D Preferred Stock, par value $.01 per share (the "Series D
Preferred Stock"), which shall initially be convertible into an aggregate
of 6,666,667 shares of the Company's Common Stock, par value $.01 per share
(the "Common Stock"), at a conversion price of $5.25 per share (subject to
antidilution provisions), (b) the issuance of up to an additional 196,200
shares of Series D Preferred Stock that may be issued by the Company as
dividends in kind on the shares of Series D Preferred Stock, (c) the
issuance of up to 10,403,810 warrants ("Warrants") (subject to antidilution
provisions) to purchase shares of Common Stock that the Company will be
required to issue if the Company elects to redeem the Series D Preferred
Stock prior to the seventh anniversary of the date of initial issuance, and
(d) the issuance of up to 10,403,810 shares (subject to antidilution
provisions) of Common Stock issuable upon conversion of shares of Series D
Preferred Stock and exercise of Warrants.
2.4. To consider and act upon such other business as may properly
be brought before the meeting or any adjournment or postponement
thereof.
Holders of record of shares of the Company's Common Stock and Series D
Preferred Stock at the close of business on December 4, 1996,June 30, 1997, the record date for
the SpecialAnnual Meeting, are entitled to notice of, and to vote at, the SpecialAnnual
Meeting and any adjournment or postponement thereof.
When a proxy is returned properly executed, the shares represented thereby
will be votedUnder Delaware law, stockholders do not have appraisal rights in
accordanceconnection with the indicated instructions. However, if no
instructions have been specified on the returned proxy, the shares represented
thereby will be voted "FOR" approval of the Proposal. The affirmative vote of a
majority of the outstanding shares of Common Stock present, in person or by
proxy, and entitled to vote at the Special Meeting is required to approve the
Proposal, provided that the total votes cast on the Proposal constitute a
majority of the outstanding shares of Common Stock.
4
Any stockholder giving a proxy has the right to revoke it at any time
before it is voted by filing, with the Secretary of the Company, either an
instrument revoking the proxy or a duly executed proxy bearing a later date.
Proxies also may be revoked by attending the meeting and voting in person.
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The accompanying Proxy Statement also constitutes the Company's Annual
Report to Stockholders for the year ended December 31, 1996 (the "Annual
Report").
By Order of the Board of Directors
AMERICAN EAGLE GROUP, INC.
/s/ M. PHILIP GUTHRIE
M. PHILIP GUTHRIE
Chairman of the Board, Chief Executive
Officer and President
YOUR VOTE IS IMPORTANT. TO ASSURE YOUR REPRESENTATION AT THE SPECIALANNUAL MEETING, PLEASE DATE THE
ENCLOSED PROXY CARD, WHICH IS SOLICITED BY THE BOARD OF DIRECTORS OF THE
COMPANY, SIGN EXACTLY AS YOUR NAME APPEARS THEREON AND RETURN IT IMMEDIATELY.
December _____________, 1997
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AMERICAN EAGLE GROUP, INC.
12801 N. CENTRAL EXPRESSWAY, SUITE 800
DALLAS, TEXAS 75243
__________ __, 1997
Dear Stockholder:
You are cordially invited to attend the 1997 annual meeting (the
"Annual Meeting") of the stockholders of American Eagle Group, Inc. (the
"Company") to be held on July 30, 1997 at 9:00 a.m. local time at the
AmeriSuites Hotel, 12411 North Central Expressway, Dallas, Texas 75243.
At the Annual Meeting, in addition to electing directors and ratifying
the appointment of the Company's independent auditors, you will be asked to
approve (i) the sale of the general aviation insurance business (the "Aviation
Division") of American Eagle Insurance Company, a wholly-owned subsidiary of
the Company ("AEIC"), 1996to Great American Insurance Company ("Purchaser"), for
the consideration and upon the terms set forth in the Purchase Agreement dated
as of April 11, 1997 among the Company, AEIC and Purchaser, and (ii) the
amendment of the Company's Restated Certificate of Incorporation to change the
name of the Company to "___________", effective upon consummation of such sale.
The attached Proxy Statement describes the proposed sale in detail, and you are
urged to review the Proxy Statement carefully.
THE BOARD OF DIRECTORS OF THE COMPANY HAS UNANIMOUSLY APPROVED THE
PROPOSED SALE AND HAS DETERMINED THAT IT IS IN THE BEST INTERESTS OF THE
COMPANY AND ITS STOCKHOLDERS. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT STOCKHOLDERS VOTE FOR THE PROPOSED SALE AND RELATED AMENDMENT TO THE
COMPANY'S RESTATED CERTIFICATE OF INCORPORATION.
PLEASE COMPLETE, SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY
CARD. IF YOU ATTEND THE MEETING AND VOTE IN PERSON, YOUR VOTE WILL SUPERSEDE
YOUR PROXY.
Sincerely,
M. PHILIP GUTHRIE
Chairman of the Board, Chief Executive
Officer and President
5
[AMERICAN EAGLE LOGO]
AMERICAN EAGLE GROUP, INC.
12801 N. CENTRAL EXPRESSWAY, SUITE 800
DALLAS, TEXAS 75243
PROXY STATEMENT SPECIALFOR
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JULY 30, 1997
ANNUAL REPORT TO STOCKHOLDERS FOR
YEAR ENDED DECEMBER 30,31, 1996
This Proxy Statement is being furnished to holders of Common Stock,
par value $.01 per share (the "Common Stock"), and to holders of Series D
Preferred Stock, par value $.01 per share (the "Series D Preferred Stock"), of
American Eagle Group, Inc., a Delaware corporation (the "Company"), in
connection with the solicitation of proxies by the Board of Directors of the
Company for use at a specialthe 1997 annual meeting of stockholders of the Company (the
"Special"Annual Meeting"), to be held at 9:00 a.m., local time, on DecemberJuly 30, 1996,1997, at
,the AmeriSuites Hotel, 12411 North Central Expressway, Dallas, Texas 75243, and
at any and all adjournments or postponements thereof.
At the SpecialAnnual Meeting, holders of Common Stock and Series D Preferred
Stock will be asked to consider
andasked:
1. To vote upon a proposal (the "Proposal") to approve (i) the
sale of the general aviation insurance business (the "Aviation
Division") of American Eagle Insurance Company, a Securitieswholly-owned
subsidiary of the Company ("AEIC"), to Great American Insurance
Company ("Purchaser"), for the consideration and upon the terms set
forth in the Purchase Agreement dated as of November 5, 1996 (the "Securities Purchase Agreement")
betweenApril 11, 1997 among the
Company, AEIC and Purchaser, and (ii) the amendment of the Company's
Restated Certificate of Incorporation to change the name of the
Company to "___________," effective upon consummation of such sale;
2. To elect two directors of the Company to serve until the
1999 and 2000 annual meeting of stockholders, respectively, or until
their successors are duly elected and qualified;
3. To ratify the appointment of Arthur Andersen LLP as the
independent auditors for the Company and American Financial Group, Inc., an Ohio corporation
("AFG"),its subsidiaries for the
fiscal year ending December 31, 1997; and
4. To consider and act upon such other business as may
properly be brought before the performance by the Company of all transactions and acts
contemplated thereby (collectively, the "Transaction"), including, among other
things, (a) the sale and issuance to AFG for an aggregate purchase price of $35
million of 350,000 shares of the Company's Series D Preferred Stock, par value
$.01 per share (the "Series D Preferred Stock"), which shall initially be
convertible into an aggregate of 6,666,667 shares of Common Stock at a
conversion price of $5.25 per share (subject to antidilution provisions), (b)
the issuance of up to an additional 196,200 shares of Series D Preferred Stock
that may be issued by the Company as dividends in kind on the shares of Series D
Preferred Stock, (c) the issuance of up to 10,403,810 warrants ("Warrants")
(subject to antidilution provisions) to purchase shares of Common Stock that the
Company will be required to issue if the Company elects to redeem the Series D
Preferred Stock prior to the seventh anniversary of the date of initial
issuance, and (d) the issuance of up to 10,403,810 shares (subject to
antidilution provisions) of Common Stock issuable upon conversion of shares of
Series D Preferred Stock and exercise of Warrants.
The Securities Purchase Agreement also embodies a strategic alliance with
AFG that will allow the Company to market and underwrite new and expanded
aviation insurance product lines, and permit the Company to offer products to
its insureds providing them the financial security of an insurer rated "A"
(Excellent) by A.M. Best Company.meeting or any adjournment or
postponement thereof.
This Proxy Statement and the accompanying Notice of SpecialAnnual Meeting of
Stockholders and Proxy were first mailed to stockholders on or about July __,
1997. This Proxy Statement also constitutes the Company's Annual Report to
Stockholders for the year ended December 4,
1996.31, 1996 (the "Annual Report"). See
"Annual Report to Stockholders."
6
TABLE OF CONTENTS
PAGE
----
SUMMARY.................................... 3SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . 4
The Special Meeting...................... 3Company . . . . . . . . . . . . . . . . . . . . . 4
The Annual Meeting . . . . . . . . . . . . . . . . . . 4
Time and Place......................... 3
Purpose................................ 3Place . . . . . . . . . . . . . . . . . . 4
Purpose . . . . . . . . . . . . . . . . . . . . . . 4
Voting; Votes Required for Approval.... 3
The Transaction.......................... 3
Securities Purchase Agreement.......... 3Approval . . . . . . . . 5
Aviation Division Sale . . . . . . . . . . . . . . . . 5
Terms of the Sale . . . . . . . . . . . . . . . . . 5
Reasons for the Transaction............ 5Aviation Division Sale . . . . . . 6
Opinion of Financial Advisor........... 7
Conditions toAdvisor . . . . . . . . . . . 10
Plans for Future Operation of the Transaction.......... 7Company . . . . . 10
Effect on Company if the Division Sales Are
Not Completed . . . . . . . . . . . . . . . . . . . 11
No Dissenters' Rights or Preemptive
Rights............................... 7. . . . . . . . . . . . . . . 11
Certain Considerations................. 7Considerations . . . . . . . . . . . . . . 11
Certain Federal Income Tax Consequences . . . . . . 11
Interests of Certain Persons in the Transaction.......................... 7
THE SPECIAL MEETING........................ 8
Time and Place; Purpose.................. 8
Voting;Transaction . . 11
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . 13
General . . . . . . . . . . . . . . . . . . . . . . . 13
Record Date . . . . . . . . . . . . . . . . . . . . . 13
Vote Required for Approval....... 8
Proxies.................................. 8
Solicitation............................. 9. . . . . . . . . . . . . . . . . . . . 13
Proxies . . . . . . . . . . . . . . . . . . . . . . . 14
Solicitation . . . . . . . . . . . . . . . . . . . . . 14
THE TRANSACTION............................ 9
General.................................. 9AVIATION DIVISION SALE . . . . . . . . . . . . . . . 15
General . . . . . . . . . . . . . . . . . . . . . . . 15
Reasons for the Transaction.............. 11
OpinionTransaction . . . . . . . . . . . . . 15
Advice of Financial Advisor............. 13
UseAdvisor . . . . . . . . . . . . . 19
Name Change . . . . . . . . . . . . . . . . . . . . . 21
Regulatory Approvals . . . . . . . . . . . . . . . . . 21
Certain Federal Income Tax Consequences . . . . . . . 21
Accounting Treatment of Proceeds.......................... 16
Regulatory Approvals..................... 16the Aviation Division
Sale . . . . . . . . . . . . . . . . . . . . . . . . . 22
No Dissenters' Rights or Preemptive
Rights................................. 16. . . . . . . . . . . . . . . . 22
Interests of Certain Persons in the Transaction............................ 17Transaction . . . 22
CERTAIN CONSIDERATIONS..................... 18
Impact on Voting and Other RightsCONSIDERATIONS . . . . . . . . . . . . . . . . . 23
Delisting of Stockholders; Impact on Future Share
Issuances.............................. 18
Substantial Equity Ownership on
Conversion............................. 18
Restrictions onCommon Stock . . . . . . . . . . . . . . 23
Loss of Margin Status . . . . . . . . . . . . . . . . 23
Investment Company Act Considerations . . . . . . . . 23
Potential Regulatory Action . . . . . . . . . . . . . 23
Plans for Operation of the Ability of AFG to
Effect a Business Combination withCompany after the
Company................................ 19
Strategic Alliance Arrangements.......... 20Aviation
Division Sale . . . . . . . . . . . . . . . . . . . . 24
Effect on Capital and Earnings Available
for Common Stockholders................ 20
CAPITALIZATION............................. 21Company if the Division Sales Are
Not Completed . . . . . . . . . . . . . . . . . . . . 24
FORWARD LOOKING STATEMENTS . . . . . . . . . . . . . . . 25
THE SECURITIES PURCHASE AGREEMENT AND RELATED
AGREEMENTS....................... 22
IssuanceAGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . 26
Purchased Assets . . . . . . . . . . . . . . . . . . . . 26
Quota Share Reinsurance Agreement . . . . . . . . . . . . 26
Closing . . . . . . . . . . . . . . . . . . . . . . . . . 26
Purchase Price and SaleOther Payments . . . . . . . . . . . . 27
Assumption of Series D Preferred
Stock.................................. 22
Recapitalization Charge.................. 22
PAGE
----
Certain Covenants........................ 22
AFG Representation on Board of
Directors.............................. 22
AFG Voting Agreement..................... 22
Strategic Alliance....................... 23
Conditions Precedent..................... 23
Restriction on Transferability of Series
D Preferred Stock...................... 23Liabilities . . . . . . . . . . . . . . . . 27
Change in Name . . . . . . . . . . . . . . . . . . . . . 27
Certain Representations, Warranties and
Warranties... 23
Covenants . . . . . . . . . . . . . . . . . . . . . . . . 28
Conditions to Closing . . . . . . . . . . . . . . . . . . 28
Termination of Strategic Alliance . . . . . . . . . . . . 29
Noncompete/No Solicitation.......................... 24
Termination.............................. 24
Break-up Warrants........................ 25
Warrants Issuable Upon Early
Redemption............................. 25
Registration Rights Agreements........... 26
Amended Registration Rights Agreement.... 27
DESCRIPTIONSolicitation and Other Actions . . . . . . 29
Termination . . . . . . . . . . . . . . . . . . . . . . . 30
Indemnification . . . . . . . . . . . . . . . . . . . . . 31
PLANS FOR FUTURE OPERATION OF SERIES D PREFERRED STOCK.... 27
Priority................................. 27
Dividends................................ 27
Voting Rights............................ 27
Conversion............................... 28
Redemption............................... 29
Liquidation Preference................... 29
Restriction on Transfer.................. 29
Preemptive Rights........................ 29
AFG'S DESIGNEES FOR DIRECTORS.............. 29THE COMPANY . . . . . . . . 32
Business . . . . . . . . . . . . . . . . . . . . . . . 32
Management . . . . . . . . . . . . . . . . . . . . . . 33
Employees . . . . . . . . . . . . . . . . . . . . . . 33
Offices . . . . . . . . . . . . . . . . . . . . . . . 33
UNAUDITED PRO FORMA FINANCIAL INFORMATION . . . . . . . . 34
SELECTED FINANCIAL INFORMATION . . . . . . . . . . . . . 41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................... 30OPERATIONS . . . . . . 42
Three Months Ended March 31, 1997
Compared to Three Months Ended March 31, 1996 . . . . 43
Year Ended December 31, 1996 Compared to Year Ended
December 31, 1995 . . . . . . . . . . . . . . . . . . 45
Year Ended December 31, 1995 Compared to Year Ended
December 31, 1994 . . . . . . . . . . . . . . . . . . 47
Liquidity and Capital Resources . . . . . . . . . . . 50
MARKET PRICES AND DIVIDENDS . . . . . . . . . . . . . . . 52
Stockholders . . . . . . . . . . . . . . . . . . . . . 52
Dividends . . . . . . . . . . . . . . . . . . . . . . 52
INSURANCE REGULATION . . . . . . . . . . . . . . . . . . 53
HISTORICAL BUSINESS OF THE COMPANY . . . . . . . . . . . 56
General . . . . . . . . . . . . . . . . . . . . . . . 56
The Divisions . . . . . . . . . . . . . . . . . . . . 56
Disposition of P&C Division . . . . . . . . . . . . . 57
Disposition of Marine Division . . . . . . . . . . . . 57
Gross Premiums Produced . . . . . . . . . . . . . . . 58
Aviation Division Business . . . . . . . . . . . . . . 58
P&C Division Business . . . . . . . . . . . . . . . . 59
Marine Division Business . . . . . . . . . . . . . . . 60
2
7
Marketing . . . . . . . . . . . . . . . . . . . . . . 60
Underwriting . . . . . . . . . . . . . . . . . . . . . 60
Claims . . . . . . . . . . . . . . . . . . . . . . . . 61
Reserves . . . . . . . . . . . . . . . . . . . . . . . 62
Reinsurance . . . . . . . . . . . . . . . . . . . . . 67
Investments . . . . . . . . . . . . . . . . . . . . . 69
Competition . . . . . . . . . . . . . . . . . . . . . 72
Employees . . . . . . . . . . . . . . . . . . . . . . 72
Legal Proceedings . . . . . . . . . . . . . . . . . . 72
ELECTION OF DIRECTORS . . . . . . . . . . . . . . . . . . 73
EXECUTIVE OFFICERS . . . . . . . . . . . . . . . . . . . 77
EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . 80
COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . 85
STOCK PERFORMANCE GRAPH . . . . . . . . . . . . . . . . . 88
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS, DIRECTORS
AND MANAGEMENT......... 40MANAGEMENT . . . . . . . . . . . . . . . . . . . . . 89
CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . . 91
RATIFICATION OF THE APPOINTMENT
OF AUDITORS . . . . . . . . . . . . . . . . . . . . . . . 94
STOCKHOLDER PROPOSALS...................... 42PROPOSALS . . . . . . . . . . . . . . . . . . 95
ANNUAL REPORT TO STOCKHOLDERS . . . . . . . . . . . . . . 95
ANNUAL REPORT ON FORM 10-K . . . . . . . . . . . . . . . 95
OTHER MATTERS . . . . . . . . . . . . . . . . . . . . . . 95
AVAILABLE INFORMATION...................... 42
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS............................... F-1
APPENDIX I -- OPINION OF CS FIRST BOSTON
CORPORATION
APPENDIX II -- SECURITIES PURCHASE AGREEMENT
APPENDIX III -- CERTIFICATE OF DESIGNATIONINFORMATION . . . . . . . . . . . . . . . . . . 95
2INDEX TO FINANCIAL STATEMENTS . . . . . . . . F-1
APPENDIX I CSFB Letter
APPENDIX II Purchase Agreement
3
78
SUMMARY
The following is only a summary of certain information contained
elsewhere in this Proxy Statement and does not purport to be complete.
Reference is made to, and this Summary is qualified in its entirety by, the
more detailed information contained elsewhere in this Proxy Statement,
including the attached Appendices. Stockholders are urged to read this Proxy
Statement and the Appendices in their entirety.
THE SPECIALCOMPANY
American Eagle Group, Inc., a Delaware corporation (the "Company"), is
an insurance holding company that, through its subsidiaries, markets and
underwrites specialized property and casualty coverages in the general aviation
insurance marketplace. Historically, the Company's business has been organized
into three divisions. The Aviation Division, which is responsible for all
general aviation insurance business, generated $108.7 million of gross premiums
produced in 1996. The Company has recently sold the businesses of its Property
& Casualty Division (the "P&C Division") and Marine Division. The P&C
Division, which was responsible for the artisan contractor insurance business
and the run-off of two discontinued lines of insurance business, generated
$35.9 million of gross premiums produced in 1996. The Marine Division, which
was responsible for all yacht insurance business, generated $6.6 million of
gross premiums produced in 1996. The sale of the artisan contractor insurance
business of the P&C Division is referred to as the "Artisan Sale," and the sale
of the yacht insurance business is referred to as the "Marine Division Sale."
As discussed more fully below, at the Annual Meeting, stockholders
will be asked to approve the sale of the Aviation Division business pursuant to
the terms of a Purchase Agreement (the "Purchase Agreement") dated as of April
11, 1997, among the Company, its wholly-owned subsidiary, American Eagle
Insurance Company ("AEIC"), and Great American Insurance Company ("Purchaser"),
a subsidiary of American Financial Group, Inc. ("AFG").
Following the sale of the Company's three divisions, the Company
expects that it will no longer write new or renewal policies for the
foreseeable future. It will continue to handle claims on the Company's policies
that are not assumed by the purchasers as part of these transactions, and
maintain the related reserves and assets. Accordingly, the Company's revenues
and earnings capacity will be significantly lower in the future. The Company's
operational focus will be on attempting to create residual value for the
Company's stockholders from the remaining assets and operations and additional
ongoing operations. See "Plans for Future Operation of the Company."
THE ANNUAL MEETING
TIME AND PLACE
The SpecialAnnual Meeting will be held at 9:00 a.m., local time, on DecemberJuly 30,
1996,1997, at ,the AmeriSuites Hotel, 12411 North Central Expressway, Dallas, Texas.Texas
75243.
PURPOSE
At the SpecialAnnual Meeting, holders of the Company's Common Stock and
Series D Preferred Stock will be asked to consider and vote onon: (i) the
Proposal. IfProposal; (ii) the Proposal is approved and the
Transaction is consummated,election of two directors of the Company will issue to American Financial Group,
Inc. ("AFG") 350,000 sharesserve until the
1999 and 2000 annual meeting of Series D Preferred Stockstockholders, respectively, or until their
successors are duly elected and qualified; (iii) the ratification of the
appointment of Arthur Andersen LLP as the independent auditors for an aggregate
purchase price of $35 million. Thethe Company
will useand its subsidiaries for the net proceeds fromfiscal year ending December 31, 1997, and (iv)
such other matters as may properly come before the Transaction to provide capital to its insurance company subsidiary, American
Eagle Insurance Company ("AEIC"), and to pay down bank debt; the remainder,
after transaction expenses, will be used for general corporate purposes.Annual Meeting or any
adjournment or postponement thereof.
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VOTING; VOTES REQUIRED FOR APPROVAL
The Board of Directors of the Company has established December 4, 1996June 30, 1997 as
the record date (the "Record Date") for the determination of stockholders
entitled to notice of and to vote at the SpecialAnnual Meeting. The Common Stock and
the Series D Preferred Stock are the only classes of outstanding securities of
the Company entitled to notice of and to vote at the Annual Meeting. As of the
Record Date, 7,047,098 shares of Common Stock and 357,875 shares of Series D
Preferred Stock were outstanding. Each share of Common Stock isoutstanding on the
Record Date shall be entitled to one vote. Onvote, and each share of Series D Preferred
Stock outstanding on the Record Date there were shares
of Common Stock outstanding.
Becauseshall be entitled to 4.92 votes upon each
matter to come before the Transaction will involve the issuance of securities convertible
into Common Stock in an amount in excess of 20%Annual Meeting.
Section 271 of the aggregate number of
shares of Common Stock outstanding, the New York Stock ExchangeDelaware General Corporation Law (the "NYSE""DGCL")
requires that the Proposalsale of all or substantially all of the assets of a
corporation be approved by the affirmative vote of the holders of a majority of the outstanding sharesstock
of Common Stockthe corporation entitled to vote thereon. Although the Aviation Division
assets being sold to Purchaser are owned by the Company's subsidiary, AEIC, on
a consolidated basis such assets constituted approximately 45.0% of the
Company's total assets as of March 31, 1997, and present,the Aviation Division
represented approximately 70.1% of earned premium for the year ended December
31, 1996. Accordingly, since Section 271 of the DGCL may be applicable to the
proposed sale, the affirmative vote of a majority of the total number of votes
entitled to be cast at the Annual Meeting has been established as a requirement
for approval of the Proposal.
A plurality of the votes cast at the Annual Meeting is required to
elect a director, and the affirmative vote of a majority of the votes cast at
the Annual Meeting is required to ratify the appointment of the Company's
independent auditors. The presence in person or by proxy at the SpecialAnnual Meeting
provided that the total
votes cast on the Proposal constitute at leastof a majority of the outstandingnumber of votes entitled to be cast is necessary to
constitute a quorum.
Purchaser, which owned 357,875 shares of Series D Preferred Stock and
116,000 shares of Common Stock.Stock on the Record Date, representing approximately
21.3% of the total votes entitled to be cast at the Annual Meeting, has agreed
to vote all of such shares for approval of the Proposal. In addition, Mason
Best Company, L.P. ("Mason Best"), which owns 2,960,772 shares of Common Stock,
representing approximately 42%33.6% of the outstanding shares of Common
Stock,total votes entitled to be cast at the
Annual Meeting, has entered into an agreement with AFGPurchaser (the "Mason Best
Voting Agreement"Commitment") to vote all of such shares for approval of the Proposal.
Accordingly, stockholder approval of the Proposal is assured.
AVIATION DIVISION SALE
TERMS OF THE TRANSACTION
SECURITIES PURCHASE AGREEMENTSALE
On November 5, 1996,April 11, 1997, the Company, AEIC and AFGPurchaser entered into the Securities
Purchase Agreement, which, subject to the terms and conditions thereof,
provides for the sale (the "Aviation Division Sale") by AEIC of the business
and issuancea substantial portion of the assets comprising the Aviation Division to
Purchaser in exchange for (i) 30% of the unearned premiums to be transferred to
Purchaser, (ii) the net book value of all furniture, fixtures and equipment to
be transferred to Purchaser, (iii) all funds collected by Purchaser with
respect to agents' balances relating to the general aviation insurance business
and which are in excess of 90 days old as of the closing of the Aviation
Division Sale; (iv) commissions of 4%, 2% and 1% of the direct written premiums
on renewal policies relating to the general aviation insurance business during
the first, second, and third years, respectively,
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10
following the closing of the Aviation Division Sale; (v) the assumption of
certain liabilities, including all liabilities relating to general aviation
policies issued by the Company to AFG of 350,000 shares of Series D
Preferred Stock for an aggregate purchase price of $35 million. Consummation ofsince 1993; and (vi) the Securities Purchase Agreement is subjecttransfer to certain conditions, including
approval of the Proposal by the stockholders of the Company.
Terms of the Series D Preferred Stock. The Series D Preferred Stock will be
entitled to a per annum cumulative dividend equal to 9% payable quarterly, with
payment commencing April 1, 1997. At the option of the Company
during the first
five years after the date of closing of the Securities Purchase Agreement (the
"Closing Date"), dividends may be paid in cash or in kind (whereby a holder, in
lieu of cash, receives shares of Series D Preferred Stock having a liquidation
value equal to the dividends declared).
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The Series D Preferred Stock will be convertible into shares of Common
Stock at any time at a conversion price of $5.25 per share (subject to
antidilution provisions). The Series D Preferred Stock may be redeemed at any
time at the Company's option; provided, however, if the Company redeems any
shares of Series D Preferred Stock prior to the seventh anniversary of the
Closing Date, the Company shall, in addition to the cash payable to the holder,
issue to the holder, for each share of Common Stock into which the redeemed
shares of Series D Preferred Stock are then convertible, a Warrant to purchase
one share of Common Stock of the Company at an exercise price of $5.25 per share
(subject to antidilution provisions). The Company is required to redeem 10% of
the outstanding shares of Series D Preferred Stock on the first business day of
each year, commencing with the first business day in January 2008, and all
remaining outstanding shares are required to be redeemed on the first business
day in January 2017. The redemption price for the Series D Preferred Stock is
$100.00 per share plus an amount equal to all accrued and unpaid dividends to
the date of redemption.
Until AFG and its affiliates no longer own Series D Preferred Stock and
shares ("Underlying Shares") of Common Stock issued or issuable upon exercise of
conversion rights relating to the Series D Preferred Stock or upon the exercise
of the Warrants representing in the aggregate the ownership, or the right to
acquire ownership, of 51% of the Underlying Shares or until the seventh
anniversary of the Closing Date, whichever is earlier, AFG shall be entitled to
nominate for election 30% of the Company's directors and, if elected, at least
one director representing AFG shall serve on each standing committee of the
Board of Directors. Notwithstanding the foregoing, the number of directors that
AFG is entitled to nominate shall be reduced by the number of directors that the
holders of the Series D Preferred Stock are entitled to elect as a class under
the terms of the Certificate of Designation for the Series D Preferred Stock
(the "Certificate of Designation"). Mason Best has agreed to vote all shares
ownedissued by it in favor of the election of AFG's nominees. If AFG's nominees fail
to be elected to the Board of Directors, AFG shall nevertheless be entitled to
have an equal number of representatives attend each meeting of the Board of
Directors. The Certificate of Designation provides that, upon the occurrence and
continuation of a default in dividend payments for at least two consecutive
quarters or a default in any mandatory redemption payment on the Series D
Preferred Stock, the holders of the Series D Preferred Stock, voting as a
separate class, shall be entitled at the next annual or special meeting of
stockholders to elect a majority of the directors of the Company to be elected.
The Certificate of Designation provides that the holders of the Series D
Preferred Stock, for the seven years following the Closing Date, shall be
entitled collectively to cast 20% of the votes eligible to be cast on each
matter submitted to a vote of the holders of capital stock of the Company,
except that if the aggregate number of shares of Common Stock issuable upon
conversion of the Series D Preferred Stock represents less than 20% of the
outstanding shares of Common Stock on a fully diluted basis, then each share of
Series D shall be entitled to the number of votes equal to the number of shares
of Common Stock into which such share of Series D Preferred Stock is then
convertible. In addition, the Securities Purchase Agreement provides that until
the date which is three yearsPurchaser in
December 1996. See "The Aviation Division Sale--General" and 180 days after the Closing Date, so long as
AFG and any affiliate of AFG shall beneficially own Series D Preferred Stock or
Underlying Shares which represent in the aggregate the ownership, or right to
acquire ownership, of at least 51% of the Underlying Shares, AFG shall, if it
and its Affiliates hold any combination of Series D Preferred Stock and Common
Stock representing the right to vote more than 20% of the total votes eligible
to be voted on a matter on which the holders of Common Stock have the right to
vote, cast all votes in excess of such 20% in proportion to the actual vote of
holders of all remaining votes (including AFG's 20% vote).
AFG and its affiliates may assign or transfer to any person shares of the
Series D Preferred Stock or the Underlying Shares, representing in the aggregate
ownership, or the right to acquire ownership, of at least 51% of the Underlying
Shares and the right of AFG in the Securities Purchase Agreement to nominate 30%
of the Company's directors only if such person assumes the voting restrictions
in the Securities Purchase Agreement which are described in the immediately
preceding paragraph.
The Company will enter into a Registration Rights Agreement with AFG
pursuant to which AFG will be granted certain demand and "piggyback"
registration rights.
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For a more complete description of the Series D Preferred Stock and AFG's
rights as a holder of Series D Preferred Stock, see "Description of Series D
Preferred Stock", and "The Securities Purchase
Agreement and Related Agreements."
Strategic Alliance with AFG. The SecuritiesAviation Division Sale is conditioned upon, among other things,
approval of the Aviation Division Sale by the Company's stockholders and
receipt of regulatory approvals from the Insurance Commissioners of the States
of Texas and California. See "The Aviation Division Sale--Regulatory Approvals"
and "The Purchase Agreement embodies a
strategic alliance with AFG that will allow the Companyand Related Agreements--Conditions to market and underwrite
both new and expanded aviation insurance product lines. For example, AFG has
agreed to provide a facility for the Company to offer workers compensation
coverage for its aviation insureds. These new and expanded products are expected
to provide the Company with enhanced opportunities for additional business by
attracting and retaining preferred accounts.
The Company also anticipatesClosing."
There can be no assurance that the strategic allianceconditions to the Aviation Division Sale
will permitbe satisfied or waived, or that the Company to offer, when requiredAviation Division Sale will be
consummated. If the Aviation Division Sale is not consummated as contemplated
by an insured, products providingthis Proxy Statement, the financial
security of an insurer rated "A" (Excellent) by Best. The Company anticipates
that this arrangement will, over the long term, reduce the costs the Company is
currently incurring for similar arrangements with other insurers.
In accordance with the provisions of the Securities Purchase Agreement, AFG
intends to nominate two of its senior executives to serve on the Company's Board
of Directors. See "AFG's Designees for Directors." The Company expects to benefit from the experiencelose its current general
aviation insurance business to other insurers and expertise of these executives.
American Financial Group, Inc. ("AFG") was incorporated as an Ohio
corporation in 1994. Its address is One East Fourth Street, Cincinnati, Ohio
45202; its phone number is (513) 579-2121. AFG is a holding company which,
through its subsidiaries, is engaged primarily in specialty and multi-line
property and casualty insurance businesses and in the sale of tax-deferred
annuities. AFG's property and casualty operations originated in 1872 and
represent the seventeenth largest property and casualty group in the United
States basedwould receive no
consideration for such business. See "Risk Factors - Effect on 1995 statutory net premiums written of $3.1 billion. AFG was
formed for the purpose of acquiring American Financial Corporation and American
Premier Underwriters, Inc. in merger transactions completed on April 3, 1995.
AFG's common stock is listed on the NYSE. At December 31, 1995, AFG had
stockholders' equity of approximately $2.9 billion. AFG's principal insurance
company subsidiaries are rated "A" (Excellent) by A. M. Best Company ("Best").
Recapitalization Charge. The Securities Purchase Agreement provides that
the Company will record a $15 million (pre-tax) recapitalization charge in its
financial results for the quarter in which the Transaction is recorded. The
recapitalization charge will provide additional strengthening of the Company's
balance sheet and overall reserve levels, and is intended to cover contingencies
and estimated exposures associated with various previously reported strategic
actions and product line discontinuations.
Certain other provisions. Concurrently with the execution of the Securities
Purchase Agreement, the Company issued to AFG 800,000 warrants (the "Break-up
Warrants") to purchase an aggregate of 800,000 shares of Common Stock at an
exercise price of $3.45 per share. The Break-up Warrants will be exercisable
only if the Securities Purchase Agreement is terminated prior to the approval of
the Proposal by the stockholders of the Company (i) by the Company if the
Board
of Directors of the Company determines in the exercise of its fiduciary duties
that such terminationAviation Sale is required by reason of a Competing Proposal (as defined
in the Securities Purchase Agreement), or (ii) by the Company or AFG if the
Company's Board of Directors withdraws or modifies in a manner materially
adverse to AFG its approval of the Securities Purchase Agreement and recommends
a Competing Proposal to the stockholders of the Company. Upon the closing (the
"Closing") of the Securities Purchase Agreement and issuance of the Series D
Preferred Stock, the Break-up Warrants will expire.Not Completed."
REASONS FOR THE TRANSACTIONAVIATION DIVISION SALE
Financial Condition. The Company has experienced substantial losses in
each of its last two fiscal years, and the Company's financial condition and
operating results have been significantly adversely affected ascontinued to deteriorate during 1997.
For the fiscal year ended December 31, 1995, the Company recorded a
resultloss before income tax benefit of the poor
financial performance of certain of the Company's lines of business andapproximately $20.4 million. Fiscal year 1995
results were particularly impacted by a special charge to earnings of $20.6
million after tax taken by the Company in
the fourth quarter of 1995 (the "Special Charge").
The Company recorded the Special Charge(after tax) for certain discontinued lines and classes of business and
increased reserves for incurred but not reported losses ("IBNR") and unearned
premium. The majority of the
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Special Charge related to the Company's poor financial performance in, and
decision to withdraw from, the franchised new automobile dealer line of business
and certain classes of commercial aviation business. As a result of the Special
Charge, net book value declined from $10.11 at September 30, 1995 to $7.58 at
December 31, 1995. Based on the Special Charge,special charge, A.M. Best Company ("Best") lowered AEIC's
rating from "A- (Excellent)" (Excellent) to "B++" (Very Good)" on March 4, 1996. Subsequent
to Best's rating action, the Company announced that it was pursuing various
alternatives for increasing the capital and surplus of AEIC.
During 1996, the Company continued to incur losses. In May 1996, the
Company reported a net loss of $2.8 million for the first quarter of 1996, due
mainly to an increase in reported claims in the transportation line of business
and weather related claims, and a decrease in net book value to $7.01 per
common share at March 31, 1996. Due to the Company's first quarter financial
performance and the further deterioration of its capitalization, Best further
downgraded AEIC's rating to "B""B (Adequate)" on May 24, 1996. Best additionally
placed a negative outlook on the rating, pending the outcome of ongoing
capital-raising efforts of the Company. Best further stated that if the Company
was unsuccessful in raising capital or if operating results did not improve,
Best would likely downgrade the rating further.
In October 1996, the Company withdrew from the transportation line of
business in connection with a strategic refocusing by the Company on the
aviation, marine and artisan contractor product lines where, in the view of
management, historic profitability and the Company's competitive advantages
arewere the greatest. During 1996, the Company's transportation line of business
had been its primary source of unacceptable underwriting results. The Company
also discontinued the quarterly dividend on its Common Stock in order to
preserve capital. In the second and third quarters of 1996, the Company
reported net losses of $0.6 million and $1.2 million, respectively, decreasing
net book value to $6.68 per common share at September 30, 1996.
The third quarter results and the Company's performance over the first nine
months of 1996 increased the likelihood that Best might further downgrade AEIC's
rating if the Company were unable to obtain additional capital. In the opinion
of management, a further downgrade by Best could have a significant adverse
effect on the Company's business.
Decision to Pursue Strategic Relationship. In FebruaryDuring 1996, the Board of Directors of the Company began discussingundertook an in-
depth review of the Company's needneeds and explored various alternatives for
additional
capital in light of the Special Charge. After the downgrade of AEIC's rating by
Best in March 1996, management began an in-depth review of various forms of
capital transactions. The Board met on six separate occasions from May through
November 4, 1996 to review the status and proposed terms of various potential
transactions.increasing capital. Ultimately determining that a properly structured strategic
alliance would offer stockholders the best opportunity to maximize stockholder
value, in November 1996, the Board of Directors authorized the Company to enter
into a binding agreement with AFG. On November 5, 1996, the Company and AFG
entered into the Securities Purchase Agreement (the "Securities Purchase
Agreement"). The stockholders of the Company approved the Securities Purchase
Agreement and the
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transactions contemplated thereby on December 31, 1996. Pursuant to the terms
of such agreement, the Company sold 350,000 shares of the Series D Preferred
Stock to Purchaser, which is a wholly-owned subsidiary of AFG, for $35.0
million. Of the proceeds, the Company used $13.3 million to fully repay and
cancel its bank credit facility and contributed $17.0 million to the capital
and surplus of AEIC. The Series D Preferred Stock has a dividend rate of 9%,
payable quarterly, and the dividend may, at the Company's option, be paid in
additional shares of Series D Preferred Stock for the first five years. The
Securities Purchase Agreement also provided that AFG and the Company, through
their appropriate subsidiaries, would negotiate in good faith the terms of
agreements embodying a strategic alliance that was expected to allow the
Company to market and underwrite new and expanded aviation insurance product
lines and permit the Company to offer, when required by an insured, products
providing the financial security of an insurer rated "A (Excellent)" by Best.
The Securities Purchase Agreement also required the Company to record
a $15 million reserve addition in its financial results for the fourth quarter
of 1996. Based upon additional data, analyses and evaluations performed in
connection with closing the books for the 1996 fiscal year, including analysis
from its independent actuary, the Company increased the level of the reserve
addition to approximately $30.0 million. After the announcement of the
withdrawal from the transportation program for local- and intermediate-haul
truckers at the beginning of the fourth quarter of 1996, the Company ended the
quarter with higher transportation loss levels than anticipated, while premium
levels declined faster than originally anticipated. Losses from the auto dealer
program, which was discontinued in 1995, also continued at higher-than-
anticipated levels. The year-end actuarial analysis, taking these patterns into
account, resulted in significant reserve additions for IBNR losses and related
reinsurance costs for these lines of business. The remainder of the reserve
additions are predominantly increases in reserves for IBNR losses and related
reinsurance costs for the aviation lines of business. Of the total $30.0
million reserve addition, approximately $19.1 million resulted from increases
in IBNR losses, and the remainder resulted from increased levels of ceded
reinsurance premiums due to increased loss levels. As a result of these
factors, the Company recorded a loss before income tax benefit of $44.4 million
for 1996, and AEIC's statutory surplus declined to $20.4 million at December
31, 1996.
In light of these financial developments, the Board of Directors
believed it prudent that the Company strengthen its capital base to support its
core aviation business. The Company followed a strategy of simultaneously
pursuing multiple alternatives aimed at preserving the value of its business,
and thus stockholder value.
On March 9, 1997, at the request of AFG, representatives of AFG met
with representatives of the Company. AFG believed that the Company needed
additional capital in order to strengthen the capital and surplus of AEIC. AFG
proposed loaning $15 million to the Company, which would be repaid from the
proceeds of a rights offering to stockholders of the Company. AFG would give to
the Company a standby commitment to subscribe for all rights which were not
subscribed by the stockholders. As a standby commitment fee, AFG proposed
decreasing the conversion price of the Series D Preferred Stock. The pricing of
the rights offering and the proposed conversion price were preliminarily
proposed to be $3.00 per share.
On March 13, 1997, the Company's Board of Directors met. The Board
approved the engagement by the Company and AEIC of Credit Suisse First
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Boston ("CSFB") with respect to their review of strategic and capital planning
alternatives. These alternatives included, among other things, sale of the
Company or assets of the Company, a rights offering to stockholders, a sale of
securities and other alternatives to increase underwriting capacity. The Board
reviewed AFG's proposal. The Board instructed CSFB to approach AFG with
information that the Company would consider negotiating a transaction, and CSFB
should return to the Board with the best transaction that could be negotiated.
During February and March 1997, the Company discussed with AFG
quickening the pace of implementation of the portion of the strategic alliance
that would permit the Company to offer to its insureds policies of Purchaser,
which would provide such insureds with the security of policies issued by an
insurer rated "A" by Best. The Company proposed publication of a joint press
release announcing the implementation of this arrangement. On March 17, 1997,
AFG notified the Company by telephone that it had determined not to proceed
with the implementation of the previously announced agreement to provide the
Company's insureds with policies of Purchaser, and that AFG would not invest
additional capital in the Company. In a subsequent telephone call on the same
day, AFG proposed acquiring the Aviation Division in consideration for
transferring the Series D Preferred Stock to the Company. Representatives of
AFG met with representatives of the Company and CSFB from March 18 through
March 21 to negotiate the terms of the proposed sale. On several occasions the
Company or CSFB discussed the inadequacy of the proposed consideration, but AFG
would not agree to increase the proposed consideration. During these meetings,
the Board met on March 18, March 19 and March 21, 1997 to review the proposed
transaction and the status of the negotiations. On March 21, 1997, the Board
rejected the transaction because of the inadequacy of the proposed
consideration.
While CSFB continued to pursue other strategic alternatives, the
Company initiated discussions with certain of its reinsurers to expand existing
underwriting agreements to make available to the Company's insureds policies of
insurers rated "A" by Best for all of the Company's general aviation product
lines. Representatives of the Company met with representatives of Chartwell Re
Corporation ("Chartwell") on March 20, 1997, and with representatives of Zurich
Reinsurance Centre, Inc. ("ZRC") on March 21, 1997. ZRC agreed to expand the
agreements of it and its affiliates so that the Company would have authority to
issue policies of ZRC and/or certain of its affiliates for all of the general
aviation product lines. Under this arrangement, AEIC would assume, as
reinsurer, all liabilities of such insurers under the policies issued by them.
The Company began preparing formal documentation and regulatory filings to
implement this arrangement. Also, Chartwell and ZRC agreed to maintain the
Company's authority to attach to AEIC's policies assumption of liability
endorsements ("ALE's") issued by them or their affiliates, which were rated at
least "A-" by Best. The ALE's provided for the assumption of AEIC's liabilities
under such policies by the insurer issuing the ALE in the event of the
insolvency of AEIC.
As a result of the effect of the 1996 loss on the statutory surplus of
AEIC, on March 25, 1997, Best downgraded its rating of AEIC from "B" to "D
(Poor)." Best stated that the downgrade reflects its view that AEIC's weakened
financial condition makes it "extremely vulnerable" to unfavorable changes in
underwriting or economic conditions. Best also expressed concern over the
potential regulatory response to the position of AEIC, whose capitalization had
fallen below the mandatory control level of risk-based capital. Risk-based
capital is a method of establishing the minimum amount of capital appropriate
for an insurance company to support its overall business operations in
consideration of its size and risk profile. AEIC's total statutory surplus at
December 31, 1996 was $19,339,374 and its Authorized Control Level was
$16,533,474. There are four different Control Levels. The Company Action
Level is when the Company's surplus is in excess of 150% of the Authorized
Control Level but less than 200% of the Authorized Control Level. This Level
requires the Company to prepare and submit a Risk Based Capital Plan to the
Commissioner of the state of domicile for his review and approval. The second
level is the Regulatory Action Level which is when the Company's surplus is in
excess of the Authorized Control level but less than 150% of the Authorized
Control Level. This is the Level of AEIC's surplus at
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December 31, 1996. This Level requires AEIC to submit a Risk Based Capital
Plan to the Commissioner of the state of domicile, which is the State of Texas.
After the report is submitted, the Commissioner will issue an order specifying
the corrective actions to be taken. AEIC's Risk Based Capital plan is in
progress. The primary attribute of the plan is to sell its remaining
operations and stop writing new and renewal business. The third Level is the
Authorized Control Level which is when the Company's surplus equals the
Authorized Control Level and authorizes the Commissioner to take whatever
regulatory actions considered necessary to protect the best interests of the
policyholders and creditors and may include regulatory control which includes
rehabilitation of liquidation. The fourth level is the mandatory control level
which is when the Company's surplus is from 70% to 100% of the Authorized
Control Level and authorizes the Commissioner to take actions necessary to
place the company under regulatory control which includes rehabilitation or
liquidation.
Throughout March 1997, the Company's revenues were declining partially
because of marketplace uncertainties about the financial condition of AEIC.
After Best downgraded AEIC's rating to "D", the Company's agents became more
reluctant to place their business with the Company even when the policies were
issued with ALE's. After the downgrade in the Best rating, the reinsurers of
the Company who had authorized the Company to issue ALE's and the insurers and
reinsurers that had authorized the Company to issue their policies became
increasingly concerned about AEIC's financial condition and vulnerability to
regulatory action. As a result of the additional credit exposure, during the
last week of March Chartwell's affiliate limited the Company's authority to
issue ALE's on marine policies to requests for ALE's specifically approved by
Chartwell. During the second week of April ZRC suspended the Company's
authority to issue ALE's, a ZRC affiliate suspended the Company's authority to
issue airport liability policies, and Virginia Surety Company gave 30 days
notice to the Company of termination of the agreement providing limited
authority for the Company to issue Virginia Surety aviation and marine
policies. However, the Company proceeded to discuss with ZRC a potential
transaction in which the Company would transfer its general aviation business
to a newly formed managing general agency operation in return for an equity
interest in such agency. ZRC or its affiliates would provide policy issuing
capacity to such agency in return for the remaining equity interest. Chartwell
expressed interest only in potentially participating in a transaction led by
ZRC. In meetings on April 8 and 9, 1997, representatives of ZRC and the Company
reviewed the potential economic terms of such transaction, and the potential
profits of the agency operation did not appear likely to provide a financial
return to the Company sufficient to fund the Company's ongoing obligations.
While the Company pursued alternatives for providing its insureds with
the security of an insurer rated at least "A-" by Best, CSFB and the Company
also pursued other strategic alternatives. CSFB contacted 13 parties that it
believed could be interested in discussing a potential transaction with the
Company. The Company contacted its lead reinsurers, ZRC and Chartwell, and its
reinsurance broker regarding their own interest or the potential interest of
other insurers or reinsurers in discussing a potential transaction with the
Company. CSFB continued to discuss a potential transaction with AFG. During the
second week of April 1997, the Company entered into extensive discussions with
AFG regarding the Aviation Division Sale. Only one party other than AFG
submitted a proposal regarding the Company or the aviation business. The
proposal was to purchase the aviation insurance business for $5 million in cash
and a 5% to 7% commission on renewals for one year. The proposal did not
include assumption of any of AEIC's existing liabilities, and the Series D
Preferred Stock would have remained outstanding.
Throughout this process, the Board had met on five separate occasions
from March 13 through April 11, 1997 to review the status of the Company's
business and the status and proposed terms of various potential
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transactions. The directors also on numerous occasions discussed these matters
informally with management and each other. The Company also consulted the Texas
Department of Insurance regarding regulatory views and issues, and the Company
and AFG met with the Texas Department on April 10, 1997. The Texas Department
strongly encouraged the Company and AFG to enter into the Purchase Agreement.
On April 11, 1997, the Board met to consider the potential transfer of the
general aviation business to a managing general agency and the two potential
proposals to acquire the aviation insurance business. Ultimately determining
that the Aviation Division Sale would offer stockholders the best opportunity
to achieve maximum value for the general aviation business, the Board
deliberated the AFG proposalAviation Division Sale at length and determined that the
proposed Transaction with AFGit was the
best available transaction.
Recommendation of the Board of Directors. In light of the financial
background described above, the Transaction involves matters of great importance
to the Company and its stockholders. The Board of Directors of
the Company has unanimously approved the Securities Purchase Agreement and believes that
the TransactionAviation Division Sale is in the best interests of the Company and its
stockholders.
The Board of Directors, in approving the TransactionAviation Division Sale and
recommending stockholder approval of the Proposal, considered a number of
factors, including the following: (i) consummation of the Transaction will provide the Company with
$35 million of new capital (before deducting the estimated expenses of the
Transaction), a majority of which will be utilized to provide capital to AEIC
and pay down bank debt; (ii) consummation of the Transaction, barring any
unforeseen events, would likely avoid a further ratings downgrading by Best,
although it will not ensure that a downgrading will not occur in the future;
(iii) the anticipated benefits to the Company of the strategic alliance with
AFG; (iv) the expected benefits from the addition of members of AFG's senior
management to the Board of Directors; (v) the lack of certainty that any of the
possible alternative transactions considered by the Board of Directors would be
successful on an expedited basis and on terms as favorable to the Company as the
Transaction; (vi) the existing assets, operations, earnings
and prospects of the Company in light of the economic and regulatory climate; (vii)climate
and AEIC's Best rating; (ii) the terms of the Securities Purchase Agreement, includingAgreement; (iii) the
voting rights, conversion rights,
preferences and other rightsadvice of the Series D Preferred Stock; (viii) the written
opinion of CS First Boston Corporation ("CS First Boston"),CSFB, the financial advisor to the Company, described below; (ix)(iv) the
high probability of consummation of the TransactionAviation Division Sale (including the
absence of a material adverse change condition to AFG's
6
11Purchaser's obligation to
close); and (x)(v) the potential adverse consequences of delaying a transaction. See "The Transaction -- Reasonstransaction while
searching for additional alternatives; (vi) the Transaction."
OPINIONterms of all potential
alternative transactions of which the Board was aware, including quantification
of the potential purchase price or financial return to the Company of the
potential alternative transactions; (vii) the probability of obtaining required
regulatory approvals; (viii) the likelihood that the Company would lose its
aviation insurance business to other, higher rated insurers without receiving
any consideration unless agents and policyholders quickly received assurance
that a financially secure insurer would assume the Company's liabilities.
ADVICE OF FINANCIAL ADVISOR
CS First Boston,CSFB, financial advisor to the Company, has rendereddelivered to the Board of
Directors of the Company a written opinion,letter, dated November 5, 1996,April 11, 1997, to the effect that as of such date and based upon and subject to certain matters
statedthe
Aviation Division Sale would result in such opinion, the cash consideration to be received by the Company in
the Transaction was fairmore value to the Company, from a
financial point of view.view, than any other alternative explored by the Company and
CSFB together. A copy of the opinion of CS First Boston dated November 5, 1996letter is attached hereto as Appendix I and should
be read carefully in its entirety with respect to the assumptions made, matters considered and limitations on the review undertaken in
connection with such opinion.considered. The
opinion of CS First Boston is directed only to
the fairness of the cash consideration to be received by the Company in the
Transaction from a financial point of view,letter does not address any other aspect of the Transaction or any related transactionAviation Division Sale and does
not constitute a recommendation to any stockholder as to how such stockholder
should vote aton the Special Meeting.Proposal. See "The Transaction -- OpinionAviation Division Sale--Advice of
Financial Advisor."
CONDITIONS TOPLANS FOR FUTURE OPERATION OF THE TRANSACTION
ConsummationCOMPANY
Following the sale of the Transaction is subject to a number of conditions,
including approvalCompany's three divisions, the business and
operations of the ProposalCompany will differ materially from the Company's past
activities. The Company expects that it will no longer write new or renewal
policies for the foreseeable future. It will continue to handle claims on the
Company's policies that are not assumed by the purchasers as part of these
transactions, and maintain the related reserves and assets. See "Plans for
Future Operation of the Company." Accordingly, the Company's revenues and
earnings capacity will be significantly lower in the future. See "Unaudited Pro
Forma Financial Information." The Company's operational focus will be on
attempting to create residual value for the Company's stockholders from the
remaining operations and assets and additional ongoing operations. The Company
will substantially reduce its workforce, and the current outside directors of
the Company have informed the Company that they intend to resign. The Company's
Board of Directors will be reduced to three members. Mr. M. Philip Guthrie,
who is the Chairman of the Board, Chief Executive Officer, President and a
current director, will remain on the Board. Mr. Richard M. Kurz, who is the
Senior Vice President/Chief Financial Officer of the Company, and Mr. Howard D.
10
15
Putnam have been nominated for election to the Board. See "Election of
Directors." The Company's management will consist of Mr. Guthrie and Mr. Kurz,
who will remain as executive officers.
It is not currently possible to determine how much residual value, if
any, will inure to the Company's stockholders following the sale or other
disposition of the Company's divisions. In addition to any value generated from
the management of claims and the investment portfolio, the Company will also
have an estimated net operating loss carryforward ("NOL") of at least $5.0
million following the sale or disposition of its divisions. Although the
Company has no current specific plans concerning the utilization of the NOL,
the NOL may be available to offset future income, if any, of the Company.
The Company will in the future explore other ways to maximize
shareholder value, including by possibly entering into a new line of business,
acquiring another business or selling the Company. The Company does not expect
that AEIC would be able to conduct any new insurance business for the
foreseeable future, however, due to regulatory restrictions and AEIC's Best
rating. Two agency subsidiaries of the Company, however, do not have similar
restrictions on their ability to conduct business. See "Plans for Future
Operation of the Company."
EFFECT ON COMPANY IF THE AVIATION DIVISION SALE IS NOT COMPLETED
If the Company is not able to complete the Aviation Division Sale as
contemplated in this Proxy Statement, the Company expects to lose its current
general aviation insurance business to other, higher rated insurers. Therefore,
the Company would expect to discontinue the insurance underwriting activities
of the Aviation Division. Consequently, the principal effect of nonconsummation
of the Aviation Division Sale would be that the Company would not receive any
consideration for the existing business conducted by such division. See "Plans
for Future Operation of the Company."
NO DISSENTERS' RIGHTS
Under Delaware law, stockholders of the Company the
expiration or termination of the applicable waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), and receipt of regulatory approvals from applicable state insurance
commissions in the States of Texas and California. See "The
Transaction -- Regulatory Approvals" and "The Securities Purchase Agreement and
Related Agreements -- Conditions Precedent."
NO DISSENTERS' RIGHTS OR PREEMPTIVE RIGHTS
Under Delaware law, holders of Common Stock are not entitled to
dissenters' appraisal rights or preemptive rights in connection with the Transaction and the
issuance of the Series D Preferred Stock.Aviation Division Sale.
CERTAIN CONSIDERATIONS
Stockholders should refer to the information under "Certain
Considerations" for a discussion of certain matters that should be considered
in connection with an evaluation of the Proposal.Aviation Division Sale.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Aviation Division Sale will not result in United States federal
income tax consequences to the holders of Common Stock of the Company. The
Company expects that it will recognize a gain for federal income tax purposes
of approximately $21.0 million, which will be offset by NOL. The Company
anticipates, nevertheless, that an alternative minimum tax in the amount of
approximately $.5 million will be payable in connection with the Aviation
Division Sale. See "The Aviation Division Sale--Certain Federal Income Tax
Consequences."
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONAVIATION DIVISION SALE
Certain officers, directors and stockholders of the Company have
certain
interests or obligations with respect to the TransactionProposal that are different from,
or in addition to, the interests of stockholders of the Company generally. The Securities Purchase Agreement provides as a condition to AFG's obligation to
close that the Company shall have adjusted the exercise price of existing stock
options granted to the current officers and directors of the Company or its
subsidiaries pursuant to its 1991 Nonqualified Stock Option Plan, 1994 Stock
Incentive Plan and 1994 Directors Option Plan to the market price on the date of
adjustment and shall provide that all such options shall have a vesting period
of three years, with one-third of the options vesting on each anniversary date
of the date of adjustment. The Company will make such adjustment on the Closing
Date. See
"The Transaction -- InterestsAviation Division Sale--Interests of Certain Persons in the Transaction.Aviation
Division Sale."
711
12
THE SPECIAL MEETING16
GENERAL INFORMATION
GENERAL
This Proxy Statement is being furnished to holders of Common Stock and
Series D Preferred Stock of the Company in connection with the solicitation of
proxies from the holders of Common Stock by the Company's Board of Directors for use at the Special Meeting.
TIME AND PLACE; PURPOSE
The SpecialAnnual Meeting willto be
held on December 30, 1996, at ,
Dallas, Texas, , commencing at 9:00 a.m., local time. Attime, on July 30, 1997, at the Special
Meeting, holders of Common Stock willAmeriSuites Hotel,
12411 North Central Expressway, Dallas, Texas 75243, and any adjournments or
postponements thereof, to consider and vote uponon (i) the Proposal. No
other business will be presented atProposal, (ii) the
Special Meeting other than those matters
incidental to the conductelection of two directors of the Special Meeting.
It is a conditionCompany to serve until the consummation1999 and 2000
annual meetings of stockholders, respectively, or until their successors are
duly elected and qualified; (iii) the ratification of the Transaction thatappointment of Arthur
Andersen LLP as the Proposal
be approved. Therefore, unlessindependent auditors of the Proposal is approved byCompany and its subsidiaries
for the stockholders,fiscal year ending December 31, 1997; and (iv) such other matters as
may properly come before the Transaction will not be consummated.
VOTING; VOTE REQUIRED FOR APPROVALAnnual Meeting or any adjournment or postponement
thereof.
RECORD DATE
The Board of Directors has established December 4, 1996fixed the close of business on June 30,
1997 as the Record Date for the determination of stockholders entitled to
notice of and to vote at the Special Meeting. Only holders of record ofAnnual Meeting and at any adjournments or
postponements thereof. The Common Stock atand the closeSeries D Preferred Stock are
the only classes of business
on such date areoutstanding securities of the Company entitled to notice of
and to vote at the SpecialAnnual Meeting.
OnVOTE REQUIRED
As of the Record Date, the Company had outstanding and entitled to vote7,047,098 shares of Common Stock.Stock and 357,875
shares of Series D Preferred Stock were outstanding. Each share of Common Stock
outstanding on the Record Date shall be entitled to one vote, and each share of
Series D Preferred Stock outstanding on the Record Date shall be entitled to
4.92 votes upon each matter to come before the Annual Meeting. Pursuant to the
terms of the Securities Purchase Agreement, AFG is required to vote all votes
which it has in excess of 20% of the total votes eligible to be voted on a
matter in proportion to the actual votes of holders of all remaining votes
(including AFG's 20% vote).
The presence, either in person or by proxy, of the holders of at least a majority of the outstanding shares of Common Stockvotes
entitled to votebe cast at the Annual Meeting is necessary to constitute a quorum
atfor the SpecialAnnual Meeting.
Because the Transaction will involve the issuance of securities convertible
into Common Stock in an amount in excess of 20%Section 271 of the aggregate number of
shares of Common Stock outstanding, the NYSEDGCL requires that the Proposalsale of all or substantially
all of the assets of a corporation be approved by the affirmative vote of the holders of a majority of
the outstanding sharesstock of Common Stockthe corporation entitled to vote thereon. Although the
Aviation Division assets being sold to Purchaser are owned by the Company's
subsidiary, AEIC, on a consolidated basis such assets constituted approximately
45.0% of the Company's total assets as of March 31, 1997 and present,the Aviation
Division represented approximately 70.1% of earned premium for the year ended
December 31, 1996. Accordingly, since Section 271 of the DGCL may be applicable
to the Aviation Division Sale, the affirmative vote of a majority of the total
number of votes entitled to be cast at the Annual Meeting has been established
as a requirement for approval of the Proposal.
A plurality of the votes cast in person or by proxy at the SpecialAnnual
Meeting provided that the total votes cast on the Proposal
constitute at leastis required to elect a director. There will be no cumulative voting for
directors. The affirmative vote of a majority of the outstandingvotes cast is required to
ratify the appointment of Arthur Andersen LLP as the Company's independent
auditors.
Abstentions will be counted as present for purposes of determining
whether a quorum is present. With respect to the Proposal, abstentions will
have the same effect as a vote against the Proposal and, with respect to the
election of management's nominees for director, the withholding of authority
will have no effect on the
12
17
election. Under the rules of the National Association of Securities Dealers,
Inc., brokers who hold shares in street name for customers will not have the
authority to vote on the Proposal unless they receive specific instructions
from beneficial owners. While such a broker non-vote will be counted as present
for purposes of a quorum, it will have the same effect as a vote against
approval of the Proposal.
Purchaser, which owned 357,875 shares of Series D Preferred Stock and
116,000 shares of Common Stock.
PursuantStock on the Record Date, representing approximately
20% of the total votes entitled to be cast at the Mason Best Voting Agreement, Mason BestAnnual Meeting, has agreed to
vote all of such shares of Common Stock owned by it in favorfor approval of the Proposal. In addition, Mason Best,
which owns 2,960,772 shares of Common Stock, representing approximately 42%33.6%
of the total votes entitled to be cast at the Annual Meeting, has entered into
an agreement with Purchaser to vote all of such shares for approval of the
Proposal. Accordingly, stockholder approval of the Proposal is assured.
PROXIES
All shares of Common Stock outstanding.
The holder of each outstanding share of Common Stock is entitled to one
vote per share on each matter considered at the Special Meeting. On all matters
considered at the Special Meeting, broker non-votes will be treated as neither a
vote "for" nor "against" the matter, although they will be counted in
determining if a quorum is present. In addition, abstentions are considered in
determining the number of votes required to attain a majority of the shares
present or represented at the Special Meeting and entitled to vote. Accordingly,
an abstention from voting on the Proposal by a stockholder present in person or
represented by proxy at the meeting has the same legal effect as a vote
"against" the Proposal because it represents a share present or represented at
the Special Meeting and entitled to vote, thereby increasing the number of
affirmative votes required to approve the Proposal.
PROXIES
All shares of CommonSeries D Preferred Stock represented by
properly executed proxies will be voted at the SpecialAnnual Meeting in accordance
with the directions indicated on the respective proxies unless the proxies have
been previously revoked. Unless contrary direction is given, all shares of
Common Stock and Series D Preferred Stock represented by proxies will be voted
FOR approval of the Proposal, the nominees for director set forth herein and
ratification of the appointment of the Company's independent auditors, and in
the proxy holder's discretion as to such other matters incident to the conduct
of the SpecialAnnual Meeting. If any other matters are properly presented at the
SpecialAnnual Meeting for action, including a question of adjourning the meeting from
time to time, the persons named in the proxies and acting thereunder will have
discretion to vote on those matters in accordance with their best judgment.
All holders of Common Stock and Series D Preferred Stock are requested
to complete, sign, date and promptly return the enclosed proxy card in the
postage paid envelope provided for this purpose in order to ensure that their
shares are voted.
8
13 A stockholder executing and returning a proxy has the power
to revoke the proxy at any time before it is voted. A stockholder who wishes to
revoke a proxy can do so by executing a later-dated proxy relating to the same
shares and delivering it to the Secretary of the Company prior to the vote at
the SpecialAnnual Meeting or by appearing in person at the SpecialAnnual Meeting and voting
in person the shares to which the proxy relates. Any written notice revoking
the proxy should be sent to American Eagle Group, Inc., 12801 N. Central
Expressway, Suite 800, Dallas, Texas 75243, Attention: Secretary.
SOLICITATION
The Company will bear the expenses in connection with this
solicitation, including the cost of preparing and mailing this Proxy Statement.
In addition to solicitation by use of the mails, proxies may be solicited by
directors, officers and employees of the Company in person or by telephone,
telegram or other means of communication. Such directors, officers and
employees will not be additionally compensated, but may be reimbursed for
reasonable out-of-pocket expenses in connection with such solicitation.
Arrangements also will also be made with custodians, nominees and fiduciaries for
forwarding of proxy solicitation materials to beneficial owners of shares held
of record by such custodians, nominees and fiduciaries, and the Company will
reimburse such custodians, nominees and fiduciaries for reasonable expenses
incurred in connection therewith.
In addition,13
18
THE AVIATION DIVISION SALE
GENERAL
On April 11, 1997, the Company, has retained to assist in the
solicitation of proxies for a fee of approximately $ , plus
reimbursement of reasonable out-of-pocket expenses incurred in connection with
this solicitation.
THE TRANSACTION
GENERAL
On November 5, 1996, the CompanyAEIC and AFGPurchaser entered into the Securities
Purchase Agreement, which, subject to the terms and conditions thereof,
provides for the sale by AEIC of the business and issuancea substantial portion of the
assets constituting the Aviation Division to Purchaser in exchange for (i) 30%
of the unearned premiums to be transferred to Purchaser, (ii) the net book
value of all furniture, fixtures and equipment to be transferred to Purchaser,
(iii) all funds collected by Purchaser with respect to agents' balances
relating to the general aviation insurance business and which are in excess of
90 days old as of the closing of the Aviation Division Sale; (iv) commissions
of 4%, 2% and 1% of the direct written premiums on renewal policies relating to
the general aviation insurance business during the first, second, and third
years, respectively, following the closing of the Aviation Division Sale; (v)
the assumption of certain liabilities including all liabilities relating to
general aviation policies issued by the Company since January 1, 1993, but
excluding liabilities relating to AFG of 350,000 shares of Series D
Preferred Stock for an aggregate purchase price of $35 million. Consummation of
the Securities Purchase Agreement is subject to certain conditions, including
approval of the Proposalnon-aviation policies issued by the stockholders ofCompany
and aviation policies issued prior to January 1, 1993; and (vi) the Company.
Terms of the Series D Preferred Stock. The Series D Preferred Stock will be
entitledtransfer to a per annum cumulative dividend equal to 9% payable quarterly, with
payment commencing April 1, 1997. At the option of
the Company during the first
five years after the Closing Date, dividends may be paid in cash or in kind
(whereby a holder, in lieu of cash, receives shares of Series D Preferred Stock
having a liquidation value equal to the dividends declared).
The Series D Preferred Stock will be convertible into shares of Common
Stock at any time at a conversion price of $5.25 per share (subject to
antidilution provisions). The Series D Preferred Stock may be redeemed at any
time at the Company's option; provided, however, if the Company redeems any
shares of Series D Preferred Stock prior to the seventh anniversary of the
Closing Date, the Company shall, in addition to the cash payable to the holder,
issue to the holder, for each share of Common Stock into which the redeemed
shares of Series D Preferred Stock are then convertible, a Warrant to purchase
one share of Common Stock of the Company at an exercise price of $5.25 per share
(subject to antidilution provisions). The Company is required to redeem 10% of
the outstanding shares of Series D Preferred Stock on the first business day of
each year, commencing with the first business day in January 2008, and all
remaining outstanding shares are required to be redeemed on the first business
day in January 2017. The redemption price for the Series D Preferred Stock is
$100.00 per share plus an amount equal to all accrued and unpaid dividends to
the date of redemption.
Until AFG and its affiliates no longer own Series D Preferred Stock and
Underlying Shares representing in the aggregate the ownership, or the right to
acquire ownership, of 51% of the Underlying Shares or until the seventh
anniversary of the Closing Date, whichever is earlier, AFG shall be entitled to
nominate for election 30% of the Company's directors and, if elected, at least
one director representing AFG shall serve on each standing committee of the
Board of Directors. Notwithstanding the foregoing, the number of directors that
9
14
AFG is entitled to nominate shall be reduced by the number of directors that the
holders of the Series D Preferred Stock are entitledissued by the Company to
elect as a class underPurchaser in December 1996.
The Company estimates that the termscash consideration to be received by
the Company at the closing of the Certificate of Designation for the Series D Preferred Stock.
Mason Best has agreed to vote all shares owned by it in favorAviation Division Sale will be approximately
$8.0 million. This amount is calculated at 30% of the electionnet unearned premiums
(gross unearned premium of AFG's nominees. If AFG's nominees fail$36.5 million less ceded unearned premiums of $9.9
million or $26.6 million). In addition, the Company will receive the estimated
$1.9 million net book value of the furniture, fixtures and equipment to be
electedtransferred to Purchaser. The Company also estimates that it may receive an
additional amount of approximately $3.0 million during the three-year period
following the closing, consisting of the percentage of commissions payable to
the BoardCompany by Purchaser on renewal policies that are expected to be written by
Purchaser. The removal retention commission was based upon an estimated
renewal retention rate of Directors,
AFG shall nevertheless be entitled to have an equal number55% for year 1, 30% for year 2 and 20% for year 3 on
approximately $100 million of representatives
attend each meetingwritten premium. The Company's actual renewal
retention rate over the last 17 months has been approximately 10% higher than
the rates used in this calculation. The estimated amount of the Board of Directors. The Certificate of Designation
provides that, upon the occurrence and continuation of a default in dividend
payments for at least two consecutive quarters or a default in any mandatory
redemption paymentrenewal premiums
written are based on the Series D Preferred Stock, the holders of the Series D
Preferred Stock, voting as a separate class, shall be entitled at the next
annual or special meeting of stockholders to elect a majority of the directorshistorical averages of the Company to be elected.
The Certificate of Designation provides that, forover the seven years following
the Closing Date, the holders of the Series D Preferred Stock shall be entitled
collectively to cast 20% of the votes eligible to be cast on each matter
submitted to a vote of the holders of capital stock of the Company, except that
if the aggregate number of shares of Common Stock issuable upon conversion of
the Series D Preferred Stock represents less than 20% of the outstanding shares
of Common Stock on a fully diluted basis, then each share of Series D Preferred
Stock shall be entitled to the number of votes equal to the number of shares of
Common Stock into which such share of Series D Preferred Stock is then
convertible. In addition, the Securities Purchase Agreement provides that until
the date which is three years and 180 days after the Closing Date, so longlatest 17
months. Actual amounts may differ as
AFG or any affiliate of AFG shall beneficially own Series D Preferred Stock or
Underlying Shares which represent in the aggregate the ownership, or right to
acquire ownership, of at least 51% of the Underlying Shares, AFG shall, if it
and its Affiliates hold any combination of Series D Preferred Stock and Common
Stock representing the right to vote more than 20% of the total votes eligible
to be voted on a matter on which the holders of Common Stock have the right to
vote, vote all votes in excess of such 20% in proportion to the actual vote of
holders of all remaining votes (including AFG's 20% vote).
AFG and its affiliates may assign or transfer to any person shares of the
Series D Preferred Stock or the Underlying Shares, representing in the aggregate
ownership, or the right to acquire ownership, of at least 51% of the Underlying
Shares and the right of AFG in the Securities Purchase Agreement to nominate 30%
of the Company's directors only iffinancial position has
changed, and such person assumes the voting restrictions
in the Securities Purchase Agreement which are described in the immediately
preceding paragraph.
The Company will enter into a Registration Rights Agreement with AFG
pursuant to which AFG willdifferences may be granted three demand and unlimited "piggyback"
registration rights.
For a more complete description of the Series D Preferred Stock and AFG's
rights as a holder of Series D Preferred Stock, see "Description of Series D
Preferred Stock", and "The Securities Purchase Agreement and Related
Agreements."
Strategic Alliance with AFG. The Securities Purchase Agreement embodies a
strategic alliance with AFG that will allow the Company to market and underwrite
both new and expanded aviation insurance product lines. For example, AFG has
agreed to provide a facility for the Company to offer workers compensation
coverage for its aviation insureds. These new and expanded products are expected
to provide the Company with enhanced opportunities for additional business by
attracting and retaining preferred accounts.
The Company also anticipates that the strategic alliance will permit the
Company to offer, when required by an insured, products providing the financial
security of an insurer rated "A" (Excellent) by Best. The Company anticipates
that this arrangement will, over the long term, reduce the costs the Company is
currently incurring for similar arrangements with other insurers.
In accordance with the provisions of the Securities Purchase Agreement, AFG
intends to nominate two of its senior executives to serve on the Company's Board
of Directors.material. See "AFG's Designees for Directors." The Company expects to
benefit from the experience and expertise of these executives.
Recapitalization Charge. The Securities Purchase Agreement provides that
the Company will record a $15 million (pre-tax) recapitalization charge in its
financial results for the quarter in which the Transaction is recorded. The
recapitalization charge will provide additional strengthening of the Company's
balance sheet
10
15
and overall reserve levels, and is intended to cover contingencies and estimated
exposures associated with various previously reported strategic actions and
product line discontinuations.
Certain other provisions. Concurrently with the execution of the Securities
Purchase Agreement, the Company issued to AFG 800,000 Break-up Warrants to
purchase an aggregate of 800,000 shares of Common Stock at an exercise price of
$3.45 per share. The Break-up Warrants will be exercisable only if the
Securities Purchase Agreement is terminated prior to the approval of the
Proposal by the stockholders of the Company (i) by the Company if the Board of
Directors of the Company determines in the exercise of its fiduciary duties that
such termination is required by reason of a Competing Proposal (as defined in
the Securities Purchase Agreement), or (ii) by the Company or AFG if the
Company's Board of Directors withdraws or modifies in a manner materially
adverse to AFG its approval of the Securities Purchase Agreement and recommends
a Competing Proposal to the stockholders of the Company. Upon the Closing of the
Securities Purchase Agreement and issuance of the Series D Preferred Stock, the
Break-up Warrants will expire.
AFG. AFG was incorporated as an Ohio corporation in 1994. Its address is
One East Fourth Street, Cincinnati, Ohio 45202; its phone number is (513)
579-2121. AFG is a holding company which, through its subsidiaries, is engaged
primarily in specialty and multi-line property and casualty insurance businesses
and in the sale of tax-deferred annuities. AFG's property and casualty
operations originated in 1872 and represent the seventeenth largest property and
casualty group in the United States based on 1995 statutory net premiums written
of $3.1 billion. AFG was formed for the purpose of acquiring American"Unaudited Pro Forma
Financial Corporation and American Premier Underwriters, Inc. in merger transactions
completed on April 3, 1995. AFG's common stock is listed on the NYSE. At
December 31, 1995, AFG had stockholders' equity of approximately $2.9 billion.
AFG's principal insurance company subsidiaries are rated "A" (Excellent) by
Best.Information."
REASONS FOR THE TRANSACTION
Financial Condition. The Company has experienced substantial losses in
each of its last two fiscal years, and the Company's financial condition and
operating results have been significantly adversely affected ascontinued to deteriorate during 1997.
For the fiscal year ended December 31, 1995, the Company recorded a
resultloss before income tax benefit of the poor
financial performance of certain of the Company's lines of business andapproximately $20.4 million. Fiscal year 1995
results were particularly impacted by a special charge to earnings of $20.6
million after tax taken by the Company in
the fourth quarter of 1995 (the "Special Charge").
During 1995, the Company saw two developing issues which were adversely
affecting financial results. First, the auto dealer line of business was
generating an unacceptably high loss ratio. This loss ratio was deteriorating in
1995, after having begun to trend unacceptably in 1994. Second, adverse loss
experience in the commercial aviation line of the general aviation business had
been observed earlier in 1995, and continued to develop adversely at an even
greater rate during the fourth quarter. Based on additional analysis, the
Company withdrew from the auto dealer line of business and discontinued writing
certain classes of business in the three troublesome segments of its eight
commercial aviation segments. In addition, during the latter half of 1995 and
the beginning of 1996, the Company implemented a number of underwriting actions,
including underwriting policy changes, revisions in risk selection criteria,
tightening of underwriting standards and guidelines, and expanded systems of
pricing and underwriting control.
As a result primarily of these two factors, the Company recorded the
Special Charge(after tax) for certain discontinued lines and classes of business and
increased reserves for IBNR and unearned premium. Approximately $8.9 million of
the Special Charge resulted from additional case reserves and related costs for
the three segments of the commercial general aviation business in which coverage
was discontinued. Approximately $0.7 million of the Special Charge resulted from
additional case reserves and related costs from the auto dealer program. The
remainder of the Special Charge, approximately $11.0 million, resulted from an
increase of IBNR and unearned premium reserves, which included reserves for the
discontinued lines and classes of business. As a result of the Special Charge,
net book value declined from $10.11 at September 30, 1995 to $7.58 at year end
1995.
Based on the Special Charge taken by the Company, on March 4, 1996,special charge,
Best lowered AEIC's rating from "A- (Excellent)" (Excellent) to "B++" (Very Good). This action
was based" on Best's expectations regarding the Company's ability to raise new
capital in a relatively short period, and that satisfactory operating
performance
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16
would resume, allowing the Company to generate internal capital.March
4, 1996. Subsequent to Best's rating action, the Company stated in its 1995 Annual Reportannounced that it was
pursuing various alternatives for increasing the capital and surplus of AEIC.
In the first quarter ofDuring 1996, the Company experienced a deterioration in
the performance of the transportation line of business and instituted a full
review of the internal and external factors affecting its performance. Oncontinued to incur losses. In May
13, 1996, the
Company reported a net loss of $2.8 million for the first quarter of 1996, due
mainly to an increase in reported claims in the transportation line of business
and weather related claims, and a decrease in net book value to $7.01 per
common share at
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19
March 31, 1996. On May 24, 1996, Best downgraded AEIC's rating from "B++" (Very Good) to
"B" (Adequate) dueDue to the Company's poor first quarter financial performance and
the further deterioration of its capitalization.capitalization, Best stated that the first
quarter 1996 loss placed additional pressurefurther downgraded AEIC's
rating to "B (Adequate)" on the Company to raise capital in
a timely fashion while making it more difficult for the Company to do so.May 24, 1996. Best additionally placed a negative
outlook on the rating, pending the outcome of ongoing capital-raising efforts
of the Company. Best acknowledgedfurther stated that if the Company was exploring capital-raising alternatives, and stated that Best would
review the rating for possible upgrade or removal of the negative outlook. If,
however, the Company proved unsuccessful in
raising capital or if operating results did not improve, Best stated that it would likely
downgrade the rating further.
Any further downgrade would likely have a significant adverse effect on
the Company, its competitive position, and its future performance.
Upon completion of the Company's review of the transportation line of
business, onIn October 1, 1996, the Company withdrew from the transportation line of
business.business in connection with a strategic refocusing by the Company on the
aviation, marine and artisan contractor product lines where, in the view of
management, historic profitability and the Company's competitive advantages
were the greatest. During 1996, the Company's transportation line of business
had been its primary source of unacceptable underwriting results. In connection with this
withdrawal, the Company began a strategic refocusing on those product lines
where the Company believes historic profitability and sustainable competitive
advantages are the greatest -- Aviation, Marine, and Artisan Contractors. The
Company believes that the changes made in the commercial aviation segment have
continued to produce increasing improvements, and that withdrawing from
transportation allows the Company to devote increasing amount of capital and
resources to the remaining lines. On September 30, 1996, the Company
also discontinued the quarterly dividend on its common stockCommon Stock in order to
more quickly
build the capital level of the Company.preserve capital. In the second and third quarters of 1996, the Company
reported net losses of $0.6 million and $1.2 million, respectively, decreasing
net book value to $6.68 per common share at September 30, 1996.
During 1996, increasing the net loss for the three quarters
ended September 30, 1996 to $4.5 million, and making the possibilityBoard of a
further Best downgrade more likely without a timely infusionDirectors of capital.
In connection with each quarter of reported losses, the Company has
renegotiatedundertook an in-
depth review of the Company's needs and explored various alternatives for
increasing capital. Ultimately determining that a properly structured strategic
alliance would offer stockholders the best opportunity to maximize stockholder
value, in November 1996, the Board of Directors authorized the Company to enter
into a binding agreement with AFG. On November 5, 1997, the Company and AFG
entered into the Securities Purchase Agreement. The stockholders of the Company
approved the Securities Purchase Agreement and the transactions contemplated
thereby on December 31, 1996. Pursuant to the terms of such agreement, the
Company sold 350,000 shares of the Series D Preferred Stock to Purchaser, which
is a wholly-owned subsidiary of AFG, for $35.0 million. Of the proceeds, the
Company used $13.3 million to fully repay and cancel its bank credit agreementfacility
and contributed $17.0 million to bringthe capital and surplus of AEIC. The Series D
Preferred Stock has a dividend rate of 9%, payable quarterly, and the dividend
may, at the Company's option, be paid in additional shares of Series D
Preferred Stock for the first five years. The Securities Purchase Agreement
also provided that AFG and the Company, through their appropriate subsidiaries,
would negotiate in good faith the terms of agreements embodying a strategic
alliance that was expected to allow the Company to market and underwrite new
and expanded aviation insurance product lines and permit the Company to offer,
when required by an insured, products providing the financial security of an
insurer rated "A (Excellent)" by Best.
The Securities Purchase Agreement also required the Company to record
a $15 million reserve addition in its financial results for the fourth quarter
of 1996. Based upon additional data, analyses and evaluations performed in
connection with closing the books for the 1996 fiscal year, including analysis
from its independent actuary, the Company increased the level of the reserve
addition to approximately $30.0 million. After the announcement of the
withdrawal from the transportation program for local and intermediate-haul
truckers at the beginning of the fourth quarter of 1996, the Company ended the
quarter with higher transportation loss levels than anticipated, while premium
levels declined faster than originally anticipated. Losses from the auto dealer
program, which was discontinued in 1995, also continued at higher-than-
anticipated levels. The year-end actuarial analysis, taking these patterns into
complianceaccount, resulted in significant reserve additions for IBNR losses and related
reinsurance costs for these lines of business. The remainder of the reserve
additions are predominantly increases in reserves for IBNR losses and related
reinsurance costs for the aviation lines of business. Of the total $30.0
million reserve addition, approximately $19.1 million resulted from increases
in IBNR losses, and the remainder resulted from increased levels of ceded
reinsurance premiums due to increased loss levels. As a result of these
factors, the Company recorded a loss before income tax benefit of $44.4 million
for 1996, and AEIC's statutory surplus declined to $20.4 million at December
31, 1996.
In light of these financial developments, the Board of Directors
believed it prudent that the Company strengthen its capital base to support its
core aviation business. The Company followed a strategy of simultaneously
pursuing multiple alternatives aimed at preserving the value of its business,
and thus stockholder value.
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20
On March 9, 1997, at the request of AFG, representatives of AFG met
with certain financial covenants. Amendmentsrepresentatives of the Company. AFG believed that the Company needed
additional capital in order to its Amendedstrengthen the capital and Restated Credit
Agreementsurplus of AEIC. AFG
proposed loaning $15 million to the Company, which would be repaid from the
proceeds of a rights offering to stockholders of the Company. AFG would give
to the Company a standby commitment to subscribe for all rights which were entered into on February 23,not
subscribed by the stockholders. As a standby commitment fee, AFG proposed
decreasing the conversion price of the Series D Preferred Stock. The pricing
of the rights offering and the proposed conversion price were preliminarily
proposed to be $3.00 per share.
On March 18, May 3, September 20, and
November 6, 1996, to effect these negotiations.
Decision to Pursue a Strategic Relationship. At the February 23, 1996
meeting of13, 1997, the Company's Board of Directors (the "Board"),met. The Board
members began
discussingapproved the engagement by the Company and AEIC of CSFB with respect to their
review of strategic and financial planning alternatives. These alternatives
included, among other things, sale of the Company or assets of the Company, a
rights offering to stockholders, a sale of securities and other alternatives to
increase underwriting capacity. The Board reviewed AFG's proposal. The Board
instructed CSFB to approach AFG with information that the Company would
consider negotiating a transaction, and CSFB should return to the Board with
the best transaction that could be negotiated.
During February and March 1997, the Company discussed with AFG
quickening the pace of implementation of the portion of the strategic alliance
that would permit the Company to offer to its insureds policies of Purchaser,
which would provide such insureds with the security of policies issued by an
insurer rated "A" by Best. The Company proposed publication of a joint press
release announcing the implementation of this arrangement. On March 17, 1997,
AFG notified the Company by telephone that it had determined not to proceed
with the implementation of the previously announced agreement to provide the
Company's need forinsureds with policies of Purchaser, and that AFG would not invest
additional capital in light of the Special
Charge. While accessCompany. In a subsequent telephone call on the same
day, AFG proposed acquiring the Aviation Division in consideration for
transferring the Series D Preferred Stock to the public markets was unlikely, CS First Boston had
informed management that it believed an opportunity existed in the private
markets to place equity linked securities. After the initial Best downgrade and
a reviewCompany. Representatives of
the first quarter results, management began an in-depth review of
the potential benefits and problemsAFG met with various forms of capital transactions.
At its next meeting, the Board analyzed a proposed term sheet prepared by
management and CS First Boston for a private equity linked offering. In May
1996, the Board approved the retention of CS First Boston to advise the Company
with respect to potential transactions, and management was authorized to pursue
a capital raising transaction. See "-- Opinion of Financial Advisor."
CS First Boston and, to a limited extent, officersrepresentatives of the Company then
began a processand CSFB from March 18 through
March 21 to negotiate the terms of selectively canvassing the private markets for indicationsproposed sale. On several occasions the
Company or CSFB discussed the inadequacy of interest in a capital raising transaction.the proposed consideration, but AFG
would not agree to increase the proposed consideration. During the course of
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17
these efforts, numerous contacts were initiated, and unsolicited indications of
interest were received. CS First Boston initially contacted AFG in August 1996.
During the course of these efforts,meetings,
the Board met on six occasions from May
through November 4, 1996March 18, March 19 and reviewedMarch 21, 1997 to review the proposed
transaction and the status of the various negotiations. With each developing negotiation,On March 21, 1997, the Board
considered a wide rangerejected the transaction because of factors,
such as potential ultimate terms, earnings per share impact, dilutive impact,
possiblethe inadequacy of the proposed
consideration. .
While CSFB continued to pursue other strategic synergies, reserving questions, expectationsalternatives, the
Company initiated discussions with certain of its reinsurers to expand existing
underwriting agreements to make available to the Company's insureds policies of
insurers rated "A" by Best timing
and special factors unique to each proposal. On several occasionsfor all of the Board
analyzed alternative types of transactions, such as a private offering of equity
linked securities, a strategic alliance and a saleCompany's general aviation product
lines. Representatives of the Company met with representatives of Chartwell Re
Corporation ("Chartwell") on March 20, 1997, and ultimately determinedwith representatives of Zurich
Reinsurance Centre, Inc. ("ZRC") on March 21, 1997. ZRC agreed to expand the
agreements of it and its affiliates so that a transaction involving not only additional capital
but the strong potentialCompany would have authority to
issue policies of ZRC and/or certain of its affiliates for strategic synergies presented the best opportunity
for maximizing stockholder value. At its final two meetings during which it
considered and ultimately approved the proposed Transaction with AFG, the Board,
with its financial and legal advisors, again reviewed in detail all of the contactsgeneral
aviation product lines. Under this arrangement, AEIC would assume, as
reinsurer, all liabilities of such insurers under the policies issued by them.
The Company began preparing formal documentation and regulatory filings to
implement this arrangement. Also, Chartwell and ZRC agreed to maintain the
Company's authority to attach to AEIC's policies assumption of liability
endorsements ("ALE's") issued by them or
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21
their affiliates, which were rated at least "A-" by Best. The ALE's provided
for the assumption of AEIC's liabilities under such policies by the insurer
issuing the ALE in the event of the insolvency of AEIC.
As a result of the effect of the 1996 loss on the statutory surplus of
AEIC, on March 25, 1997, Best downgraded its rating of AEIC from "B" to "D
(Poor)." Best stated that the downgrade reflects its view that AEIC's weakened
financial condition makes it "extremely vulnerable" to unfavorable changes in
underwriting or economic conditions. Best also expressed concern over the
potential regulatory response to the position of AEIC, whose capitalization had
fallen below the mandatory control level of risk-based capital.
Throughout March 1997, the Company's revenues were declining partially
because of marketplace uncertainties about the financial condition of AEIC.
After Best downgraded AEIC's rating to "D", the Company's agents became more
reluctant to place their business with the Company even when the policies were
issued with ALE's. After the downgrade in the Best rating, the reinsurers of
the Company who had authorized the Company to issue ALE's and the insurers and
reinsurers that had been made,authorized the various proposalsCompany to issue their policies became
increasingly concerned about AEIC's financial condition and indicationsvulnerability to
regulatory action. As a result of the additional credit exposure, during the
last week of March Chartwell's affiliate limited the Company's authority to
issue ALE's on marine policies to requests for ALE's specifically approved by
Chartwell. During the second week of April ZRC suspended the Company's
authority to issue ALE's, a ZRC affiliate suspended the Company's authority to
issue airport liability policies, and Virginia Surety Company gave 30 days
notice to the Company of termination of the agreement providing limited
authority for the Company to issue Virginia Surety aviation and marine
policies. However, the Company proceeded to discuss with ZRC a potential
transaction in which the Company would transfer its general aviation business
to a newly formed managing general agency operation in return for an equity
interest that had been received, andin such agency. ZRC or its affiliates would provide policy issuing
capacity to such agency in return for the current status of all discussions and
negotiations with all parties that hadremaining equity interest. Chartwell
expressed interest only in potentially participating in a transaction led by
ZRC. In meetings on April 8 and 9, 1997, representatives of any typeZRC and the
Company reviewed the potential economic terms of such transaction, and the
potential profits of the agency operation did not appear likely to provide a
financial return to the Company sufficient to fund the Company's ongoing
obligations.
While the Company pursued alternatives for providing its insureds with
the security of an insurer rated at least "A-" by Best, CSFB and the Company
also pursued other strategic alternatives. CSFB contacted 13 parties that it
believed could be interested in discussing a potential transaction with the
Company. The Company contacted its lead reinsurers, ZRC and Chartwell, and its
reinsurance broker regarding their own interest or the potential interest of
other insurers or reinsurers in discussing a potential transaction with the
Company. CSFB continued to discuss a potential transaction with AFG. During the
second week of April 1997, the Company entered into extensive discussions with
AFG regarding the Aviation Division Sale. Only one party other than AFG
submitted a proposal regarding the Company or the aviation business. The
proposal was to purchase the aviation insurance business for $5 million in cash
and a 5% to 7% commission on renewals for one year. The proposal did not
include assumption of any of AEIC's existing liabilities, and the Series D
Preferred Stock would have remained outstanding.
Throughout this process, the Board analyzedhad met on five separate occasions
from March 13 through April 11, 1997 to review the relative economic benefits
(including the benefits of potential synergies with a strategic partner),
contingencies to closing, timing of closing, operating results and financial
conditionstatus of the Company's
business and the status and proposed terms of various potential transactions.
The directors also on numerous occasions discussed these matters informally
with management and each other. The Company exposurealso consulted the Texas Department
of Insurance regarding regulatory views and
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22
issues, and the Company and AFG met with the Texas Department on April 10,
1997. The Texas Department strongly encouraged the Company and AFG to enter
into the Purchase Agreement. On April 11, 1997, the Board met to consider the
potential transfer of the general aviation business to a further downgrade of its Best rating,managing general
agency and other business risks attendantthe two potential proposals to acquire the various proposals or expressions of
interestaviation insurance
business. Ultimately determining that were outstanding, and determined that its strategy of pursuing a
transaction involving raising additional capital provided by a strategic partner
remainedthe Aviation Division Sale would offer
stockholders the best opportunity to achieve maximum value for maximizing stockholder value. Thethe general
aviation business, the Board deliberated the AFG proposalAviation Division Sale at length
and determined that the Transaction
offeredit was the best available transaction for the Company and its stockholders.transaction.
Recommendation of the Board of Directors. In light of the financial
background described above, the Transaction involves matters of great importance
to the Company and its stockholders. The Board of Directors of
the Company has unanimously approved the Securities Purchase Agreement and believes that
the TransactionAviation Division Sale is in the best interests of the Company and its
stockholders.
The Board of Directors, in approving the TransactionAviation Division Sale and
recommending stockholder approval of the Proposal, considered a number of
factors, including the following: (i) consummation of the Transaction will provide the Company with
$35 million of new capital (before deducting the estimated expenses of the
Transaction), a majority of which will be utilized to provide capital to AEIC
and pay down bank debt; (ii) consummation of the Transaction, barring any
unforeseen events, would likely avoid a further ratings downgrading by Best,
although it will not ensure that a downgrading will not occur in the future;
(iii) the expected benefits to the Company of the strategic alliance with AFG;
(iv) the expected benefits from the addition of members of AFG's senior
management to the Board of Directors; (v) the lack of certainty that any of the
possible alternative transactions considered by the Board of Directors would be
successful on an expedited basis and on terms as favorable to the Company as the
Transaction; (vi) the existing assets, operations, earnings
and prospects of the Company in light of the economic and regulatory climate;
(vii)and AEIC's Best rating (ii) the terms of the Securities Purchase Agreement, includingAgreement; (iii) the
voting rights, conversion rights,
preferences and other rightsadvice of CSFB, the Series D Preferred Stock; (viii) the written
opinion of CS First Boston delivered to the Board of Directors of the Company on
November 5, 1996, to the effect that, as of November 5, 1996 and based upon and
subject to certain matters stated in such opinion, the cash consideration to be
received by the Company in the Transaction is fairfinancial advisor to the Company, from a
financial point of view; (ix)described below; (iv) the
high probability of consummation of the transactionAviation Division Sale (including the
absence of a material adverse change condition to AFG'sPurchaser's obligation to
close); and (x)(v) the potential adverse consequences of delaying a transaction.
OPINIONtransaction while
searching for additional alternatives; (vi) the terms of all potential
alternative transactions of which the Board was aware, including quantification
of the potential purchase price or financial return to the Company of the
potential alternative transactions; (vii) the probability of obtaining required
regulatory approvals; (viii) the likelihood that the Company would lose its
aviation insurance business to other, higher rated insurers without receiving
any consideration unless agents and policyholders quickly received assurance
that a financially secure insurer would assume the Company's liabilities.
ADVICE OF FINANCIAL ADVISOR
CS First Boston has acted as financial advisor toOn March 13, 1997, the Company in connectionand AEIC retained CSFB with respect to
their review of strategic and financial planning alternatives, including, among
other things, sale of the Transaction. CS First BostonCompany or assets of the Company, a rights offering
to stockholders, a sale of securities, and other alternatives to increase
underwriting capacity. CSFB was selected by the Company based on CS
First Boston'sCSFB's
experience, expertise and familiarity with the Company and its business. CS First BostonCSFB
is an internationally recognized investment banking firm and is regularly
engaged in the valuation of businesses and securities in connection with
mergers and acquisitions, leveraged buyouts, negotiated underwritings,
competitive biddings, secondary distributions of listed and unlisted
securities, private placements and valuations for corporate, estate and other
purposes.
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18
In connectionAt a meeting of the Board of Directors held on April 11, 1997, a
representative of CSFB discussed with CS First Boston's engagement,the Board of Directors, among other
things, the Company's then-recent operating results (that is, that for 1996 the
Company requestedreported a GAAP net loss of $44.4 million, including $30 million of
reserve additions, and that CS First Boston evaluateAEIC's surplus had dropped to $20.4 million as of
December 31, 1996), ratings downgrades (which are described in detail above,
see "-Reasons for the fairnessTransaction"), the write down by AFG (that is, that on
March 27, 1997 AFG announced "that it has written down its $35 million
investment in [the Company], effective December 31, 1996."), regulatory action
(that is, discussions between the Company, AEIC and their various regulators),
the Company's management's views as to the future prospects (that is, the fact
that the Company's management had advised CSFB that prospects for future
earnings performance were poor without additional capital and that the
Company's preliminary first quarter results were a net loss of $2.9 million),
and stock price performance (that is, that in May 1994 the Company sold its
common stock in an initial public offering of $10 per share; that the Company's
stock price closed as high as $12-1/8 and closed above $10 as late as February
1996; that following the Company's report of disappointing fourth quarter 1995
results, including a special charge, during the first quarter of 1996 the stock
price began to deteriorate steadily and traded in a range of $3 3/8 to $4 1/8
prior to the announcement of the cash considerationsale of the Series D Preferred Stock to be received
byAFG;
and that following the
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23
announcement of the sale of the Series D Preferred Stock to AFG, the Company's
stock price traded as high as $5 1/2 but has dropped to $1 1/2 as of April
9). The representative of CSFB informed the Board that only one party other
than AFG had submitted a proposal with respect to either the Company inor AEIC,
and that such proposal was less favorable to the TransactionCompany than the AFG proposal
from a financial point of view. On November 5,
1996, CS First Boston renderedThat proposal (the "Other Proposal") made by a
third party unaffiliated with the Company reinsurers, or AEG (the "Third
Party"), involved a purchase of renewal rights to AEIC's aviation business for
$5 million in cash plus a 5-7% commission on first year renewals. AEIC, under
the Other Proposal, would retain responsibility and economic risk for all of
its existing reserves. The CSFB representative stated that, given the
Company's financial condition and prospects and the fact that the solicitation
process failed to produce any proposals at that time (other than the AFG
proposal and the one other proposal referenced above), a sale of the aviation
business and certain other assets to AFG at that time, on terms and conditions
described to the Board of Directors a written
opinion to the effect that, asat its meeting of such date and based upon and subject to
certain matters statedApril 11, 1997, would
result in such opinion, the cash consideration to be received by
the Company in the Transaction was fairmore value to the Company, from a financial point of view.view, than any
other alternative which was explored together by the Company and CSFB. A
letter dated April 11, 1997 was subsequently delivered to the Company's Board
of Directors to the foregoing effect.
In CSFB's view, the Other Proposal was less favorable to the Company
than the AFG proposal from a financial point of view because CSFB believed,
based on conversations with the Third Party, that the Other Proposal was
subject to, among other things, due diligence and negotiation of definitive
documentation, thus making consummation of a transaction less probable.
Further, the Other Proposal was, in CSFB;s view, less favorable based upon the
cash consideration which the Company would receive pursuant to the Other
Proposal as opposed to the amount of cash estimated by Company management to be
payable by AFG and the value of the Series D Preferred Stock.
As part of the solicitation process conducted by CSFB, 13 companies
were solicited. Of these, only the Third Party made a proposal.
The preparation of the CSFB letter is not necessarily susceptible to
partial analysis or summary description. Selecting portions of the analysis or
of the summary set forth above, without considering the analyses as a whole,
could create an incomplete view of the process underlying the CSFB letter. In
arriving at its views, CSFB considered the results of such analyses taken as a
whole. CSFB made qualitative judgments as to the significance and relevance of
each analysis and factor.
The full text of CS First Boston's written opinionthe letter to the Board of Directors of the Company
dated November 5, 1996,April 11, 1997, which sets forth the assumptions made, matters considered, and limitations on the review undertaken, is attached as
Appendix I to this Proxy Statement and is incorporated herein by reference.
Stockholders of the Company are urged to read this opinionletter carefully in its
entirety. CS First Boston's opinionCSFB's letter is directed only to the fairnessvalue of the cash consideration to be received by the Company in the TransactionAviation Division
Sale from a financial point of view compared to any other alternative which was
explored together by the Company and CSFB, does not address any other aspect of
the proposed
TransactionAviation Division Sale or any related transaction and does not constitute a
recommendation to any stockholder as to how such stockholder should vote at the
SpecialAnnual Meeting. The summary of the opinionletter of CS First BostonCSFB set forth in this Proxy
Statement is qualified in its entirety by reference to the full text of such
opinion.
In arriving at its opinion, CS First Boston reviewed the Securities
Purchase Agreement and certain related documents and certain publicly available
business and financial information relatingletter. CSFB has consented to the Company. CS First Boston also
reviewed certain other information, including financial forecasts, provided to
CS First Boston by the Company and met with the managementCompany's inclusion of the Company to
discuss the business and prospects of the Company, including the distressed
financial position of the Company and the near-term liquidity needs of, and
capital resources available to, the Company. CS First Boston also considered
certain financial and stock market data of the Company and compared that data
with similar data for other publicly held companies in businesses similar to
those of the Company and considered, to the extent publicly available, the
financial terms of certain other significant equity and equity-linked
investments in other publicly traded companies. CS First Boston also considered
such other information, financial studies, analyses and investigations and
financial, economic and market criteria which CS First Boston deemed relevant.
In connection with its review, CS First Boston did not assume any
responsibility for independent verification of any of the information provided
to or otherwise reviewed by CS First Boston and relied upon such information
being complete and accurate in all material respects. With respect to the
financial forecasts, CS First Boston assumed that such forecasts were reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the management of the Company as to the future financial
performance of the Company. In addition, CS First Boston did not make an
independent evaluation or appraisal of the assets or liabilities (contingent or
otherwise) of the Company, nor was CS First Boston furnished with any such
evaluations or appraisals. CS First Boston's opinion was necessarily based on
information available to CS First Boston, and financial, stock market and other
conditions as they existed and could be evaluated, on the datefull text of its
opinion.
In connection with its engagement, CS First Boston was not requested to, and did
not, solicit third party indications of interestletter in acquiring all or
substantially all of the Company. Although CS First Boston evaluated the cash
consideration to be received by the Company in the Transaction from a financial
point of view, CS First Boston was not requested to, and did not, recommend the
specific consideration payable in the Transaction, which consideration was
determined through negotiation between the Company and AFG. No other limitations
were imposed by the Company on CS First Boston with respect to the
investigations made or procedures followed by CS First Boston in rendering its
opinion.
In preparing its opinion to the Board of Directors of the Company, CS First
Boston performed a variety of financial and comparative analyses, including
those described below. The summary of CS First Boston's analyses set forth below
does not purport to be a complete description of the analyses underlying CS
First Boston's opinion. The preparation of a fairness opinion is a complex
analytic process involving various determinations as to the most appropriate and
relevant methods of financial analyses and the application of those methods to
the particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description. In arriving at its opinion, CS First Boston
made qualitative judgments as to the significance and relevance of each analysis
and factor considered by it. Accordingly, CS First Boston believes that its
analyses must be considered as a whole and that selecting portions of its
analyses and factors, without
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19
considering all analyses and factors, could create a misleading or incomplete
view of the processes underlying such analyses and its opinion. In its analyses,
CS First Boston made numerous assumptions with respect to the Company, industry
performance, regulatory, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of the
Company. No company, transaction or business used in such analyses as a
comparison is identical to the Company or the Transaction, nor is an evaluation
of the results of such analyses entirely mathematical; rather, such analyses
involve complex considerations and judgments concerning financial and operating
characteristics and other facts that could affect the acquisition, public
trading or other values of the companies, business segments or transactions
being analyzed. The estimates contained in such analyses and the ranges of
valuations resulting from any particular analysis are not necessarily indicative
of actual values or predictive of future results or values, which may be
significantly more or less favorable than those suggested by such analyses. In
addition, analyses relating to the value of businesses or securities do not
purport to be appraisals or to reflect the prices at which businesses or
securities actually may be sold. Accordingly, such analyses and estimates are
inherently subject to substantial uncertainty. CS First Boston's opinion and
financial analyses were only one of many factors considered by the Board of
Directors of the Company in its evaluation of the Transaction and should not be
viewed as determinative of the views of the Company's Board or management with
respect to the proposed Transaction or the cash consideration to be received by
the Company in the Transaction.
The following is a summary of the material financial analyses performed by
CS First Boston in arriving at its written opinion dated November 5, 1996, but
does not purport to be a complete description of the analyses performed by CS
First Boston for such purposes.
Comparison With Other Transactions. CS First Boston examined transactions
involving significant equity or equity-linked investments in various companies
in a variety of industries that had occurred since 1984, or were pending as of
October 28, 1996. In addition, CS First Boston examined several recent
transactions in the insurance industry involving significant equity or
equity-linked investments. CS First Boston then analyzed the proposed terms of
the Transaction as compared to the corresponding terms of such prior
transactions, including, without limitation, the size of the investment, voting
power acquired by the investor, whether board representation was acquired by the
investor, dividend or interest rates applicable to the investment, the
relationship between conversion price and market price of the underlying common
stock (in the case of investments in convertible preferred stock or convertible
debentures), the relationship between exercise price and market price (in the
case of investments that included warrants or options to purchase common stock),
and the relationship between purchase price and market price (in the case of
direct common stock investments). In particular, such analysis indicated that
the average conversion premiums for convertible securities and warrant or option
exercise price premiums was 18.1% and the average of dividend and interest rates
applicable to such investments was 8.7%.
Pro Forma Analysis. CS First Boston analyzed the estimated pro forma
effects of the Transaction on the Company's balance sheet at June 30, 1996 and
anticipated operating results for 1996 (as if the Transaction had been completed
at the beginning of the year) and 1997-1999, based on managements's then-current
expectations for results for such periods and certain other assumptions supplied
by the Company to CS First Boston.
Public or Rule 144A Offering Analysis. CS First Boston analyzed public
offerings and Rule 144A offerings of convertible securities and non-convertible
preferred securities completed during 1996 by companies in a variety of
industries. Using such analysis and estimates of the terms on which the Company
might successfully issue convertible preferred stock as an alternative financing
method to raise capital, CS First Boston made certain comparisons, including,
but not limited to, dividend rates and payment options, optional redemption
provisions, and conversion features, with those of the Transaction. In addition,
CS First Boston analyzed the likelihood of completing a public or Rule 144A
offering for the Company based on then-current market conditions.
Historical Relative Trading and Valuation Comparisons. CS First Boston
examined the history of the trading prices for the Common Stock, and the
relationship between the movements in the prices of such shares and movements in
certain stock indices. CS First Boston also compared the consideration to be
15
20
received by the Company pursuant to the Transaction to the historical public
trading prices of the Common Stock.this Proxy Statement.
Miscellaneous. Pursuant to the terms of CS First Boston'sCSFB's engagement, the Company
has agreed to pay CS First BostonCSFB for its services in connection with the TransactionAviation
Division Sale an aggregate financial advisory fee equal to 4% of the gross
proceeds raised by the Company in the Transaction.$500,000. The
Company also has agreed to reimburse CS First BostonCSFB for out-of-pocket expenses incurred
by CS First
BostonCSFB in performing its services, including the reasonable fees and expenses
of legal counsel and any other advisor retained by CS First Boston,CSFB, and to indemnify CS First BostonCSFB
and certain related persons and entities against certain liabilities, including
liabilities under the federal securities laws, arising out of CS First Boston'sCSFB's
engagement.
CS First BostonCSFB has in the past provided financial services to the Company, AFG
and AFGPurchaser unrelated to the proposed Transaction,Aviation Division Sale, for which services CS First
BostonCSFB
has received compensation. In connection with the sale of the Series D
Preferred Stock to Purchaser in December 1996, the Company paid CSFB a
financial advisory fee of
19
24
$1.4 million and reimbursed CSFB for its out-of-pocket expenses and agreed to
indemnify CSFB and certain related persons and entities against certain
liabilities, including liabilities under the federal securities law, arising
out of CSFB's engagement. In the ordinary course of business, CS First
BostonCSFB and its
affiliates may actively trade the equity securities of the Company and both the
debt and equity securities of AFG for their own account and for accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities.
USE OF PROCEEDS
The net proceedsNAME CHANGE
Pursuant to the Company from the Transaction are estimated to be
approximately $33 million, after the deductionterms of the expensesPurchase Agreement, the Company and AEIC
are required to change their names to names bearing no similarity to "American
Eagle." In voting on the Proposal, stockholders will also be voting on a
proposed amendment to the Company's Restated Certificate of Incorporation to
change the name of the Transaction, which are expectedCompany to total approximately $2 million. The net
proceeds will be used to contribute capital to AEIC and to pay down bank debt;
the remainder will be used for general corporate purposes. See "Capitalization."________________."
REGULATORY APPROVALS
Under the HSRHart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), and the rules promulgated thereunder, certain
transactions including certain of the transactions contemplated by the
Securities Purchase Agreement, may not be consummated unless certain information has been
furnished to the Federal Trade Commission (the "FTC") and the Antitrust
Division of the Justice Department (the "Antitrust Division") and certain
waiting period requirements have been satisfied. PursuantBased on AFG's public
statements as to the value of the Aviation Division Sale, the Company believes
that no filing is required under the HSR Act, AFGAct.
AEIC may not consummate the Aviation Division Sale with Purchaser
without the prior approvals of the Texas and California Commissioners of
Insurance. AEIC has provided the Purchase Agreement to the Texas and California
Departments of Insurance and requested approval of the Aviation Division Sale.
See "Insurance Regulation."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Aviation Division Sale will not result in federal income tax
consequences to holders of the Company's Common Stock. The Aviation Division
Sale will result in a taxable disposition of the assets of the Company and AEIC
for federal income tax purposes. The Company will recognize gain measured by
the difference, if any, between the amount paid by Purchaser (including net
liabilities assumed by Purchaser) and the Company's or AEIC's adjusted tax
basis in such assets. The Company currently estimates the federal income tax
gain to be approximately $21.0 million, all of which will promptly file Notification and Report Forms withbe offset by NOL. The
Company anticipates, nevertheless, that an alternative minimum tax in the
FTC
and the Antitrust Division for reviewamount of $.5 will be payable in connection with the Securities Purchase
Agreement. It is expected that the HSR Act waiting period will expire thirty
days after the filingAviation Division Sale.
This description of such forms. However, prior to such time, the Antitrust
Division or the FTC may extend the waiting period by requesting additional
information. Moreover, notwithstanding the terminationcertain federal income tax consequences of the
HSR Act waiting
period, at any time before or afterAviation Division Sale is based on the consummationInternal Revenue Code of 1986, as
amended, applicable Treasury Regulations thereunder, and administrative rulings
and judicial authority as of the transactions
contemplated by the Securities Purchase Agreement, any person may take action
under the antitrust laws, including seeking to enjoin the consummationdate hereof, all of the
transactions contemplated by the Securities Purchase Agreement or seeking the
divestiture by AFG of all or any part of the securities received by it pursuant
to the Securities Purchase Agreement. There can be no assurance that a challenge
to the transactions contemplated by the Securities Purchase Agreement on
antitrust grounds will not be made or that, if such a challenge is made, it
would not be successful.
The Company's insurance subsidiarieswhich are subject to
regulation by variouschange. Any such change could affect the continuing validity of these
conclusions. This description does not discuss all aspects of income taxation
that may be relevant, and it does not discuss any aspect of state, authorities, including regulation dealing withlocal,
foreign or other tax laws, or any federal tax other than federal income tax. No
ruling is being sought from the acquisition of control
of such subsidiaries. A presumption of control generally arises from ownership
of 10% or moreInternal Revenue Service as to the anticipated
federal income tax consequences of the voting securitiesAviation Division Sale.
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25
ACCOUNTING TREATMENT
The Company estimates that a gain of any person. AFGapproximately $11.7 million will
promptly make
the requisite filings with the California Insurance Commissioner and the Texas
Department of Insurance relating to the acquisition of controlbe realized in fiscal year 1997 as a result of the Company
and AEIC. There can be no assurance thatsales of the necessary approvals by the state
insurance regulators will be received by any particular date.business of its
three divisions.
NO DISSENTERS' RIGHTS OR PREEMPTIVE RIGHTS
Stockholders have no dissenters' appraisal rights or preemptive rightsunder Delaware law
in connection with the issuance of the Series D Preferred Stock.
16
21Aviation Division Sale.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION
Certain officers, directors and stockholders of the Company have
certain interests or obligations with respect to the TransactionAviation Division Sale
that are different from, or in addition to, the interests of stockholders of
the Company generally. The SecuritiesPurchaser is the holder of 357,875 shares of Series D
Preferred Stock and 116,000 shares of Common Stock. For a description of the
interests and obligations of Purchaser with respect to the Aviation Division
Sale, see "The Purchase Agreement provides as a condition to AFG's obligation to
close that the Company shall have adjusted the exercise price and vesting period
of existing stock options granted to the currentRelated Agreements." Certain officers and directors of
the Company orare parties to employment agreements with the Company whereby
certain provisions permitting the Company to terminate the employment of such
officers become inapplicable after a "change of control" of the Company.
Consummation of the Aviation Division Sale will constitute such a change of
control. Upon consummation of the sales of its subsidiaries pursuant to its 1991 Nonqualified Stock Option Plan,three divisions, only two
officers will have employment contracts. See "Executive Compensation--Executive
Officer Agreements." In addition, the Company's 1994 Stock Incentive Plan and
1994 DirectorsDirector Stock Option Plan toprovide for the market price onfull vesting of options
outstanding for at least six months in the date of adjustment and shall provide that all such options shall haveevent there is a vesting period of three years, with one-thirdchange in control
of the options vesting on each
anniversary dateCompany. Consummation of the date of adjustment. The CompanyAviation Division Sale will makeconstitute such
adjustment on the Closing Date and all such options will, subject to Closinga change in control. Within 90 days after consummation of the Securities Purchase Agreement, be exercisable at the market price (as
defined in the applicable plan agreement) on the Closing Date. The following
table sets forth certain information concerningAviation Division
Sale, however, all outstanding stock options owned by certain
executive officers and directorswhich become fully vested will
terminate, if not previously exercised, as a result of the Company that are affected bytermination of the
adjustment.
TOTAL TOTAL WEIGHTED
OUTSTANDING VESTED AVG. PRIOR
NAME AND POSITION OPTIONS(1) OPTIONS(1) EXERCISE PRICE(1)
- ----------------- ----------- ---------- -----------------
M. Philip Guthrie...................................... 230,714 190,659 $ 10.73
Chairman of the Board, Chief Executive
Officer and President
Frederick G. Anderson.................................. 72,695 57,088 $ 10.75
Senior Vice President/General
Counsel and Secretary
Richard M. Kurz........................................ 66,334 41,874 $ 10.26
Senior Vice President/
Chief Financial Officer
Allen N. Walton III.................................... 62,643 44,939 $ 10.67
President/Aviation Division
AEIC
George C. Hill III..................................... 77,825 70,639 $ 11.27
Senior Vice President/AEIC
Joseph M. Grant........................................ 15,000 7,500 $ 9.10
Director
Keith W. Hughes........................................ 11,389 2,963 $ 9.88
Director
James E. Maser......................................... 12,890 3,463 $ 8.73
Director
Elvis L. Mason......................................... 15,000 7,500 $ 9.10
Director
- ---------------
(1) The exercise priceemployment or resignation of all outstanding options shown in the table, including
vested options, will be adjusted onoption holders upon the Closing Date toconsummation of the
market price on
the Closing Date and thereafter all such options will be subject to a new
three-year vesting period.
17sale. See "Executive Compensation."
21
2226
CERTAIN CONSIDERATIONS
While the Board of Directors is of the opinion that the TransactionAviation
Division Sale is fair to, and in the best interests of, the Company and its
stockholders, stockholders should consider the following possible effects in
evaluating the Proposal.
IMPACT ON VOTING AND OTHER RIGHTSDELISTING OF STOCKHOLDERS; IMPACT ON FUTURE SHARE
ISSUANCESCOMMON STOCK
The Transaction involvesNew York Stock Exchange (the "NYSE") has informed the issuanceCompany that
it will delist the Common Stock from the NYSE upon closing of the Aviation
Division Sale because the Company will no longer meet the continued listing
requirements of the NYSE. Such delisting is likely to adversely affect the
market for the Common Stock. If the Common Stock is delisted from the NYSE, the
Company may apply to have the Common Stock quoted on the Nasdaq Small Cap
Market. There can be no assurance that the Company will be able to meet the
listing requirements for quotation on the Nasdaq Small Cap Market. If the
Company does not meet such listing requirements, it is possible that the Common
Stock would continue to trade in the local over-the-counter market and that
price quotations would be reported by other sources. The extent of the public
market for the Common Stock and the availability of such quotations would,
however, depend upon the number of stockholders remaining at the time, the
interest in maintaining a market in the Common Stock on the part of securities
that will entitlefirms and other factors.
LOSS OF MARGIN STATUS
The Common Stock is currently a "margin security" under the
holders to special voting rights. Until AFG and its affiliates no longer own
Series D Preferred Stock and Underlying Shares representing in the aggregate the
ownership, or the right to acquire ownership, of 51% of the Underlying Shares,
or until the seventh anniversary of the Closing Date, whichever is earlier, AFG
shall be entitled to nominate for election 30% of the Company's directors and,
if elected, at least one director representing AFG shall serve on each standing
committeeregulations of the Board of Directors. NotwithstandingGovernors of the foregoing,Federal Reserve System, which has
the numbereffect, among other things, of directors that AFGallowing brokers to extend credit on the
collateral of such securities. Depending upon factors similar to those
described above with respect to market quotations, it is entitled to nominate shall be reduced by the number of
directorspossible that the
holdersshares of Common Stock would no longer constitute "margin securities" for the
purposes of the Series D Preferred Stock are entitled to elect
as a class under the terms of the Certificate of Designation for the Series D
Preferred Stock. Mason Best has agreed to vote all shares owned by it in favor
of the election of AFG's nominees. If AFG's nominees fail to be elected to the
Board of Directors, AFG shall nevertheless be entitled to have an equal number
of representatives attend each meetingmargin regulations of the Board of Directors.Governors of the Federal
Reserve System and, therefore, could no longer be used as collateral for loans
made by brokers.
INVESTMENT COMPANY ACT CONSIDERATIONS
The CertificateInvestment Company Act of Designation provides1940, as amended (the "1940 Act"),
requires the registration of, and imposes various substantive restrictions on,
certain companies that uponengage primarily, or propose to engage primarily, in the
occurrencebusiness of investing, reinvesting, or trading in securities, or that fail
certain statistical tests regarding the composition of assets and continuationsources of
income, and are not primarily engaged in businesses other than investing,
holding, owning or trading securities. The Company intends to engage in a
defaultbusiness or businesses other than investing, reinvesting, owning, holding or
trading in dividend paymentssecurities as soon as reasonably possible following the closing of
the Aviation Division Sale and the disposition of its other divisions, although
there can be no guarantee that the Company will be able to do so. If the
Company were required to register as an investment company under the 1940 Act,
it would become subject to substantial regulation with respect to its capital
structure, management, operations, transactions with affiliates, and other
matters.
POTENTIAL REGULATORY ACTION AND OTHER CONTINGENCIES
AEIC is subject to periodic financial examinations by state insurance
regulatory bodies. In October 1996, the Texas Department of Insurance began a
triennial examination of AEIC. The examination is not complete and no
examination report has been issued. The Company has recently been informed that
the examiners are considering whether certain assets currently recorded in the
books and records of AEIC are ineligible to be carried as admitted assets under
statutory accounting principles and whether additional reserves may be
required. The Company has reflected its best current estimate of the provision
22
27
which might be required for at least two consecutive quartersthese matters in the pro forma financial statements
presented elsewhere in this Proxy Statement. Such estimate is $7.5 million,
the Company currently cannot predict what position the Texas Department will
ultimately take on the remaining matters. The Texas Department could require
additional adjustments that are material to the Company. If the adjustments, if
any, cause AEIC to become insolvent under statutory accounting principles, the
Department could appoint a conservator or receiver for AEIC and ultimately
liquidate AEIC. It cannot presently be predicted whether a defaultliquidation under
such circumstances would result in any mandatory redemption paymentresidual value available for
stockholders of the Company. See "Insurance Regulation."
Prior to the Company's acquisition of AEIC and Aviation Office of
America, Inc. ("AOA") from Talegen Group, Inc. ("Talegen"), AOA was the
aviation manager for certain of its affiliates, which were insurance company
subsidiaries of Talegen. AOA continued to act as aviation manager for these
companies after the acquisition. Included in the aviation business managed by
AOA before and after the acquisition were workers' compensation programs for
aviation-related businesses. International Insurance Company
("International"), a subsidiary of Talegen and successor in interest to the
Talegen subsidiaries whose aviation business was managed by AOA, is engaged in
arbitrations with certain reinsurers of the workers' compensation programs.
The issue being arbitrated involves the scope and coverage of the reinsurance
contracts in effect before, during and after the acquisition. The Company
cannot currently predict the outcome of the arbitrations. If International
loses the arbitrations, it may claim that the Company is responsible for losses
not covered by reinsurance on policies issued post-acquisition, an amount which
could potentially exceed the Company's capital. Although there can be no
guarantee of the outcome of any arbitration or litigation of such claim, the
Company believes that it has valid defenses to a claim, if one is made, by
International against the Company. The defenses involve matters such as the
scope of disclosures made to the Company at the time of the acquisition from
Talegen, interpretation of contractual language and adequacy of contractual
consideration.
PLANS FOR OPERATION OF THE COMPANY AFTER THE AVIATION DIVISION SALE
Following the sale of the Company's three divisions, the business and
operations of the Company will differ materially from the Company's past
business and operations. The Company expects that it will no longer write new
or renewal policies for the foreseeable future. It will continue to handle
claims on the Series D Preferred Stock,Company's policies that are not assumed by the holderspurchasers as part
of these transactions, and maintain the related reserves and assets.
Accordingly, the Company's revenues and earnings capacity will be significantly
lower in the future. The Company's operational focus will be on attempting to
create residual value for the Company's stockholders from the remaining
operations and assets and additional ongoing operations. In this connection,
the Company intends to engage in a business or businesses other than investing,
reinvesting, owning, holding or trading in securities as soon as reasonably
possible following the closing of the Series D Preferred Stock, voting as a separate class, shallAviation Division Sale and the
disposition of its other divisions, although there can be entitled atno guarantee that the
next annualCompany will be able to do so. It is not currently possible to determine how
much residual value, if any, will inure to the Company's stockholders following
the sale or special meeting of stockholders to elect a
majorityother disposition of the directorsCompany's divisions. See "Plans for Future
Operation of the Company."
EFFECT ON COMPANY IF THE AVIATION DIVISION SALE IS NOT COMPLETED
If the Company is not able to complete the Aviation Division Sale as
contemplated in this Proxy Statement, the Company expects to lose its current
general aviation insurance business to other, higher rated insurers. Therefore,
the Company would expect to discontinue the insurance underwriting activities
of the Aviation Division. Consequently, the principal effect of nonconsummation
of the Aviation Division Sale would be that the Company would not receive any
consideration for the existing business conducted by such division.
23
28
FORWARD LOOKING STATEMENTS
With the exception of historical information, the statements in this
Proxy Statement constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
that may cause actual performance and results of the Company to be elected. Seematerially
different from any future performance and results expressed or implied by such
forward-looking statements. Certain known factors are noted in this Proxy
Statement, including without limitation, those set forth under "The Securities Purchase
Agreement and Related Agreements.Agreements--Conditions to Closing," For the seven years following the Closing Date, the holders"Historical Business
of the Series D
Preferred Stock shall be entitled collectively to cast 20%Company--Disposition of P&C Division," "Historical Business of the
votes eligible
to be cast in each matter submitted to a voteCompany--Disposition of Marine Division," "Certain Considerations," "Plans for
Future Operation of the holdersCompany" and "Insurance Regulation." Other factors
include, without limitation, economic conditions, trends in the property and
casualty insurance industry, competitive products and pricing, possibility of
capital stockcatastrophic losses, availability of adequate surplus and reinsurance capacity,
ability to settle claims at amounts no greater than established reserves, the
Company, except that ifnumber and severity of losses reported in the aggregate number of shares of Common Stock
issuable upon conversion of the Series D Preferred Stock represents less than
20% of the outstanding shares of Common Stock on a fully diluted basis, then
each share of Series D Preferred Stock shall be entitledfuture, any actions by regulatory
agencies due to the numberfinancial condition of votes
equal to the number of shares of Common Stock into which such share of Series D
preferred Stock is then convertible. In addition, without the approval of
holders of two-thirds of the outstanding shares of Series D Preferred Stock
voting separately as a class, the Company cannot (i)AEIC and other risks indicated in
any manner (including by
merger or consolidation), amend, alter or repeal any provisions of the
resolutions establishing the Series D Preferred Stock so as to adversely affect
the powers, preferences or special rights of such Series D Preferred Stock, or
(ii) authorize the issuance of, or authorize any obligation or security
convertible into or evidencing the right to purchase shares of, any additional
class or series prior to the Series D Preferred Stock in the payment of
dividends or the preferential distribution of assets.
The holders of Series D Preferred Stock will be entitled to certain
preferences over holders of Common Stock. The shares of Series D Preferred Stock
will be entitled to a per annum dividend equal to 9% payable quarterly prior to
the payment of any dividends on shares of Common Stock, although dividends on
the Series D Preferred Stock may be paid in kind (in lieu of cash)this filing and other filings made by the Company during the first five years following the Closing Date. The Series D
Preferred Stock will also rank prior to Common Stock with respect to rights upon
liquidation, winding up or dissolution of the Company. The Series D Preferred
Stock will rank junior to the Company's Series B Cumulative Preferred Stock with
respect to dividends and rights upon liquidation. See "Description of Series D
Preferred Stock."
SUBSTANTIAL EQUITY OWNERSHIP ON CONVERSION
The Series D Preferred Stock will entitle AFG to acquire a substantial
percentage of the outstanding shares of Common Stock. If the 350,000 shares of
Series D Preferred Stock were fully converted into shares of Common Stock, AFG
would receive 6,666,667 shares of Common Stock. In addition, the Company is
entitled to pay dividends on outstanding shares of Series D Preferred Stock
during the first five years following the Closing Date by the payment in kind of
additional shares of Series D Preferred Stock ("PIK Shares") having
18
23
a liquidation value equal to the amount of dividends owed. The PIK Shares would
also be convertible into additional shares of Common Stock. Furthermore, if the
Company elects to redeem shares of Series D Preferred Stock prior to the seventh
anniversary of the Closing Date, the Company must issue to the holder one
Warrant to purchase one share of Common Stock for each share of Common Stock
into which the redeemed shares of Series D Preferred Stock are then convertible.
The table below shows the number of shares of Common Stock and the percentage of
the fully diluted shares of Common Stock outstanding that AFG could acquire on
conversion of the Series D Preferred Stock.
PERCENTAGE
NUMBER OF OF SHARES
SHARES OUTSTANDING
---------- -----------
Common Stock purchasable on full conversion of the
original 350,000 shares of Series D Preferred Stock..... 6,666,667 48.6(1)
Common Stock purchasable on full exercise of the 196,178
PIK Shares(2)........................................... 3,736,724 21.4(3)
----------
Total Potential Holdings........................ 10,403,391 59.6(3)
==========
- ---------------
(1) Based on the number of shares of Common Stock outstanding as of September
30, 1996 (7,047,498 shares), as adjusted to give effect to the issuance of
shares of Common Stock issuable on conversion of the original 350,000 shares
of Series D Preferred Stock.
(2) Assuming all dividends payable on outstanding shares of Series D Preferred
Stock during the first five years following the Closing Date were paid by
the issuance of PIK Shares.
(3) Based on the number of shares of Common Stock outstanding as of September
30, 1996 (7,047,498 shares), as adjusted to give effect to the issuance of
shares of Common Stock issuable on conversion of the original 350,000 shares
of Series D Preferred Stock and on conversion of 196,178 PIK Shares,
assuming the Company does not issue any shares of Common Stock other than
upon conversion of shares of Series D Preferred Stock (including PIK Shares)
or redeem or otherwise repurchase, retire or cancel any outstanding shares
of Common Stock.
RESTRICTIONS ON THE ABILITY OF AFG TO EFFECT A BUSINESS COMBINATION WITH THE
COMPANY
The Series D Preferred Stock will initially be convertible into an
aggregate of 6,666,667 shares of Common Stock, or approximately 48.6% of the
outstanding Common Stock (including the Underlying Shares) as of the Closing
Date. In addition to the voting restrictions described under the heading "The
Transaction -- General -- Terms of the Series D Preferred Stock," the Company's
certificate of incorporation (the "Certificate") contains certain provisions
that will restrict the ability of AFG to effect a business combination with the Company following the Closing. The Certificate provides that, in addition to any
other vote required by law, a "business combination" (which is defined in the
Certificate to generally include: (i) any merger or consolidation with or into;
(ii) any sale or other transfer of assets aggregating $1.0 million or more to;
or (iii) certain other material corporate transactions with, a "related person"
(which is defined in the Certificate to generally include any person, entity or
group which beneficially owns 10% or more of the outstanding voting stock of the
Company; provided, however, that Mason BestSecurities and
its affiliates and certain of
its assigns are deemed not to be a "related person")) shall require the
affirmative vote of the holders of at least 75% or more of the combined voting
power of the then outstanding shares of voting capital stock of the Company,
voting together as a single class; provided, however, if there are one or more
"continuing directors" then in office, and such business combination has been
approved by a majority of the Board of Directors (including at least a majority
of the "continuing directors"), then such "business combination" shall only
require such vote as is required by law or by other provisions of the
Certificate. A "continuing director" means generally, as to any related person,
any member of the Board of Directors who: (i) is not, and is not affiliated
with, the related person; and (ii) became a member of the Board of Directors
prior to the time the related person became a related person or is a successor
to a continuing director. Following the Transaction, AFG will be a "related
person" within the meaning of the business combination provisions of the
Certificate and, as such, will be subject to such provisions.
19Exchange Commission.
24
24
Following the termination of the voting restrictions, which will occur
approximately 3 1/2 years after the Closing Date, AFG may have the ability to
exert substantial control over the Company subject to the foregoing business
combination restrictions.
STRATEGIC ALLIANCE ARRANGEMENTS
Pursuant to the Securities Purchase Agreement, the Company and AFG will
enter into a strategic alliance. See "The Transaction -- General -- Strategic
Alliance with AFG." The strategic alliance will enable the Company to move into
areas in which it is not currently selling insurance and expand its current line
of business. The strategic alliance, however, will not be under the complete
control of the Company, and the parties have not yet addressed policies and
procedures that will be put in place for the management of such alliance. No
assurances can be made that the Company and AFG will be able to agree upon the
definitive terms of the strategic alliance or that, when the alliance is formed,
it will be profitable or otherwise beneficial to the Company.
EFFECT ON CAPITAL AND EARNINGS AVAILABLE FOR COMMON STOCKHOLDERS
After giving effect to the estimated expenses of the Transaction and the
recapitalization charge (see "The Securities Purchase Agreement and Related
Agreements -- Recapitalization Charge"), the sale of the Series D Preferred
Stock to AFG would increase the Company's capital by approximately $12.0 million
after the recapitalization charge of $15 million. Dividends on the Series D
Preferred Stock would reduce earnings available for common stockholders by
approximately $3.2 million per annum before PIK shares. Based upon the number of
shares of Common Stock outstanding as of September 30, 1996 and without giving
effect to the conversion of any shares of Series D Preferred Stock, the
quarterly dividends on outstanding shares of Series D Preferred Stock would
reduce the Company's primary earnings per share by approximately $.45 per year.
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25
CAPITALIZATION
The following table sets forth the summary capitalization of the Company
and its subsidiaries as of September 30, 1996, and as adjusted to give effect to
the consummation of the Transaction, the application of the estimated net
proceeds therefrom and the incurrence of the recapitalization charge.
SEPTEMBER 30,
1996 AS ADJUSTED(1)
------------- --------------
(DOLLARS IN THOUSANDS)
Note payable................................................... $13,250 $ --
Series B cumulative preferred stock, $.01 par value; 162,857
shares authorized, 162,857 shares issued and outstanding..... 1,629 1,629
Series D cumulative convertible redeemable preferred stock,
$.01 par value; no shares authorized or issued; 546,200
shares authorized as adjusted, 350,000 shares issued as
adjusted(2).................................................. -- 35,000
Stockholders' equity
Common Stock, $.01 par value; 21,000,000 shares authorized,
7,121,380 shares issued................................... 71 71
Additional paid-in capital................................... 45,555 45,555
Unrealized investments losses................................ (252) (252)
Retained earnings............................................ 1,819 (7,931)
Less 73,882 shares of Common Stock held in treasury, at
cost.................................................... (87) (87)
------- --------
Total stockholders' equity........................... 47,106 37,356
------- --------
Total capitalization................................. $61,985 $ 73,985
======= ========
- ---------------
(1) As adjusted to give effect to the sale by the Company of 350,000 shares of
Series D Preferred Stock at a price of $100 per share for an aggregate
purchase price of $35 million, the application of the estimated net proceeds
therefrom and the incurrence of the recapitalization charge.
(2) The Company's Certificate of Incorporation authorizes the Company to issue
an aggregate of 5 million shares of preferred stock, par value $.01 per
share, of which the Company has issued 162,857 shares as Series B Cumulative
Preferred Stock and has reserved 546,200 shares for issuance as Series D
Preferred Stock.
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2629
THE SECURITIES PURCHASE AGREEMENT AND RELATED AGREEMENTS
The following is a summary of certain provisions of the Securities Purchase
Agreement and certain related agreements. A copy of the Securities Purchase Agreement is
attached hereto as Appendix II. This summary is not intended to be
complete and stockholdersStockholders are urged to read the Securities Purchase
Agreement and related agreements in their entirety. The Board of Directors reserves its rightCapitalized terms not
defined herein shall have the meanings ascribed to amend or waivethem in the provisions
of the Securities Purchase
Agreement and the other documents related thereto in
all respects before or after the approval of the Proposal by the stockholders.
In addition, theAgreement. The Board of Directors reserves the right to terminate the
Securities Purchase
Agreement in accordance with its terms before or after stockholder approval of
the Proposal.
ISSUANCE AND SALE OF SERIES D PREFERRED STOCKPURCHASED ASSETS
Pursuant to the Securities Purchase Agreement, Purchaser will acquire all of
AEIC's right, title, interest and obligations in, to and under all aviation
insurance business which was written or assumed by AEIC during the period
commencing January 1, 1993 and ending March 31, 1997 (the "Aviation Business").
In addition to the Aviation Business, Purchaser will acquire (a) receivables,
investment securities and cash equal in value to the Company's reserves for
outstanding claims relating to general aviation policies issued by the Company
will sell,since January 1, 1993; (b) all right, title and AFG will purchase, 350,000 sharesinterest of Series D Preferred Stock for $35 million.
RECAPITALIZATION CHARGE
In addition,AEIC and the
Company will record a $15 million (pre-tax)
recapitalization charge in its financial results forand to the quartercomputer equipment and software used in whichconnection with
the Transaction is recorded. The recapitalization charge will provide additional
strengtheningAviation Business and the Reinsured Business (as defined below); (c) all
right, title and interest in and to the office space leased by AEIC on the
eighth and ninth floors of the Company's balance sheetbuilding located at 12801 North Central
Expressway, Dallas, Texas (the "Office Lease"); (d) all right, title and
overall reserve levels,interest of AEIC and is
intendedthe Company in and to cover contingenciesthe names "American Eagle Insurance
Company" and estimated exposures associated"American Eagle Group, Inc.," including all intellectual property
rights in connection therewith; (e) all right, title and interest of AEIC in
and to certain reinsurance contracts; (f) all right, title and interest of AEIC
and the Company in and to all furniture, fixtures and tangible personal
property used in connection with various
previously reported strategic actionsthe Aviation Business or the Reinsured
Business; and product line discontinuations.
CERTAIN COVENANTS(g) all right, title and interest of AEIC and the Company in and
to all other property relating to or used in connection with the Aviation
Business or the Reinsured Business. The foregoing shall collectively be
referred to as the "Assets."
QUOTA SHARE REINSURANCE AGREEMENT
Pursuant to the Securities Purchase Agreement, AEIC and Purchaser have entered a
certain Quota Share Reinsurance Agreement effective as of March 31, 1997,
pursuant to which AEIC has ceded to Purchaser and Purchaser has agreed to
assume and reinsure all aviation business of AEIC in force as of March 31, 1997
and all aviation business written or renewed by AEIC after March 31, 1997 and
until such time as Purchaser is qualified to issue directly its own policies
(the "Reinsured Business"). Purchaser's reinsurance obligation pertains only to
that portion of such business that AEIC retains net for its own account. In
consideration for Purchaser's assumption of such business, Purchaser will
receive AEIC's net unearned premium as of March 31, 1997 for business in force
and AEIC's net written premium for business written thereafter. Purchaser will
pay AEIC a ceding commission of 30%.
CLOSING
The closing for the transactions contemplated by the Purchase
Agreement (the "Closing") shall take place within three business days of
satisfaction of all conditions to closing as set forth in the Purchase
Agreement, but not later than July 31, 1997, unless extended by mutual
agreement of AEIC, the Company has agreed that,
ifand Purchaser. The date on which the Company has no securities registered under Section 12Closing
occurs hereafter shall be referred to as the "Closing Date."
PURCHASE PRICE AND OTHER PAYMENTS
Effective as of the Securities
Exchange Act of 1934, as amended, it will deliver copies of its annual and
quarterly financial statements to AFG and will furnish AFG with copies of any
documents required to be filed with the SEC or other governmental agencies. The
Company has agreed that, prior to the Closing Date, it will conduct its business(a) AEIC shall deliver and convey to
Purchaser assets having a market value equal to all liabilities of the Aviation
Business and the Reinsured Business; (b) Purchaser shall pay to
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AEIC, as a commission, an amount equal to 30% of unearned premiums to be
transferred to Purchaser; (c) Purchaser shall pay to AEIC an amount equal to
the book value, adjusted for depreciation, of all furniture, fixtures and
equipment included in the ordinary courseAssets; and properly maintain its existence(d) Purchaser shall convey and property.
AFG REPRESENTATION ON BOARD OF DIRECTORS
Until AFGdeliver to
the Company, free and its affiliates no longer own Series D Preferred Stock and
Underlying Shares representing in the aggregate the ownership, or right to
acquire ownership,clear of 51% of the Underlying Shares or until the seventh
anniversary of the Closing, whichever is earlier, AFG shall be entitled to
nominate for election 30% of the Company's directors and, if elected, at least
one director representing AFG shall serve on each standing committee of the
Board of Directors. Notwithstanding the foregoing, the number of directors that
AFG is entitled to nominate shall be reduced by the number of directors that the
holdersall claims whatsoever, all shares of the Series
D Preferred Stock are entitledof the Company owned by Purchaser, together with undated
stock powers duly endorsed in blank.
In addition to elect as a classall other amounts due to AEIC under the termsPurchase
Agreement, Purchaser is obligated to pay AEIC (a) an amount equal to all funds
collected by Purchaser with respect to agent's balances of the CertificateAviation
Business which are in excess of Designation90 days old as of the Closing Date and (b)
commissions equal to 4%, 2% and 1% of renewal premiums relating to the Aviation
Business and Reinsured Business during the first, second and third years,
respectively, following the Closing Date.
In addition, within 20 days after the Closing, Purchaser shall prepare
a balance sheet for the Series D Preferred Stock. If
AFG's designees failAviation Business as of the Closing Date (the "Closing
Date Balance Sheet"), and certain purchase price adjustments shall be made to
be electedaccount for differences in the amounts of assets and liabilities, the payment
of claims and the receipt of premiums since March 31, 1997.
ASSUMPTION OF LIABILITIES
At the Closing, Purchaser will assume and agree to pay, discharge or
perform, as appropriate, the following liabilities and obligations of AEIC: (a)
all liabilities and obligations of AEIC in respect of the Aviation Business
existing as of March 31, 1997, but only if and to the Boardextent that the same are
accrued or reserved for on the March 31, 1997 balance sheet of Directors, AFG shall
nevertheless be entitledassets and
liabilities being transferred to have an equal numberPurchaser and remain unpaid and undischarged
on the Closing Date except loss and loss adjustment expense reserves; (b) all
unpaid losses and unpaid loss adjustment expenses of representatives attend each
meetingAEIC with respect to the
Aviation Business arising in the regular and ordinary course on or after
January 1, 1993; (c) the obligations of AEIC under the reinsurance contracts
and the other contracts identified in the Purchase Agreement; and (d) bad faith
liability claims arising under certain policies or in connection with
litigation described in the Purchase Agreement. The foregoing described
liabilities and the obligations of the Board of Directors. Such representatives shallPurchaser under the Quota Share
Reinsurance Agreement and the Reinsurance Agreement (pursuant to which the
Aviation Business will be entitledtransferred to receive all materials and information providedPurchaser at Closing) are hereinafter
referred to as the "Assumed Liabilities."
Notwithstanding any provision in the Purchase Agreement to the
Company's Boardcontrary, Purchaser will not assume or become liable in any manner for any
liability or obligation of DirectorsAEIC or the Company, and shall receiveAEIC and the same noticesCompany will
remain solely responsible for any and all liabilities and obligations of AEIC
and the Company, other than the Assumed Liabilities.
CHANGE IN NAME
On the Closing Date, AEIC and the Company will deliver to Purchaser
all such executed documents as are givenmay be required to change AEIC's and the
Company's Boardnames to names bearing no similarity to American Eagle, including but
not limited to name change amendments with the Secretaries of Directors.
AFG VOTING AGREEMENT
The Securities Purchase Agreement also provides that, until the date which
is three yearsState of Texas
and Delaware. Within 180 days after the Closing Date, so longthe Company and AEIC will
file appropriate name change notices for each state where AEIC and the Company
are qualified to do business. Under the Purchase Agreement, AEIC and the
Company appoint Purchaser as AFG and any
affiliate of AFG shall beneficially own Series D Preferred Stocktheir attorney-in-fact to file all such documents
on or Underlying
Shares which represent inafter the aggregate the ownership, or right to acquire
ownership, of at least 51% of the Underlying Shares, AFG shall, if it and its
Affiliates hold any combination of Series D Preferred Stock and Common Stock
representing the right to vote more than 20% of the total votes eligible to
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be voted on a matter on which the holders of Common Stock have the right to
vote, vote all votes in excess of such 20% in proportion to the actual vote of
holders of all remaining votes (including AFG's 20% vote).
STRATEGIC ALLIANCEClosing Date.
CERTAIN REPRESENTATIONS, WARRANTIES AND COVENANTS
Pursuant to the Securities Purchase Agreement, the Company and AFG will
enter into a strategic alliance. See "The Transaction -- General -- Strategic
Alliance with AFG."
CONDITIONS PRECEDENT
The Securities Purchase Agreement provides that the obligations of AFG to
consummate the transactions contemplated by the Securities Purchase Agreement
are subject to the fulfillment prior to or on the Closing Date of certain
conditions precedent, or the waiver thereof by AFG, including the following: (a)
the Proposal shall have been approved by the requisite vote of the Company's
stockholders; (b) the representations and warranties of the Company shall be
true and correct when made; (c) no change in applicable law shall have occurred
as a consequence of which it shall have become and continue to be unlawful for
AFG to perform any of its agreements or obligations under the Securities
Purchase Agreement, or under any of the other agreements contemplated by the
Securities Purchase Agreement (the "Transaction Documents") or for the Company
or any subsidiary of the Company to perform any of its agreements or obligations
under the Securities Purchase Agreement or under any of the other Transaction
Documents; (d) the Company shall have performed and complied in all material
respects with all agreements and conditions contained in the Securities Purchase
Agreement required to be performed or complied with by the Company prior to or
at the Closing; (e) the Company shall have furnished to AFG a written legal
opinion in form reasonably acceptable to AFG; (f) the Company and AFG shall have
received all consents necessary for completion of the transactions contemplated
by the Securities Purchase Agreement including regulatory approvals; (g) Mason
BestAEIC and the Company shall have entered into an Amended Registration Rights
Agreement; (h) Mason Best shall have entered into the Voting Agreement; and (i)
the Company shall have adjusted the exercise price of existing stock options
granted to continuing officers and directors of the Company or its Subsidiaries
pursuant to its 1991 Nonqualified Stock Option Plan, 1994 Stock Incentive Plan
and 1994 Directors Option Plan to the market price on the date of adjustment and
shall have set the vesting period of such stock options to three years, with
one-third of the options vesting on each anniversary of the adjustment date.
The obligations of the Company to consummate the transactions contemplated
by the Securities Purchase Agreement are subject AFG's fulfillment, prior to or
on the Closing Date, of certain conditions precedent reciprocal to the
conditions contained in paragraphs (a), (b), (c), and (f) above.
RESTRICTION ON TRANSFERABILITY OF SERIES D PREFERRED STOCK
As long as AFG has certain rights or obligations regarding Board
representation and voting agreements pursuant to the Securities Purchase
Agreement, AFG and any of its Affiliates may assign or transfer to any person
shares of Series D Preferred Stock or Underlying Shares, representing in the
aggregate ownership, or the right to acquire ownership, of at least 51% of the
Underlying Shares and all of their rights described under "-- AFG Representation
on Board of Directors", so long as such person assumes all of the obligations
described under "-- AFG Voting Agreement."
CERTAIN REPRESENTATIONS AND WARRANTIES
Under the Securities Purchase Agreement, the Company has mademake certain
representations, warranties and warrantiescovenants to AFGPurchaser as to AEIC and the
Company, including (i)(a) corporate existence organization and qualification; (ii) corporate power and authority;
(iii)power; (b)
enforceability of the various agreements entered into; (iv)(c) financial condition;
(d) the accounts receivable of AEIC arising from the Aviation Business and
Reinsured Business; (e) taxes; (f) the books, records
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and accounts of AEIC with respect to the Aviation Business and Reinsured
Business; (g) the existing condition of AEIC with respect to the Aviation
Business and Reinsured Business; (h) AEIC's title to properties that are
included in the Assets; (i) the condition of tangible Assets ; (j) employee
benefit plans and arrangements; (k) certain intellectual property matters; (l)
software of AEIC; (m) environmental matters; (n) the Assets; (o) the solvency
of AEIC and the Company after the transactions contemplated by the Purchase
Agreement; (p) the agents and brokers that have generated Aviation Business
that is currently in-force with AEIC; (q) the completeness of information
presented to Purchaser regarding the Aviation Business and the Reinsured
Business; (r) the absence of undisclosed legal actions; (s) the absence of
conflicts; (v) litigation; (vi) financial condition; (vii)(t) reinsurance contracts with respect to the Aviation Business and
the Reinsured Business; (u) absence of certain
changeslegal bar to its business, financial conditionthe transactions
contemplated by the Purchase Agreement; (v) indemnification of the Purchaser
with respect to broker's or capitalization; (viii)finder's fees or commissions; (w) the contracts to
be conveyed to Purchaser; (x) absence of material defaults; (ix) compliance with laws; (x) taxes; (xi) employee
benefits plans; (xii) compliance with environmental laws; (xiii) investment
company status; (xiv) capitalization of the Company and its Subsidiaries; (xv)
title to properties; (xvi) absence of undisclosednondisclosed liabilities; and other
matters.
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UnderPursuant to the Securities Purchase Agreement, AFG has madePurchaser makes certain
representations, warranties and warrantiescovenants to AEIC and the Company as to
AFG,Purchaser, including (i)(a) corporate existence and organization; (ii) corporate authorization and compliance with
law; (iii) required consents, approvals and licenses from governmental
authorities or other third parties; (iv)power; (b)
enforceability of the various agreements entered into; (v) investment intent;(c) absence of required
consents; (d) absence of participation of outside parties; and (vi) commissions.
NO SOLICITATION
After(e) voting by
Purchaser.
Pursuant to the Purchase Agreement, AEIC further covenants and agrees
with Purchaser that prior to consummation of the Aviation Division Sale (a)
AEIC will give Purchaser and its agents access to such information concerning
the Aviation Business and the Reinsured Business as Purchaser may reasonably
request and will consult in good faith with members of Purchaser's management
regarding the business operations and strategies of AEIC in connection with the
Aviation Business and the Reinsured Business; (b) AEIC will continue to operate
the Aviation Business and Reinsured Business in the ordinary course of business
without material changes or loss payments (except with the consent of
Purchaser); (c) AEIC will pay directly to each employee of the Aviation
Business that portion of all employee benefits due through the Closing Date,
except for certain benefits to be assumed by Purchaser at Closing; (d) AEIC
will deliver to Purchaser final schedules to the Purchase Agreement (and
related documentation) for approval by Purchaser; (e) AEIC will give detailed
written notice to Purchaser promptly upon the occurrence of any event that
would cause or constitute a material breach of the Purchase Agreement or would
have caused a material breach of the Purchase Agreement had such event occurred
or been known to AEIC prior to the date of the Purchase Agreement.
The representations, warranties, covenants and agreements of the
parties contained in the Purchase Agreement or in any document delivered
pursuant to the terms of the Purchase Agreement, will survive the Closing for a
period of one year.
CONDITIONS TO CLOSING
The obligations of Purchaser, on the one hand, and the Company and
AEIC, on the other hand, under the Purchase Agreement are subject to the
satisfaction, at or prior to the Closing Date, of the following conditions: (a)
all the terms, covenants and conditions of the Purchase Agreement to be
complied with and performed by the other party on or before the Closing Date
will have been complied with and performed; (b) except for changes between the
date of the Purchase Agreement and the Closing Date permitted by the terms of
the Purchase Agreement, the representations and warranties of the other party
in the Purchase Agreement or in any document or certificate delivered to such
party pursuant to the Purchase Agreement will be true and correct in all
material respects as of the Closing Date with the same force and effect as
though such representations and warranties had been made at and as of the
Closing Date; (c) on the Closing Date, no action or proceeding before any court
or governmental body will be pending or threatened wherein an unfavorable
judgment, decree or order would prevent the carrying out of the Purchase
Agreement or any of the transactions or events contemplated thereby, declare
unlawful the transactions or events contemplated by the Purchase Agreement or
cause such transactions to be rescinded; (d) the other parties will have
received the necessary regulatory and any other approval or approvals of the
transactions contemplated in the Purchase Agreement as may be required by
pertinent laws,
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regulations or agreements; (e) Purchaser and AEIC will have entered into (i)
the Quota Share Reinsurance Agreement ceding the Reinsured Business to
Purchaser and (ii) the Reinsurance Agreement transferring the Aviation Business
to Purchaser; (f) Purchaser and AEIC will have entered into a Claims Servicing
Agreement and a Computer System Use Agreement; (g) the parties will have
received opinions of each other's counsel in form and substance reasonably
satisfactory to the receiving party; (g) Purchaser and AEIC will have executed
a mutual release; and (h) Purchaser and AEIC will have received such other
certificates, documents and instruments as their respective counsel may
reasonably request.
In addition, the obligations of Purchaser under the Purchase Agreement
are, at the option of Purchaser, subject to the satisfaction, at or prior to
the Closing Date, of the following: (a) AEIC will have obtained the consent of
reinsurers with respect to at least 80% of the Aviation Business and the
Reinsured Business to the transfer to and reinsurance thereof by Purchaser and
to the assignment to Purchaser of AEIC's rights under the reinsurance treaties
and agreements currently in effect with respect to the Aviation Business and
the Reinsured Business; (b) AEIC will have obtained all consents required in
order to convey to Purchaser the Office Lease; and (c) AEIC will not have
entered into any contract or agreement after December 31, 1996 which would
adversely affect Purchaser's ability to acquire and conduct the Aviation
Business and the Reinsured Business.
In addition, the obligations of AEIC under the Purchase Agreement are
subject to receipt of, at or prior to the Closing Date, the consent of the
stockholders of AEIC and the Company to the terms of the Purchase Agreement and
the transactions contemplated therein.
TERMINATION OF STRATEGIC ALLIANCE
Pursuant to the Purchase Agreement and notwithstanding any subsequent
termination of the Purchase Agreement, Purchaser and the Company terminated
their respective obligations under Section 5.4 of the Securities Purchase
Agreement to form a strategic alliance.
NONCOMPETE/NO SOLICITATION AND OTHER ACTIONS
Pursuant to the Purchase Agreement, neither AEIC nor the Company, shall not,
and the Company shall direct and use its reasonable best efforts to cause the
officers, directors, employees, agents, advisors and other representativesnor
anyone acting on behalf of the Company not to, directly or indirectly, (i) solicit,either of them, may initiate knowingly
encourage, or participate in discussions or negotiations regarding, any
proposals or offers fromwith any
person entity or group
(an "Offeror") relating to anyconcerning a Competing Proposal (as defined below), or (ii)
furnish to any other Offeror any non-public information or access to such
information with respect to, or otherwise concerning, any Competing Proposal.
The Company shall immediately cease. AEIC and cause to be terminated any existing
discussions or negotiations with any third parties conducted heretofore with
respect to any proposed Competing Proposal.
Notwithstanding the foregoing, until the stockholders of the Company
have
approved the transactions contemplated by the Securities Purchase Agreement, the
Company shall not be prohibited by the Securities Purchase Agreement frommay (i)
participating in discussions or negotiations with, and, during such period, the
Company may furnish information to, an Offerorofferor that seeks to engage in discussions
or negotiations, requests information or makes a proposal to acquire the
CompanyAviation Business and the Reinsured Business pursuant to a Competing Proposal,
if AEIC's and the Company's directors determine in good faith that such action
is required for the discharge of their fiduciary obligations, after
consultation with independent legal counsel,and financial advisors, who may be AEIC's
and the Company's regularly engaged legal counsel and financial advisors (a
"Director Duty"); (ii) complyingcomply with Rule 14d-9 or Rule 14e-2 promulgated under
the Securities Exchange Act of 1934 (the "Exchange Act") with regard to a
tender or exchange offer; (iii) makingmake any disclosure to AEIC's and the Company's
stockholders in accordance with a Director Duty; (iv) failingfail to make, modifyingmodify or
amendingamend its recommendations, consents or approvals referred to herein in
accordance with a Director Duty; or (v) terminatingterminate the Securities Purchase Agreement and enteringenter
into an agreement providing for a Competing Proposal in accordance with a
Director Duty.Duty; or (vi) take any other action as may be appropriate in order for
AEIC's and the Company's Board of Directors to act in a manner that is
consistent with their fiduciary obligations under applicable law. In the event
that AEIC or the Company or any of itstheir officers, directors, employees,
agents, advisors or other representatives participate in discussions or
negotiations with, or furnish information to an Offerorofferor that seeks to engage in
such discussions or negotiations, requests information or makes a proposal to
acquire the Company pursuant to a Competing
Proposal, then, subject to any confidentiality requirements of an Offeror: (i)offeror, AEIC
and the Company shallwill immediately disclose to AFGPurchaser (i) the decision of
AEIC's and the Company's directors; (ii) the identity of the Offeror;offeror; and (iii)
copies of all information or material not previously furnished to AFGPurchaser
which AEIC or the Company, or itstheir agents, provides or causes to be provided
to such Offerorofferor or any of its officers, directors, employees, agents, advisors
or representatives. For purposes of the Purchase Agreement, "Competing
Proposal" means any proposal ora bona fide offer to AEIC, the Company, or the stockholders of
the Company with respectfrom a Qualified Third
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Party (as defined below). "Qualified Third Party" means an entity directly or
indirectly having (i) the underwriting capacity of an insurance carrier rated
"A" by A. M. Best Company, (ii) policyholders surplus of $250 million; and
(iii) agreed to (i) any merger,
consolidation, share exchange, business combination, or other similar
transaction, (ii) any sale, lease, exchange, transfer or other disposition of
all or substantiallyassume all of Purchaser's reinsurance obligations arising under
the assetsQuota Share Reinsurance Agreement.
As of the Closing Date, Purchaser will offer employment to, and AEIC
will use its best efforts to assist Purchaser in employing as new employees of
Purchaser, all persons presently engaged in the Aviation Business except for
certain persons identified in the Purchase Agreement (the "Employees"). AEIC
will terminate effective as of the Closing Date all employment agreements it
has with any of the Employees, except for employment agreements of Nick Walton
and Bob Conrey, which agreements will be assumed by Purchaser. Until the third
anniversary of the Closing Date, (1) AEIC, the Company and any of their
affiliates will not directly or indirectly solicit or offer employment to any
Employee (i) who did not become an employee of Purchaser, (ii) who is then an
employee of Purchaser, or (iii) who has terminated such employment without the
consent of Purchaser within 180 days of such solicitation or offer, and (2)
Purchaser will not directly or indirectly solicit or offer employment to any
person who, after the Closing Date is then an employee of AEIC or who has
terminated such employment without the consent of AEIC within 180 days of such
solicitation or offer.
AEIC, the Company and each of their affiliates agrees that for a
period of three years after the Closing Date, neither AEIC, the Company or any
of their subsidiaries will, directly or indirectly, own, manage, operate, join,
control or participate in the ownership, management, operation or control of,
any business whether in corporate proprietorship or partnership form or
otherwise as more than a five percent 5% owner in such business where such
business is competitive with the Aviation Business.
As of the Closing Date, the Company, AEIC, AFG and Purchaser will
mutually release each other from all liabilities arising out of the execution
of the Securities Purchase Agreement and the purchase of the Series D Preferred
Stock.
Upon the execution of the Purchase Agreement and pursuant to the terms
of the Purchase Agreement, Purchaser received a written commitment from Mason
Best Company L.P. that, among other matters, it will vote its shares of the
common stock of the Company and its material
subsidiaries, taken as a whole, in a single transaction or series of related
transactions, or (iii) any tender offer or exchange offer for sharesfavor of the Common Stock.transactions contemplated herein.
TERMINATION
The SecuritiesNotwithstanding any other provision contained in the Purchase
Agreement, the Purchase Agreement may be terminated at any time prior to the
Closing Date: (a) by mutual written consent of the Company and AFG;parties; (b) by the Company or AFGany party,
upon written notice to the other party,parties, if the Closing shallwill not have occurred
on or prior to Marchthe July 31, 1997, (the "Outside Date"), unless such failure of consummation shallwill be
due to the failure of the party seeking such termination to perform or observe
in all material respects the covenants and agreementsagreement hereof to be performed or
observed by such party; (c) by the
Company or AFG,any party, upon written notice to the other
party,parties, if a governmental authority of competent jurisdiction shallwill have issued
an injunction, order or decree enjoining or otherwise prohibiting the
consummation of the transactions contemplated by the Securities Purchase Agreement, and
such injunction, 24
29
order or decree shallwill have become final and nonappealablenon-appealable or
if a governmental authority has otherwise made a final determination that any
required regulatory consent would not be forthcoming; provided, however, that
the party seeking to terminate the Securities Purchase Agreement pursuant to this clause
has used all requiredcommercially reasonable efforts to remove such injunction, order
or decree; (d) by AEIC or the Company if prior to approval by the stockholders of the Company of the Proposal, the Board of Directors of AEIC or the
Company determines in accordance with a Director Duty that such termination is
required by reason of a Competing Proposal; or (e) by any party if the Company or AFG, if prior to approval of the stockholders of the Company of
the Proposal, the BoardBoards
of Directors of AEIC and the Company shallwill have withdrawn or modified in a
manner materially adverse to AFG itsPurchaser their approval of the adoption of the
Proposal,Purchase Agreement, because the BoardBoards of Directors hashave determined to
recommend to AEIC's and the Company's stockholders or approve a Competing
Proposal, in accordance with a Director Duty.Duty; provided, however, that any
communication that advises that AEIC or the Company has received a Competing
Proposal will in no event be deemed a withdrawal or modification adverse to
Purchaser of its approval of the Purchase Agreement. In the event that the
Securities29
34
Purchase Agreement is terminated by reason
ofpursuant to clause (d) or (e) above, the Break-up Warrants issued to AFG under the Securities
Purchase Agreement shall become immediately exercisable and AFG shall have all
of the benefits of the Warrant Registration Rights Agreement relating to such
Break-up Warrants. In the event that the Securities Purchase Agreement is
terminated due to any other reason described above, the Break-up Warrants shall
be cancelled and neither party shall have any further rights or obligations
under the Securities Purchase Agreement or the Registration Rights Agreement.
If either party shall default in the performance of its obligations under
the Securities Purchase Agreement, the non-defaulting party shall retain all
rights and remedies, whether arising in equity or at law, including actions for
specific performance and damages, as a result of the default by the other party
under the Securities Purchase Agreement.
BREAK-UP WARRANTS
The Break-up Warrants were issued to AFG upon execution of the Securities
Purchase Agreement pursuant to a Warrant Subscription Agreement dated as of
November 5, 1996 between the Company and AFG. Pursuant to the Warrant
Subscription Agreement, the Company issued AFG the Break-up Warrants for 800,000
shares of Common Stock exercisable for $3.45 per share. The Break-up Warrants
may be exercised commencing the first business day following the termination of
the Securities Purchase Agreement pursuant to the provisions described above
permitting such termination in order to accept a Competing Proposal, and
thereafter remain exercisable until November 4, 2003. The Break-up Warrants
shall be cancelled simultaneously with the Closing under the Securities Purchase
Agreement.
The exercise price and number of shares subject to the Break-up Warrants
are subject to adjustment pursuant to customary antidilution provisions. In
addition, in case of any consolidation of the Company with or merger of the
Company into another corporation or in case of any sale, transfer or lease to
another corporation of all or substantially all the property of the Company,
each holder of Break-up Warrants shall thereafter be entitled, upon payment of
the exercise price in effect immediately prior to such action, to purchase upon
exercise of each Break-up Warrant the kind and amount of cash, shares and other
securities and property which such holder would have owned or have been entitled
to receive after the happening of such consolidation, merger, sale, transfer or
lease had such Break-up Warrant been exercised immediately prior to such action,
provided, however, that no adjustment in respect of dividends, interest or other
income on or from such shares or other securities and property shall be made
during the term or upon the exercise of a Break-up Warrant.
Subject to compliance with applicable securities laws, the Break-up
Warrants are transferable. In addition, the holders thereof are entitled to
certain demand and piggyback registration rights.
WARRANTS ISSUABLE UPON EARLY REDEMPTION
Certain warrants (the "Warrants") shall be issued upon the early redemption
of the Series D Preferred Stock, which may be done at any time at the Company's
option. In the event of a redemption of Series D Preferred Stock prior to the
seventh anniversary of the Closing Date, the Company shall, in addition to the
cash payable to the holder, issue to the holder, for each share of Common Stock
into which the redeemed shares of Series D Preferred Stock arepreceding
sentence, then convertible,
a Warrant to purchase one share of Common Stock of
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30
the Company at an exercise price of $5.25 per share (subject to antidilution
provisions) under the terms of the Form of Warrant Subscription Agreement
attached as an exhibit to the Securities Purchase Agreement. The Warrants may be
exercised commencing the first business day following their issuance and
thereafter remain exercisable until November 4, 2003, at which time all
unexercised Warrants will expire.
The exercise price and number of shares subject to the Warrants are subject
to adjustment pursuant to customary antidilution provisions. In addition, in
case of any consolidation of the Company with or merger of the Company into
another corporation or in case of any sale, transfer or lease to another
corporation of all or substantially all the property of the Company, each holder
of Warrants shall thereafter be entitled, upon payment of the exercise price in
effect immediately prior to such action, to purchase upon exercise of each
Warrant the kind and amount of cash, shares and other securities and property
which such holder would have owned or have been entitled to receive after the
happening of such consolidation, merger, sale, transfer or lease had such
Warrant been exercised immediately prior to such action, provided, however, that
no adjustment in respect of dividends, interest or other income on or from such
shares or other securities and property shall be made during the term or upon
the exercise of a Warrant.
Subject to compliance with applicable securities laws, the Redemption
Warrants are transferable. In addition, the holders thereof are entitled to
certain demand and piggyback registration rights.
REGISTRATION RIGHTS AGREEMENTS
The Company will enter into a Registration Rights Agreement with AFG with
respect to the shares of Series D Preferred Stock, the shares of Common Stock
purchased upon conversion of the Series D Preferred Stock (the "Common Shares")
and the Warrants issuable upon optional redemption of the Series D Preferred
Stock by the Company prior to the seventh anniversary of the Closing Date
(collectively, the "Registrable Securities"). Pursuant to the Registration
Rights Agreement, AFG shall have the right on three occasions to demand
registration under the Securities Act of 1933, as amended (the "Securities
Act"), of the Registrable Securities; provided, however, that the Company shall
in no event (including by reason of any assignment of rights by AFG or any other
holder of Registrable Securities) be subject to more than three demand
registrations under such agreement and shall not be obligated at any time to
register the lesser of (i) 25% of the total outstanding number of Series D
Preferred Stock, Common Shares or Warrants, whichever is the case, or (ii)
Registrable Securities with a market value (based on the market value of the
underlying shares of Common Stock) of less than $1.0 million pursuant to any
such request. The Registration Rights Agreement also provides that, in the event
the Company proposes to register any of its securities under the Securities Act
for its own account or for the account of any other person, AFGPurchaser will be entitled to include Registrable Sharesa cash payment within five days of
the termination date from AEIC of $1.75 million.
INDEMNIFICATION
From and after the Closing, each of AEIC and the Company, jointly and
severally, will reimburse, indemnify and hold harmless Purchaser and its
successors and assigns (an "Indemnified Purchaser Party") against and in
respect of: (a) any such registration, subjectand all damages, losses, deficiencies, liabilities, costs
and expenses incurred or suffered by any Indemnified Purchaser Party that
result from, relate to or arise out of (i) any and all liabilities and
obligations of AEIC of any nature whatsoever, except for the Assumed
Liabilities, or (ii) any misrepresentation, breach or warranty or
nonfulfillment of any agreement or covenant on the part of AEIC or the Company
under the Purchase Agreement, or from any misrepresentation in or omission from
any certificate, schedule, statement, document or instrument furnished to
Purchaser pursuant to the rightPurchase Agreement or in connection with the
negotiation, execution or performance of the managing underwriterPurchase Agreement; and (b) any
and all actions, suits, claims, proceedings, investigations, demands,
assessments, audits, fines, judgments, costs and other expenses (including,
without limitation, reasonable legal fees and expenses) incident to any of the
foregoing or to the enforcement of the indemnification rights of an Indemnified
Purchaser Party.
From and after the Closing, Purchaser will reimburse, indemnify and
hold harmless AEIC, the Company and their successors or assigns (an
"Indemnified AEIC Party") against and in respect of: (a) any and all damages,
losses, deficiencies, liabilities, costs and expenses incurred or suffered by
any Indemnified AEIC Party that result from, relate to or arise out of (i) the
Assumed Liabilities or (ii) any misrepresentation, breach of warranty or non-
fulfillment of any such offeringagreement or covenant on the part of Purchaser under the
Purchase Agreement, or from any misrepresentation in certain circumstancesor omission from any
certificate, schedule, statement, document or instrument furnished to exclude someAEIC
pursuant to the Purchase Agreement or in connection with the negotiation,
execution or performance of the Purchase Agreement; and (b) any and all
actions, suits, claims, proceedings, investigations, demands, assessments,
audits, fines, judgments, costs and other expenses (including without
limitation, reasonable legal fees and expenses) incident to any of such Registrable Shares from such registration.
Thethe
foregoing or to the enforcement of the indemnification rights of an Indemnified
AEIC Party.
AEIC and the Company will also enter into a Warrant Registration Rights Agreement
with AFGhave no liability (for indemnification or
otherwise) with respect to indemnification of an Indemnified Purchaser Party
until the Break-up Warrantstotal of all damages actually paid or incurred by an Indemnified
Purchaser Party with respect to such matters exceeds $1.0 million, and then
only for the amount by which such damages actually paid or incurred by an
Indemnified Purchaser Party exceed $1.0 million. The maximum aggregate
obligation of AEIC and the sharesCompany with respect to all matters for which an
Indemnified Purchaser Party may seek indemnification for misrepresentation or
breach of Common Stock
acquired upon exercisewarranty will not exceed $20.0 million.
The maximum aggregate obligation of the Break-up Warrants (the "Warrant Shares,Purchaser to AEIC and
together with the Break-up Warrants, the "Break-up Securities"). Pursuant to the
Warrant Registration Rights Agreement, AFG shall have the right on three
occasions to demand registration of the Break-up Securities under the Securities
Act; provided, however, that the Company
shall in no event (including by reason
of any assignment of rights by AFG or any other holder of Break-up Securities)
be subjectwith respect to more than three demand registrations under such agreement and
shall not be obligated at any time to register the lesser of (i) 25% of the
total number of Break-up Warrants or Warrant Shares outstanding or (ii) Warrant
Shares with a market value (based on the market value of the underlying shares
of Common Stock) of less than $1.0 million pursuant to any such request. The
Warrant Registration Rights Agreement also provides that, in the eventall matters for which the Company proposes to register anyor AEIC may seek
indemnification for misrepresentation or breach of its securities under the Securities Act for
its own account or for the account of any other person, AFG will be entitled to
include Break-up Securities in such registration, subject to the right of the
managing underwriter of any such offering in certain circumstances to exclude
some or all of such Break-up Securities from such registration.
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AMENDED REGISTRATION RIGHTS AGREEMENT
The Company and Mason Best will amend the Existing Registration Rights
Agreement dated March 21, 1994 to provide that holders of registrable securities
under such agreementwarranty will not have the right to include their shares in a
registration statement filed by the Company for an underwritten offering of
securities by AFG if the managing underwriter shall have rendered an opinion
that such registration materially would impair AFG's ability to sell the
securities being registered for sale by AFG.
DESCRIPTIONexceed
$20.0 million.
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35
PLANS FOR FUTURE OPERATION OF SERIES D PREFERRED STOCK
The followingTHE COMPANY
Set forth below is a summary of management's plans for the operation
of the Company following the sale or other disposition of its three divisions.
If the Company is unable to sell all of its divisions as contemplated in this
Proxy Statement, the Company expects to lose its current insurance business to
other, higher rated insurers. Therefore, the Company would expect to
discontinue the insurance underwriting activities of any unsold division.
Consequently, the principal effect of nonconsummation of the sale of a division
would be that the Company would not receive any consideration for the existing
business conducted by such division.
BUSINESS
Following the sale of the Company's three divisions, the Company
expects that it will no longer write new or renewal policies for the
foreseeable future. It will continue to handle claims on the Company's policies
that are not assumed by the purchasers as part of these transactions and
maintain the related reserves and assets. Accordingly, the Company's revenues
and earnings capacity will be significantly lower in the future. The Company's
operational focus will be on attempting to create residual value for the
Company's stockholders from the remaining operations and assets and additional
ongoing operations. It is not currently possible to determine how much residual
value, if any, will inure to the Company's stockholders.
Following the sale or disposition of its divisions, the Company will
discontinue all insurance marketing and underwriting activities. The Company
intends to continue to manage claims as described under "Historical Business of
the Company--Claims." The Company will continue to be responsible for all
claims that are covered by Company auto dealer and trucking policies, claims
occurring before January 1, 1993 that are covered by aviation policies, claims
occurring before March 1, 1997 that are covered by artisan contractor policies,
and claims occurring before April 30, 1997 that are covered by marine policies.
The Company also intends to continue to manage its investment portfolio
substantially as described under "Historical Business of the Company--
Investments." In this connection, the Company intends to engage in a business
or businesses other than investing, reinvesting, owning, holding or trading in
securities as soon as reasonably possible following the closing of the Aviation
Division Sale and the disposition of its other divisions, although there can be
no guarantee that the Company will be able to do so. If the Company were
required to register as an investment company under the 1940 Act, it would
become subject to substantial regulation with respect to its capital structure,
management, operations, transactions with affiliates, and other matters.
In addition to any value generated from the management of claims and
the investment portfolio, the Company will also have an estimated net operating
loss carryforward ("NOL") of at least $5.0 million following the sale or other
disposition of its divisions. Although the Company has no current specific
plans concerning the utilization of the NOL, the NOL may be available to offset
future income, if any, of the Company.
The Company will in the future explore ways to maximize shareholder
value, including by possibly entering into a new line of business, acquiring
another business or selling the Company. The Company does not expect that AEIC
would be able to conduct any new insurance business for the foreseeable future,
however. As a result of AEIC's financial condition, Best rating downgrades and
sales of its businesses, the insurance regulatory agencies in the states of
California, Florida, Idaho, Illinois, Michigan, Minnesota, New York, North
Carolina and Washington have ordered or requested AEIC to limit or cease
writing insurance in their states. In addition, the Texas Department of
Insurance has ordered AEIC to cease writing insurance in any state after
completion of the sales of its divisions. The Company expects that additional
states may issue similar orders or make similar requests. See "Insurance
Regulation." While these orders or requests remain in effect, AEIC would not
have the ability to enter into any new insurance business. Also, AEIC's current
Best rating of "D" makes it unlikely that it could enter into any new insurance
business. On the other hand, two of the Company's subsidiaries that are
licensed agencies do not have similar restrictions on their ability to conduct
business. Aviation Office of America, Inc. is a licensed managing general
agency in
31
36
Texas and a licensed agency in certain other states. AE Insurance Agency, Inc.
is a licensed agency in California and certain other states. While management
has no specific plans to start or acquire any insurance agency businesses,
these subsidiaries are available if an opportunity arises.
MANAGEMENT
Following the sale or other disposition of its divisions, the Company
expects Mr. Guthrie and Mr. Kurz to remain as executive officers with their
current titles. Mr. Kurz will assume the additional title of Secretary. The
Company's outside directors, Messrs. Joseph M. Grant, Keith W. Hughes, James E.
Maser and Elvis L. Mason, have informed the Company that they intend to resign
following consummation of the Aviation Division Sale. The Company's Board of
Directors will be reduced to three members following such resignations. Mr.
Guthrie will remain on the Board and Mr. Kurz and Howard D. Putnam have been
nominated for election to the Board. See "Election of Directors."
EMPLOYEES
Following the sale or other disposition of its divisions, the Company
expects to reduce its workforce from 199 full-time employees at May 30, 1997 to
no more than 15 full-time employees. These employees will continue to handle
accounting, claims, reinsurance billing and collection and administrative
functions for the Company.
OFFICES
The Company subleases approximately 5,000 square feet of office space
on the sixth floor of the building in Dallas, Texas in which it currently
maintains its executive and business offices. The Company will retain this
sublease after the Aviation Division Sale and will move all of its executive
and business offices into this space.
32
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UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following Unaudited Pro Forma Financial Statements have been
prepared to illustrate the estimated effects of the Aviation Division Sale, the
Artisan Sale and the Marine Division Sale (collectively, the Transactions). The
Unaudited Pro Forma Condensed Consolidated Statements of Operations for the
year ended December 31, 1996 and the three months ended March 31, 1997 were
prepared as if the Transactions were consummated on January 1, 1996 and January
1, 1997, respectively. The Unaudited Pro Forma Condensed Consolidated Balance
Sheet was prepared as if the Transactions were consummated on March 31, 1997.
The Unaudited Pro Forma Financial Statements do not purport to represent what
the Companys financial position or results of operations would actually have
been if the Transactions had in fact occurred on such dates. The Unaudited Pro
Forma Financial Statements also do not purport to project the financial
position or results of operations of the Company as of any future date or for
any future period.
The Unaudited Pro Forma Financial Statements should be read in
conjunction with the Companys consolidated financial statements and the related
notes included elsewhere in this Proxy Statement.
The Artisan Sale and Marine Sale have been completed under terms
consistent with the presented pro forma data as of March 31, 1997.
33
38
AMERICAN EAGLE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET
MARCH 31, 1997
(Unaudited)
(In Thousands Except Share Data)
Pro Forma Aviation Auction Division Pro Forma
March 31, Other After Other Division Quota Share Other March 31,
ASSETS 1997 Sales(1) Sales (2) Sales(3) Reinsurance(4) Adjustments(5) 1997
---- -------- --------- -------- -------------- -------------- ----
Cash and investments $ 66,562 $ 815 $ 67,377 $ (7,632) $(18,591) $ (353) $ 40,801
Accounts receivable 55,625 (10,601) 45,024 (17,557) -- -- 27,467
Reinsurance recoverable, net 69,896 -- 69,896 (34,268) -- -- 35,628
Deferred policy acquisition costs 13,234 (1,977) 11,257 -- (11,257) -- --
Deferred reinsurance premiums 29,208 (606) 28,602 (8,922) (9,932) -- 9,748
Other assets 13,460 (1,776) 11,684 (1,946) -- (5,000) 4,738
-------- -------- -------- -------- -------- -------- --------
Total assets $247,985 $(14,145) $233,840 $(70,325) $ 39,780 $ (5,353) $118,382
======== ======== ======== ======== ======== ======== ========
LIABILITIES AND
STOCKHOLDER'S EQUITY
Liabilities:
Reserve for losses and loss
adjustment expenses $135,573 $ -- $135,573 $(67,366) $ -- $ -- $ 68,207
Unearned premiums 50,566 (14,075) 36,491 (36,491) -- --
Other policy liabilities 16,833 -- 16,833 (1,646) -- -- 15,187
Agency payables to insurance
companies (1,463) -- (1,463) (1,311) -- -- (2,774)
Accounts payable and other
liabilities 10,690 -- 10,690 -- -- 13,902 24,592
-------- -------- -------- -------- -------- -------- --------
Total liabilities 212,199 (14,075) 198,124 (70,323) (36,491) 13,902 105,212
-------- -------- -------- -------- -------- -------- --------
Commitments and contingent
liabilities:
Series B Cumulative Preferred
Stock,
$.01 par value, 162,857 shares
authorized, 142,857 shares
issued and outstanding 1,428 -- 1,428 -- -- -- 1,428
Series D Cumulative Convertible
Redeemable Preferred Stock,
$.01 par value, 546,200 shares
authorized, 357,875 shares
issued and outstanding at March
31, 1997 33,952 -- 33,952 (33,952) -- -- --
Stockholder's equity:
Common Stock, $.01 par value,
21,000,000 shares authorized,
7,047,098 shares issued 71 -- 71 -- -- -- 71
Additional paid-in-capital 45,600 -- 45,600 -- -- -- 45,600
Unrealized apprec(deprec) on
investment securities (467) -- (467) -- -- (353) (820)
Retained earnings (44,711) (70) (44,781) 33,950 (3,289) (18,902) (33,022)
Less - 73,882 shares of common
stock held in the treasury, at
cost (87) -- (87) -- -- -- (87)
-------- -------- ---------- -------- -------- -------- --------
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39
Total stockholders' equity 406 (70) 336 33,950 (3,289) (19,255) 11,742
-------- -------- ---------- -------- -------- -------- --------
Total liabilities and
stockholders' equity $247,985 $(14,145) $233,840 $(70,325) $ 39,780 $ (5,353) $118,382
======== ======== ======== ======== ======== ======== ========
- -------------------------
(1) The "Other Sales" column reflects the historical cost basis of the assets
and liabilities transferred to the purchasers of the Artisan and Marine
operations and the related net loss resulting from the two transactions.
(2) The "Pro Forma After Other Sales" column reflects the pro forma balance
sheet after the sale of the Artisan and Marine operations.
(3) The "Aviation Division Sale" column reflects the historical cost basis of
the assets and liabilities in pursuant to the Aviation Division Sale,
including the cancellation of the Series D Preferred Stock. The rights, preferences and privilegesgain
results from cancellation of the Series D Preferred Stock of $33,952 . . .
. .
(4) The "Aviation Division Quota Share Reinsurance" column reflects the
impact of the Quota Share Reinsurance contract whereby the company ceded
100% of the net unearned premium as of March 31, 1997 and received a
ceding commission of 30% of the unearned premium or $7,968. The ceding
commission of $7,968 was less than the deferred policy acquisition costs
of $11,257 resulting in a loss of $3,289. The unearned premium of $36,491
less ceded unearned premiums of $9,932 and the ceding commission of $7,968
result in a payment to the reinsurer of $18,591.
(5) The "Other Adjustments" column reflects other adjustments required to
properly reflect the consolidated financial positions of American Eagle
Group, Inc. after the sales of its remaining operations. Such items are
containednot necessarily related to a specific sale. Such adjustments include the
write-off of intangible assets including unamortized goodwill, the
recording of all fixed income investments at market values where
previously a portion of the fixed income portfolio had been held to
maturity and carried at amortized cost, accruals related to the wind down
of the Company's operation and an estimate of adjustments which might be
required by regulators. Such wind down costs include the costs of
completing the transactions, costs associated with the exiting of the
business including the costs of administration and the settlement of all
remaining claims and the billing and collection of any reinsurance
recoverable. These estimated exit costs $5,902 are expected to total
approximately. The estimate of adjustments which might be required by
regulators is $7,500. This column also includes the estimated federal
income tax resulting from the pro forma adjustments of $500. These costs
will be included in the Certificateincome statement and will be part of Designation,the
calculation of the gain on the sales of the various operations. No
amounts have been charged against the liability at the date of this Proxy.
See "Certain Considerations--Potential Regulatory Action and Other
Contingencies."
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AMERICAN EAGLE GROUP, INC. AND SUBSIDIARIES
CONDENSED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(Unaudited)
(In Thousands Except Share Data)
Aviation Other Sales and Pro Forma
December 31, Division Terminated Other December 31,
1996 Sale(2) Lines (3) Adjustments(4) 1996
---- ------- --------- -------------- ------------
Revenues
Earned premiums, net of
reinsurance $ 107,217 $(75,145) $(32,072) $ -- $ --
Agency operations, net 424 (424) -- -- --
Investment income, net 4,470 -- -- (1,307) 3,163
Realized investment gains (losses),
net (74) -- -- -- (74)
--------- -------- -------- -------- ---------
Total revenues 112,037 (75,569) (32,072) (1,307) 3,089
--------- -------- -------- -------- ---------
Expenses
Losses and loss adjustment
expenses, net of reinsurance 107,473 (56,840) (50,633) -- --
Policy acquisition and other
underwriting expenses 47,848 -- -- (45,998) 1,850
Interest expense 1,132 -- -- (1,132) --
--------- -------- -------- -------- ---------
Total expenses 156,453 (56,840) (50,633) (47,130) 1,850
--------- -------- -------- -------- ---------
Income (loss) before income tax
expenses (44,416) (18,729) 18,561 45,823 1,239
Income tax expense (benefit)....... 0 0 0 0 0
--------- -------- -------- -------- ---------
Net income (loss).................. $ (44,416) $(18,729) $ 18,561 $ 45,823 $ 1,239
========= ======== ======== ======== =========
Preferred dividends $ 98 98
========= ==
=========
Net income (loss) available for
common stockholders (1) $ (44,514) $ 1,141
========= =========
Weighted average number of
common shares outstanding 7,048,898 7,048,898
========= =========
Net income (loss) per share of
common stock (1) $ (6.32) $ .16
========= =========
- -------------------
(1) After deduction of preferred dividends of $98.
(2) The "Aviation Division Sale" column reflects the historical operating
results of the Aviation Division.
(3) The "Other Sales and Terminated Lines" column reflects the historical
operating results of the P&C Division and Marine Division. The
transportation and auto dealer lines of the business, which had previously
been terminated but which continued to have some run-off activity, have
been reflected as terminated lines for each applicable period. Since such
operations will not continue in the future, they have been eliminated in
the pro forma income statement.
(4) The "Other Adjustments" column reflects adjustments required as a copyresult
of the sales and terminations which are not specifically attributable to a
specific sale or termination , primarily reductions in operating and
investment income. Interest expense was eliminated as the outstanding
indebtedness was repaid on December 31, 1996.
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41
AMERICAN EAGLE GROUP, INC. AND SUBSIDIARIES
CONDENSED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(Unaudited)
(In Thousands Except Share Data)
Aviation Other Sales and Pro Forma
March 31, Division Discontinued Other March 31,
1997 Sale(2) Lines(3) Adjustments(4) 1996
--------- -------- --------------- -------------- ----------
Revenues
Earned premiums, net of
reinsurance $ 23,806 $(16,350) $(7,456) $ - $ -
Agency operations, net 326 (326) - - -
Investment income, net 1,278 - - (576) (702)
Realized investment gains
(losses), net (58) - - - (58)
--------- -------- ------- -------- ---------
Total revenues 25,352 (16,676) (7,456) (576) 644
--------- -------- ------- -------- ---------
Expenses
Losses and loss adjustment
expenses, net of reinsurance 19,953 (12,550) (7,403) - -
Policy acquisition and other
underwriting expenses 11,142 - - (10,680) 462
Interest expense - - - - -
--------- -------- ------- ------- ---------
Total expenses 31,095 (12,550) (7,403) (10,680) 462
--------- -------- ------- -------- ---------
Income (loss) before income tax
expenses (5,743) (4,126) (53) 10,104 182
Income tax expense (benefit) - - - - -
--------- -------- -------- ------- ---------
Net income (loss) $ (5,743) $ (4,126) $ (53) $10,104 182
========= ======== ======== ======= =========
Preferred dividends $ (809) $ (788) (21)
========= ======= =========
Net income (loss) available for
common stockholders (1) $ (6,552) $ 161
========= =========
Weighted average number of common
shares outstanding 7,048,898 7,048,898
========= =========
Net income (loss) per share of
common stock (1) $ (0.93) $ .02
========= ========
- --------------------
(1) After deduction of preferred dividends of $809 at March 31, 1997 of which
is attached hereto
as Appendix III. Stockholders are urged to read the Certificate of Designation
in its entirety.
PRIORITY
The Series D Preferred Stock will have a liquidation value of $100 per
share (the "Liquidation Value"). The Series D Preferred Stock will rank prior to
the Common Stock and to all other shares of capital stock of the Company that
are junior$788 relates to the Series D Preferred Stock with respect towhich is being canceled.
(2) The "Aviation Division Sale" column reflects the payment of
dividends and payments or distributions upon liquidation (the Common Stock and
all such shares are referred to herein as the "Junior Stock"). The Series D
Preferred Stock will rank junior to the Company's Series B Cumulative Preferred
Stock (the "Series B Preferred Stock") with respect to dividends and rights upon
liquidation and will be subject to the creation of other stock ranking senior
to, on a parity with, or junior to, the Series D Preferred Stock to the extent
not prohibited by the Company's Certificate of Incorporation, except that
creation of stock ranking senior to the Series D Preferred Stock is subject to
the approvalhistorical operating
results of the holders of two-thirdsAviation Division.
(3) The "Other Sales and Terminated Lines" column reflects the historical
operating results of the outstanding sharesP&C Division and Marine Division. The
transportation and auto dealer lines of Series D
Preferred Stock voting separatelybusiness, which had previously
been terminated but which continued to have some run-off activity, have
been reflected as terminated lines for the applicable period. Since such
operations will not continue in the future, they have been eliminated in
the pro forma income statement.
(4) The "Other Adjustments" column reflects adjustments required as a class. See "-- Voting Rights."
DIVIDENDS
The Series D Preferred Stock will be entitledresult
of the sales and terminations which are not specifically attributable to a
per annum cumulative
dividend equal to 9% payable quarterly as declared by the Board beginning April
1, 1997. At the option of the Company, dividends will be payable eitherspecific sale or termination, primarily reductions in cash
or in kind (whereby the holder receives, in lieu of cash, shares of Series D
Preferred Stock having a liquidation value equal to the dividends declared)
during the first five years after the Closing Date. Following the fifth
anniversary of the Closing Date, dividends will be payable quarterly only in
cash.
Subject to the rights of holders of the Series B Preferred Stock, the
Company shall not declare or pay or set apart for payment any dividend (other
than dividends payable in shares of Junior Stock) for any period upon any Junior
Stock or any stock of the Company ranking on a parity with the Series D
Preferred Stock as to dividends, nor shall the Company redeem or purchase any
such shares or pay any money to a sinking fund for the redemption or repurchase
of any such shares unless all dividends on the Series D Preferred Stock,
including all accruedoperating expenses
and unpaid dividends, have been paid in full.
Notwithstanding the foregoing, the Company may pay dividends on the shares of
the Series D Preferred Stock and shares of stock of the Company ranking on a
parity therewith as to dividends ratably in proportion to the sums which would
be payable on such shares if all dividends, including accumulations, if any,
were declared and paid in full. Accumulations of dividends on any shares of the
Series D Preferred Stock shall bear interest at 9% per annum, compounded
quarterly.
VOTING RIGHTS
The holders of shares of Series D Preferred Stock shall be entitled to the
following voting rights for the seven year period commencing on the Closing
Date. Thereafter, holders of Series D Preferred Stock will have no voting rights
except as set forth in (b) and (c) or as otherwise provided by law:
(a) With regard to any matter submitted to a vote of the holders of
capital stock of the Company, the holders of the Series D Preferred Stock
shall be entitled collectively to cast 20% of the votes eligible
27
32
to be cast in such matters; provided, however, in the event that the
aggregate number of shares of Common Stock into which the Series D
Preferred Stock is convertible represents less than 20% of the aggregate
number of all shares of Common Stock outstanding (on a fully diluted
basis), then each holder of a share of Series D Preferred Stock shall be
entitled to cast one vote for each full share of Common Stock into which
such share is then convertible with respect to any such matter;
(b) Notwithstanding the foregoing, upon the occurrence and
continuation of an Event of Default (defined as a default in dividend
payments for at least two consecutive quarters or a default in any
mandatory redemption payment on the Series D Preferred Stock), each share
of Series D Preferred Stock shall be entitled to cast the number of votes
equal to the number of shares of Common Stock into which such share is then
convertible on any matter submitted for the consideration of the
stockholders of the Company, and the holders of the Series D Preferred
Stock, voting separately, as a class shall be entitled at the next annual
or special meeting of stockholders to elect such number of directors which
is a majority (rounded up) of the directors to be elected. The term of
office of directors elected under these circumstances shall end upon the
earlier of the termination of the Event of Default and the next annual
meeting of stockholders; and
(c) Without the approval of holders of two-thirds ofinvestment income. Interest expense was eliminated because the
outstanding indebtedness was repaid on December 31, 1996.
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42
SELECTED FINANCIAL INFORMATION
(Dollars in Thousands Except Per Share Amounts)
DECEMBER 31 MARCH 31,
------------------------------------------------------------------ ---------------------------
FOR THE PERIOD 1992 1993 1994 1995 1996 1996 1997
-------- ------- -------- -------- --------- ------- --------
Gross premiums produced(1) $114,750 $139,847 $167,207 $181,561 $151,182 $42,366 $ 23,810
Net premiums written $ 51,250 $ 71,869 $ 95,997 $120,957 $ 96,229 $32,662 $ 14,988
Earned premiums $ 43,725 $ 66,091 $ 82,725 $102,447 $107,217 $32,834 $ 23,806
Net investment income $ 2,880 $ 2,918 $ 4,106 $ 5,497 $ 4,470 $ 1,403 $ 1,278
Realized investment gains
(losses) $ 1,622 $ 1,414 $ (33) $ 496 $ (74) $ 153 $ (58)
Interest expense $ 462 $ 708 $ 800 $ 987 $ 1,132 $ 250 $ 0
Operating income (loss) $ 3,145 $ 4,799 $ 7,164 $(13,394) $(44,342) $(2,853) $ (5,685)
Income (loss) before
extraordinary items and
cumulative effect of
change in accounting principle $ 4,199 $ 5,718 $ 7,143 $(13,076) $(44,416) $(2,752) $ (5,743)
Net income (loss) $ 6,079 $ 5,718 $ 7,143 $(13,076) $(44,416) $(2,752) $ (5,743)
Net income (loss)
available for common
stockholders(2) $ 4,781 $ 4,420 $ 6,588 $(13,174) $(44,514) $(2,776) $ (6,552)
Weighted average shares
outstanding 3,469,448 3,469,448 5,684,386 7,052,998 7,048,898 7,050,548 7,048,898
Loss and LAE Ratio 57.7% 62.3% 63.7% 88.8% 100.2% 83.8% 83.8%
Expense Ratio 38.2% 29.8% 28.6% 36.4% 44.6% 32.8% 46.8%
--------- --------- --------- --------- --------- --------- ---------
Combined Ratio 99.1% 92.1% 92.3% 125.2% 144.8% 116.6% 130.6%
========= ========= ========= ========= ========= ========= =========
PER COMMON SHARE
Operating income $ 0.91 $ 1.38 $ 1.26 $ (1.90) $ (6.29) $ (0.40) $ (0.81)
Operating income (loss) for
common stockholders (2) $ 0.53 $ 1.01 $ 1.16 $ (1.91) $ (6.30) $ (0.40) $ (0.92)
Net income (loss) $ 1.75 $ 1.65 $ 1.26 $ (1.85) $ (6.30) $ (0.39) $ (0.81)
Net income (loss) for
common stockholders (2) $ 1.38 $ 1.27 $ 1.16 $ (1.87) $ (6.32) $ (0.39) $ (0.93)
Stockholders' equity $ 7.00 $ 8.27 $ 9.12 $ 7.58 $ 1.06 $ 7.01 $ .06
Dividends declared $ 0.00 $ 0.00 $ 0.09 $ 0.13 $ 0.08 $ 0.04 --
AT PERIOD END
Total cash and investments $ 48,064 $ 87,262 $ 98,181 $106,792 $ 89,087 $ 87,880 $ 66,562
Total assets $219,028 $299,622 $337,103 $318,269 $261,959 $297,202 $247,985
Reserve for loss and loss
adjustment expenses $ 95,074 $122,342 $142,768 $136,528 $138,133 $139,892 $135,573
Note payable $ 10,000 $ 10,000 $ 9,250 $ 11,250 -- $ 11,250 --
Total liabilities $183,114 $259,285 $271,139 $263,174 $219,670 $246,169 $212,199
Redeemable preferred stock $ 11,629 $ 11,629 $ 1,629 $ 1,629 $ 34,793 $ 1,629 $ 35,380
Stockholders' equity $ 24,285 $ 28,708 $ 64,335 $ 53,466 $ 7,496 $ 49,404 $ 406
Total debt to equity 89.1% 75.3% 16.9% 24.1% 464.2% 26.1% 8,714.0%
SELECTED STATUTORY DATA
Policyholders' surplus $ 40,204 $ 44,752 $ 65,107 $ 50,465 $ 20,351 $ 47,013 $ 15,169
Net premiums written to
surplus 1.1x 1.6x 1.3x 2.3x 4.9x 2.8x 4.0x
Loss and LAE Ratio 57.9% 63.1% 64.2% 89.8% 100.2% 83.7% 83.4%
Expense Ratio 41.2% 30.0% 33.7% 34.9% 43.5% 35.5% 48.4%
--------- --------- --------- --------- --------- ---------- ---------
Combined Ratio 99.1% 93.2% 97.9% 124.7% 143.7% 119.2 131.8%
========= ========= ========= ========= ========= ========== =========
- ---------------
(1) For a discussion of Series D Preferred Stock voting separately as a class, the
Company will not, in any manner (including by merger or consolidation) (i)
amend, alter or repeal any provisionsgross premiums produced, see "Management's Discussion
of the resolutions establishing the
Series D Preferred Stock so as to adversely affect the powers, preferences
or special rightsFinancial Condition and Results of such Series D Preferred Stock, or (ii) authorize the
issuanceOperations."
(2) After deduction of or authorize any obligation or security convertible into or
evidencing the right to purchase shares of, any additional class or series
of stock ranking prior to the Series D Preferred Stock in the payment ofpreferred dividends
or the preferential distribution of assets. The foregoing shall
not be interpreted to require any vote or consent of the Series D Preferred
Stock in connection with the authorization or issuance of any series of
Preferred Stock ranking on a parity with or junior to the Series D
Preferred Stock as to dividends and/or the distribution of assets.
In addition, pursuant to the Securities Purchase Agreement, until AFG and
its affiliates no longer own Series D Preferred Stock and Underlying Shares
representing in the aggregate the ownership, or the right to acquire ownership,
of 51% of the Underlying Shares, or until the seventh anniversary of the Closing
Date, whichever is earlier, AFG shall be entitled to nominate for election to
the Company's Board of Directors at least the number of directors which
represents 30% (rounded up to the next director) of the number of directors
serving at any one time, and, if elected, at least one of the directors
representing AFG shall serve on each of the standing committees of the Board of
Directors. Notwithstanding the foregoing, the number of directors that AFG shall
be entitled to nominate shall be reduced to the extent and by the number of
directors the holders of Series D Preferred Stock are entitled to elect as a
class under the terms of the Certificate of Designation. In the event AFG's
representatives fail to be elected as directors, the Company agrees that AFG
shall be entitled to have an equal number of representatives in place of such
directors attend each meeting of the Board of Directors. Such representatives
shall be entitled to receive all materials and information provided to the
Company's Board of Directors and shall receive the same notices as are given to
the Company's Board of Directors.
CONVERSION
The Series D Preferred Stock will be convertible at any time, in whole or
in part, at the option of the holder into shares of the Common Stock at a per
share conversion price equal to $5.25 per share of Common Stock (the "Conversion
Price"). The Conversion Price is subject to certain post-closing antidilution
adjustments upon the occurrence of certain events such as (i) stock dividends,
stock splits and reverse stock splits, (ii) stock reclassifications or
combinations, (iii) issuances of rights, warrants or securities convertible or
exchangeable into Common Stock, which rights, options, warrants or securities
have a conversion or exercise price per share less than the market value of the
Common Stock, and (v) distributions of evidences of indebtedness or of assets to
holders of Common Stock. In the case of a merger or consolidation, holders of
2838
33
Series D Preferred Stock shall have the right to convert the shares into the
kind and amount of shares and other property receivable in such transaction by
the holders of the Common Stock.
REDEMPTION
The Company may, at its option, redeem shares of Series D Preferred Stock
for cash, at any time and from time to time, in whole or in part, by vote of its
Board of Directors; provided, however, in the event that any share of Series D
Preferred Stock is redeemed by the Company on or before the seventh anniversary
of the Closing Date, in addition to the cash payable to the holder of each such
share, the holder shall, for each share of Common Stock into which the redeemed
share of Series D Preferred Stock is then convertible, receive a Warrant to
purchase one share of Common Stock of the Company at an exercise price of $5.25
per share, or, in the event of any adjustment to the Conversion Price hereunder,
at the adjusted Conversion Price, at any time prior to the seventh anniversary
of the Closing Date. The Company is required to redeem 10% of the outstanding
shares of Series D Preferred Stock on the first business day of each year,
commencing with the year 2008, and all remaining outstanding shares are required
to be redeemed on the first business day of the year 2018. The redemption price
of each share of Series D Preferred Stock is $100.00 per share plus an amount
equal to accrued and unpaid dividends to the date fixed for redemption. Any
redemption made shall be on a pro rata basis.
LIQUIDATION PREFERENCE
Subject to the rights of holders of the Series B Preferred Stock, in the
event of liquidation of the Company, the holders of shares of Series D Preferred
Stock shall be entitled to receive a liquidation payment of $100.00 per share
plus all accrued and unpaid dividends thereon to the date of payment before any
payment or distribution of assets may be made to holders of Junior Stock.
RESTRICTION ON TRANSFER
In addition to the restrictions on transfer of the Series D Preferred Stock
applicable to AFG, which are contained in the Securities Purchase Agreement, the
Certificate of Designation requires that certificates for shares of Series D
Preferred Stock contain a restrictive legend noting the fact that such shares
have not been registered under the Securities Act of 1933. Holders of Series D
Preferred Stock also agree to notify the Company in writing of any proposed
transfer of such stock, accompanied by written opinions of counsel and written
assurances of appropriate securities regulatory agencies as to the legality of
the proposed transfer.
PREEMPTIVE RIGHTS
Holders of the Series D Preferred Stock have no preemptive rights.
AFG'S DESIGNEES FOR DIRECTORS
AFG has advised the Company that it intends to nominate the persons named
below to serve as directors of the Company until the next annual meeting of
stockholders and until their successors are elected and have been duly
qualified. AFG has advised the Company that it currently does not know of any
circumstance which could render any of these individuals unable to take office.
Gary J. Gruber. Mr. Gruber, age 41, is a Senior Vice President of Great
American Insurance Company ("Great American"), a subsidiary of AFG, and has
served in such capacity for more than the past five years. From October 1990 to
June 1995, Mr. Gruber also served as the treasurer of Great American.
Thomas A. Hayes. Mr. Hayes, age 53, is a Senior Vice President and
President of the Commercial Division of Great American and has served in such
capacities since June 30, 1995. Mr. Hayes has also served as a director of Great
American for more than the past five years. Prior to June 30, 1995, Mr. Hayes
served as an Executive Vice President of Great American for more than five
years.
At the Closing, the Company's Board of Directors will appoint the nominees
of AFG to positions on the Board of Directors.
29
3443
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results
of operations should be read in conjunction with the audited and unaudited
Consolidated
Financial Statements and Notes thereto of American Eagle Group,
Inc. and its subsidiaries (the "Company") starting at page F-1.
AFG TRANSACTION
On November 5, 1996, the Company and AFGincluded elsewhere in
this Proxy Statement.
SALES OF OPERATIONS
As discussed elsewhere in this Proxy Statement, the Company has entered
into an agreement to sell the Securities
Purchase Agreement, which,business and a substantial portion of the assets
of its Aviation Division. The closing of the Aviation Division Sale is subject
to stockholder approval, regulatory approvals and other customary conditions.
See "The Aviation Division Sale." The Company has recently completed the termssales
of the artisan contractor insurance business of its P&C Division, and conditions thereof, providesthe yacht
insurance business of its Marine Division.
Upon completion of these transactions, the Company expects that it will no
longer write new or renewal policies for the sale and issuanceforeseeable future. It will
continue to handle claims on the Company's policies that are not assumed by the
Company to AFGpurchasers as part of 350,000 sharesthese transactions, and maintain the related reserves and
assets. Accordingly, the Company's revenues and earnings capacity will be
significantly lower in the future. See "Plans for Future Operation of Series D
Preferred Stock for an aggregate purchase price of $35 million. See "The
Transaction.the
Company" and "Unaudited Pro Forma Financial Information."
GROSS PREMIUMS PRODUCED
As used in this discussion, gross premiums produced means the gross
premiums written by American Eagle Insurance Company ("AEIC"), the Company's
significant subsidiary,AEIC and by other companies for which the Company has
authority to issue policies that are marketed, underwritten and serviced by the
Company.
Set forth below in this discussion areThe following table depicts the total amount of gross premiums produced by
the Company, the portion of the gross premiums produced that were gross
premiums written for other companies, and the amount of premiums which AEIC has
assumed from such other companies. Gross premiums written is the portion of the
gross premiums produced for AEIC together with the premiums AEIC assumes from
such other companies. AEIC cedes a portion of its gross premiums written to
reinsurers for reinsurance protection. The ceded premiums reduce the amount of
gross premiums written, resulting in the net premiums written by AEIC. The
gross premiums produced for other companies may generate commission income for
the Company but do not provide an opportunity to generate an underwriting
profit unless AEIC assumes premiums and related risk from the other companies.
The net premiums written by AEIC provide an opportunity to generate
underwriting profit but can result in underwriting losses.
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------- --------------------
1994 1995 1996 1996 1997
-------- -------- -------- --------- ---------
(Dollars in thousands)
Gross premiums produced $167,207 $181,561 $151,182 $ 42,366 $ 23,810
For other companies (15,332) (15,560) (20,985) (2,572) (3,893)
Assumed from other companies 7,268 6,235 12,622 1,562 3,300
-------- -------- -------- --------- ---------
Gross premiums written 159,143 172,236 142,819 41,356 23,218
Ceded premiums (63,146) (51,279) (46,590) (8,694) (8,230)
-------- -------- -------- --------- ---------
Net premiums written $ 95,997 $120,957 $ 96,229 $ 32,662 $ 14,988
======== ======== ======== ========= =========
39
44
The Company obtains reinsurance coverage primarily through excess-of-loss
treaty reinsurance. Under excess-of-loss reinsurance treaties, the reinsurer
assumes losses above specified amounts as stipulated in the reinsurance
contract for an agreed-upon premium. The agreed-upon premium may vary within
predetermined ranges based upon the level of losses experienced by the
reinsurer. AEIC's maximum net retention is $200,000 for liability loss and
$150,000 for hull loss in the Aviation Division subject to reinsurance
deductible amounts, $250,000 per occurrence in the P&C Division and $75,000 per
occurrence in the Marine Division.
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
Gross Premiums Produced
Gross premiums produced decreased 43.8% to $23.8 million for the first
quarter of 1997 from $42.4 million in the first quarter of 1996. Of this
decrease, 23.3% was produced by the Aviation Division, 21.2% was produced by
the P&C Division, and offset by a 0.6% increase produced by the Marine
Division. The decrease in the Aviation Division resulted primarily from
marketplace uncertainties about the financial condition of AEIC. During most of
the first quarter of 1996, AEIC was rated "A-" by Best. In March 1996, Best
downgraded AEIC's rating to a "B++." In May 1996, Best downgraded AEIC's rating
to a "B," where the rating remained through most of the first quarter of 1997.
In March 1997, Best downgraded AEIC's rating to "D." The decrease in the P&C
Division is due to the discontinued underwriting of the trucking insurance
business late in 1996 and also the decreases in the Best rating.
The gross premiums produced for other companies increased 51.3% to $3.9
million in the first quarter of 1997 from $2.6 million in the first quarter of
1996 as a result of writing more business for other companies due to the
decrease in the Best rating.
The gross premiums assumed from other companies increased 111.3% to $3.3
million in the first quarter of 1997 from $1.6 million in the first quarter of
1996.
Gross premiums written decreased 43.9% to $23.2 million in the first
quarter of 1997 from $41.4 million in the first quarter of 1996 as a result of
the decrease in gross premiums produced for the Company and its subsidiaries.
Ceded premiums decreased 5.3% to $8.2 million in the first quarter of
1997, compared to $8.7 million in the first quarter of 1996. This decrease is
primarily a result of a slight decrease in ceded losses on retrospectively
rated reinsurance contracts.
Net premiums written decreased 54.1% to $15.0 million in the first three
months of 1997, compared to $32.7 million in the first three months of 1996.
Revenues
Earned premiums, net of reinsurance, decreased 27.4% to $23.8 million in
the first quarter of 1997 from $32.8 million in the first quarter of 1996. Of
this decrease, 22.1% was related to the Aviation Division, 8.3% to the P&C
Division, with the Marine Division having an increase of 3.0%. Earned premiums,
net of reinsurance, declined at a lower rate in comparison to written premiums,
net of reinsurance, due to less of a decline in written premiums in earlier
quarters, which are now becoming earned premiums.
Agency operations, net, increase to a profit of $0.3 million in the first
quarter of 1997 from a minimal loss in the first quarter of 1996.
40
45
Investment income, net, decreased 7.1% to $1.3 million in the first
quarter of 1997 from $1.4 million in the first quarter of 1996 The net
tax-effected investment yield on average invested assets for the first quarter
of 1997 increased to 7.5% from 5.9% in the comparable quarter of 1996. Average
invested assets decreased $23.1 million in the first quarter of 1997, compared
to the first quarter of 1996, primarily as a result of cash flow used in
operating activities, as discussed below.
Realized investment gains (losses), net, were insignificant in the first
quarter of 1997 and 1996.
Operating Expenses
Losses and loss adjustment expenses, net of reinsurance, were 83.8% of
earned premiums, net of reinsurance, in the first quarter of 1997 and 83.8% in
the first quarter of 1996. The Aviation Division loss ratio increased 5.5
percentage points to 76.8% in the first quarter 1997, from 71.3% in the first
quarter of 1996 as a result of higher levels of hull losses. The P&C Division
loss ratio decreased 8.2 percentage points to 112.1% in the first quarter of
1997 from 120.3% in the first quarter of 1996. The unacceptable P&C Division
loss ratio is a result of losses from the discontinued trucking line of
business, where premium levels have declined faster than loss levels. The
Marine Division loss ratio increased 1.4 percentage points to 50.5% in the
first quarter of 1997 from 49.1% in the first quarter of 1996.
Policy acquisition and other underwriting expenses increased 14.0
percentage points to 46.8% of earned premiums in the first quarter of 1997 from
32.8% of earned premiums in the first quarter of 1996. The decrease in written
premium and related unearned premiums and earned premiums resulted in a
decrease in the amount of deferrable acquisition costs, which increased the
expense level of the current quarter. In addition, current expense levels could
not be reduced further due to the pending sales of the ongoing operations.
The Company's combined ratio increased 14.0 percentage points to 130.6% in
the first quarter of 1997 from 116.6% in the first quarter of 1996 as a result
of the factors discussed above. A combined ratio below 100% generally indicates
profitable underwriting prior to the consideration of investment income.
Management believes that there has been a seasonality pattern in the loss
ratio. Losses have historically been higher in the first half of the year and
then declined in the second half. The Company believes that this pattern
results primarily from weather-related factors which contribute to a higher
loss frequency in the first two quarters of the year.
The Company had no interest expense in the first quarter of 1997 due to
the repayment on December 31, 1996 of the Company's note payable. Interest
expense was $0.25 million in the first quarter of 1996.
Income
The Company did not record an income tax benefit in the first quarter of
1997 as compared to a benefit of $1.4 million recorded in the first quarter of
1996.
The first quarter of 1997 net loss was $5.7 million, compared to net loss
of $2.8 million in the first quarter of 1996.
Net income (loss) available for common stockholders in the first quarter
of 1997 was a net loss of $6.6 million, or $0.93 per share, compared to net
loss of $2.8 million or $0.39 per share, in the first quarter of 1996. In the
first quarter of 1997, the Company paid in kind Series D Preferred Stock
dividends of $0.785 million. The Series D Preferred Stock was not outstanding
in the first quarter of 1996.
41
46
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
SPECIAL CHARGEIn the fourth quarter of 1996 the Company announced a proposal to the
holders of Common Stock to approve the Securities Purchase Agreement with AFG.
The stockholders approved the agreement on December 31, 1996. The Securities
Purchase Agreement included, among other things, the sale and issuance for $35
million of 350,000 shares of the Company's Series D Preferred Stock, the
issuance of up to an additional 196,200 shares of Series D Preferred Stock if
the Company elected to issue additional Series D Preferred Stock for the first
five years in lieu of paying the quarterly cash dividends due on the Series D
Preferred Stock, and the issuance of up to 10,403,810 shares of Common Stock
upon conversion of the Series D Preferred Stock. The agreement, signed on
November 5, 1996, also required the Company to record a $15 million reserve
addition in its financial results for the fourth quarter of 1996. Based upon
additional data, analyses and evaluations, including analysis from its
independent actuary as of the end of the fourth quarter, the Company increased
the level of the reserve addition to approximately $30.0 million. Of the total
$30.0 million reserve addition, approximately $19.1 million resulted from
increases in IBNR losses, and the remainder resulted from increased levels of
ceded reinsurance premiums. After the announcement of the withdrawal from the
transportation program for local and intermediate-haul truckers at the
beginning of the fourth quarter of 1996, premium levels and the exposure base
of the program declined faster than originally anticipated. However, trucking
loss levels increased in the fourth quarter of 1996 compared to prior quarters.
Also, losses from the auto dealer program, which was discontinued in 1995, also
continued at higher-than-anticipated levels. The year-end actuarial analysis,
taking these fourth quarter 1996 patterns into account, resulted in significant
reserve additions of $15.1 million for incurred-but-not-reported ("IBNR")
losses and related reinsurance costs for these lines of business. The remainder
of the reserve additions are predominantly increases in reserves for IBNR
losses and related reinsurance costs for the aviation lines of business.
Gross Premiums Produced
Gross premiums produced decreased 16.7% to $151.2 million in 1996 from
$181.6 million in 1995. Of this decrease, 7.8% was produced by the P&C
Division, 10.7% was produced by the Aviation Division, which was partially
offset by a 1.8% increase produced by the Marine Division. The Aviation
Division's gross premiums produced decreased 15.1% to $108.7 million in 1996
from $128.1 million in 1995. This decline was due to a decrease in policies in
force resulting from underwriting actions taken by the Company in its
commercial aviation book of business and from business lost due to its decline
in credit rating. Gross premiums produced by the P&C Division decreased 28.3%
to $35.9 million in 1996 from $50.1 million in 1995. This decrease resulted
from a decision to discontinue the auto dealer program in the fourth quarter of
1995 and the transportation program in the fourth quarter of 1996, offset by
growth in the artisan program. On March 22, 1997 the Company announced that
AEIC had entered into a letter of intent to sell its artisan program and
complete its strategic plan for a complete withdrawal from the specialty
property and casualty lines of business. The sale, subject to definite
documentation, approvals of the boards of directors, regulatory approvals and
licenses, and other customary conditions would result in an immaterial gain.
The Marine Division's gross premiums produced increased 100.0% to $6.6 million
in 1996 from $3.3 million in 1995 as a result of more policies in force.
Gross premiums produced for other companies is comprised of premiums
written for other companies which are assumed by the Company and those premiums
written for other companies for higher coverage limits
42
47
which are retained by the other companies. Such amounts increased 34.6% to
$21.0 million in 1996 from $15.6 million in 1995 as a result of writing more
business on policies of companies rated at least "A-" by Best because of the
decline in the rating of the Company.
The gross premiums assumed from other companies increased 103.2% to $12.6
million in 1996 from $6.2 million in 1995 as a result of the increase in the
amount of gross premiums produced for other companies.
Gross premiums written decreased 17.1% to $142.8 million in 1996 from
$172.2 million in 1995 primarily as a result of the factors noted in the three
preceding paragraphs.
Ceded premiums decreased 9.2% to $46.6 million in 1996 from $51.3 million
in 1995. The ceded premiums in the Aviation Division decreased 30.6% to $29.0
million in 1996 from $41.8 million in 1995 as a result of improved ceded loss
experience. The ceded premiums in the P&C Division increased 79.2% to $16.3
million in 1996 from $9.1 million in 1995 as a result of deteriorating loss
experience. The ceded premiums in the Marine Division increased, generally,
consistently with the increase in gross premiums produced.
Net premiums written decreased 20.5% to $96.2 million in 1996 from $121.0
million in 1995 as a result of the matters described above.
Revenues
Earned premiums, net of reinsurance, increased 4.7% to $107.2 million in
1996 from $102.4 million in 1995. Of this increase, 8.6% was related to the
Aviation Division and 2.8% to the Marine Division, which was offset by a 6.7%
decrease in the P&C Division. The reasons for the changes in the components of
gross premiums produced resulted in the increase.
Investment income, net of related expenses, decreased 18.2% to $4.5
million in 1996 from $5.5 million in 1995. Average invested assets decreased
15.4% to $84.9 million in 1996 from $100.3 million in 1995. The decrease in
average invested assets was a result of cash flow used by operations, which
resulted primarily from reductions in unearned premiums and decreases in other
policy liabilities. The yield for the year increased to 5.6% from 5.5% in 1995.
Realized investment gains (losses), net, were $(0.1) million in 1996
compared to $0.5 million in 1995.
Agency operations is that portion of business not focused on
premium-generating insurance company underwriting operations. The operations
consisted of the generation of commission income offset by operating expense.
Agency operations, net, were approximately $0.4 million in 1996 and 1995.
Operating Expenses
Losses and loss adjustment expenses, net of reinsurance, were 100.2% of
earned premiums, net of reinsurance in 1996 as compared to 88.8% in 1995. The
ratio of losses and loss adjustment expenses to earned premiums, net of
reinsurance, is referred to as the loss ratio. The Aviation Division loss ratio
decreased to 75.6% in 1996 from 92.2% in 1995. The Aviation Division losses
include approximately $12.9 million of the $30.0 million reserve addition
previously discussed herein. Losses in the Aviation Division recorded in 1996
applicable to prior years were $7.5 million, with most of the amounts related
to the 1995 year. The P&C Division loss ratio increased to 169.4% in 1996 from
82.6% in 1995. These losses include approximately $16.6 of the $30.0 million
reserve addition previously described. Losses recorded in 1996 applicable to
prior years for the P&C Division were approximately $10.8 million and related
primarily to the commercial automobile liability coverages of the
transportation program. The Marine Division loss ratio decreased to 74.8% in
1996 from 80.0% in 1995. The improvement in the Aviation Division loss ratio in
1996 compared to 1995, is primarily attributable to the underwriting
enhancements made in late 1995 and early 1996 for the commercial aviation
43
48
book of business. The P&C Division loss ratio increased in 1996 due to the
continued adverse results of the auto dealer program, which was discontinued
in the fourth quarter of 1995, and the adverse results in 1996 for the
transportation program, which was discontinued in the fourth quarter of 1996.
Policy acquisition and other underwriting expenses were 44.6% of earned
premiums, net of reinsurance, in 1996 and 36.4% of earned premiums, net of
reinsurance, in 1995. The ratio of policy acquisition and other underwriting
expenses, computed on a GAAP basis, to earned premiums, net of reinsurance, is
referred to as the
expense ratio. The increase in the expense ratio in 1996 compared to 1995 was
due to an increase in net commission expense and a reduction in new premium
production. In a period of declining premium production, as occurred between
1996 and 1995, not only are expenses incurred in the current period not
deferred to future periods because the book of business is decreasing, but
expenses deferred in prior periods when the book was growing are expensed in
the current period.
A measure of the Company's underwriting performance is its combined ratio,
which is the total of its loss ratio and expense ratio. A combined ratio below
100% generally indicates profitable underwriting prior to the consideration of
investment income. The Company's combined ratio increased to 144.8% in 1996
from 125.2% in 1995 as a result of the factors discussed above.
Interest expense increased 10.0% to $1.1 million in 1996 from $1.0 million
in 1995 due to an increase of $2.0 million in the outstanding note payable for
most of 1996. As of December 1996, the note payable balance was fully paid.
Loss
Loss before income tax benefit was $44.4 million in 1996 compared to $20.4
million in 1995 as a result of the factors described above.
The income tax benefit in 1995 resulted from the Company's ability to
carryback losses to prior years and recover previously paid taxes. In
accordance with the requirements of SFAS No. 109, the Company did not record an
income tax benefit relating to the net operating loss carryforward generated in
1996. At December 31, 1996 the Company had a net operating loss carryforward of
approximately $45.0 million available to offset future income. During 1996, the
Company underwent a change in ownership for purposes of Section 382 of the
Internal Revenue Code of 1986. As a result, the Company's net operating loss
carryforward will be limited to approximately $1.9 million per year through
2011. At the current statutory tax rate of 34%, the Company has an unrecorded
income tax benefit of approximately $14.1 million.
The Company recorded a net loss of $44.4 million in 1996 compared to a net
loss of $13.1 million in 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO EARNINGSYEAR ENDED DECEMBER 31, 1994
1995 Special Charge to Earnings
During the fourth quarter of 1995, the Company recorded a special charge
to earnings of $20.6 million (after tax) for certain discontinued lines and
classes of business and increased reserves for incurred but not reported (IBNR)IBNR losses and unearned
premiums.
Approximately $8.9 million of the special charge resulted from additional
case reserves and related costs for three segments of the Aviation Division in
which certain classes of coverage have beenwere discontinued. Approximately $.7 million
of the special charge resulted from additional case reserves and related costs
for the discontinued auto dealer program of the P&C Division from which the Company
withdrew in the fourth quarter of 1995.Division. The remainder of
the special charge, approximately $11.0 million, resulted from an increase in
IBNR and unearned premium reserves, which includesincluded reserves for
44
49
the discontinued lines and classes of business. Of the increase in IBNR and
unearned premium reserves, $7.1 million iswas attributed to the Aviation
Division, and $3.9 million to the P&C Division.
The Aviation Division has discontinued writing coverages for the flying club
segment and certain classes in the instruction and rental and the charter
segments. The discontinued segment and classes, together, represented less than
10% of the Aviation Division's total 1995 book of business, in 1995, but had significant
adverse
30
35 impact on the overall underwriting results of the Division. TheIn 1995,
the P&C Division discontinued its franchised auto dealer program, which represented the
smallest of the three P&C Division segments. This segment had gross premiums
produced of $9.9 million in 1995, or 19.7% of total P&C Division gross premiums
produced.
Case and IBNR reserves do not represent an exact calculation of liability,
but rather are estimates involving actuarial and statistical projections at a
given time to reflect the Company's expectations of the ultimate costs of
administration and settlement of claims. Such estimates are based on facts and
circumstances then known, predictions of future events, estimates of future
trends in claims reporting frequency and severity and other variable factors. As
a consequence, although the Company believes that its reserves are adequate to
meet its future obligations under existing policies, actual losses may deviate,
perhaps substantially, from reserves reflected in the Company's financial
statements. There are a number of factors that could cause losses to deviate
from estimates. Such factors include assumptions proving incorrect regarding the
positive effect of underwriting and claims handling improvements on future
trends in claims reporting, frequency and severity, and increases in claims
settlement costs due to higher inflation or new theories of liability. To the
extent reserves prove inadequate, the Company would have to increase reserves
and incur a charge to earnings in the period in which the reserves are
increased, which could have a material adverse effect on the financial results
of the Company for such period.
Due to the significance of the special charge on the Company's 1995
financial results, the following discussion will present 1995 results including
and excluding the effect of the special charge, where applicable.
A.M. BEST COMPANY RATING
As a result of the effect of the 1995 special charge on the statutory
policyholders' surplus and operating results of AEIC, A.M. Best Company lowered
its rating of AEIC by one level to "B++" (Very Good). As a result of the net
loss of $2.8 million reported in the first quarter of 1996, A.M. Best lowered
its rating of AEIC to "B" (Adequate). Some insureds and agents, primarily in the
airport segment of the Aviation Division, require their insurance carriers to
maintain an A.M. Best rating of at least "A-." Through various agreements, AEIC
has authority to offer policies issued by an insurance carrier with a rating of
at least "A-" to its aviation accounts. AEIC reinsures and services these
policies. These agreements are limited in scope, have an annual term and are
subject to regulatory requirements. During 1996, AEIC has renewed or replaced
these agreements, and is completing the related regulatory filings. As discussed
below, a portion of the decrease in gross premiums produced during the first
nine months of 1996 resulted from AEIC's inability to provide certain insureds
with policies issued by an insurer rated at least "A-" while AEIC was completing
these renewals or replacements and regulatory filings. No assurance can be given
that these agreements will be renewed or replaced upon the expiration of the
current agreements. However, in the event of the closing of the Transaction with
AFG, AEIC expects that it will enter into an arrangement with a subsidiary of
AFG that will permit AEIC to offer, when required by an insured, policies
providing the financial security of an insurer rated at least "A-" by A.M. Best.
See "The Transaction -- General -- Strategic Alliance with AFG."
WITHDRAWAL FROM TRANSPORTATION LINE OF BUSINESS
On September 30, 1996, the Company announced that it was withdrawing from
the transportation line of business. During 1996, this line of business had been
its primary source of unacceptable underwriting results. At September 30, 1996,
the Company's in-force premiums in this line of business were approximately $20
million. The Company expects the gross premiums produced by this line of
business to run-off to zero during the fourth quarter of 1997.
RECAPITALIZATION CHARGE
The Securities Purchase Agreement provides that the Company will record a
$15 million (pre-tax) recapitalization charge in its financial results for the
quarter in which the Transaction is recorded. The recapitalization charge will
provide additional strengthening of the Company's balance sheet and overall
reserve levels, and is intended to cover contingencies and estimated exposures
associated with various previously reported strategic actions and product line
discontinuations.
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36
FIRST NINE MONTHS OF 1996 COMPARED TO THE FIRST NINE MONTHS OF 1995
Gross Premiums Produced
Gross premiums produced for the first nine months of 1996 as compared to
the first nine months of 1995 were as follows (in millions):
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1995 1996
------ ------
Gross premiums produced............................................ $138.7 $121.1
For other companies................................................ (12.4) (13.4)
Assumed from other companies....................................... 5.1 8.8
------ ------
Gross premiums written............................................. 131.4 116.5
Ceded premiums..................................................... (42.8) (29.2)
------ ------
Net premiums written............................................... $ 88.6 $ 87.3
====== ======
Gross premiums produced decreased 12.7% to $121.1 million for the first
nine months of 1996 from $138.7 million in the first nine months of 1995. Of
this decrease, 8.4% was in the Aviation Division, and 6.2% was in the P&C
Division. The Marine Division gross premium produced increased 1.9%. The
decreases in the Aviation and P&C Divisions' gross premiums produced result
primarily from previously announced actions taken during 1995 and the first nine
months of 1996 to eliminate unprofitable segments of the operations. In
addition, in the Aviation Division, primarily in the airport segment, certain
insureds require insurance written by an insurer with an A.M. Best Company
rating of "A-" or better, which resulted in a portion of the decrease in gross
premiums produced. The Company is completing arrangements and regulatory filings
that will permit it to offer insureds the financial security of an insurer rated
"A-" or better. The increase in the Marine Division's gross premiums produced is
due to an increase in policies in force.
The gross premiums produced for other companies increased 8.1% to $13.4
million in the first nine months of 1996 from $12.4 million in the first nine
months of 1995. This increase is primarily a result of the increased use of
arrangements that provide the Company the ability to offer its insureds the
financial security of insurance companies with an A.M. Best Company rating of
"A-" or better.
The gross premiums assumed from other companies increased 72.5% to $8.8
million in the first nine months of 1996 from $5.1 million in the first nine
months of 1995, primarily as a result of the increase in business produced for
other companies.
Gross premiums written decreased 11.3% to $116.5 million in the first nine
months of 1996 from $131.4 million in the first nine months of 1995 primarily as
a result of the decrease in gross premiums produced.
Ceded premiums decreased 31.8% to $29.2 million in the first nine months of
1996, compared to $42.8 million in the first nine months of 1995. This decrease
is a result of a decline in business written in the airport segment that is
reinsured with other companies under a facultative reinsurance agreement and,
also, a decrease in ceded excess of loss reinsurance premiums for both Aviation
and P&C Divisions.
Net premiums written decreased 1.5% to $87.3 million in the first nine
months of 1996, compared to $88.6 million in the first nine months of 1995, as a
result of the decrease in gross premiums.
Revenues
Earned premiums, net of reinsurance, increased 29.8% to $94.0 million in
the first nine months of 1996 from $72.4 million in the first nine months of
1995. Of this increase, 22.4% was related to the Aviation Division, 3.3% to the
Marine Division, and 4.1% to the P&C Division. The growth in earned premiums,
net of reinsurance, in comparison to the decline in net written premiums, is due
to a higher level of written premiums in earlier quarters, which is now becoming
earned premiums.
32
37
Agency operations, net, decreased 66.1% to a minimal gain in the first nine
months of 1996 from a gain of $0.5 million in the first nine months of 1995.
Investment income, net, decreased 16.4% to $3.5 million in the first nine
months of 1996 from $4.2 million in the first nine months of 1995. The net
tax-effected investment yield on average invested assets for the first nine
months of 1996 decreased to 4.3% from 4.4% for the comparable period in 1995.
This decrease was a result of a decrease of $14.4 million in average invested
assets in the first nine months of 1996 compared to the first nine months of
1995 primarily as a result of cash flow used in operating activities, as
described below, and a general market decline in investment yields for fixed
maturities.
Realized investment gains, net, were insignificant in the first nine months
of 1996 as compared to a gain of $0.5 million in the first nine months of 1995.
Expenses
Losses and loss adjustment expenses, net of reinsurance, were 70.5% of
earned premiums, net of reinsurance, in the first nine months of 1996, compared
to 63.0% in the first nine months of 1995. The Aviation Division loss ratio
decreased 4.4 percentage points to 57.6% in the first nine months 1996, from
62.0% in the first nine months of 1995, and the P&C Division loss ratio
increased 36.2 percentage points to 100.4% in the first nine months of 1996 from
64.2% in the first nine months of 1995. The increase in the P&C Division loss
ratio is driven primarily by a high level of reported claims for the
transportation segment of the P&C Division. The Marine Division loss ratio for
the first nine months of 1996 was 74.4%.
Policy acquisition and other underwriting expenses were 39.2% of earned
premiums in the first nine months of 1996 and 32.6% of earned premiums in the
first nine months of 1995. The increase in the expense ratio in the first nine
months of 1996 results from the increased amortization of previously deferred
policy acquisition costs due to the decline in the level of net premiums written
in the first nine months of 1996, compared to 1995, and an adjustment of
estimated reinsurance ceding commission income to actual.
The Company's combined ratio increased 14.1 percentage points to 109.7% in
the first nine months of 1996 from 95.6% in the first nine months of 1995 as a
result of the factors discussed above. A combined ratio below 100% generally
indicates profitable underwriting prior to the consideration of investment
income.
Interest expense increased 13.8% to $0.83 million in the first nine months
of 1996 from $0.73 million in the first nine months of 1995 due primarily to an
increase in the Company's note payable of $2.0 million.
Income
The income tax benefit was 28.7% of loss before tax benefit in the first
nine months of 1996, and income tax expense was 31.0% of income before tax
expense in the first nine months of 1995. The decrease in the effective tax rate
in the third quarter of 1996 is due to adjusting the year-end estimated tax
provision to equal the actual filed 1995 federal income tax return.
Net loss for the first nine months of 1996 was $4.5 million, compared to
net income of $5.2 million in the first nine months of 1995. The decrease
resulted from the revenue and expense factors discussed above. Operating income
(loss), defined as net income (loss) less net realized investment gains or
losses, net of the associated income tax effect, was a loss of $4.5 million in
the first nine months of 1996, compared to income of $4.9 million in the first
nine months of 1995.
Net income (loss) available for common stockholders was ($4.5) million, or
($0.64) per share in the first nine months of 1996, compared to $5.2 million, or
$0.73 per share, in the first nine months of 1995.
33
38
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Gross Premiums Produced
Gross premiums produced for the years 1993 through 1995 were as follows:
YEAR ENDED DECEMBER 31,
--------------------------------
1993 1994 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
Gross premiums produced.............................. $139,847 $167,207 $181,561
For other companies.................................. (21,410) (15,332) (15,560)
Assumed from other companies......................... 10,780 7,268 6,235
-------- -------- --------
Gross premiums written............................... 129,217 159,143 172,236
Ceded premiums....................................... (57,348) (63,146) (51,279)
-------- -------- --------
Net premiums written................................. $ 71,869 $ 95,997 $120,957
======== ======== ========
Gross premiums produced increased 8.6% to $181.6 million in 1995 from
$167.2 million in 1994. Of this increase, 4.1% was produced by the P&C
Division, 2.5% was produced by the Aviation Division, and 2.0% was produced by
the Marine Division. The Aviation Division's gross premiums produced increased
3.4% to $128.1 million in 1995 from $123.9 million in 1994. This growth was due
to an increase in policies in force, rate increases and continued increases in
the value of private aircraft. Gross premiums produced by the P&C Division
increased 15.7% to $50.1 million in 1995 from $43.3 million in 1994. This
growth relates to increased policies in force and expansion into additional
states. The Marine Division, which began operations in 1995, produced gross
premiums of $3.3 million.
Gross premiums produced for other companies is comprised of premiums
written for other companies which are assumed by the Company and those premiums
written for other companies for higher coverage limits which are retained by
the other companies. Such amounts increased 1.5% to $15.6 million in 1995 from
$15.3 million in 1994 as a result of an increase in underwriting airport risks
in the Aviation Division. Due to the size of coverage limits involved in
airport liability policies, more of these risks are retained by the other
companies.
The gross premiums assumed from other companies decreased 14.2% to $6.2
million in 1995 from $7.3 million in 1994 as a result of more of the gross
premiums produced for other companies being retained by such companies.
Gross premiums written increased 8.2% to $172.2 million in 1995 from
$159.1 million in 1994 primarily as a result of the factors noted in the three
preceding paragraphs.
Ceded premiums decreased 18.8% to $51.3 million in 1995 from $63.1 million
in 1994. As part of the 1994 and 1995 aviation treaty renewals, a change was
made whereby the Company receivesreceived less ceding commission and cedes less
premiums. The result of this change is to leave unaltered the agreed-upon net
cost of reinsurance, but it increases the expense ratio due to the reduction in
ceding commission income, and decreases the loss ratio due to having more
retained premium. The full financial impact of this change has occurred in 1995.
Also, the P&C Division treaties were renewed at lower costs.
Net premiums written increased 26.0% to $121.0 million in 1995 from $96.0
million in 1994 as a result of the increase in gross premiums written and the
Company retaining more of the gross premiums written.
Revenues
Earned premiums, net of reinsurance, increased 23.8% to $102.4 million in
1995 from $82.7 million in 1994. Of this increase, 17.5% was related to the
Aviation Division, 5.1% to the P&C Division, and 1.2% to the
45
50
Marine Division. The reasons for the changes in the components of gross
premiums produced resulted in the increase.
34
39
Investment income, net of related expenses, increased 33.9% to $5.5
million in 1995 from $4.1 million in 1994, while average invested assets
increased 22.3% to $100.3 million in 1995 from $82.0 million in 1994. A portion
of the increase in average invested assets was a result of having the proceeds
for the initial public offering for a full year in 1995. These proceeds
increased the Company's investment portfolio by approximately $20.1 million in
May 1994. The yield for the year increased to 5.5% (5.7% on a tax-adjusted basis) from 5.0% (5.2% on a
tax-adjusted basis) as a result of
investing the proceeds of the initial public offering for a full year in 1995,
and significantly reducing the level of equity securities in September of 1994.
At the end of 1995, there were no equity investments.
Realized investment gains, net, were $0.5 million in 1995 compared to an
immaterial realized investment loss in 1994.
Agency operations is that portion of business not focused on premium-generatingpremium-
generating insurance company underwriting operations. The operations consisted
of the generation of commission income offset by operating expense. Agency
operations, net, declined from $0.9 million in 1994 to a $0.4 million in 1995
primarily as a result of the charge-off of certain uncollectible balances.
Operating Expenses
Losses and loss adjustment expenses, net of reinsurance, were 88.8% (59.9%
excluding special charge) of earned premiums, net of reinsurance in 1995 as
compared to 63.7% in 1994. The ratio of losses and loss adjustment expenses to
earned premiums, net of reinsurance, is referred to as the loss ratio. The
Aviation Division loss ratio increased to 92.2% (58.2% excluding the special
charge) in 1995 from 57.7% in 1994, and the P&C Division loss ratio increased
to 82.6% (62.6% excluding the special charge) in 1995 from 73.9% in 1994. The
Marine Division loss ratio was 80.0% in 1995. The Aviation Division loss ratio,
excluding the special charge, was within normal operating ranges in both 1995
and 1994. The increase in the Aviation Division loss ratio in 1995 is primarily
attributed to the adverse results in the three classes of coverages, which have
beenwere
discontinued in 1995, and a higher than expectedhigher-than-expected number of severe liability
losses and hull losses reported in 1995 for the 1994 and prior accident years. The P&C Division loss ratio
increased due to the continued adverse results of the franchised auto dealer program and a
longer than anticipated development period for the other liability coverages
line of business.
Policy acquisition and other underwriting expenses were 36.4% of earned
premiums, net of reinsurance in 1995 and 28.6% of earned premiums, net of
reinsurance, in 1994. The ratio of policy acquisition and other underwriting
expenses, computed on a GAAP basis, to earned premiums, net of reinsurance, is
referred to as the expense ratio. The increase in the expense ratio in 1995
compared to 1994 was due to a decreasean increase in ceding commission income,ceded premiums and growth in policy
acquisition and other underwriting expense levels in 1995. Policy acquisition
and other underwriting expense levels in the P&C Division grew partially as a
result of increased commission expenses due to changes in the local and
intermediate haul transportation program's method of distribution.
A measure of the Company's underwriting performance is its combined ratio,
which is the total of its loss ratio and expense ratio. A combined ratio below
100% generally indicates profitable underwriting prior to the consideration of
investment income. The Company's combined ratio increased to 125.2% (94.9%
excluding the special charge) in 1995 from 92.3% in 1994 as a result of the
factors discussed above.
Interest expense increased 23.4% to $1.0 million in 1995 from $0.8 million
in 1994 due to an increase of $2.0 million in the outstanding note payable. As
of December 1995, the outstanding note payable balance iswas $11.3 million.
46
51
Income (Loss)
Income (loss) before income tax expenseprovision (benefit) was a loss of $(20.4)$20.4
million in 1995 as compared to income of $10.5 million in 1994 as a result of
the revenue and expense factors described above.
Excluding the effect of the
special charge in 1995, income before tax expense increased 3.1% to $10.8
million.
35
40
Income tax expenseprovision (benefit) was a tax benefit of (35.8)%35.8% of the loss
before income tax benefit in 1995 compared to income tax expenseprovision of 31.9% in
1994. The income tax benefit in 1995 generally resultsresulted from the Company's ability to
carryback current year taxable losses to prior years and recover previously paid taxes.
Net income (loss) was a net loss of $(13.1)$13.1 million in 1995 as compared to
net income of $7.1 million in 1994.
Excluding the effect of the special charge,
net income for 1995 increased 5.2% to $7.5 million.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Gross Premiums Produced
Gross premiums produced increased 19.6% to $167.2 million in 1994 from
$139.8 million in 1993. Of this increase, 7.8% was produced by the P&C Division,
and 11.8% was produced by the Aviation Division. The Aviation Division's gross
premiums produced increased 15.3% to $123.9 million in 1994 from $107.5 million
in 1993. This growth was due to an increase in policies in force, rate increases
and continued increases in the value of private aircraft. During 1994, as a
result of continued adverse underwriting results for helicopters, the Company
continued to refine and tighten the underwriting standards and increase prices
for helicopter risks. This action resulted in the non-renewal of over $6.1
million in aviation revenues. Gross premiums produced by the P&C Division
increased 33.8% to $43.3 million in 1994 from $32.4 million in 1993. This growth
relates to increased policies in force and expansion into additional states.
Gross premiums produced for other companies decreased 28.4% to $15.3
million in 1994 from $21.4 million in 1993 as a continued result of the
Company's shift in strategy to premium-generating underwriting operations.
The gross premiums assumed from other companies decreased 32.6% to $7.3
million in 1994 from $10.8 million in 1993 as a result of the decrease in gross
premiums produced for other companies.
Gross premiums written increased 23.2% to $159.1 million in 1994 from
$129.2 million in 1993 primarily as a result of the factors noted in the three
preceding paragraphs.
Ceded premiums increased 10.1% to $63.1 million in 1994 from $57.3 million
in 1993. This increase is primarily a result of the increase in gross premiums
produced by the Company. The aviation treaties were renewed in 1994 at higher
costs which were generally consistent with the rate increases received on gross
premiums produced. As part of the 1994 aviation treaty renewal, a change was
made whereby the Company received less ceding commission and ceded less
premiums. The result of this change is to leave unaltered the agreed-upon net
cost of reinsurance for 1994 but should result in an increase in the expense
ratio, due to the reduction in ceding commission income, offset by a decrease in
the loss ratio due to having more retained premium. The full financial impact of
this change occurred in 1995. The P&C Division treaties were renewed at lower
costs.
Net premiums written increased 33.6% to $96.0 million in 1994 from $71.9
million in 1993 as a result of the increase in gross premiums written and the
Company retaining more of the gross premiums written.
Revenues
Earned premiums, net of reinsurance, increased 25.2% to $82.7 million in
1994 from $66.1 million in 1993. Of this increase, 14.3% was related to the
Aviation Division and 10.9% to the P&C Division. The reasons for the changes in
the components of gross premiums produced resulted in the increase.
Investment income, net, increased 40.7% to $4.1 million in 1994 from $2.9
million in 1993 as a result of an increase in average invested assets to $82.0
million in 1994 from $56.0 million in 1993 and a decline in yield. The yield
decreased to 5.0% (5.2% on a tax-adjusted basis) from 5.2% as a result of
holding more investments in shorter term securities in the first eight months of
1994. The proceeds of the initial public offering increased invested assets by
approximately $20.1 million in May 1994.
Realized investment gains (losses), net, were an immaterial loss in 1994
and a $1.4 million gain in 1993. In 1993, the Company was changing the strategic
focus of the portfolio to reduce the level of equity securities
36
41
and also increase the quality of the fixed income portfolio. In 1994, the
Company sold substantially all of the remainder of its equity investments and
invested the proceeds in fixed income investments.
Agency operations, net, improved from a $0.2 million loss in 1993 to a $0.9
million profit in 1994 as a result of increased revenues, continued management
of agency expenses, and the realignment of expenses between agency operations
and policy acquisition and other underwriting expenses.
Expenses
Losses and loss adjustment expenses, net of reinsurance, were 63.7% of
earned premiums, net of reinsurance, in 1994 as compared to 62.3% in 1993. The
ratio of losses and loss adjustment expenses to earned premiums, net of
reinsurance, is referred to as the loss ratio. The Aviation Division loss ratio
decreased to 57.7% in 1994 from 60.1% in 1993, and the P&C Division loss ratio
increased to 73.9% in 1994 from 66.3% in 1993. The Aviation Division loss ratio
was within normal operating ranges in both 1994 and 1993. The P&C Division loss
ratio increased due to adverse development of the 1993 accident year resulting
from slower than anticipated reporting of incurred losses in the auto liability
and other liability lines of business.
Policy acquisition and other underwriting expenses were 28.6% of earned
premiums, net of reinsurance, in 1994 and 29.8% of earned premiums, net of
reinsurance, in 1993. The growth in earned premiums, net of reinsurance, in 1994
compared to 1993, together with lower growth in policy acquisition and other
underwriting expense due to continued expense management, resulted in the
reduction in the expense ratio.
A measure of the Company's underwriting performance is its combined ratio,
which is the total of its loss ratio and expense ratio. The Company's combined
ratio increased to 92.3% in 1994 from 92.1% in 1993 as a result of the factors
discussed above.
Interest expense increased 13.0% to $0.8 million in 1994 from $0.7 million
in 1993 due to an increase in the floating interest rate of the Company's note
payable. Just prior to the 1994 year end, the Company amended its note agreement
to a revolving credit facility. The interest rate on the facility has been
lowered to the bank's corporate base rate from 0.5% plus such base.
Income
Income before income tax expense increased 21.1% to $10.5 million in 1994
from $8.7 million in 1993 as a result of the revenue and expense factors
described above.
Income tax expense was 31.9% of income before income tax expense in 1994
and 34.0% in 1993. The decline in the effective tax rate generally results from
an increase in tax-exempt interest income.
Net income increased 24.9% to $7.1 million in 1994 from $5.7 million in
1993.
LIQUIDITY AND CAPITAL RESOURCES
AsThe Company is a holding company AEIC is thewhose principal asset of the Company.is AEIC. The
Company's cash flow depends primarily on dividends and tax allocation payments
from AEIC and cash advances underAEIC. The Company also retained approximately $2.9 million of the Company's credit facility with its bank
described below.net
proceeds of the sale of the Series D Preferred Stock on December 31, 1996 for
general corporate purposes.
The ability of AEIC to pay dividends to its parent is subject to certain
regulatory restrictions and restrictions contained in the Company's
bank credit agreement.
During 1995, AEIC paid $0.5 million in dividends to the Company.restrictions. During 1996, AEIC paid no dividends to the Company.
Based on regulatory restrictions presently in effect, the maximum amount available for payment asCompany does not
expect AEIC to have the ability to pay dividends to its parent for the
Company by AEIC without the prior approval of regulatory authorities is $5.0
million, if at the time of payment AEIC has earned surplus at least equal to the
amount of dividends. At September 30, 1996, AEIC had earned surplus (deficit) of
approximately $(14.7) million. However, theforeseeable future. See "Insurance Regulation." The Company believes that upon
completion of the Transaction, it
will havehas adequate liquiditycash to meet all of
its cash needs for the next twelve months.
AEIC's sources of funds are premiums collected, reinsurance recoveries,
investment income and proceeds from sales and maturities of investments. Funds
are applied primarily to the payments of claims and 37
42
expenses and to the
purchase of investments. Premiums are typically received in advance of related
claim payments. Because the Company does not expect to write new or renewal
policies after the Transactions are consummated, premium revenues are expected
to decrease to zero by December 31, 1997.
AEIC has $26.3$33.8 million of cash and cash equivalents, short-term
investments and U.S. Treasury securities, and $42.9$32.8 million of other fixed
income, investment-grade securities at September 30, 1996,March 31, 1997 on a pro forma basis
after giving effect to the CompanyTransactions. AEIC believes that AEIC will haveit has adequate
liquidity to meet all of its cash needs for the next twelve months.
AEIC is subject to periodic financial examinations by state insurance
regulatory bodies. In October 1996, the Texas Department of Insurance began a
triennial examination of AEIC. The agency operations cash flowexamination is not complete, and no
examination report has been issued. The Company has recently been informed that
the examiners are considering whether certain assets currently recorded in the
books and records of AEIC are ineligible to be carried as admitted assets under
statutory accounting principles and whether additional reserves may be
required. Although the Company has reflected some of these matters in the pro
forma financial statements presented elsewhere in this Proxy Statement, the
Company currently cannot predict what position the Texas Department will
ultimately take on business written for others since 1993
relatesthe remaining matters. The Texas Department could require
adjustments that are material to the collection ofCompany. If the adjustments, if any, cause
AEIC to become insolvent under statutory accounting principles, the Department
could appoint a conservator or receiver for AEIC and payment of premiums and operating expenses. For
business writtenultimately liquidate AEIC.
It cannot presently be predicted whether a liquidation under such circumstances
would presently be predicted whether a liquidation under such circumstances
would result in any residual value available for others in earlier years, cash flow depends primarily on the
collection of premiums and reinsurance recoverable and the payment of claims on
behalfstockholders of the insurers for which it has managed aviation business. Claims are
typically paid before the related reinsurance recoverable is collected. In 1993,
AEIC and the other primary insurer for which the agency managed business began
paying claims directly, which eliminated the negative cash flow impact on the
agency operations.Company.
The Company's consolidated cash flow used inby operations was $35.5$22.4 million
in the first nine monthsquarter of 1997, compared to cash flow used by operations of $16.8
million in the first quarter of 1996. The major uses of cash in the first
quarter of 1997 relate primarily to the decline in the volume of business
generated by the
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Company, resulting in declines in unearned premiums, reserves for losses and
losses and loss adjustment expenses and other liabilities, offset by an
increase in accounts receivable.
The Company's consolidated cash flow used in operations was $36.0 million in 1996. Cash
flow provided by operations was $4.0 million in 1995. Consolidated1995, and cash flow used byin
operations was $4.1 million in 1994,1994. Cash flow used in operations resulted
primarily from a reduction in unearned premiums of $19.5 million, as a result
of a decline in gross premiums written and cash flow provided by operations was
$40.4the resultant decline in net
premiums written and a decrease of $20.0 million in 1993. The funds usedother policy liabilities.
Other policy liabilities decreased as a result of decreases in the first nine months of 1996 relate
primarily to the settlement of a large claim incurred in 1995claims drafts
payable and the payment of
prior periods' retrospectively ratedceded reinsurance premiums and the reduction in
written premiums, which was not offset by an equal reduction in claim payments.payable. Cash flow provided by operations in 1995
resulted primarily from settlement of balances with reinsurers, as well as
positive cash flow from increases in written premiums and premium collections.
Cash flow used by operations in 1994 resulted primarily from an increase in
reinsurance recoverable, as well as reinsurers' accelerating the payment for
premiums due them in the 1994 reinsurance renewal. The level of cash flow provided by operations in 1993
resulted primarily from the collection from reinsurers in the first half of the
year of monies paid out on an unusually high level of gross claims during the
latter part of 1992. The unusually high level of claims resulted from Hurricane
Andrew and other large losses earlier in 1992. Cash flow in 1993 was also
favorably affected by increases in premiums written and premium collections.
Cash proceeds from the sales
and maturities of fixed income securities and sales of equity securities were
$41.1$41.6 million in 1996, $166.3 million in 1995, $72.9and $84.2 million in 1994, and
$35.5 million in 1993.
As described in "The Transaction" and "The Securities Purchase Agreement
and Related Agreements",1994.
In December 1996, the Company announced the termsissued 350,000 shares of a $35 million
investment in the Company's Series D Preferred
Stock andfor a total purchase price of $35 million, before expenses. Of the
formation of a
strategic alliance with American Financial Group, Inc.
In May 1994,proceeds, the Company issued 3,563,750 shares of common stock through an
initial public offering, which resulted in $32.0used $13.3 million of proceeds, net of
issuance costs. Of the net proceeds, $10.1 million was used to redeem all of the
Series C Cumulative Preferred Stock, including accrued dividends, $20.1fully repay and cancel its bank
credit facility, and $17.0 million was contributed to the capital and surplus
of AEIC, andAEIC. The Series D Preferred Stock has a dividend rate of 9%, payable
quarterly. At the remainder was used
for general corporate purposes.
At September 30, 1996 and December 31, 1995 and 1994, the carrying valueoption of the Company's total investments, including cash and cash equivalents, was $69.2
million, $106.8 million and $98.2 million, respectively. The decrease in total
investments inCompany, during the first nine monthsfive years, the
quarterly dividend can be paid in additional shares of 1996 was primarily a resultSeries D Preferred
Stock. Upon consummation of the cash
flow used in insurance operations as discussed above.Aviation Division Sale, the Series D Preferred
Stock will be transferred back to the Company and canceled.
The Company's fixed incomefixed-income securities are segregated into two categories
at September 30, 1996. Fixed incomeMarch 31, 1997. Fixed-income securities expected to be held to maturity are
carried at amortized cost; the carrying value of such securities was $23.5$20.4
million, and the market value was $23.2$20.0 million, both at September 30, 1996.March 31, 1997 on a
pro forma basis after giving effect to the Transactions. The remaining
fixed incomefixed-income securities are available for sale and were carried at a market
value of $36.6$29.2 million at September 30,December 31, 1996. In December 1994,connection with the Aviation
Division Sale, the Company entered into a revised credit facility with
its bank. In February 1996, revisions were madeplans to the credit facility as a
result of the special charge taken in the fourth quarter of 1995. In March, May
and September 1996, revisions were made to the credit facility as a result of
operating results in the first and second quarters of 1996. In November 1996,
the Company and its bank have amended the Company's credit facility to, among
other things, revise certain financial covenants so that no default would occur
thereunder at September 30, 1996, and to add certain covenant and default
provisions requiring the
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Company to close the Transaction with AFG by March 31, 1997. In addition, the
new covenants require that, upon closing of such Transaction, the principal
amount of the loan will be reduced to $10 million, that additional principal
payments will reduce the bank's commitment by an equal amount, and that the
Company must hold $10 million of proceeds from such Transaction for use only to
pay loan obligations, dividends and redemptions required by the terms of the
Company's Series B Cumulative Preferred Stock and operating expenses. Currently,
the bank commitment is $15 million, of which $13.25 million was outstanding at
September 30, 1996. Under this credit facility, the Company pays an annual
facility fee of 1/2% per year on the available principal amount of the loan,
whether used or unused, while AEIC has no earned surplus, and a fee of 1/4% per
year at all other times. The loan commitment will be reduced by an additional $1
million in 1996, $3 million annually in 1997 and 1998, and $4 million annually
in the last two years. The loan is secured byconvert all of the outstanding stock of
AEIC and the other directly owned subsidiaries of the Company. The revised
agreement with the bank prohibits the payment of dividends on commonits fixed income securities
to available for sale, which is not expected to result in a material gain or
preferred stock in excess of $1.5 million in the aggregate during any four
consecutive quarters, incurring other indebtedness with certain exceptions,
entering into a merger or sale of material assets or making capital expenditures
above $1.6 million. The agreement also requires the Company to maintain certain
financial ratios, including a fixed charge coverage ratio, a combined ratio, a
ratio of net premiums written to statutory capital, and minimum capital and
surplus levels. The Company was in compliance with these covenants at September
30, 1996.loss.
The Company plans to spend up to $1.6 millionan immaterial amount on capital expenditures
in
1996 primarily for computer hardware and softwareduring the next 12 months, which will be funded out of operating cash flow.
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MARKET PRICES AND DIVIDENDS
The Common Stock is traded on the New York Stock Exchange under the symbol
"FLI." The following table shows the cash dividend declared and the high and
low sales prices per share of the Common Stock on the New York Stock Exchange
for each quarterly period set forth below.
Quarter Ended High Low Dividend
- ------------- ---- --- --------
March 31, 1995........... $10.625 $ 8.000 $.03
June 30, 1995............ $12.000 $ 9.000 $.03
September 30, 1995....... $12.000 $10.375 $.03
December 31, 1995........ $12.125 $ 9.250 $.04
March 31, 1996........... $11.000 $ 7.500 $.04
June 30, 1996............ $ 7.750 $ 4.250 $.04
September 30, 1996....... $ 5.000 $ 3.750 --
December 31, 1996........ $ 4.875 $ 3.375 --
March 31, 1997........... $ 5.500 $ 1.500 --
June 30, 1997 (through
May 30, 1997)............ $ 1.875 $ .469 --
The NYSE has notified the Company that it will delist the Common Stock
upon closing of the Aviation Division Sale. See "Certain
Considerations--Delisting of Common Stock."
STOCKHOLDERS
The Company has three classes of authorized capital stock: 20,000,000
shares of Common Stock, $.01 par value per share, 1,000,000 shares of nonvoting
common stock, $.01 par value per share (the "Nonvoting Common Stock"), and
5,000,000 shares of preferred stock, $.01 par value per share, 162,857 of which
are designated Series B Cumulative Preferred Stock, $.01 par value per share
(the "Series B Preferred Stock"), and 546,200 of which are designated Series D
Preferred Stock, $.01 per value per share (the "Series D Preferred Stock"). As
of the Record Date, there were 7,047,098 shares of Common Stock outstanding
held by 184 stockholders of record, there were 142,857 shares of Series B
Preferred Stock outstanding held by two stockholders of record and there were
357,875 shares of Series D Preferred Stock outstanding held by one stockholder
of record.
DIVIDENDS
In September 1996, the Company announced that it would discontinue the
regular quarterly dividend on the Common Stock. Any determination to pay cash
dividends in the future will be at the discretion of the Board of Directors and
will be dependent upon the Company's results of operations, financial
condition, regulatory and contractual restrictions and other factors deemed
relevant. As an insurance holding company, the Company depends primarily on
dividends from AEIC to meet operating expenses and to fund cash dividends, if
any, to stockholders. See "Business of the Company--Regulation--Dividends" for
a description of the regulatory restrictions on the payment of dividends by
AEIC to the Company. See also "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
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INSURANCE REGULATION
The Company's subsidiaries are subject to regulation by government
agencies in the states in which they do business. The nature and extent of such
regulation vary from jurisdiction to jurisdiction, but typically involve prior
approval of the acquisition of control of an insurance company or of any
company controlling an insurance company, regulation of certain transactions
entered into by an insurance company with any of its affiliates, approval of
premium rates and policy forms for many lines of insurance, standards of
solvency and minimum amounts of capital and surplus which must be maintained,
limitations on types and amounts of investments, restrictions on the size of
risks which may be insured by a single company, licensing of insurers and
agents, deposits of securities for the benefit of policyholders, methods of
accounting, establishing reserves for losses and loss adjustment expenses,
regulation of underwriting and marketing practices, regulation of reinsurance
and filing of annual and other reports with respect to financial condition and
other matters. These regulations may impede, or impose burdensome conditions
on, rate increases or other actions that the Company might want to take to
enhance its operating results. Such regulation is generally intended for the
protection of policyholders rather than security holders. In addition, state
regulatory examiners perform periodic examinations of insurance companies.
In addition to the regulatory supervision of the Company's insurance
subsidiaries, the Company is also subject to regulation under the Texas
Insurance Holding Company System Regulatory Act (the "Holding Company Act").
The Holding Company Act contains certain reporting requirements including those
requiring AEIC to register and annually file certain reports with the Texas
Insurance Commissioner (the "Texas Commissioner"). The annual registration
statements call for current information regarding the capital structure,
general financial condition, ownership and management of AEIC and persons
controlling it, and for the disclosure of the identity and relationship of
every member of its insurance holding company system. The registration
statement must also disclose certain agreements and transactions between AEIC
and its affiliates, which agreements and transactions must satisfy certain
standards set forth in the Texas Insurance Code.
Insurance companies are also affected by a variety of state and federal
legislative and regulatory measures and judicial decisions that define and
extend the risks and benefits for which insurance is sought and provided.
RISK-BASED CAPITAL. The Texas Department of Insurance has adopted a rule
substantially similar to the NAIC risk-based capital model act. The model act
sets regulatory levels with respect to minimum capital requirements for
property and casualty insurers based on the underwriting, investment and other
business risks inherent in an insurer's operations. Under the model act, any
insurance company that does not meet threshold risk-based capital levels
ultimately could be subject to regulatory intervention, mandatory
rehabilitation or liquidation proceedings. AEIC's capital is currently below
the risk based capital requirement, and AEIC has been ordered to prepare a
capital plan for review and approval of the Insurance Department of the State
of Texas.
DIVIDENDS. The payment of dividends by AEIC to the Company is regulated by
the Texas Insurance Code. These laws provide that a property and casualty
insurance company may not pay any dividends except from earned surplus arising
from its business. This provision is interpreted to mean accumulated, realized,
earned surplus, as distinguished from paid in surplus or unrealized earnings or
surplus. In addition, these laws also provide that the maximum amount of
dividends or other distributions that AEIC may declare or pay to the Company
within any 12-month period, without the permission of the Texas Commissioner,
is limited to the greater of 10% of policyholders' surplus (excluding
unrealized capital gains and losses) as of the end of the prior year or 100% of
net income for the prior year, both determined in accordance with statutory
accounting principles ("SAP"). If insurance regulators determine that payment
of a dividend or any other payments to an affiliate would, because of the
financial condition of AEIC or otherwise, be hazardous to its policyholders or
creditors, the regulators may prohibit payments that would otherwise be
permitted without prior approval.
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During 1996, AEIC paid no dividends to the Company. The amount of future
dividends may be limited by business and regulatory considerations. However,
based upon restrictions presently in effect, AEIC may not pay dividends without
first obtaining the prior approval of the Texas Commissioner. At March 31,
1997, AEIC had unassigned earned surplus (deficit) of $(4.2) million AEIC
received permission from the Department of Insurance of the State of Texas to
reset earned surplus to zero at December 31, 1996 by transferring from the paid
in capital account the amount necessary to bring the earned surplus account to
zero. The loss incurred in the first quarter of 1997 resulted in the earned
deficit.
TRANSACTIONS WITH AFFILIATES. Under the Texas Insurance Code, AEIC may not
enter into certain transactions, including sales, loans, investments,
reinsurance agreements and the systematic rendering of services, with members
of its insurance holding company system unless AEIC has notified the Texas
Commissioner of its intentions to enter into such transactions 30 days prior
thereto or such shorter period as the Texas Commissioner permits and the Texas
Commissioner has not disapproved of them within that period. Any such
transactions that in any twelve month period aggregate at least 5% of AEIC's
admitted assets or 25% of its policyholders' surplus are subject to prior
approval by the Texas Commissioner. Among other things, such transactions are
subject to the requirements that their terms be fair and equitable, charges or
fees for services performed be reasonable and AEIC's policyholders' surplus
following any dividends or distributions be reasonable in relation to its
outstanding liabilities and adequate to its financial needs.
MEMBERSHIP IN INSOLVENCY FUNDS AND ASSOCIATIONS; MANDATORY POOLS. Most
states require property and casualty insurers to become members of insolvency
funds or associations which generally protect policyholders against the
insolvency of an insurer writing insurance in the state. Members of the fund or
association must contribute to the payment of certain claims made against
insolvent insurers. Maximum contributions required by law in any one year vary
between 1% and 2% of annual premiums written. The Company's assessments from
guarantee funds were immaterial for 1994, 1995 and 1996. Most of these payments
are recoverable through future policy surcharges and premium tax reductions.
The Company is also required to participate in various mandatory insurance
facilities or in funding mandatory pools, which are generally designed to
provide insurance coverage for consumers who are unable to obtain insurance in
the voluntary insurance market. These pools typically require all companies
writing property insurance in the state for which the pool has been established
to fund deficiencies experienced by the pool based upon each company's relative
premium writings in that state, with any excess funding typically distributed
to the participating companies on the same basis. The financial impact of such
assessment has been immaterial in each of the years 1994, 1995 and 1996.
NAIC IRIS RATIOS. The NAIC's Insurance Regulatory System ("IRIS") was
developed by a committee of state insurance regulators and is intended to
assist state insurance departments in executing their statutory mandates to
oversee the financial condition of insurance companies operating in their
respective states. IRIS identifies 12 industry ratios and specifies "usual
values" for each ratio. Departure from the usual values on four or more of the
ratios can lead to inquiries from individual state insurance commissioners as
to certain aspects of an insurer's business.
At December 31, 1996, AEIC was outside the "usual values" with respect to
eight ratios: Net Premium Written to Surplus; Two-year Overall Operating Ratio;
Change in Surplus; Liabilities to Liquid Assets; Agents' Balances to Surplus;
One-Year Reserve Development to Surplus; Two-Year Reserve Development to
Surplus; and Estimated Current Reserve Deficiency to Surplus. AEIC was outside
the usual values for each of these tests due to the reserve addition made in
1996.
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Usual Values
Equal to or
Ratio Over Under Company Value
----- ------------ -------------
Net Premium Written to Surplus 300 - 430
Two-year Overall Operating Ratio 100 - 126
Change in Surplus 50 -10 -38
Liabilities to Liquid Assets 105 - 119
Agents' Balance to Surplus 40 - 83
One-Year Reserve Development to Surplus 20 - 38
Two-Year Reserve Development to Surplus 20 - 36
Estimated Current Reserve Deficiency to Surplus 25 - 71
LEGISLATIVE AND REGULATORY PROPOSALS. From time to time, various
regulatory and legislative changes are proposed in the insurance industry. The
Company is unable to predict whether any of these proposed laws and regulations
will be adopted, the form in which any such laws and regulations would be
adopted, or the effect, if any, these developments would have on the operations
and financial condition of the Company.
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HISTORICAL BUSINESS OF THE COMPANY
GENERAL
The Company is an insurance holding company that, through its
subsidiaries, markets and underwrites specialized property and casualty
coverages in the general aviation insurance marketplace. Historically, the
Company has organized its business into three divisions. The Aviation Division,
which is responsible for all general aviation insurance business, generated
$108.7 million of gross premiums produced in 1996. The Property and Casualty
Division (the "P&C Division"), which was responsible for the artisan contractor
insurance business and the run-off of discontinued trucking and auto dealer
lines of insurance business, generated $35.9 million of gross premiums produced
in 1996. The Marine Division, which was responsible for all yacht insurance
business, generated $6.6 million of gross premiums produced in 1996.
As discussed more fully elsewhere in this Proxy Statement, the Company has
entered into the Purchase Agreement to sell the Aviation Division. In separate
transactions, the Company has recently completed the sales of the artisan
contractor portion of the P&C Division and the yacht insurance business of its
Marine Division. See "--Disposition of P&C Division" and "--Disposition of
Marine Division."
Regardless of whether the Company is able to complete the Aviation
Division Sale, the future business and operations of the Company will differ
materially from the Company's past activities. Following the sale of the
Company's three divisions, the Company expects that it will no longer write new
or renewal policies for the foreseeable future. It will continue to handle
claims on the Company's policies that are not assumed by the purchaser as part
of these transactions, and maintain the related reserves and assets. See
"Unaudited Pro Forma Financial Information." Accordingly, the Company's
revenues and earnings capacity will be significantly lower in the future. The
Company's operational focus will be on attempting to create residual value from
the remaining operations and assets and additional ongoing operations for the
Company's stockholders. See "Plans for Future Operation of the Company."
Therefore, the following discussion of the Company's historical business
activities has limited relevance to the Company's future operations.
THE DIVISIONS
During 1996, the Aviation Division was one of the largest providers of
general aviation insurance in the United States based on net premiums written.
The Company's general aviation insurance business consists primarily of
non-airline commercial aviation coverages, airport coverages and pleasure and
business aircraft coverages.
The P&C Division historically marketed and underwrote a commercial
insurance program for selected artisan contractors. During 1996, the P&C
Division marketed this product in three states, with a majority of this
business written in California. The P&C Division also managed the run-off of
the franchised auto dealer and local and intermediate-haul trucking lines of
business, from which the Company withdrew in November 1995 and October 1996,
respectively. See "--Disposition of P&C Division."
The Marine Division historically marketed and underwrote an insurance
program for private yachts navigating the inland and coastal waters of the
United States. The Marine Division targeted powerboats and sailboats valued
between $30,000 and $500,000. During 1996, the Marine Division marketed its
product nationwide through approximately 15 specialty independent producers.
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DISPOSITION OF P&C DIVISION
In the P&C Division, the Company's continued review in the third quarter
of 1996 of the trucking line of business resulted in the Company's withdrawal,
consistent with all regulatory and contractual obligations, from the line of
business in October 1996. The continuing unsatisfactory results, together with
the intense and prolonged price competition in this market, led the Company to
this decision.
On April 23, 1997, the Company entered into an agreement to sell the fixed
assets and continuing business of the P&C Division to a newly formed managing
general agency controlled by the executive management of the P&C Division. The
sale was completed effective June 30, 1997. Chartwell Re Holdings Corporation,
a subsidiary of Chartwell Re Corporation, holds an equity interest in the
managing general agency. The Insurance Corporation of New York ("INSCORP"), a
Chartwell subsidiary, provides the policy issuing capacity for the managing
general agency, and reinsured 100% of the Company's liability on the artisan
contractor insurance business in force on March 1, 1997 or written thereafter,
in consideration for the transfer by the Company to INSCORP of the unearned
premium reserve for such business at March 1, 1997. INSCORP paid the Company a
ceding commission of 27.35%.
The Company expects to recognize an immaterial gain on the transaction.
The Company also entered into a services agreement to purchase claims handling
and certain other run-off management services from the managing general agency
for a limited period of time.
DISPOSITION OF MARINE DIVISION
On June 19, 1997, the Company sold the assets and continuing business of
the Marine Division to American Yachts, Ltd., a newly formed agency.
Underwriters Insurance Company ("Underwriters") provides the policy issuing
capacity for the agency, and reinsured 100% of the Company's liability on the
marine insurance business in-force on April 30, 1997 or written thereafter, in
consideration for the transfer by the Company to Underwriters of the unearned
premium reserve for such business at April 30, 1997. Underwriters paid the
Company a ceding commission of 23% of the unearned premium reserve. The Company
expects to recognize an immaterial loss on the transaction.
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GROSS PREMIUMS PRODUCED
The table below sets forth the Company's gross premiums produced by the
Aviation Division, the P&C Division and the Marine Division for each of the
three years ended December 31, 1996.
Year ended December 31,
----------------------------
1994 1995 1996
---- ---- ----
(Dollars in thousands)
Aviation Division
Commercial $ 62,161 $ 63,408 $ 48,347
Pleasure and Business 34,861 35,066 38,431
Airport 19,968 23,610 17,487
Aviation Property -- -- 2,098
Other (1) 6,910 6,018 2,327
-------- -------- --------
Total $123,900 $128,102 $108,690
======== ======== ========
P&C Division
Local and intermediate-haul trucking $ 28,547 $ 25,292 $ 14,338
Automobile dealers 7,708 9,889 548
Artisan contractors 7,052 14,943 20,997
-------- -------- --------
Total $ 43,307 $ 50,124 $ 35,883
======== ======== ========
Marine Division(2) $ -- $ 3,335 $ 6,609
======== ======== ========
- -----------------------
(1) Includes premiums for retrospectively rated workers' compensation and
airline hull and liability coverages, which the Company no longer
writes, and for property coverages for aviation-related businesses and
farm and ranch coverages on which the Company did not take any of the
underwriting risk.
(2) The Marine Division began operation in the first quarter of 1995.
AVIATION DIVISION BUSINESS
The Company's Aviation Division divides its general aviation insurance
into three major segments: commercial aviation, airports and personal pleasure
and business aircraft. Scheduled airline operations are not part of the general
aviation market segment.
Commercial. During 1996, commercial aviation was the largest market
segment for the Company, based on premium volume. The Company provides aircraft
insurance coverages for non-airline owners and operators of commercial,
corporate and municipal aircraft, as well as product liability coverage for
manufacturers of non-critical aircraft components. Aircraft coverages include
hull, liability and ancillary coverages. Such aircraft coverages protect the
insured against physical loss or damage to the covered aircraft and against
liability to third parties resulting from the ownership, maintenance or use of
the aircraft.
The commercial class of aircraft includes all general aviation aircraft,
including helicopters, owned or operated by non-airline commercial operators
for such purposes as carrying cargo and passengers for hire, charter, rental
and other commercial uses. The corporate and municipal classes of aircraft
include low to medium valued piston, turbo prop and jet engine general aviation
aircraft, including helicopters, used solely for business purposes by their
owners and flown by professionally qualified pilots. During 1996, the Company
insured
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approximately 6,000 commercial, corporate and municipal aircraft. The average
hull value for these aircraft insured by the Company was approximately
$250,000.
The Company defines non-critical aircraft components as those whose
failure is not expected to jeopardize the safety of flight of an aircraft.
Examples of components insured by the Company include chair release levers and
tray hinges. The Company no longer writes products liability coverage for
manufacturers of airframes, engines and critical engine/airframe components.
Airports. In 1996, the Company was one of the larger providers in the
United States of general liability insurance for owners and managers of
airports and aviation support businesses located on airport premises. The
Company's policies provide coverages such as premises liability, completed
operations/products liability, and hangarkeepers' liability. Insureds range
from selected large hub airports with scheduled airline service to small and
medium-sized, privately and publicly owned airports. At December 31, 1996, out
of an estimated 11,500 FAA certified airports and heliports in the United
States, the Company insured approximately one out of every eight, including one
out of every four large hub airports. These coverages were also marketed to
businesses located on airport premises that provide aviation support services
such as aircraft sales, maintenance, storage, charter, instruction, rental, and
cargo hauling. Coverages have not been provided to scheduled airlines. The
Company historically has not insured commercial operations of control tower
facilities; however, control tower exposure may be covered to the extent that
the airport owner is responsible for the operation of the control tower.
Pleasure and Business Aircraft. The Eagle Express Department of the
Aviation Division has provided aircraft insurance for owners and operators of
private aircraft used for personal business and pleasure. In this segment of
its business, the Company has provided coverage for single-engine and light to
medium multi-engine, fixed-wing aircraft and helicopters. The pilots are
trained and licensed but are not paid, full-time pilots. These policies provide
insurance coverage to owners of private aircraft similar in nature to the
coverage widely available to owners of personal automobiles. The Company's
policies protect the insured owner or operator against physical loss or damage
to the coverage aircraft and against liability to third parties resulting from
the ownership, maintenance or use of the aircraft. This class represents the
largest class of the active domestic general aviation fleet, comprising at
least 60% of the fleet of approximately 170,000 aircraft as estimated by the
General Aviation Manufacturer's Association. At year end 1996, the Company
insured approximately 24,600 pleasure and business aircraft.
Aviation Property. For over eight years the Company has been marketing a
program to provide property, commercial auto and inland marine coverages for
small and medium size airports and businesses providing aviation support
services on airport premises. Prior to 1996, American Eagle acted as agent in
producing this business for other insurers, but began underwriting these risks
for its own account in 1996. This business accounted for approximately $2.1
million of the $108.7 million of gross premiums produced by the Aviation
Division in 1996.
P&C DIVISION BUSINESS
The P&C Division historically provided commercial coverages for various
types of specialty artisan contractors, such as swimming pool, tile and
masonry, drywall, heating, ventilation and air conditioning, residential
painting, parking lot maintenance, landscaping, and rural and suburban land
improvement contractors specializing in small to mid-sized residential and
commercial projects. These policies provided auto, general liability, property,
inland marine, crime, and umbrella and excess coverages. The Company targeted a
preferred class of business consisting of businesses in each industry group
with an operating history of at least three years, an acceptable and verifiable
loss history over the previous three years, and a stable financial condition.
The Company targeted types of contractors that it believed generally were
not subject to the risk of catastrophic losses. These policies typically
generated gross premiums produced between $5,000 and $10,000
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per contractor. At December 31, 1996, the Company had approximately 2,500
artisan contractor policies in force with average gross premiums produced per
contractor of approximately $8,500. At December 31, 1996, this program was
marketed predominantly in California and was also marketed in Arizona and
Nevada.
MARINE DIVISION BUSINESS
In the first quarter of 1995, the Company established the Marine Division.
The Marine Division marketed and underwrote an insurance program for private
yachts navigating the inland and coastal waters of the United States. The
Marine Division targeted powerboats and sailboats valued between $30,000 and
$500,000. This program provided hull, liability and ancillary coverages for
owners and operators of yachts. During 1996, the Marine Division marketed its
products nationwide through approximately 15 specialty independent producers.
At December 31, 1996, the Company had over 5,500 yacht policies in force with
average gross premiums produced per yacht of approximately $1,200.
MARKETING
Aviation Division. During 1996, the Company marketed its aviation
insurance products through approximately 1,200 independent insurance producers.
The Company's top 100 independent producers accounted for over 76.4% of the
aviation gross premiums produced in 1996. Many of these producers specialize in
aviation insurance and provide technical knowledge of products, markets and
customers that creates marketing and underwriting opportunities. The Company
compensates producers based upon a percentage of gross premiums written and the
services performed. For the year ended December 31, 1996, no single producer
represented more than 7.4% of the Company's total aviation gross premiums
produced.
In addition to affinity group marketing through certain aviation
associations, the Company has also participated in trade shows and conventions
in the general aviation industry as a means of developing and retaining
customer relationships and name recognition.
P&C Division. During 1996, the P&C Division marketed its product for
artisan contractors through a combination of four employed producers and
independent producers. The Company also devoted a part of its marketing efforts
in the P&C Division to marketing to and through affinity groups such as local
trade groups and industry associations.
Marine Division. During 1996, the Company marketed its yacht product
nationwide, with emphasis on inland lakes and waterways, through established
independent, specialty marine insurance producers. At December 31, 1996, the
Marine Division had approximately 15 producers. The Company pays its
independent producers commissions and fees based on a percentage of gross
premiums produced of approximately 23%.
The Company's marine marketing efforts included participation at, and
sponsorship of, yachting events, including recognized regional boat shows.
UNDERWRITING
The Company's historical goal has been to achieve an underwriting profit,
as measured by a combined ratio of less than 100%. Each underwriter, other than
senior managers, has specialized in one of the Company's niche markets. The
Company believes that this specialization has allowed its underwriters to
develop experience and expertise in the industries and products they
underwrote, all of which have unique characteristics. In accepting risks,
underwriters were required to comply with risk parameters, retention limits and
rates established by the Company. Underwriting authority levels have been
established for the Company's underwriters based on the employee's ability and
level of experience.
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AVIATION AND P&C DIVISIONS. When an insurance quotation was issued, the
Company's underwriters performed a complete underwriting evaluation to
determine risk selection, premiums and coverage provisions. For smaller risks
that were quoted and issued in higher volumes, such as pleasure and business
aircraft and artisan contractors, underwriters have used a template
underwriting technique that permitted them to determine whether a risk met
underwriting guidelines in a highly controlled and efficient manner. If a risk
did not meet the template requirements, it was referred to a more senior
underwriter for review. For large and complex aviation risks, the Company
relied on on-site loss control surveys to gain knowledge of risks and assist
insureds with loss control procedures and policies. The Company's senior
underwriting officers monitored and analyzed underwriting results to determine
when adjustments to underwriting guidelines and pricing may be necessary.
Certain aviation agents had underwriting and binding authority within rigidly
defined guidelines and authority limits established for each producer.
To maintain compliance with underwriting guidelines, underwriting managers
routinely audited underwriters' files. These audits were also used to help
identify deficiencies and training needs for implementation of corrective
actions.
The Company has established aviation rates and coverage forms
independently. In many states, the rates for aircraft and certain other
aviation coverages are exempt from filing and approval requirements, which has
allowed the Company to more easily adjust rates in response to changing
conditions.
The Company has devoted significant resources to the development of
automated rating systems for much of its aviation business. At December 31,
1996, the systems provided rating standards for approximately 65% of the
Company's aviation business based on policy count.
The Company established premium rates for its P&C Division business in
most cases after considering advisory rates or prospective loss costs suggested
by the Insurance Services Office, Inc. ("ISO"), an industry advisory group. The
Company used a combination of ISO coverage forms and independently filed forms.
MARINE DIVISION. The Company established marine premium rates and forms
independently. In most states, the rates for marine coverages are exempt from
filing and approval requirements. The Company's independent producers were
experienced, knowledgeable specialty marine producers with underwriting and
binding authority within rigidly defined guidelines and authority limits
established for each producer.
Within strict template underwriting guidelines, the Company's select
marine producers performed a complete underwriting evaluation to determine risk
selection, premiums and appropriate coverage provisions when an insurance
quotation is issued. The producers referred to Company underwriters risks that
did not fall within these guidelines.
CLAIMS
The Company has historically maintained an active approach to claims
management. Accordingly, the Company's claims policy emphasizes timely
investigation of claims and prompt settlement of meritorious claims for
equitable amounts, maintenance of adequate reserves for claims, and control of
external claims adjustment and litigation expenses.
At May 30, 1997, the Company employed 13 adjusters in the Aviation and
Marine Divisions, and five adjusters in the P&C Division. Upon consummation of
the Transactions, the Company expects to employ one adjuster. The Company also
expects to enter into agreements with the purchasers of the aviation and
artisan contractor businesses to purchase claims handling services. The
purchasers will have very limited claims settlement authority. Upon receipt,
each claim will be reviewed and assigned to an adjuster based on the type and
severity of the claim. A claim file will be immediately opened and, if
appropriate, a reserve established based on
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current information and established guidelines. The reserve will be adjusted as
more current information becomes available, and at 30 and 90 day intervals.
RESERVES
The Company establishes loss and loss adjustment expenses ("LAE") reserves
to provide for the ultimate cost of administration and settlement of claims
under insurance and reinsurance policies issued by the Company, including
claims that have been reported to it by its insureds and claims for losses that
have occurred but have not yet been reported to the Company.
The reserves for losses and LAE established by the Company are estimates
of amounts needed to pay reported and unreported claims and related LAE
incurred as of the end of each accounting period, net of estimated related
salvage and subrogation claims and recoverable reinsurance. These reserves do
not represent an exact calculation of liability, but rather are estimates
involving actuarial and statistical projections at a given time to reflect the
Company's expectations of the ultimate costs of administration and settlement
of claims. Such estimates are based on facts and circumstances then known,
predictions of future events, estimates of future trends in claims reporting
frequency and severity and other variable factors. As a consequence, although
the Company believes that its reserves at December 31, 1996 are adequate to
meet its obligations under existing policies, actual losses and LAE may
deviate, perhaps substantially, from reserves reflected in the Company's
financial statements. To the extent reserves prove inadequate, the Company
increases such reserves and incurs a charge to earnings in the period in which
the reserves are increased, which could have a material adverse effect on the
financial results of the Company for such period. Because of the nature of the
business written by the Company, the Company does not believe that it has
material latent exposures related to toxic waste, asbestos and other
environmental claims that would have a material adverse effect on the Company's
financial condition or results of operations. To verify the adequacy of its
reserves, the Company engages independent actuarial consultants to perform
annual loss reserve analyses.
For reported claims, the Company first establishes case reserves pursuant
to the Company's guidelines when it receives notice of the claim and determines
that coverages may have been provided. The initial estimate is adjusted
periodically based upon the receipt of additional facts and documentation, the
informed judgment of personnel in the Company's claims department based on
general insurance reserving practices and the experience and knowledge of such
personnel regarding the nature and value of the specific type of claim,
jurisdiction of the occurrence, circumstances surrounding the claim, severity
of injury or damage, potential for ultimate exposure, the line of business and
policy provisions relating to the particular type of claim.
A variety of methods have been developed in the insurance industry for
determining reserves for incurred but not reported losses and liabilities. In
general, these methods involve the extrapolation of reported loss data to
estimate ultimate losses. The Company's loss calculation methods generally rely
upon a projection of ultimate losses based upon the Company's historical
patterns of reported loss development in aviation lines. The effects of
inflation are not specifically estimated by the Company in calculating its
reserves, but are reflected in the Company's historical pattern of loss
development.
The following table provides a reconciliation of beginning and ending loss
and LAE reserves established in accordance with generally accepted accounting
principles ("GAAP"), net of reinsurance recoverables, for the years ended
December 31, 1994, 1995 and 1996. The Company does not discount its reserves;
that is, it does not calculate them on a present value basis. Loss and LAE
reserves are stated on a net basis after deduction for losses recoverable from
reinsurers.
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Year Ended December 31,
----------------------------------
1994 1995 1996
-------- ----------- -----------
(Dollars in thousands)
Reserve for losses and LAE at beginning of year $40,855 $50,451 $ 57,852
Provision for losses and LAE for current year claims 48,567 72,072 88,885
Increase in estimated losses and LAE for
prior year claims 4,162 18,861 18,588
------- ------- --------
Total incurred losses and LAE 52,729 90,933 107,473
Losses and LAE payments for claims attributable to:
Current year 26,552 42,066 48,063
Prior years 16,581 41,466 43,111
------- ------- --------
Total payments 43,133 83,532 91,174
Reserve for losses and LAE at end of period $50,451 $57,852 $ 74,151
The table below provides a reconciliation of the gross, ceded and net
"increase (decrease) in estimated losses and LAE for prior year claims" above
for the years ended December 31, 1994, 1995 and 1996.
Year Ended December 31,
----------------------------------
1994 1995 1996
-------- ----------- -----------
(Dollars in thousands)
Gross increase in estimated losses and LAE for prior
year claims $2,303 $23,365 $18,936
Ceded (increase) decrease in estimated losses and
LAE recoverable from reinsurers for prior year
claims 1,859 (4,504) 348
------ ------- -------
Net increase in estimated losses and LAE for prior
year claims $4,162 $18,861 $18,588
The table below reconciles reserves for losses and LAE, net of reinsurance
recoverable, at December 31, 1994, 1995 and 1996, to the Company's Consolidated
Balance Sheet.
Year Ended December 31,
-------------------------------
1994 1995 1996
-------- ----------- --------
(Dollars in thousands)
Reserve for losses and LAE $142,768 $136,528 $138,133
Reinsurance recoverable-loss reserves 92,317 78,676 63,982
-------- -------- --------
Reserve for losses and LAE, net of reinsurance
recoverable $ 50,451 $ 57,852 $ 74,151
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Set forth below is a table showing the amount of losses and LAE for the
Company, excluding American Meridian Insurance Company, Limited, a wholly
owned subsidiary of AEIC domiciled in Bermuda ("American Meridian"), at
December 31, 1994, 1995 and 1996.
Year Ended December 31,
-------------------------------
1994 1995 1996
-------- ----------- --------
(Dollars in thousands)
Company's reserves for losses and LAE $50,451 $57,852 $74,151
American Meridian's reserves for losses and LAE 1,480 1,232 1,158
------- ------- -------
Reserve for losses and LAE, excluding American
Meridian $48,971 $56,620 $72,993
======= ======= =======
The Aviation Division had an increase in estimated reserves for losses and
LAE (i.e., unfavorable loss development) for prior year claims of $7.5 million
in 1996 and $11.9 million in 1995, compared to favorable loss development of
$1.4 million in 1994 and $4.0 million in 1993. The P&C Division had unfavorable
loss development for prior year claims of $10.8 million in 1996, $7.0 million
in 1995, $5.6 million in 1994, and $0.4 million in 1993.
The unfavorable loss development in 1996 for the Aviation Division relates
primarily to the 1995 year. The unfavorable development results from a higher
than anticipated number of severe liability losses and hull losses reported in
1996 for 1995 occurrences. The unfavorable loss development in 1996 for the P&C
Division relates primarily to the commercial automobile liability line of
business and is related to accident years 1994 and 1995. The unfavorable loss
development for the commercial automobile liability was due primarily to a
higher than anticipated number of severe losses reported in 1996 for
occurrences and increased severity of 1994 losses.
The following table presents the development of the Company's GAAP
liability for losses and LAE for each of the fiscal years ended December 31,
1986 through 1996, excluding American Meridian. The top line of the table shows
the estimated amounts of losses and LAE for claims arising in that year and all
prior years that are unpaid at the balance sheet date, including losses
incurred but not yet reported to the Company. The upper portion of the table
shows the cumulative amounts subsequently paid as of successive years with
respect to the liability. The table also shows the reestimated amount of the
previously recorded liability based on experience as of the end of each
succeeding year. The estimates change as more information becomes known about
the frequency and severity of claims for individual years. A redundancy exists
when the reestimated liability at each December 31 is less than the prior
liability estimate and a deficiency exists when such reestimated liability is
greater than the prior liability estimate. The cumulative redundancy or
deficiency depicted in the table, for any particular calendar year, represents
the aggregate change in the initial estimates over all subsequent calendar
years. Each amount in the table below includes the effects of all changes in
amounts for prior periods. The table does not present accident or policy year
development data.
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YEAR ENDED DECEMBER 31,
1986 1987 1989 1990 1991 1992 1993 1994 1995 1996 1997
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES)
Reserve for losses
and LAE,
as stated $21,094 $31,825 $39,573 $37,307 $31,124 $30,411 $35,153 $38,544 $48,971 $56,620 $72,993
Cumulative paid
as of:
1 year later $4,721 $7,615 $8,325 $9,751 $5,797 $7,183 $12,824 $16,116 $42,092 $43,035
2 years later 8,266 4,605 15,638 15,029 10,397 14,058 19,815 37,577 57,390
3 years later 9,966 9,319 19,153 18,701 15,799 17,179 27,514 42,848
4 years later 12,167 11,441 21,892 23,853 17,413 21,825 27,759
5 years later 13,401 13,191 23,533 24,996 20,709 21,930
6 years later 13,752 14,374 23,167 27,866 20,759
7 years later 14,339 14,678 24,912 27,880
8 years later 14,627 15,058 25,215
9 years later 14,887 13,551
10 years later 15,203
Reserve
re-estimated
as of:
1 year later $20,723 $24,926 $34,442 $34,270 $30,537 $26,653 $32,205 $43,072 $68,706 $75,206
2 years later 20,393 21,206 32,999 36,045 25,890 26,801 31,901 51,534 73,025
3 years later 20,701 18,108 34,420 31,635 25,760 27,007 35,315 52,171
4 years later 18,909 21,837 31,186 32,075 25,328 27,890 34,413
5 years later 19,463 20,064 29,827 30,886 25,465 27,030
6 years later 17,649 19,425 26,824 31,645 25,369
7 years later 17,799 16,392 27,160 32,000
8 years later 15,763 16,663 28,770
9 years later 15,887 15,860
10 years later 17,020
Initial reserve
in excess of
(less than)
re-estimated
reserve:
Amount $4,074 $15,965 $10,803 $5,307 $5,755 $3,381 $740 $(13,627) $(24,054) $(18,586)
Percent 19.3% 50.2% 27.3% 14.2% 18.5% 11.1% 2.1% -35.4% -49.1% -32.8%
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The table below presents the gross development of the Company's GAAP
liability for loss and LAE for 1994, 1995 and 1996 excluding American Meridian.
Year Ended December 31,
------------------------------------------
1994 1995 1996
------------------------------------------
(Dollars in thousands, except percentages)
Gross reserve for losses and LAE as stated: $138,131 $130,568 $132,515
Cumulative paid as of:
1 year later 73,064
2 years later 109,407 69,712
Gross reserve re-estimated as of:
1 year later
2 years later
Gross initial reserve in excess of (less than) 162,952
re-estimated reserve: 160,125 149,504
Amount (21,994) (18,936)
Percent -15.9% -14.5%
The table below presents the ceded development of the Company's GAAP
liability for losses and LAE for 1994, 1995 and 1996 excluding American
Meridian. The ceded development represents the difference between the net
development and the gross development.
Year Ended December 31,
------------------------------------------
1994 1995 1996
------------------------------------------
(Dollars in thousands, except percentages)
Ceded reserve for losses and LAE as stated: $89,160 $73,948 $59,522
Cumulative paid as of:
1 year later 30,972
2 years later 52,014 26,674
Ceded reserve re-estimated as of:
1 year later
2 years later
Ceded initial reserve in excess of (less than) 94,246
re-estimated reserve: 89,097 74,296
Amount 63 (348)
Percent -- -.4%
Conditions and trends that have affected reserve development in the past
may not necessarily occur in the future. Accordingly, it is not appropriate to
extrapolate future redundancies or deficiencies based on the foregoing.
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REINSURANCE
The Company has followed the customary industry practice of reinsuring a
portion of the exposure under its policies and, as consideration, paying to its
reinsurers a portion of the premium received on its policies. Under certain
treaties, the agreed-upon premium may vary within predetermined ranges based
upon the level of losses experienced by the reinsurer and subject to
reinsurance deductible amounts. Insurance is ceded principally to reduce an
insurer's liability on individual risks and to protect against catastrophic
losses. Although reinsurance does not legally discharge an insurer from its
primary liability to policyholders for the full amount of coverage provided by
its policies, it does make the assuming reinsurer liable to the insurer to the
extent of the reinsurance ceded.
The Company structured separate reinsurance programs for the Aviation
Division, the P&C Division and the Marine Division. Under its current aviation
reinsurance protections, the Company has limited its net retained loss for any
one occurrence to a maximum of $200,000 for liability loss and $150,000 for
hull loss. Under its current property and casualty reinsurance protections, the
Company has limited its net retained loss to a maximum of $250,000 for any one
occurrence. Under its current marine reinsurance protections, the Company has
limited its net retained loss for any one occurrence to a maximum of $75,000.
In addition, the Company purchased catastrophe protection to limit its
retention to $250,000 for the Aviation Division, $500,000 for the P&C Division,
and $75,000 for the Marine Division in a single occurrence involving multiple
policyholders, such as a hurricane, flood or earthquake, up to $1,000,000.
Occurrences above $1,000,000 are protected by a combined catastrophe program
which reinsures 95% of a single occurrence above $1,000,000 up to $20,000,000.
The 1997 renewal of the catastrophe program extends the coverage up to
$30,000,000. The Company also reinsured on a facultative basis when it wrote a
risk with limits of liability exceeding the maximum limits of its treaties or
when it otherwise considered such action appropriate.
In formulating its reinsurance programs, the Company has been selective in
its choice of reinsurers and considered numerous factors, the most important of
which is the financial stability of the reinsurer. In an effort to minimize its
exposure to the insolvency of any reinsurer, the Company carefully evaluated
the acceptability of each reinsurer. As part of the Company's acquisition of
AEIC and AOA in 1986, the Company agreed that AEIC should assume the risk of
uncollectible reinsurance relating to reinsurance arranged by AOA for aviation
business AOA managed between June 30, 1986 and December 31, 1992 for its
formerly affiliated insurers. Since the acquisition, AEIC has not written off
any reinsurance recoverables; however, the Company has provided an allowance of
$1.4 million for uncollectible reinsurance.
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The following table sets forth certain information related to the
Company's 15 largest reinsurers based on ceded reinsurance premiums during
1996.
CEDED NET 1996
REINSURANCE REINSURANCE BEST
REINSURERS PREMIUMS RECOVERABLE(1) RATING(2)
- ----------- -------------- -------------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES)
Zurich Reinsurance Centre, Inc. $16,954 $22,185 A
Lloyds of London 7,603 9,257 (3)
Kemper Reinsurance Company 2,632 2,042 A-
Chartwell Reinsurance Company 2,541 3,312 A
Nac Reinsurance Corporation 1,317 18,779 A
St. Paul Fire & Marine Insurance Company 1,170 1,901 A+
TIG Reinsurance Company 789 1,498 A
Hanover Ruckversicherungs AG. 729 146 S&P AAA
Frankona Ruckversicherungs AG. 704 1,557 S&P AA+
American Reinsurance Company 660 2 A+
Transatlantic Reinsurance Company 636 1,552 A+
San Francisco Reinsurance Company 628 934 A-
North Star Reinsurance 569 1,296 A
Everest Reinsurance Company 464 828 A
Gerling Global Re (US) 341 447
---------- ---------
Top 15 reinsurers $37,737 $65,736
========== =========
All reinsurers $46,591 $69,242
Percentage of total represented
by top 15 reinsurers 81.0% 94.9%
(1) Includes losses and LAE paid, outstanding losses and LAE, incurred but not
reported loss reserves and unearned premium reserves net of ceded
reinsurance premiums payable as of December 31, 1996.
(2) Except as otherwise indicated, A.M. Best Company rating assigned as of
December 31, 1996.
(3) See discussion of Lloyd's syndicates below.
(4) Insurance Solvency International ranking.
Lloyd's of London is a collection of underwriters, known as "names," who
generally group together annually to form syndicates. Lloyd's reported material
aggregate losses for its underwriting years of account prior to 1992. These
losses have had serious effects on Lloyd's in general, and on certain
syndicates in particular. On September 3, 1996, Lloyds of London obtained
approval from the UK Government to reinsure all 1992 and prior years
liabilities into Equitas Limited in order to obtain operating and investment
efficiencies and provide for future development of 1992 and prior liabilities.
The reinsurance of the 1992 and prior liabilities does not relieve the Lloyds
Syndicate of their responsibility for those liabilities but does place Equitas
Limited as the entity of first course. There has also been a substantial
decrease in the underwriting capacity of Lloyd's syndicates in recent years.
These and other adverse developments could affect the ability of certain
syndicates to continue to underwrite risk and the ability of insureds to
continue to place business with particular syndicates. It is not possible to
predict what effects the circumstance described above may have on Lloyd's and
the Company's contractual relationship with Lloyd's syndicates in the future.
However, the Company is not currently aware of
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any circumstances that would lead the Company to believe that the amounts
recoverable from any Lloyd's syndicate may be uncollectible.
S&P has published stability rankings for Lloyd's syndicates, which rate,
based on a five-tier system, a syndicate's financial characteristics over the
most recent four years of reported results. Under this system, a ranking of one
asterisk is assigned to syndicates that have demonstrated the least favorable
financial characteristics, a ranking of three asterisks is assigned to
syndicates that have demonstrated middle-range financial characteristics and a
ranking of five asterisks is assigned to syndicates that have demonstrated the
most favorable financial characteristics. No ranking is given for syndicates
that have not closed at least two underwriting years. In the most recent S&P
ranking, which is based on underwriting years up to and including 1995, all
ranked syndicates to which the Company cedes risk were ranked either ***, ****
or *****.
INVESTMENTS
The Company has a conservative investment philosophy with the object of
maximizing investment returns, consistent with appropriate safety,
diversification, tax and regulatory considerations, and providing sufficient
liquidity to enable the Company to meet its obligations on a timely basis. The
Company's portfolio is comprised of investment-grade fixed income securities.
The Company has no investments in real estate, mortgages, collateralized
mortgage obligations, non-investment-grade bonds, private placements or
derivative securities.
The Company's investment practices are governed by guidelines established
and approved by its Board of Directors and by the qualitative and quantitative
limits prescribed by the Texas Insurance Code and the Texas Insurance
Department. The Company has engaged Luther King Capital Management, Inc. and
Aon Advisors, Inc. to manage its investment portfolio, subject to the
investment guidelines adopted by the Board of Directors and regulatory
requirements. The Investment Committee of the Company's Board of Directors
meets periodically with management to set investment policy and review the
performance of the Company's investment managers. In addition, representatives
of the outside investment managers consult at least quarterly with management
regarding portfolio performance and characteristics.
The Company's management determines the appropriate classification of
securities at the time of purchase. If the Company's management has the intent
and the Company has the ability at the time of purchase to hold securities
until maturity, they are classified as held to maturity and carried at
amortized cost. Securities to be held for indefinite periods of time and not
specifically intended to be held to maturity are classified as available for
sale and carried at market value.
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The following table shows the Company's investments and cash and cash
equivalents as of December 31, 1996.
Percent of
Carrying Value Market Value Market Value
-------------------------------------------------------
Fixed income securities (Dollars in thousands)
Available for sale $29,167 $29,167 44.3%
Held to maturity 23,479 23,264 35.4%
------ ------ -----
Total fixed income securities $52,646 $52,431 79.7%
Short-term investments 13,347 13,347 20.3%
Total investments $65,993 $65,778 100.00%
======= ======= ======
Cash and cash equivalents $23,094 $23,094
======= =======
The following table shows the composition of the Company's fixed income
investment portfolio by rating as of December 31, 1996. The Company did not
have at December 31, 1996, and does not currently have, any investments rated
below 2 by the National Association of Insurance Commissioners ("NAIC").
NAIC S&P's Equivalent Carrying Value Market Percent of
RATING (1) Description (Dollars in Thousands) Value Market Value
- ---------- ----------- -------------------- ----- ------------
1 AAA $22,430 $22,223 42.4%
1 AA 7,728 7,720 14.7
1 A 16,421 16,421 31.3
2 BBB 6,067 6,067 11.6
- ----- ----- ----
TOTAL $52,646 $52,431 100.0%
======= ======= =====
- ------------------------
(1) The Securities Valuation Office of the NAIC maintains a security valuation
system that assigns a numerical rating to each security. The numerical
ratings generally correspond to S&P's classifications, as indicated,
although S&P has not necessarily rated the securities as indicated. The
ratings assigned by the NAIC range from Class 1 to Class 6, with Class 1
as the highest quality rating.
The S&P rating system utilizes various symbols to indicate the relative
investment quality of a rated bond. "AAA" rated bonds are judged to be the best
quality and are considered to carry the smallest degree of investment risk.
"AA" rated bonds are judged to be of high quality by all standards. Together
with "AAA" bonds, these bonds comprise what are generally known as high grade
bonds. "A" rated bonds possess many favorable investment attributes and are
considered to be upper medium grade obligations. "BBB" rated bonds are
considered as medium grade obligations; they are neither highly protected nor
poorly secured.
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The following table sets forth contractual maturities for the Company's
fixed income investment portfolio at December 31, 1996. 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.
Percent of
Carrying Value Carrying Value
---------------------- --------------
(Dollars in thousands)
Maturity category
Less than one year $ 5,085 9.7%
One year to three years 12,183 23.1%
Over three years to five years 2,104 4.0%
Over five years to seven years 15,444 29.3%
Over seven years to ten years 8,333 15.9%
Over ten years 9,497 18.0%
------- -----
Total $52,646 100.0%
======= =====
The Company's investment strategies are designed to take into account the
liability profiles of each division and provide for appropriate asset/liability
matching. At December 31, 1996, the Company's fixed income portfolio had a
weighted average life of 4.8 years and an average duration of 3.6 years.
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The following table reflects the Company's investment results for each
year in the five-year period ended December 31, 1996.
Year Ended December 31,
----------------------------------------------
1992 1993 1994 1995 1996
-----------------------------------------------
(Dollars in thousands, except percentages)
Average invested asset $53,273 $55,984 $82,046 $100,261 $84,932
Net investment income 2,880 2,918 4,106 5,497 4,470
Realized gains (losses) on
investments 1,622 1,414 (33) 496 (74)
Net tax-adjusted yield on
average invested assets
(excluding realized gains
(losses) on investments) 5.4% 5.2% 5.2% 5.7% 5.8%
COMPETITION
The property and casualty insurance industry is highly competitive. In its
aviation lines of business, the Company competes primarily with other aviation
specialty insurers and underwriting organizations, including aviation
underwriting pools composed of large national multi-line insurers. In its
marine line of business, the Company competes primarily with national and
regional insurers, some of which are specialty insurers in the Company's lines
of business. Many of these insurers and underwriting organizations are
substantially larger, have significantly greater financial resources and have
higher Best ratings than the Company.
EMPLOYEES
The Company employed 199 full-time employees at May 30, 1997. None of the
employees are represented by a labor union and management considers its
relationship with its employees to be generally excellent.
LEGAL PROCEEDINGS
The Company and its subsidiaries are routinely parties to pending or
threatened legal proceedings and arbitrations. These proceedings involve
alleged breaches of contract, torts, including bad faith and fraud claims, and
miscellaneous other causes of action. These lawsuits may include claims for
punitive damages in addition to other specified relief. The Company insures or
reinsures some, but not all, of its exposure to such damages. Based upon
information presently available, and in light of legal and other defenses
available to the Company, management does not consider liability from any
threatened or pending litigation to be material.
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ELECTION OF DIRECTORS
Two directors are to be elected at the Annual Meeting. The current outside
directors have informed the Company that they intend to resign, upon
consummation of the Aviation Division Sale, and the Company will reduce the
size of its Board of Directors to three. The Company's Restated Certificate of
Incorporation provides that the Board of Directors shall be divided into three
classes as nearly equal in number as possible. Thus, the Board of Directors is
divided into three classes, the terms of office of which are currently
scheduled to expire on the dates of the Company's annual meetings of
stockholders in 1997, 1998 and 1999. Richard M. Kurz and Howard D. Putnam have
been nominated to serve in the class which is currently under nomination and,
if elected, will serve until the Company's annual meeting of stockholders in
1999 and 2000, respectively, and until their respective successors shall have
been elected and qualified. A plurality of the votes cast in person or by proxy
by the holders of Common Stock and Series D Preferred Stock is required to
elect a director. Accordingly, assuming a quorum is present, abstentions and
"broker non-votes" would have no effect on the election of directors. A broker
non-vote occurs if a broker or other nominee does not have discretionary
authority and has not received instructions with respect to a particular item.
There will be no cumulative voting for members of the Board of Directors.
Unless otherwise instructed or unless authority to vote is withheld, the
enclosed proxy will be voted for the election of the nominees listed below.
Although the Board of Directors does not contemplate that any of the nominees
will be unable to serve, if such a situation arises prior to the Annual
Meeting, the persons named in the enclosed proxy will vote for the election of
such other person(s) as may be nominated by the Board of Directors.
Stated in the tables below and on the following pages are the names and
ages of the nominees and directors continuing in office, the principal
occupation of each during at least the last five years, the date on which each
individual became a director of the Company, and other directorships and civic
affiliations of such persons. The information set forth on the following pages
with respect to each nominee's and director's principal occupation, other
directorships and affiliations and beneficial ownership of Common Stock has
been furnished by the nominee or director.
NOMINEES FOR ELECTION TO THE BOARD OF DIRECTORS
DIRECTOR'S
NAME AGE TERM ENDING
---- --- -----------
Richard M. Kurz 55 1999
Howard D. Putnam 59 2000
RICHARD M. KURZ joined the Company in December 1993 as Senior Vice
President/Chief Financial Officer. He has been a director of the Company since
February 1995. From August 1991 until December 1992, Mr. Kurz was Chief
Financial Officer of BDP International, Inc., a Custom House broker and freight
forwarder, where he was responsible for finance and administration. From July
1989 to August 1991, Mr. Kurz held a number of senior financial positions in
CIGNA Corporation's Property and Casualty Group. From April 1986 to July 1989
Mr. Kurz was Chief Financial Officer of CIGNA Worldwide, Inc. ("CIGNA"), where
he was responsible for financial reporting, planning, mergers and acquisitions,
treasury, and international investment portfolio strategy. From January 1982 to
April 1986, Mr. Kurz was the Chief Accounting Officer of the Property and
Casualty Group of CIGNA where he was responsible for financial reporting and
controls. Mr. Kurz also served in various positions with Price Waterhouse for
11 years, including Senior Manager in the firm's insurance industry specialty
group providing accounting and consulting services to the insurance industry.
Mr. Kurz is a Certified Public Accountant.
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HOWARD D. PUTNAM has been self-employed as an author and consultant on
business management matters since 1989. Prior to that time, Mr. Putnam was an
airline executive and entrepreneur. Mr. Putnam's background in the airline
industry has spanned more than thirty-five years, with professional positions
including service as the Chief Executive Officer of Braniff International from
1981 to 1983, the Chief Executive Officer of Southwest Airlines from 1978 to
1981 and the Senior Vice President of United Air from 1976 to 1978. Mr. Putnam
is a graduate of the Harvard Advanced Management Program and holds a masters of
business administration from the University of Chicago.
MEMBER OF THE BOARD OF DIRECTORS
CONTINUING IN OFFICE
DIRECTOR'S
NAME AGE TERM ENDING
---- --- -----------
M. Philip Guthrie 52 1998
M. PHILIP GUTHRIE joined the Company as a director in May 1989, and his
term expires in 1998. Mr. Guthrie became Chairman of the Board and Chief
Executive Officer of the Company in December 1992 and President in September
1996. Mr. Guthrie was a managing director of Mason Best Company, L.P., a
merchant banking firm ("Mason Best"), from 1989 through 1996. Mr. Guthrie has
been a director of San Jacinto Holdings, Inc. ("SJH") and Safeguard Business
Systems, Inc. from 1989 through 1996. Mr. Guthrie was President and a General
Partner of Diamond Management Group, Inc., a Dallas-based private investment
company, from 1984 until 1989. From 1981 to 1984, Mr. Guthrie was the Executive
Vice President, Chief Financial Officer and a director of Braniff
International. From 1978 to 1981, Mr. Guthrie was Vice President, Chief
Financial Officer and Treasurer of Southwest Airlines Company. Mr. Guthrie is a
Certified Public Accountant.
MEMBERS OF THE BOARD OF DIRECTORS
NOT CONTINUING IN OFFICE
DIRECTOR'S
NAME AGE TERM ENDING
---- --- -----------
Joseph M. Grant 58 1997
Keith W. Hughes 51 1999
James E. Maser 59 1998
Elvis L. Mason 64 1999
JOSEPH M. GRANT has been a director of the Company since February 1994.
Mr. Grant has been Executive Vice President, Chief Financial Officer and a
director of Electronic Data Systems Corporation ("EDS") since December 1990.
Prior to joining EDS, Mr. Grant served as Executive Vice President and Chief
Systems Officer for Houston-based American General Corp., a holding company in
the life insurance, real estate and consumer finance businesses. From 1986 to
1989, Mr. Grant was Chairman of the Board and Chief Executive Officer of Fort
Worth-based Texas American Bancshares, Inc., a bank holding company. Mr. Grant
serves on the Board of Directors of Heritage Media Communication, a radio,
television and direct marketing firm, and Nor Am Energy Corp., an oil and gas
company.
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KEITH W. HUGHES has been a director of the Company since August 1995. Mr.
Hughes has been Chairman and Chief Executive Officer of Associates First
Capital Corporation (the "Associates"), a consumer and commercial finance
company, since February 1995. Mr. Hughes has been associated with the
Associates since 1981. Mr. Hughes serves on the Board of Directors of
Associates First Capital Corporation.
JAMES E. MASER has been a director of the Company since February 1995. Mr.
Maser has been Vice Chairman of Club Corporation International, a company which
owns and operates clubs, resorts, public fee golf courses and real estate
developments worldwide, since 1989. Mr. Maser has been associated with Club
Corporation International since 1965.
ELVIS L. MASON has served as a director of the Company since February 1992
and from 1986 through 1987. Mr. Mason has been the Managing Partner of Mason
Best, a merchant banking firm, since August 1984. Mason Best is a stockholder
of the Company. Since February 1992, Mr. Mason served as Chairman of the Board
of Safeguard Business Systems, Inc., a manufacturer and marketer of business
forms and services. From February 1992 until October 1996 Mr. Mason also served
as Chief Executive Officer of Safeguard Business Systems, Inc. Mr. Mason is
also a director of Tracor, Inc., a defense electronics firm, and United
Meridian Corporation, an oil and gas firm.
DIRECTORS' MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors held eight meetings during 1996. Joseph M. Grant
and Keith W. Hughes attended fewer than 75% of the aggregate of the total
number of meetings of the Board of Directors and the total number of meetings
held by all committees of the Board of Directors on which such director served.
The Board of Directors currently has the following standing committees:
the Audit Committee, the Compensation Committee and the Investment Committee.
The Board of Directors has no nominating committee or other committee which
performs similar functions.
The Audit Committee, which held one meeting during 1996, is charged with
overseeing the financial affairs of the Company. The Audit Committee recommends
an accounting firm to serve as the Company's independent auditors, reviews with
the independent auditors the scope and timing of audit and non-audit services,
and reviews the annual audit report of the Company with the independent
auditors. Currently, the members of the Audit Committee are Mr. Grant
(Chairman), Mr. Maser and Mr. Mason.
The Compensation Committee, which held one meeting during 1996, is charged
with the responsibility of overseeing the compensation policies of the Company.
The Compensation Committee reviews and approves or recommends to the Board of
Directors the types and amounts of compensation for the officers of the
Company, reviews and recommends to the Board of Directors such employee benefit
plans and other forms of remuneration as it deems appropriate, and acts as the
committee administering all of the stock option plans of the Company, with the
duties provided in such plans. Currently, the members of the Compensation
Committee are Mr. Mason (Chairman), Mr. Hughes and Mr. Maser.
The Investment Committee, which held one meeting during 1996, is charged
with overseeing the investment affairs of the Company. The Investment Committee
establishes investment policies for the Company, reviews investment results,
meets periodically with the Company's investment advisors and makes
recommendations to the Board of Directors for engaging and discharging the
investment advisors. Currently, the members of the Investment Committee are Mr.
Guthrie (Chairman), Mr. Grant and Mr. Hughes.
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DIRECTOR COMPENSATION
Directors who are compensated as employees of the Company receive no
additional compensation as directors. Non-employee directors receive annual
compensation of $15,000, plus $1,000 for each Board of Directors meeting
attended. Committee chairmen receive $1,000, and other material capital
expenditurescommittee members
receive $500, for each committee meeting attended. The Company has terminated
its deferred compensation plan that had been available to all non-employee
directors for the cash portion of the compensation.
The Company has adopted a stock option plan for non-employee directors
(the "Director Plan"), which authorizes 100,000 shares of Common Stock for
issuance pursuant to stock options granted to non-employee directors. Under the
Director Plan, (i) each newly appointed director is granted an option to
purchase shares of Common Stock on the date of the Company's first meeting of
the Board of Directors for which they served as a director equal to the lesser
of 10,000 shares or the number of shares equal to 100,000 divided by the fair
market value per share on the date of the grant; and (ii) each director is
granted additional options to purchase 2,500 shares of Common Stock on each of
the dates of the subsequent annual meetings of the Board of Directors.
AUDIT AND COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Decisions with respect to the compensation of the Company's executive
officers have been made by a Compensation Committee consisting of Mr. Hughes,
Mr. Maser and Mr. Mason, who were directors of the Company at that time. None
of Messrs. Hughes, Maser or Mason have ever been officers of the Company. Mr.
Mason is Chairman of the Board and Chief Executive Officer of Safeguard
Business Systems, Inc. Mr. Guthrie, Chairman of the Board, President and Chief
Executive Officer of the Company, is a member of the Compensation Committee of
Safeguard Business Systems, Inc.
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EXECUTIVE OFFICERS
The following table sets forth information regarding the current executive
officers of the Company and certain of its subsidiaries. Following the sale of
the Company's divisions, only Messrs. Guthrie and Kurz will remain as executive
officers of the Company. See "Plans for Future Operation of the Company."
NAME AGE POSITION
- ---- --- --------
M. Philip Guthrie....... 52 Chairman of the Board, Chief Executive Officer,
President and Director
Allen N. Walton III .... 57 President/Aviation Division
Frederick G. Anderson .. 46 Senior Vice President/General Counsel and Secretary
Helen F. Knight ........ 53 Senior Vice President of AEIC
Richard M. Kurz ........ 55 Senior Vice President/Chief Financial Officer
John P.S. Leigh ........ 49 Senior Vice President/Aviation Underwriting of AEIC
David A. Notestein ..... 44 Senior Vice President/Chief Underwriting Officer
Ronald D. Taylor ....... 51 Vice President/Information Systems
Michael G. Westover .... 38 Vice President and Treasurer
The Executive Officers named above were elected by the Board of Directors
of the Company, or, in the case of Ms. Knight, Ms. Solomon and Messrs. Daniels,
Hill and Leigh, the Board of Directors of AEIC, to serve in such capacities
until the next annual meeting of such Boards of Directors, or until their
respective successors have been duly elected and have been qualified, or until
their earlier death, resignation, disqualification or removal from office. For
certain biographical information concerning Messrs. Guthrie and Kurz, see
"Election of Directors."
FREDERICK G. ANDERSON joined the Company as Vice President/General Counsel
and Secretary in March 1992. Mr. Anderson became Senior Vice President/General
Counsel and Secretary in February 1994. Prior to joining the Company, Mr.
Anderson practiced law for 12 years in the Dallas, Texas office of Akin, Gump,
Strauss, Hauer & Feld, L.L.P., a large international law firm. Mr. Anderson was
a partner in the corporate/securities section of the firm for over five years,
during which time Mr. Anderson and the firm represented American Eagle in a
variety of corporate, regulatory, litigation and other matters.
HELEN F. KNIGHT joined AOA in 1977, following AOA's acquisition of
International Aviation Underwriters, where she had been employed as an aviation
underwriter in the Special Risk Department. She has been Senior Vice
President/Special Accounts of AEIC since September 1994, where she is
responsible for the major airport program and placement of facultative
reinsurance. Prior to this she held various positions in AEIC and AOA. Mrs.
Knight has over 27 years experience in the insurance industry.
JOHN P.S. LEIGH joined AOA in July 1983, following AOA's acquisition of
Duncanson & Holt/Aerospace Managers Agency, Inc., where he served as Vice
President, Underwriting. He has been Senior Vice President/Aviation
Underwriting of AEIC since July 1995, where he is responsible for all aspects
of aviation underwriting and aviation underwriting management. Prior to this he
held various positions at AEIC and AOA. Mr. Leigh has over 28 years experience
in the insurance industry.
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DAVID A. NOTESTEIN joined the Company in March 1997 as Senior Vice
President/Chief Underwriting Officer. Prior to joining the Company, Mr.
Notestein was Senior Vice President of Transport Insurance Company for over 10
years. During this period, he directed a product management group responsible
for establishing pricing, distribution and underwriting practices and standards
that returned a commercial auto insurance product to underwriting profitability
and subsequently was responsible for similar functions involving development of
a new non-standard auto product.
RONALD D. TAYLOR joined the Company as Vice President/Data Processing in
December 1990, and has served as Vice President/Information Systems since
January 1993. Prior to joining the Company, Mr. Taylor had been with Policy
Management Systems Corporation, an insurance systems software development and
sales and support company, since June 1988. Prior to that, Mr. Taylor was an
independent data processing consultant working with insurance and financial
organizations.
ALLEN N. WALTON III joined Aviation Adjustment Bureau, Inc. ("AAB"), a
subsidiary of the Company, in January 1974. He has been Senior Vice
President/Claims of AAB since January 1989. In November 1995, Mr. Walton became
President/Aviation Division of AEIC. In July 1993, Mr. Walton became Senior
Vice President/Claims of AEIC, and in February 1994 he became Senior Vice
President/Claims of the Company. Mr. Walton managed the P&C Division claims
operations since June 1993 and the Aviation Division claims operations since
December 1989. Prior to that, Mr. Walton was responsible for the investigation
and supervision of general aviation, airport, product and airline claims for
the Company.
MICHAEL G. WESTOVER joined AOA as reinsurance accounting manager/internal
auditor in May 1990. Mr. Westover became Vice President of AOA in October 1990,
and became Vice President and Treasurer of the Company in February 1992. From
September 1989 to May 1990, Mr. Westover served as Financial Director of
Combined Independent Agencies. Mr. Westover is a Certified Public Accountant.
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EXECUTIVE COMPENSATION
The following table sets forth compensation information with respect to
(i) the Chief Executive Officer, (ii) the four most highly compensated
executive officers of the Company at the end of the 1996 fiscal year other than
the Chief Executive Officer, and (iii) one individual who had been an executive
officer during 1996 but who was not serving as an executive officer at the end
of the year (each, a "Named Executive Officer"):
SUMMARY COMPENSATION TABLE
Annual Compensation Long-term Compensation
---------------------------------------------------- ----------------------------------------
Other Restricted Securities All Other
Name and Principal Annual Stock Underlying Compensation
Position Year Salary (1) Bonus (2) Compensation (3) Awards (4) Options (#) (5)
===================================================================================== ========================================
M. Philip Guthrie,
Chairman of the Board 1996 $ 350,002 -- -- -- 230,714 $ 4,758
and Chief Executive 1995 350,002 -- -- -- -- 7,033
Officer 1994 338,462 $ 75,000 -- $ 1,075 120,142 7,835
George F. Cass (6) 1996 250,001 -- -- -- -- 6,258
1995 250,001 -- -- -- -- 7,033
1994 244,232 50,000 -- 1,075 81,560 6,566
Frederick G. Anderson, 1996 167,500 -- -- -- 72,695 6,258
Sr. Vice 1995 167,500 -- -- -- 15,000 7,033
President/General 1994 166,346 40,000 -- 1,075 20,000 6,740
Counsel and Secretary
Richard M. Kurz, Sr 1996 162,500 -- -- -- 66,334 6,258
Vice President/Chief 1995 158,269 -- -- -- 30,000 7,033
Financial Officer 1994 135,000 40,000 -- 1,075 20,000 3,488
Allen N. Walton III, 1996 162,500 -- -- -- 66,643 6,258
President/Aviation 1995 147,887 -- -- -- 5,000 7,033
Division 1994 141,636 10,000 -- 1,075 20,000 6,070
George C. Hill (7), Sr. 1996 160,002 -- -- -- 15,000 6,258
Vice President/AEIC 1995 159,233 -- -- -- -- 7,033
1994 154,424 7,000 -- 1,075 10,000 6,487
(1) Salary and bonus levels are determined in accordance with the process
described in the "Compensation Committee Report on Executive
Compensation."
(2) Bonuses are generally earned in the year shown and paid in the following
year.
(3) No Named Executive Officer received perquisites or other personal
benefits in any of the Company's three most recent fiscal years which
exceeded the lesser of $50,000 or 10% of his combined annual salary and
bonus for such year.
(4) Each of Messrs. Guthrie, Cass, Anderson, Kurz, Walton and Hill held 100
shares of restricted stock having a value of $475 on December 31, 1996.
Each 100 share grant was made on May 18, 1994 as restricted stock subject
to certain vesting requirements pursuant to the terms of the Employee
Restricted Stock Plan ("ERSP"). On December 31, 1996, all shares of
restricted stock issued and outstanding under the ERSP
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became fully vested pursuant to the terms of the ERSP. Dividends were
paid on all restricted stock when earned.
(5) Amounts reflect contributions made by the Company to the Employee Profit
Sharing and Savings Plan account of the Named Executive Officer.
Discretionary contributions made by the Company are earned in the year
shown and paid in the following year.
(6) Mr. Cass resigned from the position of President and Chief Operating
Officer and a director of the Company in September 1996. He retired as an
employee of the Company on March 31, 1997.
(7) Mr. Hill resigned from his position as Senior Vice President effective
June 30, 1997 upon completion of the Artisan Sale.
STOCK OPTION GRANTS
The following table provides details regarding options granted to the
Named Executive Officers in 1996. 39In addition, in accordance with Securities
and Exchange Commission (the "SEC") rules there are shown the hypothetical
gains or "option spreads" that would exist for the respective options. The
gains are based on assumed rates of annual compound growth in stock price of 5%
and 10% from the date the options were granted over the full option term. The
actual value, if any, a Named Executive Officer may realize will depend on the
spread between the market price and the exercise price on the date the option
is exercised.
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
Number of Percent of Potential Realizable
Securities Total Options Assumed Annual Rates
Underlying Granted Exercise or of Share Price
Options Employees in Base Price Per Expiration Appreciation for
Name Granted(1) Fiscal 1996 Share Date Option(2)
--------------------
5% 10%
=============================================================================================================================
M. Philip Guthrie 110,572(3) 13.8% $4.525 12/31/2007 $398,621 $998,133
120,142(3) 5.0 4.75 12/31/2006 359,225 909,475
George F. Cass -- -- -- -- -- --
Frederick G. Anderson 20,945(3) 2.6 4.525 12/31/2007 75,507 189,071
51,750(3) 6.5 4.75 12/31/2006 154,733 391,748
Richard M. Kurz 9,584(3) 1.2 4.525 12/31/2007 34,550 86,515
56,750(3) 7.1 4.75 12/31/2006 169,683 429,598
Allen N. Walton III 14,603(3) 1.8 4.525 12/31/2007 52,644 131,821
48,040(3) 6.0 4.75 12/31/2006 143,640 363,663
George C. Hill 3,480(3) 0.4 4.525 12/31/2007 12,545 31,414
11,520(3) 1.4 4.75 12/31/2006 34,445 87,206
- ---------
(1) The options noted are subject to a three-year vesting schedule with
33-1/3% becoming first exercisable on December 31, 1997 (the first annual
anniversary of the date of grant). An additional 33-1/3% becomes
exercisable on each of December 31, 1998 and December 31, 1999.
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(2) Potential gains are net of the exercise price, but before taxes
associated with the exercise. These amounts represent the assumed annual
rates of appreciation shown, based on SEC rules. Actual gains, if any, on
stock option exercises are dependent on the future performance of the
Common Stock, overall market conditions and the optionholders' continued
employment through the vesting period. The amounts reflected in this table
may not necessarily be achieved.
(3) Replacement stock options granted on December 31, 1996. See "Ten Year
Option Repricing" below.
STOCK OPTION EXERCISES AND HOLDINGS
The following table shows the number of shares covered by both exercisable
and non-exercisable stock options held by the Named Executive Officers at the
end of 1996. Also reported are the values for "in-the-money" options which
represent the positive spread between the exercise price of any such existing
stock options and the year-end price of the Company's Common Stock. There were
no options exercised by any Named Executive Officers in 1996.
AGGREGATED FISCAL YEAR-END OPTION VALUES
Number of Shares Underlying Value of Unexercised
Unexercised Options In-the-Money Options
Name at December 31, 1996 at December 31, 1996
=============================================================================
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
M. Philip Guthrie -- 230,714 -- $24,878.80
George F. Cass -- -- -- --
Frederick G. Anderson -- 72,695 -- 4,712.63
Richard M. Kurz -- 66,334 -- 2,156.40
Allen N. Walton III -- 62,643 -- 3,285.68
George C. Hill 62,825 15,000 -- 783.00
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TEN YEAR OPTION REPRICING
The following table provides the specified information concerning all
repricing of options to purchase the Company's stock held by the named
executive officers during the last ten years.
Securities Exercise Length of original
Underlying price at time option term
number of Market price of of repricing remaining at date
options repriced stock at time of or New of repricing or
or amended repricing or amendment exercise amendment
Name Date (#)(1) amendment ($) ($) price (Months)
- -------------------- -------- ---------------- ---------------- ------------- -------- ------------------
M. Philip Guthrie 12/31/96 104,038 $4.75 $11.52 $4.525 84
(Chairman, President 12/31/96 6,534 $4.75 $11.52 $4.525 96
and CEO) 12/31/96 120,142 $4.75 $10.00 $4.75 89
George F. Cass -- -- -- -- --
Frederick G. Anderson 12/31/96 16,985 $4.75 $11.52 $4.75 75
(Sr. Vice 12/31/96 355 $4.75 $11.52 $4.525 75
President/General 12/31/96 17,340 $4.75 $11.52 $4.525 87
Counsel) 12/31/96 3,015 $4.75 $11.52 $4.75 96
12/31/96 20,000 $4.75 $10.00 $4.75 89
12/31/96 11,750 $4.75 $9.875 $4.75 98
12/31/96 3,250 $4.75 $ 9.57 $4.525 110
Richard M. Kurz 12/31/96 16,334 $4.75 $11.52 $4.75 96
(Sr. Vice 12/31/96 20,000 $4.75 $10.00 $4.75 89
President/Chief 12/31/96 16,750 $4.75 $9.875 $4.75 98
Financial Officer) 12/31/96 9,584 $4.75 $ 9.57 $4.525 110
12/31/96 3,666 $4.75 $ 9.57 $4.75 110
Allen N. Walton III 12/31/96 17,340 $4.75 $11.52 $4.525 70
(President/Aviation 12/31/96 4,021 $4.75 $11.52 $4.525 87
Division) 12/31/96 6,282 $4.75 $11.52 $4.525 96
12/31/96 20,000 $4.75 $10.00 $4.75 89
12/31/96 5,000 $4.75 $9.075 $4.75 98
12/31/96 3,040 $4.75 $10.25 $4.75 110
12/31/96 6,960 $4.75 $ 9.94 $4.525 122
George C. Hill 12/31/96 10,000 $4.75 $10.00 $4.75 89
(Sr. Vice 12/31/96 1,520 $4.75 $10.25 $4.75 110
President/AEIC) 12/31/96 3,480 $4.75 $ 9.94 $4.525 122
(1) The repriced options are subject to a three year vesting schedule with
33-1/3% becoming first exercisable on December 31, 1997 (the first annual
anniversary of the date of grant). An additional 33-1/3% becomes
exercisable on each of December 31, 1998 and December 31, 1999.
RECENT STOCK OPTION GRANTS
On May 30, 1997 the Board of Directors granted to Mr. Guthrie and Mr.
Kurz, who will continue as executive officers of the Company after consummation
of the Aviation Division Sale, options to purchase 110,000 and 55,000 shares of
Common Stock, respectively, at the exercise price of $.625 per share, the
closing price of the Common Stock on the NYSE on the date of grant. In
addition, the Board of Directors also granted Mr. Guthrie and Mr. Kurz options
to purchase 390,000 and 195,000 shares of Common Stock, respectively,
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which will become effective only when the following conditions are met: (i)
the Aviation Division Sale is consummated; (ii) sufficient shares of Common
Stock are available to be granted under the Company's stock option plans, and
(iii) Mr. Guthrie and Mr. Kurz agree to cancel all previously granted options.
The exercise price per share will be the fair market value per share on the
date such options become effective. All options granted to Mr. Guthrie and Mr.
Kurz are subject to a two year vesting schedule with 50% becoming exercisable
on the first anniversary of the date of grant and 50% becoming exercisable on
the second anniversary.
EXECUTIVE OFFICER AGREEMENTS
Effective December 31, 1994, the Company entered into employment
agreements with the following executive officers to serve in the positions
noted: M. Philip Guthrie, Chairman of the Board and Chief Executive Officer;
George F. Cass, President and Chief Operating Officer; Frederick G. Anderson,
Senior Vice President/General Counsel and Secretary; Richard M. Kurz, Senior
Vice President/Chief Financial Officer; and Allen N. Walton III,
President/Aviation Division. Effective December 31, 1994, AEIC entered into an
employment agreement with George C. Hill to serve as Senior Vice President of
AEIC. On September 27, 1996, Mr. Cass retired as President of the Company and
his employment agreement was terminated by mutual agreement. Each employment
agreement is for a term of three years from the date of the agreement;
provided, however, that on each anniversary of such agreement, the term of the
agreement is automatically extended for one additional year unless at least 60
days before any such anniversary either party provides the other party written
notice that the automatic extension shall be terminated. Pursuant to the
respective employment agreements, each of Messrs. Guthrie, Anderson, Hill, Kurz
and Walton received an annual salary as listed in the Summary Compensation
Table for 1996, which may be increased by the Board of Directors in its
discretion. Each is also entitled to receive such annual bonuses in amounts up
to 50% of his annual salary as the Board of Directors may approve in its
discretion. In the event of a Change of Control (as defined in the employment
agreements), and, thereafter, an officer's employment is terminated by the
Company, except for good reason (as defined in the employment agreements) or as
otherwise set forth therein, the Company would be required to continue payment
of his base salary for the remainder of the term. The sale by the Company of
the Series D Preferred Stock on December 31, 1996 constituted a Change of
Control as defined in the employment agreements, and the Aviation Division Sale
will constitute a Change of Control as defined in such agreements. Each
employment agreement contains confidentiality and non-solicitation provisions
effective during the term of employment and for three years after the
employment agreement is terminated.
Upon closing of the Artisan Sale, the employment agreements of Messrs.
Hill and Daniels were terminated. Upon closing of the Aviation Division Sale,
the employment agreement of Mr. Walton will be assigned to and assumed by
Purchaser, and notices will be given to Messrs. Guthrie and Kurz that their
agreements will no longer be automatically extended upon their anniversary
dates. The Company expects to enter into an agreement with Mr. Anderson
providing for termination of his employment agreement after closing of the
Aviation Division Sale, payment of six months salary to Mr. Anderson and the
engagement of Mr. Anderson as a consultant on a part time basis for up to one
year. Mr. Anderson would be paid a fee on an hourly basis for actual time
worked.
The Company's 1994 Stock Incentive Plan provides for full vesting of
options outstanding for at least six months in the event there is a change in
control of the Company. The Aviation Division Sale will constitute a change in
control of the Company for purposes for the 1994 Stock Incentive Plan. See "The
Aviation Division Sale - Interests of Certain Persons in the Aviation Division
Sale."
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COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
OVERALL OBJECTIVES OF THE EXECUTIVE COMPENSATION PROGRAM
The Compensation Committee believes that management compensation should be
directly linked to changes in stockholder value and long-term financial and
operating performance. The Company's executive compensation program thus
includes significant long-term incentives, through equity-based awards, which
are tied to the long-term performance of the Company's Common Stock. The
Compensation Committee recognizes, however, that while stock prices may reflect
management performance over the long-term, other factors, such as general
economic conditions and varying investors' attitudes toward the stock market in
general, and specific industries in particular, may significantly affect stock
prices at any point in time. Accordingly, the salary component of compensation
emphasizes individual performance and the annual bonus component of
compensation emphasizes the realization of defined business objectives, both of
which are independent of short-range fluctuations in the stock price.
Executive compensation thus has been designed to align executive
compensation with both the Company's business goals and long-term stockholder
interests. The Compensation Committee believes that the program, as
implemented, is balanced and consistent with these objectives. The Compensation
Committee will continue to monitor the operation of the program and cause the
program to be adjusted and redefined, as necessary, to ensure that it continues
to support both corporate and stockholder goals.
The key details of the Company's total executive compensation program are
discussed below.
COMPETITIVE LEVELS OF COMPENSATION
The Company attempts to provide its executives with a total compensation
package that, at expected levels of performance, is competitive with those
provided to executives who hold comparable positions or have similar
qualifications. Total compensation is defined to include base salary, annual
incentives, and long-term incentives.
The Company determines competitive levels of compensation for executive
positions based on information drawn from compensation surveys, proxy
statements for comparative organizations and compensation consultants. The
proxy statement analysis on pay levels uses a peer group of companies similar
in size and/or business to the Company. The Compensation Committee reviews
compensation recommendations made by the Chief Executive Officer based upon his
assessment of each officer's past performance and expectations as to future
contributions. The Compensation Committee then formulates its own
recommendations, which are submitted for approval by the Board of Directors.
It should be noted that the value of any individual executive's
compensation package will vary significantly based on individual and company
performance. So while the expected value of an executive's compensation package
may be competitive, actual payments made to executives in a given year may be
higher or lower than competitive market rates because of performance.
BASE SALARY PROGRAM
The objective of the Company's base salary program is to provide salaries
that are near the market median for companies of comparable size and/or
business. The Company believes that it is crucial to provide competitive
salaries in order to attract and retain talented managers.
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Base salary levels are also based on each individual employee's
performance over time and each individual's role in the Company. Consequently,
employees with higher levels of sustained performance over time and/or
employees assuming greater responsibilities will be paid correspondingly higher
salaries.
Salaries for executives are reviewed annually based on a variety of
factors, including individual performance, general levels of market salary
increases and the Company's overall financial results. All salary increases are
granted within a pay-for-performance framework.
ANNUAL INCENTIVE COMPENSATION
The Compensation Committee may, in its discretion, recommend that an
annual cash bonus be paid to an individual executive in recognition of
outstanding individual performance. The Company's annual incentive
compensation program assists the Company in rewarding and motivating key
employees and provides cash compensation opportunities to executives.
No annual bonuses were paid to officers for 1996 because earnings per
share thresholds in the 1996 annual incentive bonus program were not met.
LONG-TERM INCENTIVE PLANS
The Company provides long-term equity based incentives through the 1994
Stock Incentive Plan, the 1991 Nonqualified Stock Option Plan, and the P&C
Stock Option Plan--Hill, and cash based incentives through the Employee Profit
Sharing and Savings Plan.
The Company's overall long-term incentive grant levels are established by
considering market data on grant levels and an appropriate overall level of
shares reserved for such plans in the market. Individual long-term incentive
grants are based on the level of each participant in the Company and individual
performance. Also, the Compensation Committee does consider the size of
existing stock option holdings by executives in determining the size of stock
option grants.
The compensation of executive officers is periodically reviewed to ensure
an appropriate mix of base salary, annual incentive, and long-term incentive
within the philosophy of providing competitive total direct compensation
opportunities consistent with the pay philosophy articulated above.
STOCK OPTION REPRICING
On November 5, 1996, the Company and AFG entered into the Securities
Purchase Agreement which provided for the sale and issuance by the Company of
350,000 shares of Series D Preferred Stock for an aggregate purchase price of
$35 million. As a condition to AFG's obligation to close, the Securities
Purchase Agreement required the Company to adjust the exercise price and
vesting period of existing stock options granted to the current officers and
directors of the Company or its subsidiaries pursuant to its 1991 Nonqualified
Stock Option Plan, 1994 Stock Incentive Plan and 1994 Directors Option Plan to
the market price on the date of closing and provided that all such options
shall have a vesting period of three years, with one-third of the options
vesting on each anniversary date of the date of adjustment.
In addition to the requirements in the Securities Purchase Agreement, the
Board of Directors reviewed certain options previously granted to employees of
the Company and the market price of the Company's Common Stock during the past
two years. The Board recognized that such options issued by the Company are
utilized as compensation and to provide incentives to improve Company
performance and thereby positively influence the market price for Company's
common stock for the benefit of all stockholders. The Board determined that the
market price had declined despite the Company's significant accomplishments,
that options previously granted under the 1994 Stock Incentive Plan and the
1991 Nonqualified Stock Option Plan were at exercise prices in
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excess of the current market prices of the Company's Common Stock, and that the
current outstanding stock options if left in place would not achieve the
underlying objectives. The Compensation Committee, which administers the 1994
Stock Incentive Plan and the 1991 Nonqualified Stock Option Plan, reviewed and
approved the Board of Director's analysis regarding the option reset.
Accordingly, on December 31, 1996 (the "Grant Date"), replacement stock
options were granted to replace previously issued stock options under such
plans. The replacement options did not involve the grant of any additional
shares. Pursuant to the requirements of the Securities Purchase Agreement, the
replacement options were granted and priced as of the December 31, 1996 closing
of the Securities Purchase Agreement. No other option repricing or exchange has
occurred in the past ten years.
1996 CHIEF EXECUTIVE OFFICER PAY
As described above, the Company manages its pay for all executives,
including the Chief Executive Officer, considering both a pay-for-performance
philosophy and market rates of compensation for each executive position.
Specific actions recommended by the Compensation Committee and taken by the
Board of Directors regarding Mr. Guthrie's compensation are summarized below.
Base Salary. Mr. Guthrie's base salary remained unchanged at $350,000
annually.
Annual Bonus and Long-Term Incentive Awards. Mr. Guthrie received no bonus
for 1996 performance and was granted no additional stock options in 1996. Mr.
Guthrie's existing stock options were repriced on December 31, 1996. See "Ten
Year Option Repricing" and "Stock Option Repricing" above. Mr. Guthrie's pro
rata share of the Company's contribution for 1996 to the profit sharing portion
of the Employee Profit Sharing and Savings Plan was $1,758.
DISCUSSION OF CORPORATE TAX DEDUCTION ON COMPENSATION IN EXCESS OF $1 MILLION A
YEAR
Internal Revenue Code Section 162(m), enacted in 1993, precludes a public
corporation from taking a deduction in 1994 or subsequent years for
compensation over $1 million for its chief executive officer or any of its four
highest-paid officers. Certain performance-based compensation, however, is
specifically exempt from the deduction limit.
In connection with the compensation of executive officers, the
Compensation Committee is aware of Section 162(m) as it relates to
deductibility of qualifying compensation paid to executive officers. The
Compensation Committee believes that compensation to be paid in 1997 will not
exceed the deductibility limitations on non-excluded compensation to any of the
Company's executives.
The Compensation Committee of the Board of Directors is:
Elvis L. Mason, Chairman
Keith W. Hughes
James E. Maser
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STOCK PERFORMANCE GRAPH
The performance graph shown below was prepared by Research Holdings, Ltd.
for use in this Proxy Statement. The graph sets forth the compounded return to
the Company's stockholders since the Company became a public company on May 11,
1994, compared on an indexed basis with the S&P 500 Stock Index and the
Company's Peer Group.
[GRAPH]
Research Date Group Total Return - Data Summary
FLI Begin: 05/11/94
End: 12/31/96
456BZFLI
- ------------------------------------------------------------------------------------------------------------------------------------
5/94 6/94 9/94 12/94 3/95 6/95 9/95 12/95 3/96 6/96 9/96 12/96
AMERICAN EAGLE GROUP INC FLI 100 93 113 82 97 119 103 111 79 46 43 48
PEER GROUP PPEERO 100 104 107 103 115 115 133 145 142 144 164 177
S & P 500 1500 100 101 106 106 116 127 137 146 153 160 165 179
13-Feb-97
ASSUMES $100 INVESTED ON MAY 11, 1994 AND REINVESTMENT OF DIVIDENDS.
FISCAL YEAR ENDING DECEMBER 31.
QUARTERLY: MAY 11, 1994 TO DECEMBER 31, 1996.
The Peer Group includes the following companies:
AVEMCO Corp., Frontier Insurance Group, Inc., GAINSCO Inc.,
Gryphon Holdings, Inc., Guaranty National Corp., HCC Insurance Holdings, Inc.,
Hartford Steam Boiler Inspection & Insurance Company, Markel Corp.,
Navigators Group, Inc., Progressive Corp. and WR Berkley Corp.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS, DIRECTORS AND MANAGEMENT
The Company has two classes of voting securities: the Common Stock and the
Series D Preferred Stock. The following table sets forth certain information,
with respect to the beneficial ownership of the Company's Common Stock, as of
October 31, 1996,April 30, 1997, by (i) all persons who are known by the Company to be
beneficial owners of five percent or more of such stock, (ii) each director and
director nominee of the Company, (iii) each named executive officerNamed Executive Officer and (iv)
all executive officers and directors of the Company as a group. Unless
otherwise noted, the persons named below have sole voting and investment power
with respect to such shares. No effect has been given to shares reserved for
issuance upon conversion of preferred stock or under outstanding stock options
except where otherwise indicated.
BENEFICIAL OWNERSHIP
------------------------------------------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF %SHARES PERCENT OF CLASS OR IDENTITY OF GROUP SHARES OUTSTANDING(1)
------------------------- --------- --------------
(1)
==================================== ================ ====================
American Financial Group, Inc. (2) 6,782,667 49.5%
One East Fourth Street
Cincinnati, Ohio 45202
Mason Best Company, L.P.(2)........................................ (3) 2,960,772 42.0
2121 San Jacinto, Ste. 1000
Dallas, Texas 75201
Wellington Management Company, LLP (4) 698,000 9.9
75 State Street
Boston, Massachusetts 02109
Heartland Advisors, Inc.(3)........................................ 443,000 6.3 (5) 559,500 7.9
790 North Milwaukee Street
Milwaukee, Wisconsin 53202
U.S. Bancorp (6) 473,400 6.7
111 S.W. Fifth Avenue
Portland, Oregon 97204
Dimensional Fund Advisors, Inc. (7) 401,200 5.7
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401
M. Philip Guthrie(4)............................................... 197,665 2.7Guthrie (8) 11,014 *
George F. Cass 6,317 *
Frederick G. Anderson(5)........................................... 59,223Anderson (9) 2,813 *
George C. Hill III(6).............................................. 68,406III (10) 21,100 *
Richard M. Kurz(7)................................................. 43,584Kurz 2,391 *
Allen N. Walton III(8)............................................. 46,581III 2,491 *
Joseph M. Grant(9)................................................. 7,500Grant -- *
Keith W. Hughes -- *
James E. Maser(10)................................................. 8,927Maser 2,000 *
Elvis L. Mason(11)................................................. 2,973,272 42.2
Keith W. Hughes(9)................................................. 2,963Mason (11) 2,965,772 42.1
Howard D. Putnam 2,000 *
All directors and executive officers as a group
(23(19 persons including those listed above).................................... 3,566,594 50.4 3,013,175 42.8
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- ------------------------
* less than one percent
(1) Shares of Common Stock which are not outstanding but the beneficial
ownership of which can be acquired by a person upon exercise of an option
or warrant within sixty days of the date of this Proxy Statement are
deemed outstanding for the purpose of computing the percentage of
outstanding shares beneficially owned by such person. However, such shares
are not deemed to be outstanding for the purpose of computing the
percentage of outstanding shares beneficially owned by any other person.
(2) Based on a report on Schedule 13G13D dated January 3, 1997 and filed with
the Securities Exchange Commission. Includes 6,666,667 shares of Common
Stock that may be acquired upon conversion of 350,000 shares of Series D
Preferred Stock. The Series D Preferred Stock is entitled to certain
voting rights on the matters submitted to holders of Common Stock.
American Financial Group, Inc. and Exchange
Commission dated February 9, 1995.its affiliates are also subject to
certain voting agreements that limit their voting rights. See " Certain
Relationships and Related Transactions--Voting Rights and Agreements."
(3) Based on a report on Schedule 13G filed with the Securities and Exchange
Commission dated February 9, 1996.1995.
(4) Based on a report on Schedule 13G filed with the Securities and Exchange
Commission dated January 24, 1997.
(5) Based on a report on Schedule 13G filed with the Securities and Exchange
Commission dated February 12, 1997.
(6) Based on a report on Schedule 13G filed with the Securities and Exchange
Commission dated February 11, 1997.
(7) Based on a report on Schedule 13G filed with the Securities and Exchange
Commission dated February 5, 1997.
(8) Includes 1,4002,400 shares of Common Stock held by Mr. Guthrie's wife, and 200
shares of Common Stock held by Mr. Guthrie's son, and 190,667 shares of
Common Stock which may be acquired upon the exercise of options.
(5)son.
(9) Includes 300 shares of Common Stock held by Mr. Anderson's wife, and 57,090
shares of Common Stock which may be acquired upon the exercise of options.
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45
(6)wife.
(10) Includes 1,00021,000 shares of stock held by a trust for which Mr. Hill is the
trustee, and 67,306 shares of Common Stock which may be acquired upon the
exercise of options.
(7) Includes 41,874 shares of Common Stock which may be acquired upon the
exercise of options.
(8) Includes 44,940 shares of Common Stock which may be acquired upon the
exercise of options.
(9) All amounts listed represent shares of Common Stock which may be acquired
upon the exercise of options.
(10) Includes 6,92762,825 shares of Common Stock which may be acquired upon the
exercise of options.
(11) Elvis L. Mason, the Managing Partner of Mason Best Company, L.P., may be
deemed to be the beneficial owner of all shares held by Mason Best
Company, L.P.
Includes 5,000As of June 30, 1997, American Financial Group, Inc. was the beneficial
owner of all of the 357,875 outstanding shares heldof Series D Preferred Stock. Its
address is set forth in the table above.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
REGISTRATION RIGHTS AGREEMENTS
Pursuant to a qualified retirement planregistration rights agreement (the "AFG Agreement") by and
between AFG and the Company, AFG has the right on three occasions to demand
registration under the Securities Act of 1933, as amended (the "Securities
Act"), of the Series D Preferred Stock or the Common Stock into which Mr.it is
converted or the warrants that may be issued upon its redemption (the
"Registrable Securities"); provided, however, that the Company shall in no
event (including by reason of any assignment of rights by AFG or any other
holder of Registrable Securities) be subject to more than three demand
registrations under the AFG Agreement and shall not be obligated at any time to
register the lesser of (i) 25% of the total outstanding number of Registrable
Securities, or (ii) Registrable Securities with a market value (based on the
market value of the underlying shares of Common Stock) of less than $1.0
million pursuant to any such request. The AFG Agreement also provides that, in
the event the Company proposes to register any of its securities under the
Securities Act for its own account or for the account of any other person, AFG
will be entitled to include Registrable Shares in any such registration,
subject to the right of the managing underwriter of any such offering in
certain circumstances to exclude some or all of such Registrable Shares from
such registration. Upon closing of the Aviation Division Sale, the AFG
Agreement will terminate.
Pursuant to a registration rights agreement (the "MB Agreement") between
the Company and Mason isBest, Mason Best has the sole beneficiary and 7,500right to have any or all of the
shares of Common Stock held by it included in a registration statement filed by
the Company under the Securities Act subject to certain limitations set forth
in the MB Agreement. Mason Best also has the right, subject to certain
conditions, to require American Eagle to file a registration statement under
the Securities Act with respect to the Common Stock held by Mason Best (a
"demand registration"). Mason Best is entitled to demand registrations only if
at the time it holds an aggregate of at least 20% of the outstanding Common
Stock of the Company and the demand is to register shares equal to at least 10%
of the outstanding shares but are not otherwise limited as to the number of
times they can require a demand registration. The Company is entitled to delay
a demand registration for up to 180 days if, at the time it receives a demand,
it notifies Mason Best that it intends to make a public offering of Common
Stock within 180 days of such demand pursuant to a firm underwriting. The
registration rights are assignable, provided the assignee beneficially owns
more than 5% of the outstanding shares of Common Stock.
In general, the Company will bear all of the registration and filing fees,
printing expenses, fees and disbursements of counsel for the Company (with AFG
and Mason Best responsible for the fees and disbursements of their separate
counsel), "blue sky" fees and expenses and the expense of any special audits
incident to or required by a registration required by the AFG or MB Agreements;
provided, however, that all underwriting discounts and selling commissions
applicable to sales by AFG or Mason Best will be borne by the respective party.
If the offering is a secondary offering pursuant to a demand registration and
Mason Best is the only stockholder selling shares in such offering, then,
except with respect to the first such offering, Mason Best must pay its
pro-rata share of all the expenses directly attributable to the offering.
The Company and AFG, and the Company and Mason Best, have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act, in connection with the registration of Common Stock
pursuant to the AFG Agreement and the MB Agreement, respectively.
VOTING RIGHTS AND AGREEMENTS
Pursuant to the terms of the Certificate of Designation of the Series D
Preferred Stock (the "Certificate of Designation"), the holders of shares of
Series D Preferred Stock are entitled to the following voting rights for the
seven year period commencing on December 31, 1996. Thereafter, holders of
Series D Preferred Stock will have no voting rights except as set forth in
paragraphs (b) and (c) below or as otherwise provided by law:
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(a) With regard to any matter submitted to a vote of the holders of
Common Stock of the Company, the holders of the Series D Preferred
Stock shall be entitled collectively to cast 20% of the votes eligible
to be cast in such matters; provided, however, in the event that the
aggregate number of shares of Common Stock into which maythe Series D
Preferred Stock is convertible represents less than 20% of the
aggregate number of all shares of Common Stock outstanding (on a fully
diluted basis), then each holder of a share of Series D Preferred Stock
shall be acquiredentitled to cast one vote for each full share of Common Stock
into which such share is then convertible.
(b) Notwithstanding the foregoing, upon the occurrence and continuation
of an Event of Default (defined as a default in dividend payments for
at least two consecutive quarters or a default in any mandatory
redemption payment on the Series D Preferred Stock), each share of
Series D Preferred Stock shall be entitled to cast the number of votes
equal to the number of shares of Common Stock into which such share is
then convertible on any matter submitted for the consideration of the
stockholders of the Company, and the holders of the Series D Preferred
Stock, voting separately, as a class shall be entitled at the next
annual or special meeting of stockholders to elect such number of
directors which is a majority (rounded up) of the directors to be
elected. The term of office of directors elected under these
circumstances shall end upon the earlier of the termination of the
Event of Default and the next annual meeting of stockholders.
(c) Without the approval of holders of a majority of the outstanding
shares of Series D Preferred Stock voting separately as a class, the
Company will not, in any manner (including by merger or consolidation)
(i) amend, alter or repeal any provisions of the resolutions
establishing the Series D Preferred Stock so as to adversely affect the
powers, preferences or special rights of such Series D Preferred Stock,
or (ii) authorize the issuance of, or authorize any obligation or
security convertible into or evidencing the right to purchase shares
of, any additional class or series of stock ranking prior to the Series
D Preferred Stock in the payment of dividends or the preferential
distribution of assets. The foregoing shall not be interpreted to
require any vote or consent of the Series D Preferred Stock in
connection with the authorization or issuance of any series of
Preferred Stock ranking on a parity with or junior to the Series D
Preferred Stock as to dividends and/or the distribution of assets.
In addition, pursuant to the Securities Purchase Agreement, until AFG and
its affiliates no longer own Series D Preferred Stock, or shares of Common
Stock issued or issuable upon conversion of the Series D Preferred Stock or
exercise of options.
41warrants issued upon redemption of the Series D Preferred Stock
(the "Underlying Shares"), representing in the aggregate the ownership, or the
right to acquire ownership of 51% of the Underlying Shares, or until December
31, 2003, whichever is earlier, AFG shall be entitled to nominate for election
to the Company's Board of Directors the number of directors which represents
30% (rounded up to the next director) of the number of directors serving at any
one time, and, if elected, at least one of the directors representing AFG shall
serve on each of the standing committees of the Board of Directors.
Notwithstanding the foregoing, the number of directors that AFG shall be
entitled to nominate shall be reduced to the extent and by the number of
directors the holders of Series D Preferred Stock are entitled to elect as a
class under the terms of the Certificate of Designation. In the event AFG's
representatives fail to be elected as directors, AFG shall be entitled to have
an equal number of representatives in place of such directors attend each
meeting of the Board of Directors. Such representatives shall be entitled to
receive all materials and information provided to the Company's Board of
Directors and shall receive the same notices as are given to the Company's
Board of Directors.
In connection with the Securities Purchase Agreement, on November 8, 1996,
Mason Best and AFG entered into a letter agreement (the "Voting Agreement")
whereby Mason Best agreed to vote its stock in favor of the election to the
Company's Board of Directors of those individuals nominated by AFG in
accordance with the terms of the Securities Purchase Agreement. The Voting
Agreement shall continue until December 31, 2003.
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Pursuant to the Securities Purchase Agreement, until AFG and its
affiliates no longer own Series D Preferred Stock or Underlying Shares
representing in the aggregate the ownership or the right to acquire ownership
of 51% of the Underlying Shares, or until June 29, 2000, whichever is earlier,
if AFG and its affiliates hold Series D Preferred Stock and Common Stock that
represents the right to vote more than 20% of the total votes eligible to be
cast on any matter, then AFG and its affiliates will vote all shares of Series
D Preferred Stock and Common Stock owned by them in excess of such 20% in
proportion to the actual vote of holders of all remaining votes (including
AFG's 20% vote).
Upon closing of the Aviation Division Sale, all shares of Series D
Preferred Stock will be transferred to the Company and cancelled and the voting
rights and agreements described above will terminate.
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RATIFICATION OF THE APPOINTMENT OF AUDITORS
The Board of Directors has appointed the firm of Arthur Andersen LLP,
which has served as independent auditors of the Company since 1986, as
independent auditors of the Company and its subsidiaries for the fiscal year
ending December 31, 1997, and recommends ratification by the stockholders of
such appointment. Such ratification requires the affirmative vote of a majority
of the votes entitled to be cast at the Annual Meeting. An abstention would
have the same legal effect as a vote against this proposal, but a broker
non-vote would not be counted for purposes of determining whether a majority
had been achieved. The persons named in the accompanying proxy intend to vote
for ratification of such appointment unless instructed otherwise on the proxy.
The Board of Directors recommends a vote "FOR" this proposal.
In the event the appointment is not ratified, the Board of Directors will
consider the appointment of other independent auditors. The Board of Directors
may terminate the appointment of Arthur Andersen LLP as the Company's
independent auditors without the approval of the stockholders of the Company
whenever the Board of Directors deems such termination necessary or
appropriate. A representative of Arthur Andersen LLP is expected to attend the
Annual Meeting and will have the opportunity to make a statement, if such
representative desires to do so, and will be available to respond to
appropriate questions.
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STOCKHOLDER PROPOSALS
Any stockholder who wishes to submit a proposal for inclusion in the proxy
material and for presentation at the Company's 19971998 Annual Meeting of
Stockholders must forward such proposal to the Secretary of the Company at the
address indicated on the second page of this proxy statement, so that the
Secretary receives it no later than November 30, 1996.April 2, 1998.
The Company's Bylaws also require that notice of nominations of persons
for election to the Board of Directors at the 19971998 Annual Meeting of
Stockholders, other than those made by or at the direction of the Board of
Directors, must be received by the Secretary not later than the close of
business on the tenth day following the date on which the Company first makes
public disclosure of the date of the meeting; provided, however, that in the
event that the meeting is adjourned, and the Company is required by Delaware
law to give notice to stockholders of the adjourned meeting date, written
notice of such stockholder's intent to make such nomination at such adjourned
meeting must be delivered to or received by the Secretary of the Company no
later than the close of business on the fifth day following the earlier of: (i)
the date the Company makes public disclosure of the date of the adjourned
meeting; or (ii) the date on which notice of such adjourned meeting is first
given to stockholders. The notice must present certain information concerning
the nominees and the stockholder making the nominations, as set forth in the
Bylaws. The Secretary must receive a statement of any such nominee's consent to
serve if elected.
ANNUAL REPORT TO STOCKHOLDERS
The Proxy Statement constitutes the Company's Annual Report and contains
all of the information required by Rule 14a-3 promulgated under the Exchange
Act to be contained in an annual report to stockholders.
ANNUAL REPORT ON FORM 10-K
The Company will provide without charge a copy of its Annual Report on
form 10-K for the year ended December 31, 1996, including the financial
statements and financial statement schedules, as filed with the Securities and
Exchange Commission (without exhibits), upon the written request of any
Stockholder of record as of June 30, 1997. Copies of exhibits to the Annual
Report on Form 10-K will be furnished (upon payment of the Company's reasonable
expenses in furnishing such exhibits) upon request to Richard M. Kurz, Chief
Financial Officer, American Eagle Group, Inc., 12801 N. Central Expressway,
Suite 800, Dallas, Texas 75343.
OTHER MATTERS
The Board of Directors does not know of any other matters that are to be
presented for action at the Annual Meeting. However, if any other matters
properly come before the Annual Meeting or any adjournment(s) thereof, it is
intended that the enclosed proxy will be voted in accordance with the judgment
of the persons voting the proxy.
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AVAILABLE INFORMATION
The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports and other information
with the Securities and
Exchange Commission (the "SEC").SEC. Such reports, proxy statements and other information may be
inspected and copied at the public reference facilities maintained by the SEC
at 450 Fifth Street, N.W., Washington, D.C. 20549; and at its regional offices
located at 7 World Trade Center, New York, New York 10048 and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such materials may
also be obtained from the Public Reference Section of the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549, upon payment of certain fees prescribed
by the SEC. The SEC also maintains a site on the World Wide Web, the address of
which is http/www.sec.gov.,www.sec.gov, that contains reports, proxy and information
statements and other information regarding reporting companies that file
electronically with the SEC. The Company's Common Stock is listed on the NYSE,
and, accordingly, reports, proxy statements and other information are available
for inspection at the offices of the NYSE at 20 Broad Street, New York, New
York 10005.
42By Order of the Board of Directors
FREDERICK G. ANDERSON
Senior Vice President/General Counsel
and Secretary
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants..............................................Accountants ....................................................... F-2
Audited
Consolidated Financial Statements:
Consolidated Balance Sheets at- December 31, 1996 and 1995 and December 31, 1994................................................ F-3
Consolidated Statements of Income for each fiscal year in- For the three year period
endedYears Ended December 31, 1995..........................................................1996, 1995
and 1994 .............................................................................. F-4
Consolidated Statements of Stockholders' Equity for each fiscal year in- For the three
year period endedYears Ended December 31,
1995..............................................1996, 1995 and 1994 ................................................................... F-5
Consolidated Statements of Cash Flows for each fiscal year in- For the three year period
endedYears Ended December 31, 1995..........................................................1996,
1995 and 1994 ......................................................................... F-6
Notes to Consolidated Financial Statements..........................................Statements ................................................ F-7
Unaudited Consolidated Financial Statements:
Unaudited Condensed Consolidated Balance Sheet at September 30, 1996................ F-21
Unaudited- March 31, 1997 ..................................... F-25
Condensed Consolidated Statements of Income for- For the nine months ended
September 30,Three Months Ended March 31, 1997
and 1996 and September 30, 1995........................................ F-22
Unaudited.............................................................................. F-26
Condensed Consolidated Statements of Cash Flows for- For the nine months ended September
30,Three Months Ended
March 31, 1997 and 1996 and September 30, 1995.................................................. F-23............................................................... F-27
Notes to Unaudited Condensed Consolidated Financial Statements...................... F-24
Quarterly Financial Data............................................................ F-25Statements - For the Three Months
Ended March 31, 1997 and 1996 ......................................................... F-28
F-1
4898
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF AMERICAN EAGLE GROUP, INC.To the Stockholders and Board of Directors of
American Eagle Group, Inc.:
We have audited the accompanying consolidated balance sheets of American Eagle
Group, Inc. (a Delaware corporation) and subsidiaries as of December 31, 19951996
and 1994,1995, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1995.1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As discussed in Note 1, the Company has entered into transactions to sell
substantially all of its insurance operations.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Eagle Group, Inc. and
subsidiaries as of December 31, 19951996 and 1994,1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995,1996, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Dallas, Texas,
February 27, 1996March 26, 1997, except for the matters
described in paragraphs 4 and 5 of Note 1,
for which the date is April 23, 1997.
F-2
4999
AMERICAN EAGLE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS- DECEMBER 31, 1996 AND 1995
(In Thousands Except Share Data)
DECEMBER 31,
----------------------ASSETS 1996 1995
1994
-------- -------------- --------- ---------
Investments:
Fixed Income Securities
--
Available for Sale, at Fair Value (Cost $29,004 in 1996 and $55,136 in 1995 and $54,016 in
1994).................................................................1995) $ 56,71929,167 $ 50,79356,719
Held to Maturity, at Amortized Cost (Fair Value $23,264 in 1996
and $28,889 in 1995 and
$27,060 in 1994)......................................................1995) 23,479 28,952 29,134
Equity Securities, at Fair Value (Cost $264 in 1994)...................... -- 173
Short-Term Investments, at Cost (Which Approximates Fair Value)........... 13,347 18,199
16,551
-------- ----------------- ---------
Total Investments..................................................Investments 65,993 103,870 96,651
Cash and Cash Equivalents...................................................Equivalents 23,094 2,922 1,530
Accrued Investment Income...................................................Income 1,171 1,606 1,604
Accounts Receivable:
Agents' Balances, Net.....................................................Net 30,161 24,866
31,512
Deferred Premiums.........................................................Premiums 18,052 31,393
24,674
Other, Net................................................................Net 501 631
2,102
-------- ----------------- ---------
Total Accounts Receivable..........................................Receivable, net 48,714 56,890 58,288
Reinsurance Recoverable, Net:
Insurance Operations --- Paid Losses.......................................Losses 5,260 22,449 26,246
Insurance Operations --- Loss Reserves.....................................Reserves 63,982 78,676
92,317
-------- ----------------- ---------
Total Reinsurance Recoverable, Net.................................Net 69,242 101,125 118,563
Deferred Policy Acquisition Costs...........................................Costs 14,509 15,296 15,048
Deferred Reinsurance Premiums............................................... 19,829 34,200Premiums 26,706 28,264
Other Assets................................................................Assets 12,530 16,731
11,219
-------- ----------------- ---------
Total Assets....................................................... $318,269 $337,103
======== ========Assets $ 261,959 $ 326,704
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Policy Liabilities and Accruals --
Reserve for Losses and Loss Adjustment Expenses......................... $136,528 $142,768Expenses $ 138,133 $ 136,528
Unearned Premiums.......................................................Premiums 60,065 79,605 66,812
Other Policy Liabilities................................................ 20,196 31,813
-------- --------Liabilities 7,646 27,678
--------- ---------
Total Policy Liabilities and Accruals.............................. 236,329 241,393Accruals 205,844 243,811
Agency Payables to Insurance Companies, Net............................. 1,736 7,336Net 1,094 4,601
Accounts Payable and Other Liabilities.................................. 13,859 13,160Liabilities 12,732 11,947
Note Payable............................................................Payable - 11,250
9,250
-------- ----------------- ---------
Total Liabilities.................................................. 263,174 271,139Liabilities 219,670 271,609
Commitments and Contingent Liabilities -- --
Series B Cumulative Redeemable Preferred Stock, $.01 Par Value; 162,857 Shares
Authorized, Issued and Outstanding.................................Outstanding 1,629 1,629
Series D Cumulative Convertible Redeemable Preferred Stock, $0.01 Par Value
546,200 Shares Authorized, 350,000 Shares Issued and Outstanding in 1996 33,164 --
Stockholders' Equity:
Common Stock, $.01 Par Value; 21,000,000 Shares Authorized, 7,124,5807,120,980 Shares
Issued and Outstanding in 1996 and 7,124,580 in 1995 and 7,129,180 in 1994............................. 71 71
Additional Paid-In Capital................................................Capital 45,563 45,532 45,497
Unrealized Appreciation (Depreciation) on Investment Securities Available for Sale, Net of Deferred Taxes (Benefit) of $554 in 1995 and $(1,163) in 1994...........106 1,029
(2,151)
Retained Earnings.........................................................Earnings (Deficit) (38,157) 6,921
21,005
Less --- 73,882 Shares of Common Stock Held in Treasury, at Cost...........Cost (87) (87)
-------- ----------------- ---------
Total Stockholders' Equity.........................................Equity 7,496 53,466
64,335
-------- ----------------- ---------
Total Liabilities and Stockholders' Equity......................... $318,269 $337,103
======== ========Equity $ 261,959 $ 326,704
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
50100
AMERICAN EAGLE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)DECEMBER 31, 1996, 1995 AND 1994
(In Thousands Except Per Share Data)
YEARS ENDED DECEMBER 31,
-------------------------------------1996 1995 1994
1993
--------- --------- -------------------- ----------- -----------
Revenues:
Earned Premiums, Net of Reinsurance.....................$ 107,217 $ 102,447 $ 82,725
$ 66,091
Agency Operations, Net..................................Net 424 396 919
(208)
Investment Income, Net..................................Net 4,470 5,497 4,106 2,918
Realized Investment Gains (Losses), Net.................Net (74) 496 (33)
1,414
--------- --------- -------------------- ----------- -----------
Total Revenues..................................Revenues 112,037 108,836 87,717
70,215----------- ----------- -----------
Expenses:
Losses and Loss Adjustment Expenses, Net of Reinsurance..........................................Reinsurance 107,473 90,933 52,729 41,172
Policy Acquisition and Other Underwriting Expenses......Expenses 47,848 37,292 23,694
19,667
Interest Expense........................................Expense 1,132 987 800
708
--------- --------- -------------------- ----------- -----------
Total Expenses..................................Expenses 156,453 129,212 77,223
61,547----------- ----------- -----------
Income (Loss) Before Income Tax ExpenseProvision (Benefit)......... (44,416) (20,376) 10,494
8,668
Income Tax ExpenseProvision (Benefit).............................. -- (7,300) 3,351
2,950
--------- --------- -------------------- ----------- -----------
Net Income (Loss)......................................... $ (44,416) $ (13,076) $ 7,143
$ 5,718
========= ========= ==================== =========== ===========
Net Income (Loss) Available for Common Stockholders.......Stockholders $ (44,514) $ (13,174) $ 6,588
$ 4,420
========= ========= ==================== =========== ===========
Net Income (Loss) Per Common Share (Primary and Fully Diluted)................................................ $ (6.32) $ (1.87) $ 1.16
$ 1.27
========= ========= ==================== =========== ===========
Weighted Average Number of Common Shares Outstanding:
Share and Share EquivalentsOutstanding
(Primary and Fully Diluted)............................................. 7,048,898 7,052,998 5,684,386
3,469,448
========= ========= ==================== =========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
51101
AMERICAN EAGLE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
AND 1993
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)(In Thousands Except Share Data)
UNREALIZED
APPRECIATION
ADDITIONAL (DEPRECIATION) TOTAL
COMMON PAID-IN ON INVESTMENT RETAINED TREASURY STOCKHOLDERS'
STOCK CAPITAL SECURITIES EARNINGS STOCK EQUITY
------ ---------- -------------- -------- --------Unrealized
Appreciation
on Securities
Additional Available for Retained Total
Common Paid-In Sale, Net Earnings Treasury Stockholders'
Stock Capital of Taxes (Deficit) Stock Equity
------------ ------------ ------------- ------------ ------------ ------------
Balance, December 31, 1992.................1993 $ 35 $ 13,465 $ 240243 $ 10,632 $(87)15,052 $ 24,285
Net Income................................. -- -- -- 5,718 -- 5,718
Unrealized Gain on Investments, Net of
Deferred Taxes........................... -- -- 3 -- -- 3
Dividends on Series B and C Cumulative
Preferred Stock.......................... -- -- -- (1,298) -- (1,298)
--- ------- ------- -------- ---- --------
Balance, December 31, 1993................. 35 13,465 243 15,052 (87) $ 28,708
Net Income.................................Income -- -- -- 7,143 -- 7,143
Proceeds from Issuance of
3,563,750 shares of Common
Stock, Net of Issuance Costs...Costs 36 32,001 -- -- -- 32,037
Unrealized Loss on Investments,
Net of
Deferred Taxes........................... -- -- (2,394) -- -- (2,394)
Dividends on Series B and C
Cumulative Preferred Stock..........................Stock -- -- -- (555) -- (555)
Amortization of Unearned
Compensation......Compensation -- 31 -- -- -- 31
Common Stock Dividends.....................Dividends -- -- -- (635) -- (635)
--- ------- ------- -------- ---- -------------------- ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1994.................1994 71 45,497 (2,151) 21,005 (87) 64,335
Net Loss...................................Loss -- -- -- (13,076) -- (13,076)
Unrealized Gain on Investments,
Net of
Deferred Taxes........................... -- -- 3,180 -- -- 3,180
Dividends on Series B
Cumulative Preferred Stock....................................Stock -- -- -- (91) -- (91)
Amortization of Unearned
Compensation......Compensation -- 35 -- -- -- 35
Common Stock Dividends.....................Dividends -- -- -- (917) -- (917)
--- ------- ------- -------- ---- -------------------- ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1995.................1995 71 45,532 1,029 6,921 (87) 53,466
Net Loss -- -- -- (44,416) -- (44,416)
Unrealized Loss on Investments,
Net -- -- (923) -- -- (923)
Dividends on Series B
Cumulative Preferred Stock -- -- (98) -- (98)
Amortization of Unearned
Compensation -- 31 -- -- -- 31
Common Stock Dividends -- -- -- (564) -- (564)
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1996 $ 71 $ 45,53245,563 $ 1,029106 $ 6,921 $(87)(38,157) $ 53,466
=== ======= ======= ======== ==== ========(87) $ 7,496
============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
52102
AMERICAN EAGLE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED (DOLLARS IN THOUSANDS)DECEMBER 31, 1996, 1995 AND 1994
(In Thousands)
DECEMBER 31,
-------------------------------------1996 1995 1994 1993
--------- --------- ---------
Cash and Cash Equivalents Derived From:
Operating Activities --Activities-
Net Income (Loss).......................................... $ (44,416) $ (13,076) $ 7,143 $ 5,718
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by
(Used in): Operating Activities --Activities-
Depreciation and Amortization.........................Amortization 49,758 40,406 28,412
14,468
Provision for Allowance for Doubtful Accounts.........Accounts 564 (711) 214 --
Realized Investment (Gains) Losses, Net...............Net 74 (495) 33 (1,414)
Amortization of Bond Discount and Premium, Net........Net 269 261 374 251
Deferral of Policy Acquisition Costs..................Costs (47,219) (40,848) (33,551)
(16,347)
ChangeChanges in assets and liabilities:
Accrued Investment Income...................Income 435 (2) (524)
(403)
Change in Accounts Receivable.........................Receivable, Net 8,176 1,398 (4,492)
(21,913)
Change in Reinsurance Recoverable, Net................Net 31,319 18,149 (20,425)
6,925
Change in Deferred Reinsurance Premiums...............Premiums 1,558 14,371 (7,248)
(21,810)
Change in Other Assets................................Assets 4,201 (5,512) 1,968 (1,183)
Change in
Reserve for Losses and Loss Adjustment Expenses............................................Expenses 1,605 (6,240) 20,426
27,268
Change in Other Policy Liabilities....................Liabilities (20,032) (11,617) 9,691
80
Change in Unearned Premiums...........................Premiums (19,540) 12,793 8,309 30,618
Change in
Agency Payables to Insurance Companies......Companies, Net (3,507) (5,600) (13,353) 16,873
Change in
Accounts Payable and Other Liabilities......Liabilities 785 699 (1,107) 1,267
--------- --------- ---------
Total Provided by (Used in) Operating Activities....Activities (35,970) 3,976 (4,130)
40,398--------- --------- ---------
Investing ActivitiesActivities-
Proceeds (Purchases) of Short-Term Investments, net 4,852 (1,648) (12,258)
Purchases of Investment Securities:
Available for Sale (10,315) (165,684) (90,888)
Held to Maturity -- (1,012) (14,356)
Proceeds from Maturities of Short-Term Investments......... 252,203 214,466 151,513
Purchases of Short-Term Investments........................ (253,851) (226,724) (149,062)
Purchases of Fixed Income Securities....................... (41,497) (92,937) (54,370)Investment Securities:
Available for Sale 1,610 3,166 5,235
Held to Maturity 5,275 1,250 4,266
Proceeds from Sales of Fixed Income Securities............. 36,509 58,612 19,848
Proceeds from Maturities of Fixed Income Securities........ 4,381 9,501 7,521
Purchases of Equity Securities............................. -- (1,032) (5,339)
Proceeds from Sales of Equity Securities................... 168 4,813 8,142Investment Securities:
Available for Sale 34,692 161,841 74,700
Purchases of Property and Equipment........................Equipment (942) (1,552) (1,170) (1,133)
--------- --------- ---------
Total Used inProvided by (Used in) Investing Activities..................Activities 35,172 (3,639) (34,471)
(22,880)--------- --------- ---------
Financing ActivitiesActivities-
Proceeds from Issuance of Series D Cumulative Convertible Redeemable
Preferred Stock, net of issuance costs 33,164 --
Payments on Note Payable................................... -- (750) --
Proceeds from(Repayment) of Note Payable.................................Payable, net (11,250) 2,000 -- --(750)
Dividends Paid on Series B and C Cumulative Preferred Stock...................................................Stock (98) (98) (555)
(1,233)
Proceeds from issuanceIssuance of common stock,Common Stock, net of issuance costs...................................................costs -- -- 32,037 --
Retirement of Series C Cumulative Preferred Stock..........Stock -- -- (10,000) --
Dividends Paid on Common Stock.............................Stock (846) (847) (423) --
--------- --------- ---------
Total Provided by (Used in) Financing Activities....Activities 20,970 1,055 20,309
(1,233)--------- --------- ---------
Net Change in Cash and Cash Equivalents........................Equivalents 20,172 1,392 (18,292) 16,285
Cash and Cash Equivalents, Beginning of Year...................Year 2,922 1,530 19,822 3,537
--------- --------- ---------
Cash and Cash Equivalents, End of Year.........................Year $ 23,094 $ 2,922 $ 1,530 $ 19,822
========= ========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
53103
AMERICAN EAGLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
AND 1994(In Thousands Except Share Data)
1. COMPANY OPERATIONS AND CURRENT OPERATING ENVIRONMENT:
American Eagle Group, Inc. (the "Company") is an insurance holding company
that, through its subsidiaries, markets and underwrites specialized property
and casualty insurance coverages in selected niche markets. The Company has
organized its business into three divisions: Aviation, Property & Casualty
("P&C") and Marine. The Aviation Division is one of the largest providers of
general aviation insurance in the United States based on net premiums written.
The Company's general aviation business consists primarily of non-airlinenonairline
commercial aviation coverages, airport coverages and pleasure and business
aviation coverages. The P&C Division markets and underwrites commercial
insurance programs for selected artisan contractors ("Artisan") and local and
intermediate-haul truckers franchised
automobile dealers (discontinued("Transportation"). Transportation was discontinued
in 1995), and selected artisan contractors.December 1996. The Marine Division markets and underwrites an insurance
program for private yachts navigating the inland and coastal waters of the
United States.
In May 1994,December 1996, the Company issued 3,563,750350,000 shares of CommonSeries D Cumulative
Convertible Redeemable Preferred Stock through an
initial public offering,("Series D Preferred Stock") which
resulted in $32,037$33,164 of proceeds, net of issuance costs of $3,601, to the Company.$1,836. Of the net
proceeds, $10,156$13,250 was used to redeem
all ofrepay the Company's Series C Cumulative Preferred Stock, including accrued
dividends, $20,100note payable to a bank,
$17,000 was contributed to the capital and surplus of American Eagle Insurance
Company ("AEIC"), the Company's significant subsidiary, and the remainder was
used for general corporate purposes.
For the years ended December 31, 1996 and 1995, the Company reported net losses
of $44.4 million and $13.1 million, respectively. The net losses were primarily
the result of reserve additions (including incurred-but-not-reported losses)
and reinsurance costs. As a result of the effect of the 1996 net loss on
statutory policyholders' surplus on AEIC, in March 1997, A.M. Best lowered its
rating of AEIC to "D." This reduction could have a material impact on AEIC's
ability to generate premium income. The loss in policyholders' surplus also
restricts the amount of premium income that AEIC can write. The Company expects
that the rating revision will increase the amount of business that the Company
assumes from other companies that provide "A" rated policies, and it will
substantially reduce the amount of business the Company directly writes for its
own account in the future.
As a result of a review of its capital and strategic alternatives in April,
1997, the Company entered into transactions to sell its aviation and artisan
contractor insurance operations. The closing of the aviation transaction will
require approval by AEG's stockholders, although stockholders owning a majority
of AEG's voting stock have agreed to vote in favor of the transaction. The
closing of the aviation transaction is also subject to regulatory approvals and
other customary conditions. The Company has also entered into a letter of
intent to sell its marine operations. The closing of the marine transaction is
subject to definitive documentation, Boards' of Directors approvals, required
regulatory approvals and licenses and other customary conditions. Historically,
the marine operations have not been material to the Company. The accompanying
statutory financial statements give no effect to these proposed transactions.
F-7
104
Upon completion of these transactions, the Company expects that it will no
longer write new or renewal policies for the foreseeable future. It will
continue to handle claims on the Company's policies that are not assumed as
part of these transactions and maintain the related reserves and assets.
Accordingly, the Company's revenues and earnings capacity will be significantly
lower in the future. In addition, as a result of the decline in rating, the
Company and American Financial Group implemented an expanded underwriting
agreement to make available A.M.
Best "A" rated paper for all of the Company's general aviation product lines.
As a result of the Company's 1996 net loss and resulting declines in statutory
capital and A.M. Best rating, the Company has been requested by the Texas
Department of Insurance to submit a capital plan outlining the actions the
Company plans to take to improve overall statutory capital levels. The Texas
Department of Insurance is also in the process of completing its triennial
examination for the period ended December 31, 1996. The examination is not
complete and no examination report has been issued. The Company has been
informed that the examiners are considering whether certain assets currently
recorded by the Company are ineligible to be carried as admitted assets under
statutory accounting principles. The Company cannot predict what position the
Texas Department of Insurance will ultimately take on these matters. The
accompanying statutory financial statements do not include any adjustments
related to the capital plan or regulatory examination.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company
prepared in conformity with generally accepted accounting principles, which
differ in some respects from those followed in reports to insurance regulatory
authorities. All significant intercompany balances and transactions have been eliminated in
consolidation. The term insurance operations refers to the activities of AEIC
and its wholly owned insurance subsidiary American Meridian Insurance Company
Limited ("AMIC"). The term agency operations refers to the activities of
Aviation Office of America ("AOA").
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Investments
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS No. 115"). SFAS No. 115 addresses the accounting and
reporting for investments in equity securities that have a readily determinable
fair value and for all investments in fixed income securities. Such investments
are classified in three categories and accounted for as follows:
o Held to maturity - Held-to-maturity -- Investments in fixed income securities that the
Company has the positive intent and ability to hold to maturity and
are carried at amortized cost.
o Available for sale - Available-for-sale -- Investments in fixed income and equity securities
not classified as either held-to-maturity securities or trading
securities. These securities are purchased with the original intent to
hold for extended periods but may be available to be sold to maximize
the Company's investment yields and liquidity requirements in response
to market conditions or modifications in the Company's investment
policy. Available-for-sale securities are carried at fair value and
changes in unrealized gains and losses, net of deferred taxes, are
recorded as a direct increase or decrease to stockholders' equity.
F-7
54
AMERICAN EAGLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
-o Trading securities --- Investments in fixed incomefixed-income and equity securities
that are bought and held principally for the purpose and objective of
selling them in the near term and generating profits on short-term
differences in price. Trading securities are carried at fair value and
changes in unrealized gains and losses are included in earnings. The
Company does not engage in securities trading activities.
F-8
105
Gains or losses on maturities or sales of investments are determined using the
specific identification method. If a decline in fair value of an equity or
fixed income security is other than temporary, the security is written down to
estimated fair value with the write-down recognized as a reduction of net
investment income. No such reductions were required in 1996, 1995 1994 and 1993.or 1994.
At December 31, 1995,1996, fixed income and short-term investments with a book value
of $5,236$5,864 were on deposit with or pledged to state regulatory authorities to
meet statutory requirements, and short-term investments of approximately $1,965
have been pledged under letter of credit arrangements to secure future payments
of losses. In addition, at December 31, 1996, short-term investments of $8,940
were held on deposit under the Company's reinsurance contracts.
Recognition of Revenue
Premiums due from agents and premiums payable to insurance companies, together
with applicable commission or fee income, are generally recorded as of the
effective date of the policies. Additional premiums, rate adjustments, policy
cancellations and contingent commissions are accrued as they become known and
estimable. Insurance premiums are earned on a pro rata basis, net of
reinsurance premiums, over the terms of the respective policies. Unearned
premiums represent the portion of net premiums written applicable to the
unexpired portion of the coverage period.
Deferred Policy Acquisition Costs
Costs of acquiring business for the insurance operations which vary with and
are directly related to the production of such business are deferred and
amortized ratably over the related policy period.period (generally one year). Policy
acquisition costs include commissions, brokerage fees and certain other policy
issuance expenses. Deferred policy acquisition costs are reviewed periodically
to determine that they do not exceed recoverable amounts after considering
anticipated investment income.
Property and Equipment
Expenditures for significant improvements or betterments are capitalized.
Maintenance and repair costs are expensed as incurred. Depreciation is provided
on a straight-line basis over the estimated useful lives of the assets (four to
ten years).
Property and equipment, net of accumulated depreciation, were recorded atof $3,849 and $3,265 and $2,769
at December 31, 1996 and 1995, and 1994, respectively, were recorded as a component of
Other Assets. Accumulated depreciation of property and equipment totaled approximately $3,247$3,610 and $3,494$3,247
at December 31, 19951996 and 1994,1995, respectively.
Intangible Assets
The excess of cost over the fair market value of net assets acquired of AEIC
and AOA and certain other intangibles areis being amortized on a straight-line basis over periods up to 25 years. Subsequent to the acquisitions,
the Company continually evaluates whether later events and circumstances have
occurred that indicate the remaining estimated useful life of intangible assets
may warrant revision or that the remaining balance of intangible assets may not
be recoverable.
F-8
55
AMERICAN EAGLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Intangible
assets, net of accumulated amortization, were recorded atof $4,969 and $5,309
and $5,659 at December 31,
1996 and 1995, and 1994, respectively, were recorded as a component of Other Assets.
Accumulated amortization of intangible assets totaled approximately $3,254$3,603 and $2,915$3,254 at December
31, 1996 and 1995, respectively.
F-9
106
Impairment of Long-Lived Assets
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and 1994, respectively.for
Long-Lived Assets to be Disposed Of," requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Based on management
estimates, no impairment exists at December 31, 1996.
Reserve for Losses and Loss Adjustment Expenses
The reserve for losses and loss adjustment expenses includes estimates for
losses incurred but not reported as well as losses pending settlement. The
reserve is based upon management's best estimates, loss adjusters' evaluations,
and independent actuarial determinations and,determinations. As a consequence, although the
Company believes that its reserves at December 31, 1996, are adequate, actual
losses may deviate, perhaps substantially, from reserves reflected in the
opinionCompany's consolidated financial statements. There are a number of managementfactors that
could cause losses to deviate from estimates. Such factors could include
assumptions proving incorrect regarding the positive effect of recent changes
in underwriting and claims-handling improvements on future trends in claims
reporting, frequency and severity of losses, and increases in claims settlement
costs due to higher inflation or new theories of liability.
Future adjustments to the amounts recorded at December 31, 1996, resulting from
the continued review process as well as differences between estimates and
ultimate payments or recoveries, will be reflected in the Company's independent actuary,statements
of income in future periods when such reserve is adequate.adjustments become known. Such
adjustments could be material to the Company's financial position and results
of operation.
In the normal course of business, the Company reduces the loss that may arise
from catastrophes or other events that cause unfavorable underwriting results
through reinsurance arrangements. Losses recoverable from reinsurers are
estimated in a manner consistent with the associated claim.
Future adjustments to the amounts recorded at December 31, 1995, resulting
from the continued review process as well as differences between estimates and
ultimate payments or recoveries, will be reflected in the Company's statements
of income in future periods when such adjustments become known.
Reinsurance
Reinsurance premiums (including reinstatement premiums), commissions, expense
reimbursements, and reserves related to reinsured business are accounted for on
bases consistent with those used in accounting for the original policies issued
and the terms of the reinsurance contracts. Expense allowances received in
connection with reinsurance ceded have been accounted for as a reduction of the
related policy acquisition costs.
Income Taxes
The Company follows the provisions of Statement of Financial Accounting
StandardsSFAS No. 109, "Accounting for Income
Taxes" ("SFAS No. 109").Taxes." SFAS No. 109 requires an asset and liability approach for financial
accounting and reporting for income taxes.
Net Income (Loss) Per Common Share
IncomeNet income (loss) per common share has been computed by dividing income (loss),
after deducting preferred stock dividends, by the weighted average number of
common shares and equivalent shares outstanding each year.
F-10
107
Stock Option Plans
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the use of
fair value for stock-based compensation granted to employees. The statement
allows companies to adopt the provisions of the statement, or to disclose the
effects of the statement, and is effective beginning in 1996. The Company follows Accounting Principles Boardhas
elected to continue accounting for stock-based compensation under APB Opinion
No. 25 "Accounting
for Stock Issuedand will elect to Employees" (APB 25) in accounting for its six stock option
plans for officers, directors and key employeesfollow the disclosure-only provisions of the Company. Under APB 25, no
compensation expense is recognized since the exercise price of the Company's
stock options equals the market price of its common stock on the date of grant.SFAS No. 123.
(See Note 8.)
Statements of Cash Flows
The Company includes as cash equivalents in the statements of cash flows,
temporary cash investments which generally have original maturities of 90 days
or less.
Interest expense paid during 1996, 1995 1994 and 19931994 was approximately $1,132, $987
$800 and $712,$800, respectively. Income taxes paid during 1996, 1995 and 1994 were
approximately $0, $1,284 and $3,465, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets 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.
Reclassifications
The 1994 and 1993 were
approximately $1,284, $3,465 and $1,196, respectively.
F-9
56
AMERICAN EAGLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reclassifications
The 1993 and 19941995 consolidated financial statements differ from the
presentation previously reported as a result of certain reclassifications
between captions in the balance sheets and the statements of income to conform
to the 19951996 presentation. These reclassifications had no effect on the
Company's stockholders' equity, net income or cash flows.
3. INSURANCE OPERATIONS:
Reinsurance Transactions
In the ordinary course of business, AEIC and AMIC purchase reinsurance for the
purpose of limiting their retained loss exposure and maintaining required
statutory surplus amounts.
Reinsurance does not relieve the Company from its liabilities under the
original policies to the extent that the reinsuring companies fail to meet
their obligations under reinsurance contracts. Management evaluates the
financial condition of its reinsurers and monitors concentrations of credit
risk arising from similar geographic regions, activities, or economic
characteristics of the reinsurers to minimize its exposure to significant
losses from reinsurer insolvencies and records allowances for future anticipated losses.insolvencies. Management believes that the allowances at
December 31, 1995,1996, are adequate to cover known and anticipated losses. At
December 31, 19951996 and 1994,1995, the Company's consolidated balance sheets reflected
the following reinsurance recoverable balances and the related allowances for
doubtful accounts:
1996 1995
1994
-------- ----------------- ---------
Reinsurance recoverable........................................ $101,941 $119,864recoverable $ 70,622 $ 101,941
Allowance for doubtful accounts................................accounts (1,380) (816)
(1,301)
-------- ----------------- ---------
Reinsurance recoverable, net................................... $101,125 $118,563
======== ========net $ 69,242 $ 101,125
========= =========
F-10F-11
57
AMERICAN EAGLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)108
The effect of reinsurance on premiums written and earned for the insurance
operations is as follows:
WRITTEN EARNED
-------- --------Written Earned
--------- ---------
For the year ended December 31, 1995--1996-
Direct premiums.................................................... $166,001 $152,579premiums $ 130,198 $ 153,817
Reinsurance assumed................................................assumed 12,622 8,543
Reinsurance ceded (46,591) (55,143)
--------- ---------
Net premiums $ 96,229 $ 107,217
========= =========
Percentage assumed of net 13% 8%
========= =========
Written Earned
--------- ---------
For the year ended December 31, 1995-
Direct premiums $ 166,001 $ 152,579
Reinsurance assumed 6,235 7,164
Reinsurance ceded..................................................ceded (51,279) (57,296)
--------- ---------
Net premiums............................................... $120,957 $102,447premiums $ 120,957 $ 102,447
========= =========
Percentage assumed of net 5% 7%
========= =========
For the year ended December 31, 1994--1994-
Direct premiums.................................................... $151,875 $136,445premiums $ 151,875 $ 136,445
Reinsurance assumed................................................assumed 7,268 5,040
Reinsurance ceded..................................................ceded (63,146) (58,760)
--------- ---------
Net premiums...............................................premiums $ 95,997 $ 82,725
========= =========
Percentage assumed of net............................................net 8% 6%
========= =========
For the year ended December 31, 1993--
Direct premiums.................................................... $118,437 $ 93,813
Reinsurance assumed................................................ 10,780 12,811
Reinsurance ceded.................................................. (57,348) (40,533)
--------- ---------
Net premiums............................................... $ 71,869 $ 66,091
========= =========
Percentage assumed of net............................................ 15% 19%
========= =========
The Company makes quarterly deposits for reinsurance contracts in the normal
course of business. At December 31, 19951996 and 1994,1995, the Company had entered into
reinsurance contracts with future deposits totaling $32,064$17,550 and $26,319,$ 32,064,
respectively. These deposits are generally payable in the first nine months of
the subsequent year.
Deferred Policy Acquisition Costs
Changes in deferred policy acquisition costs for the years ended December 31,
1996, 1995 1994 and 1993,1994, are summarized below:
1996 1995 1994 1993
-------- -------- --------
Balance, beginning of year................................. $ 15,048 $ 8,651 $ 5,829
Underwriting and acquisition costs....................... 40,848 33,551 16,347
Current period amortization.............................. (40,600) (27,154) (13,525)
--------- --------- ---------
Balance, end of year.......................................year $ 15,296 $ 15,048 $ 8,651
========= ========= =========Underwriting and acquisition costs 47,219 40,848 33,551
Current period amortization (48,006) (40,600) (27,154)
-------- -------- --------
Balance, end of year $ 14,509 $ 15,296 $ 15,048
======== ======== ========
F-11F-12
58
AMERICAN EAGLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)109
Reserve for Losses and Loss Adjustment Expenses
Changes in the reserves for losses and loss adjustment expenses are summarized as
follows:
1996 1995 1994
1993
-------- -------- ----------------- --------- ---------
Balance at January 1....................................... $142,768 $122,3421 $ 95,074136,528 $ 142,768 $ 122,342
Less reinsurance recoverables..............................recoverables (78,676) (92,317) (81,487) (56,799)
--------- --------- ---------
Net Balance at January 1...................................1 57,852 50,451 40,855
38,275--------- --------- ---------
Incurred related to:
Current year.............................................year 88,885 72,072 48,567
44,811
Prior years..............................................years 18,588 18,861 4,162 (3,639)
--------- --------- ---------
Total incurred.............................................incurred 107,473 90,933 52,729 41,172
Paid related to:
Current year.............................................year 48,063 42,066 26,552
25,648
Prior years..............................................years 43,111 41,466 16,581 12,944
--------- --------- ---------
Total paid.................................................paid 91,174 83,532 43,133
38,592--------- --------- ---------
Net Balance at December 31.................................31 74,151 57,852 50,451
40,855
Plus reinsurance recoverables..............................recoverables 63,982 78,676 92,317 81,487
--------- --------- ---------
Balance at December 31..................................... $136,528 $142,768 $122,34231 $ 138,133 $ 136,528 $ 142,768
========= ========= =========
4. INVESTMENTS:
Net investment income for the years ended December 31, 1996, 1995 1994, and 1993,1994,
comprised primarily of interest and dividends, was derived from the following
sources:
1996 1995 1994
1993
------ ------ ------------- ------- -------
Interest and dividend income --income-
Fixed income securities................................ $5,567 $3,943 $2,755securities $ 4,556 $ 5,567 $ 3,943
Equity securities......................................securities -- 66 241
187
Short-term investments.................................investments 177 172 339
281
------ ------ ------------- ------- -------
Total interest and dividend income.............income 4,733 5,805 4,523
3,223
Investment expenses......................................expenses (263) (308) (417)
(305)
------ ------ ------
Net investment income.................................... $5,497 $4,106 $2,918
====== ====== ======------- ------- -------
Investment income, net $ 4,470 $ 5,497 $ 4,106
======= ======= =======
There are no investments in fixed income securities that have been nonincomenon-income
producing for the years ended December 31, 1996, 1995 1994, and 1993.1994. Investment
expenses include advisory fees paid to unrelated parties.
F-12F-13
59
AMERICAN EAGLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)110
Realized pretax gains (losses) on the salesales of investments for the years ended
December 31, 1996, 1995 1994, and 1993,1994, are as follows:
1996 1995 1994
1993
---- ----- ----------- -----
Fixed income securities available for sale --sale-
Gross realized gains..................................... $643gains $ 379 $ 643 $ 32
$1,112
Gross realized losses....................................losses (453) (50) (68)
(53)
---- ----- ----------- -----
Net gain (loss).................................. (74) 593 (36)
1,059
Equity securities --securities-
Gross realized gains.....................................gains -- 1 340
723
Gross realized losses....................................losses -- (98) (337)
(368)
---- ----- ----------- -----
Net gain (loss).................................. -- (97) 3
355
---- ----- ----------- -----
Realized investment gains (losses), net.................... $496net $ (74) $ 496 $ (33)
$1,414
==== ===== =========== =====
In connection with the Company's adoption of SFAS No. 115 effective
December 31, 1993, fixed income securities with a carrying value of $32,418 were
transferred from held to maturity to available for sale. Net unrealized
appreciation of these securities as of the date of transfer ($214 before income
taxes) was recorded as a component of stockholders' equity. The Company has made
no other transfers between classifications of fixed income securities during the
years ended December 31, 1995, 1994 and 1993.
Following is an analysis of the change in the unrealized appreciation
(depreciation) of investment securities available for sale, which is reported
as a component of stockholders' equity:
1996 1995 1994
1993
------- ------- ------------
Change in unrealized appreciation (depreciation)
of equity securities................................................securities $ -- $ 91 $ (246) $(209)
Unrealized appreciation of fixed income securities
transferred from held to maturity to available for sale at
December 31, 1993 (date of adoption of SFAS No. 115)...... -- -- 214
Change in unrealized appreciation (depreciation)
of fixed income securities available for sale......................sale (1,420) 4,806 (3,437)
--
Deferred income taxes.......................................taxes 497 (1,717) 1,289
(2)
------- ------- ------------
Net change during year.....................................year (923) 3,180 (2,394) 3
Balance, beginning of year..................................year 1,029 (2,151) 243
240
------- ------- ------------
Balance, end of year........................................year $ 106 $ 1,029 $(2,151)
$ 243
======= ======= ============
F-13F-14
60
AMERICAN EAGLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)111
The amortized cost and estimated fair values of investments in fixed income and
equity securities at December 31, 19951996 and 19941995, are as follows:
GROSS GROSS
UNREALIZED UNREALIZED FAIR CARRYING
DECEMBERGross Gross
Unrealized Unrealized Fair Carrying
December 31, 1995 COST(1) GAINS LOSSES VALUE VALUE1996 Cost (1) Gains Losses Value Value
- -------------------------------------------- ------------------------- ---------- ---------- -------- ------------------ ---------- ----------
Fixed income securities:
Available for sale ---
Corporate debt securities $ 29,004 $ 418 $ (255) $ 29,167 $ 29,167
---------- ---------- ---------- ---------- ----------
Held to maturity -
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies.............................agencies 17,203 -- (190) 17,013 17,203
Obligations of states and
political subdivisions 5,780 10 (30) 5,760 5,780
Corporate debt securities 496 -- (5) 491 496
---------- ---------- ---------- ---------- ----------
Total fixed income securities
held to maturity 23,479 10 (225) 23,264 23,479
---------- ---------- ---------- ---------- ----------
Total fixed income securities 52,483 428 (480) 52,431 52,646
---------- ---------- ---------- ---------- ----------
Short-term investments 13,347 -- -- 13,347 13,347
---------- ---------- ---------- ---------- ----------
Total investments $ 65,830 $ 428 $ (480) $ 65,778 $ 65,993
========== ========== ========== ========== ==========
(1) Original cost of fixed income securities adjusted for amortization of
premiums and accretion of discounts.
F-15
112
Gross Gross
Unrealized Unrealized Fair Carrying
December 31, 1995 Cost (1) Gains Losses Value Value
- ----------------- ---------- ---------- ---------- ---------- ----------
Fixed income securities:
Available for sale -
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 9,733 $ 139 $ (49) $ 9,823 $ 9,823
Obligations of states and
political subdivisions.........................subdivisions 3,117 138 --- 3,255 3,255
Corporate debt securities..............securities 42,286 1,457 (102) 43,641 43,641
-------- ------ ----- -------- ------------------ ---------- ---------- ---------- ----------
Total fixed income securities
available for sale........................sale 55,136 1,734 (151) 56,719 56,719
-------- ------ ----- -------- ------------------ ---------- ---------- ---------- ----------
Held to maturity ---
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies.............................agencies 22,527 45 (115) 22,457 22,527
Obligations of states and
political subdivisions.........................subdivisions 5,927 19 (25) 5,921 5,927
Corporate debt securities..............securities 498 16 (3) 511 498
-------- ------ ----- -------- ------------------ ---------- ---------- ---------- ----------
Total fixed income securities held
to maturity.....................maturity 28,952 80 (143) 28,889 28,952
-------- ------ ----- -------- ------------------ ---------- ---------- ---------- ----------
Total fixed income securities.....securities 84,088 1,814 (294) 85,608 85,671
-------- ------ ----- -------- ------------------ ---------- ---------- ---------- ----------
Short-term investments......................investments 18,199 -- --- - 18,199 18,199
-------- ------ ----- -------- ------------------ ---------- ---------- ---------- ----------
Total investments................. $102,287 $1,814investments $ 102,287 $ 1,814 $ (294) $103,807 $103,870
======== ====== ===== ======== ========$ 103,807 $ 103,870
========== ========== ========== ========== ==========
- ---------------
(1) Original cost of equity securities; original cost of fixed income securities adjusted for amortization of
premiums and accretion of discounts.
The amortized cost and estimated fair market value of fixed income securities at
December 31, 1995,1996, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
AVAILABLE FOR SALE HELD TO MATURITY
-------------------- --------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUEAvailable for Sale Held to Maturity
--------------------- ---------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ------- --------- ---------------- ---------
Less than one year...........................year $ -- $ -- $ 5,2715,085 $ 5,3015,072
One year to three years...................... 5,677 5,787 11,200 11,133years -- -- 12,183 12,005
Over three years to five years............... 14,305 14,436 7,252 7,220years -- -- 2,104 2,102
Over five years to seven years............... 8,554 8,726 1,595 1,618years 12,788 12,888 2,556 2,534
Over seven years to ten years................ 15,127 16,020 3,095 3,071years 7,270 7,308 1,025 1,019
Over ten years............................... 11,473 11,750 539 546
------- ------- ------- -------
$55,136 $56,719 $28,952 $28,889
======= ======= ======= =======years 8,946 8,971 526 531
--------- --------- --------- ---------
$ 29,004 $ 29,167 $ 23,479 $ 23,263
========= ========= ========= =========
F-14F-16
61
AMERICAN EAGLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GROSS GROSS
UNREALIZED UNREALIZED FAIR CARRYING
DECEMBER 31, 1994 COST(1) GAINS LOSSES VALUE VALUE
- ----------------------------------------------- ------- ---------- ---------- ------- --------
Fixed income securities:
Available for sale --
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies................................ $17,912 $ -- $ (1,420) $16,492 $ 16,492
Obligations of states and political
subdivisions............................ 3,116 -- (132) 2,984 2,984
Corporate debt securities................. 32,988 30 (1,701) 31,317 31,317
------- ---- ------- ------- -------
Total fixed income securities
available for sale................. 54,016 30 (3,253) 50,793 50,793
------- ---- ------- ------- -------
Held to maturity --
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies................................ 22,146 -- (1,544) 20,602 22,146
Obligations of states and political
subdivisions............................ 6,487 1 (477) 6,011 6,487
Corporate debt securities................. 501 -- (54) 447 501
------- ---- ------- ------- -------
Total fixed income securities held to
maturity........................... 29,134 1 (2,075) 27,060 29,134
------- ---- ------- ------- -------
Total fixed income securities........ 83,150 31 (5,328) 77,853 79,927
------- ---- ------- ------- -------
Equity securities (primarily common stocks).... 264 -- (91) 173 173
Short-term investments......................... 16,551 -- -- 16,551 16,551
------- ---- ------- ------- -------
Total investments.................... $99,965 $ 31 $ (5,419) $94,577 $ 96,651
======= ==== ======= ======= =======
- ---------------
(1) Original cost of equity securities; original cost of fixed income securities
adjusted for amortization of premiums and accretion of discounts.113
5. NOTE PAYABLE:
Note payable at December 31, 19951996 and 1994,1995, was as follows:
1996 1995
1994-------- ------- ------
Note payable to a bank, bearing interest at the bank's corporate
base rate (8.5% and 9.0% at December 31, 19951996 and 1994,1995,
respectively), interest payable quarterly....................... $11,250 $9,250
======= ======
The annual maturities of the Company's note payable at December 31, 1995
are as follows:
1996...............................................................quarterly $ -- 1997............................................................... 250
1998............................................................... 3,000
1999............................................................... 4,000
2000............................................................... 4,000
-------
$11,250
=======
The note payable is a revolving credit facility. The total commitment is
limited to $16 million and is reduced by $2 million during 1996, $3 million
annually during 1997 and 1998, and $4 million annually until expiration in the
year 2000.
F-15
62
AMERICAN EAGLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company pays an annual facility fee to the bank at a rate of 1/2% per
year of the bank's commitment, whether used or unused, while AEIC has no earned
surplus, and at a rate of 1/4% per year at all other times. Payments are made
on a quarterly basis. The outstanding borrowings are collateralized by the
capital stock of AEIC, AOA, and the other direct subsidiaries of the Company.
The Company is subject to certain operating restrictions pursuant to the credit
facility, including limitations on payment of dividends (see Note 7),
limitations on capital expenditures, and maintenance of certain financial
covenants.
Total interest expense for the years ended December 31, 1996, 1995 1994 and 19931994 was
approximately $1,132, $987 and $800, respectively.
The note payable was a revolving credit facility with a total commitment
limited to $16 million. During 1996, an additional $2 million was borrowed
against the revolving credit facility. In December 1996, $13,250 of the
proceeds received from the issuance of the Series D Preferred Stock was used to
pay the revolving credit facility balance, and $708 respectively.the revolving credit facility
was terminated by the Company.
6. INCOME TAXES:
The federal income tax provision (benefit) for the years ended December 31, 1996, 1995
1994 and 1993,1994, consisted of the following:
1996 1995 1994
1993
------- ------ ------------- -------
Current.................................................Current $ -- $(7,100) $1,871 $3,317
Deferred................................................$ 1,871
Deferred -- (200) 1,480
(367)
------- ------ ------
Total...................................................------- -------
Total $ -- $(7,300) $3,351 $2,950$ 3,351
======= ====== ============= =======
The federal income tax provision (benefit) differs from that computed at the federal
statutory corporate tax rate for the years ended December 31, 1996, 1995 1994 and
1993,1994, as follows:
1996 1995 1994
1993
-------- ------- -------------- --------
Pre-tax financial reporting --Income (loss) before income (loss)..................tax provision (benefit) $(44,416) $(20,376) $10,494 $8,668$ 10,494
Tax at 34% statutory rate.....................................rate (15,101) (6,928) 3,568 2,947
Tax effect of:
Amortization of goodwill....................................goodwill 110 117 120 113
Tax exempt interest income..................................income (125) (245) (96)
(30)
Dividends received deduction................................deduction -- (15) (52) (38)
"Fresh Start" loss reserve adjustment....................... -- -- 34
Discounting of "Fresh Start" adjustment.....................adjustment (141) (35) (26)
(97)
Other, net..................................................net 368 (194) (163)
21Valuation allowance 14,889 -- --
-------- ------- -------------- --------
Total federal income tax provision (benefit).................. $ -- $ (7,300) $ 3,351
$2,950
======== ======= ============== ========
Current federal income taxes payable (receivable) at December 31, 1995 and
1994 were $(7,100) and $335, respectively. These amounts are presented as a
component of Other Assets and Accounts Payable and Other Liabilities,
respectively.F-17
114
Certain income and expense items are recognized for financial reporting
purposes and for income tax purposes in different periods. Deferred taxes are
provided in the consolidated financial statements to account for these
"temporary" differences. The primary sources of the Company's temporary
differences are attributable to the discounting of reserves for losses and loss
adjustment expenses for income tax purposes, recognition of unearned policy
premium income, differences in depreciation methods, provisions for
uncollectible accounts and differences in the amortization period for deferred
acquisition costs. Except for the effects of the reversal of such net
deductible temporary differences, the Company is not currently aware of any
factors which would cause any significant differences between taxable income
and pre-tax book income in future years. However, there can be no assurances
that there will be no significant differences in the future between
consolidated taxable income and consolidated pre-tax book income if
circumstances change (such as, for example, changes in tax laws or the
Company's financial condition or performance).
F-16
63
AMERICAN EAGLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of and changes in the net deferred tax asset (liability) during
the years ended December 31, 19951996 and 1994,1995, were as follows:
DEFERRED DEFERRED
DECEMBERDeferred Deferred
December 31, BENEFIT DECEMBERBenefit December 31, BENEFIT DECEMBERBenefit December 31,
1993 (EXPENSE)1996 (Expense) 1995 (Expense) 1994
(EXPENSE) 1995
------------ --------- ------------ --------------------- ------------ ------------
Discounting of insurance loss reserves.........................reserves $ 2,0513,628 $ 933354 $ 2,9843,274 $ 290 $ 3,2742,984
Unearned policy premium income..... 1,282 304income 2,301 (160) 2,461 875 1,586 875 2,461
Reserve for uncollectible accounts......................... (147) (80)accounts (66) 326 (392) (165) (227) (165) (392)
Deferred policy acquisition costs............................ (1,505) (2,916)costs (5,770) 264 (6,034) (1,613) (4,421) (1,613) (6,034)
Salvage and subrogation............ (305) 23subrogation -- 282 (282) -- (282)
Other, net......................... 88 256net 326 334 (8) (352) 344 (352) (8)
Net operating loss carryforward.... -- -- --carryforward 15,705 14,540 1,165 1,165 ------- ------- ------- ------- -------
1,464 (1,480)--
------------ ------------ ------------ ------------ ------------
16,124 15,940 184 200 (16)
200 184Valuation allowance (14,889)
Unrealized (appreciation)depreciation
on investment securities....................... (126)securities (55) N/A (554) N/A 1,163
N/A (554)
------- ------- ------- ------- ------------------- ------------ ------------ ------------ ------------
Total net deferred tax asset (liability)...................... $ 1,3381,180 $ (370) $ 1,147
$ (370)
======= ======= ======= ======= =================== ============ ============
At December 31, 1996, the Company had a net operating loss carryforward for
financial reporting purposes of approximately $45.0 million. In connection with
the issuance of the Series D Preferred Stock, (see Note 8), the Company
underwent a change in ownership for purposes of Section 382 of the Internal
Revenue Code of 1986. As a result, the utilization of the Company's net
operating loss carryforward will be limited to approximately $1.9 million per
year through 2011.
No income, profit or capital gain taxes are levied in Bermuda and, accordingly,
no provision or benefit for such taxes has been recorded by AMIC. In the event
such taxes are levied, AMIC has an agreement with the Bermuda government
exempting it from all such taxes until March 2016.
7. STATUTORY INFORMATION:
Accounting Practices
Generally accepted accounting principles (GAAP)("GAAP") differ in certain respects
from accounting practices prescribed or permitted by the domiciliary insurance
regulatory authorities of the State of Texas and Bermuda.
F-18
115
AEIC and AMIC are required to report to certain regulatory agencies on the
basis of Statutory Accounting Practices ("SAP"). The principal differences
between SAP and GAAP are as follows:
-o Under SAP, policy acquisition costs, such as commissions, premium
taxes, fees, and other costs of underwriting policies are charged to
current operations as incurred, whereas, the related written premium
is included in earnings on a pro-rata basis over the period covered by
the policy;
-o Under SAP, certain assets, designated as "Nonadmitted Assets" (such as
prepaid expenses) are charged against surplus;
-o Under SAP, federal income taxes are only provided on taxable income
for which income taxes are currently payable, while under GAAP,
deferred income taxes are provided with respect to temporary
differences.
-differences;
o Under SAP, certain reserves are established in amounts which differ
from amounts which would be provided in conformity with GAAP.
Financial Information
The unaudited statutory capital and surplus of AEIC as of December 31, 1996 and
1995, was $20,351 and 1994, was $50,465, and $65,107, respectively. Unaudited statutory net income
(loss) of AEIC for the years ended December 31, 1996, 1995 and 1994 was
$(45,629), $(15,735) and 1993 was
$(15,735), $2,943, and $5,268, respectively.
The unaudited statutory capital and surplus of AMIC as of December 31, 1996 and
1995, was $4,031 and 1994, was $3,761, and $2,536, respectively. Unaudited statutory net income of
AMIC for the years ended December 31, 1996, 1995 and 1994, was $92, $1,143 and
1993, was $1,143, $313, and
$394, respectively.
F-17
64
AMERICAN EAGLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Minimum Capital Requirements
The insurance subsidiaries must maintain a minimum amount of statutory capital
and surplus to satisfy regulatory requirements. At December 31, 1995,1996, AEIC had
unaudited statutory capital and surplus of $50,465$20,351 with a minimum requirement
of $15,982$16,533 and AMIC had unaudited statutory capital and surplus of $3,761$4,031 with
a minimum requirement of $123.$250. As a result of the Company's 1996 net loss and
resulting decline in statutory capital, the Company has been requested by the
Insurance Department of the State of Texas to submit a capital plan outlining
the actions the Company plans to take to improve overall statutory capital
levels.
Dividend Restrictions
The insurance subsidiaries are subject to various regulatory restrictions which
limit the maximum amount of annual dividends allowed to be paid. Generally,
dividends may only be paid from earned surplus arising from the business, and
then the maximum dividend that may be paid without prior regulatory approval is
limited to the greater of (i) 10% of statutory surplus or (ii) the lesser of
100% of net investment income, or net income, for the prior year. Dividends
exceeding these limitations can be made subject to approval by the domiciliary
insurance regulatory authorities. Based on regulatory restrictions presently in
effect, the maximum amount available for payment as dividends to the Company by
AEIC without the prior approval of regulatory authorities is $5.0$2.0 million, if
at the time of payment AEIC has earned surplus at least equal to the amount of
dividends.dividend. At December 31, 1995,1996, AEIC had earned surplus (deficit) was reset to
zero. AEIC received permission from the Department of approximately $(8.8) million.Insurance of the State of
Texas to reset earned surplus to zero at December 31, 1996 by transferring from
the paid-in capital account the amount necessary to bring the earned surplus
account to zero. However, no dividend can be paid prior to January 1, 1998.
F-19
116
8. REDEEMABLE PREFERRED STOCK, COMMON STOCK AND OPTION PLANS:
Series B Cumulative Redeemable Preferred Stock
In June 1990, the Company issued 162,857 shares of Series B Cumulative
Redeemable Preferred Stock ("Series B Preferred Stock") in exchange for the
cancellation of the outstanding principal balance of the Company's acquisition
notes payable. Cash dividends of 6% are payable in quarterly installments. The
preferred shares are redeemable by the Company at any time at a price of $10
per share plus accrued and unpaid dividends, and are mandatorily redeemable at
$10 per share plus accrued and unpaid dividends as follows: 20,000 shares -- December 31, 1996, 30,000 shares ---
December 31, 1997 and all remaining shares on December 31, 1998. Pursuant to
the mandatory redemption provisions, 20,000 shares were redeemed on January 15,
1997.
Series D Preferred Stock
In December 1996, the Company issued 350,000 shares of Series D Preferred Stock
for a purchase price of $100 per share. The Series D Preferred Stock has a
liquidation value of $100 per share and ranks junior to the Series B Preferred
Stock with respect to payment of dividends and payments or distributions upon
liquidation.
The Series D Preferred Stock has an annual, cumulative dividend of 9% payable
quarterly. At the option of the Company, dividends during the first five years
may be paid either in cash or in shares of the Series D Preferred Stock.
Until December 31, 2003, the holders of Series D Preferred Stock collectively
are entitled to cast 20% of the votes eligible to be cast on any matter
submitted to a vote of the holders of capital stock of the Company; except if
the aggregate number of shares of Common Stock into which the Series D
Preferred Stock is then convertible is less than 20% of the outstanding shares
of Common Stock on a fully diluted basis, then the Series D Preferred Stock
will be entitled to cast one vote for each share of Common Stock into which it
is convertible.
The Series D Preferred Stock is convertible into Common Stock at any time at
the option of the holder at a conversion price of $5.25 per share (subject to
antidilution provisions). The Company has reserved 10,403,810 shares of Common
Stock for the conversion.
The Series D Preferred Stock may be redeemed for cash by the Company at any
time. If, however, redemption occurs on or before December 31, 2003, the
Company will pay the redemption price and issue warrants to purchase the number
of shares of Common Stock of the Company into which the redeemed Series D
Preferred Stock could have been converted. Such warrants would have an exercise
price of $5.25 per share (subject to antidilution provisions) and would expire
on December 31, 2003. The Company is required to redeem 10% of the outstanding
shares of Series D Preferred Stock on the first business day of January of each
year beginning 2008, with all remaining shares required to be redeemed on the
first business day of January 2017. The redemption price is $100 per share plus
accrued and unpaid dividends.
Common Stock
The common stock of the Company is issuable in either of two classes, Common
Stock or Nonvoting Common Stock. Other than the voting rights, the two classes
are identical in every respect. As of December 31, 1996 and 1995, 7,047,098 and
1994,
7,044,698 and 7,049,298 shares of Common Stock were outstanding, respectively. As of December
31, 1996, no shares of Nonvoting Common Stock were outstanding. At December 31,
1995, and 1994, 6,000 shares of Nonvoting Common Stock were outstanding.outstanding, all of which
were converted to Common Stock in January 1996. The Company declared cash
dividends of $0.08, $0.13 and $0.09 per common share in 1996, 1995 and 1994,
respectively.
No cash dividends were declared onF-20
117
In May 1994, the Company issued 3,563,750 shares of Common Stock through an
initial public offering, which resulted in 1993.$32,037 of proceeds, net of issuance
costs of $3,601, to the Company. Of the net proceeds, $10,156 was used to
redeem all of the Company's Series C Cumulative Preferred Stock, including
accrued dividends, $20,100 was contributed to the capital and surplus of AEIC,
and the remainder was used for general corporate purposes.
Stock Option Plans
The Company has six stock option plans for officers, directors, and key
employees of the Company: the 1991 Non-Qualified Stock Option Plan, the three
Amended and Restated P&C Stock Option Plans, the 1994 Stock Incentive Plan, and
the 1994 Director Stock Option Plan. Under the plans, vesting periods are
established at the time of grant but typically range up to three years, and
exercise prices are at fair market value at the time of grant. In connection
with the issuance of the Series D Preferred Stock, certain stock options
outstanding were cancelled and new options granted at fair market value with
new vesting periods and expiration dates. Stock option expiration dates may
vary from 10 years to 15 years from the date of grant. Option prices per share
at December 31, 19951996 ranged from $9.57$4.525 to $11.52, with a weighted average of
$10.73.
F-18
65
AMERICAN EAGLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)$5.89. There were no significant differences between the historical results of
operations and net income (loss) per common share and the pro-forma amounts
required under SFAS No. 123.
At December 31, 1995,1996, the Company has 1,246,8481,229,550 common shares reserved for
stock options. Option activity is as follows:
Weighted Weighted
Average Price Average Price
1996 Per Share 1995 Per Share 1994
1993---------- ------------- ---------- ------------- ---------
------- -------
Outstanding, beginning of year.....................year 1,099,881 993,680 589,424
371,168
Granted............................................Granted 801,550 $5.27 173,779 $9.77 441,702
235,342
Canceled...........................................Canceled (980,257) $10.61 (67,578) $10.65 (37,446)
(17,086)---------- ---------- --------- ------- -------
Outstanding, end of year...........................year 921,174 1,099,881 993,680
589,424========== ========== ========= ======= =======
Exercisable, end of year...........................year 163,345 655,438 422,644
302,521========== ========== =========
======= =======Weighted average exercise price $ 5.84 $ 10.73 $ 10.84
========== ========== =========
1994 Employee Restricted Stock Plan
In February 1994, the board of directors approved the 1994 Employee Restricted
Stock Plan ("Restricted Stock Plan"). Under the Restricted Stock Plan, all
employees on the date of closing of the initial public offering received a
grant of 100 shares of Common Stock, subject to forfeiture upon termination of
employment within five years after the date of closing of the initial public
offering for any reason other than retirement, death, or disability. As of December 31, 1995, 17,200 shares of restricted stock remained
outstanding under this plan. Unearned compensation of $238 was recorded at the
date of award based on the market valuea
result of the shares. Unearned compensation,
which is a componentissuance of shareholders' equity, is being amortizedthe Series D Preferred Stock, in accordance with the
plan, the restrictions were eliminated, and the shares were distributed to expense over
the
five-year vesting period, or in certain circumstances upon normal
retirement.plan participants.
F-21
118
9. SAVINGS AND PENSION PLANS:
Employee Profit Sharing and Savings Plan
Effective December 1, 1993, the Company's Employee Savings Plan was amended and
restated as the Employee Profit Sharing and Savings Plan (the "Savings Plan").
Employees who have completed six months of service are eligible to participate
in the Savings Plan. Participants may make contributions to the Savings Plan
through payroll deductions of up to 15% of their base compensation on a
tax-deferred basis and up to 10% of their base compensation on an after-tax
basis. The Company matches 50% of each participant's tax deferred contributions
to the Savings Plan up to 6% of the participant's compensation. Participants
are 100% vested in their contributions and the Company's matching
contributions. Contributions made by the Company to participant accounts
totaled approximately$228, $210 $209 and $146$209 for the years ended December 31, 1996, 1995 1994 and
1993,1994, respectively.
The Company may make annual profit sharing contributions tofor all employees
eligible to participate in the Savings Plan. The amount of the contribution is
within the discretion of the Board of Directors. Profit sharing contributions
are allocated among participants in proportion to their compensation.
Participants vest in profit sharing contributions on a graduated vesting
schedule over three years. The Company's profit sharing contributioncontributions to the
Savings Plan totaled $100, $140 $175 and $150$175 for the years ended December 31, 1996,
1995 1994 and 1993,1994, respectively.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting StandardsSFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
the Company to disclose the estimated fair value of its financial instrument
assets and liabilities. Approximately 34%33% of the Company's assets and 4%0% of its
liabilities are considered financial instruments as defined in Statement No.
107.
F-19
66
AMERICAN EAGLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Estimated fair values have been determined using an estimation methodology
suitable for each category of financial instruments. The estimation
methodologies used, estimated fair values, and recorded book balances at
December 31, 19951996 and 1994,1995, were as follows:
-o Financial instruments actively traded in a secondary market have
been valued using quoted available market prices.
ESTIMATED RECORDED
FAIR VALUE BOOK BALANCE
-------------------- --------------------Estimated Recorded
Fair Book
Value Balance
------------------- -------------------
1996 1995 19941996 1995
1994
-------- ------- -------- --------------- --------
Cash and cash equivalents.................equivalents $ 23,094 $ 2,922 $ 1,53023,094 $ 2,922
$ 1,530
======== ======= ======== =============== ========
Investments (Note 4)...................... $ 65,778 $103,807 $94,577$ 65,993 $103,870
$96,651
======== ======= ======== =============== ========
-o Financial instrument liabilities with variable rates have an
estimated fair value equal to the recorded book balance.
ESTIMATED RECORDED
FAIR VALUE BOOK BALANCE
------------------ ------------------Estimated Recorded
Fair Book
Value Balance
------------------- -------------------
1996 1995 19941996 1995
1994
------- ------ ------- -------------- -------- -------- --------
Note payable.................................. $11,250 $9,250 $11,250 $9,250
=======payable $ -- $ 11,250 $ -- $ 11,250
====== =============== ====== ========
F-22
119
Changes in assumptions or estimation methodologies may have a material effect
on these estimated fair values. The Company's remaining assets and liabilities
which are not considered financial instruments have not been valued differently
than has been customary with historical cost accounting.
11. COMMITMENTS AND CONTINGENT LIABILITIES:
Litigation
In the ordinary course of business, the Company and its subsidiaries have been
named defendants in various lawsuits seeking both actual and punitive damages.
Although the ultimate outcome of these matters is uncertain, management, based
on consultation with outside legal counsel, is of the opinion that their
resolution will not have a material adverse effect on the Company's financial
position or results of operations.
Lease Commitments
The Company has entered into various noncancelable operating leases
(principally with respect to facilities and equipment) which call for future
minimum lease payments as follows:
1996................................................................ $1,050
1997................................................................ 1,048
1998................................................................1997 1,050
1998 782
1999................................................................1999 760
2000 and thereafter.................................................760
Thereafter 760
Total rent expense for the years ended December 31, 1996, 1995 1994 and 1993,1994, was
approximately $1,097, $1,035 $852 and $870,$852, respectively.
Directors and Officers Liability
The Company is required to indemnify officers and directors for liability and
defense costs associated with litigation which might arise in connection with
the fulfillment of their responsibilities to the Company.
F-20Other Matters
Prior to the Company's acquisition of AEIC and Aviation Office of
America, Inc. ("AOA") from Talegen Group, Inc. ("Talegen"), AOA was the
aviation manager for certain of its affiliates, which were insurance company
subsidiaries of Talegen. AOA continued to act as aviation manager for these
companies after the acquisition. Included in the aviation business managed by
AOA before and after the acquisition were workers' compensation programs for
aviation-related businesses. International Insurance Company ("International"),
a subsidiary of Talegen and successor in interest to the Talegen subsidiaries
whose aviation business was managed by AOA, is engaged in arbitrations with
certain reinsurers of the workers' compensation programs. The issue being
arbitrated involves the scope and coverage of the reinsurance contracts in
effect before, during and after the acquisition. The Company cannot currently
predict the outcome of the arbitrations. If International loses the
arbitrations, it may claim that the Company is responsible for losses not
covered by reinsurance on policies issued post-acquisition, an amount which
could potentially exceed the Company's capital. The Company believes that it
has valid defenses to a claim, if one is made, by International against the
Company, although there can be no guarantee of the outcome of any arbitration
or litigation of such claim.
F-23
67120
AMERICAN EAGLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
12. QUARTERLY FINANCIAL DATA (UNAUDITED):
The table below sets forth the Company's operating results by quarter for 1996
and 1995.
1996
-------------------------------------------------------------------
Mar. 31 June 30 Sept.30 Dec. 31 Total
------------- ------------- ------------- ------------- -------------
(Dollars in millions, except per share data and ratios)
Revenues
Earned premiums, net of
reinsurance $ 32.8 $ 33.5 $ 27.6 $ 13.3 $ 107.2
Agency operations, net -- -- 0.2 0.2 0.4
Investment income, net 1.4 1.0 1.0 1.1 4.5
Realized investment gains
(losses), net 0.2 (0.1) -- (0.2) (0.1)
------------- ------------- ------------- ------------- -------------
Total revenues 34.4 34.4 28.8 14.4 112.0
Expenses
Losses and loss adjustment
expenses, net of reinsurance 27.5 21.1 17.6 41.1 107.3
Policy acquisition and other
underwriting expenses 10.8 13.7 12.4 11.0 47.9
Interest expense 0.3 0.3 0.3 0.3 1.2
------------- ------------- ------------- ------------- -------------
Total expenses 38.6 35.1 30.3 52.4 156.4
Income (loss) before income tax
provision (benefit) (4.2) (0.7) (1.5) (38.0) (44.4)
Income tax provision (benefit) (1.4) (0.1) (0.3) 1.8 --
------------- ------------- ------------- -------------
Net income (loss) $ (2.8) $ (0.6) $ (1.2) $ (39.8) $ (44.4)
============= ============= ============= =============
Net income (loss) per common share
$ (0.39) $ (0.08) $ (0.17) $ (5.67) $ (6.32)
============= ============= ============= =============
Weighted average number of
common shares outstanding
(primary and fully diluted) 7,050,548 7,049,898 7,048,498 7,047,298 7,048,898
GAAP ratios
Loss and LAE ratio 83.8% 63.1% 63.7% 311.0% 100.2%
Expense ratio 32.8 40.9 44.8 83.0 44.6
------------- ------------- ------------- ------------- -------------
Combined ratio 116.6% 104.0% 108.5% 394.0% 144.8%
============= ============= ============= ============= =============
1995
-----------------------------------------------------------------------------------
Mar. 31 June 30 Sept.30 Dec. 31 Total
------------- ------------- ------------- ------------- -------------
(Dollars in millions, except per share data and ratios)
Revenues
Earned premiums, net of
reinsurance $ 20.6 $ 24.6 $ 27.2 $ 30.0 $ 102.4
Agency operations, net 0.3 -- 0.2 (0.1) 0.4
Investment income, net 1.3 1.5 1.4 1.3 5.5
Realized investment gains
(losses), net -- -- 0.4 0.1 0.5
------------- ------------- ------------- ------------- -------------
Total revenues 22.2 26.1 29.2 31.3 108.8
Expenses
Losses and loss adjustment
expenses, net of reinsurance 13.6 15.6 16.3 45.4 90.9
Policy acquisition and other
underwriting expenses 7.0 7.6 9.1 13.6 37.3
Interest expense 0.1 0.2 0.3 0.4 1.0
------------- ------------- ------------- ------------- -------------
Total expenses 20.7 23.4 25.7 59.4 129.2
Income (loss) before income tax
provision (benefit) 1.5 2.7 3.5 (28.1) (20.4)
Income tax provision (benefit) 0.5 0.8 1.1 (9.7) (7.3)
------------- ------------- ------------- ------------- -------------
Net income (loss) $ 1.0 $ 1.9 $ 2.4 $ (18.4) $ (13.1)
============= ============= ============= ============= =============
Net income (loss) per common share
$ 0.14 $ 0.26 $ 0.34 $ (2.60) $ (1.87)
============= ============= ============= ============= =============
Weighted average number of
common shares outstanding
(primary and fully diluted) 7,055,298 7,053,998 7,052,898 7,051,398 7,052,998
GAAP ratios
Loss and LAE ratio 65.9% 63.6% 60.2% 151.0% 88.8%
Expense ratio 33.7 30.7 33.5 45.5 36.4
------------- ------------- ------------- ------------- -------------
Combined ratio 99.6% 94.3% 93.7% 196.5% 125.2%
============= ============= ============= ============= =============
The fourth quarter of 1996 includes a charge to operations of approximately
$30.0 million relating primarily to reserve additions (including
incurred-but-not-reported losses) and reinsurance costs.
F-24
121
AMERICAN EAGLE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETSSHEET - MARCH 31, 1997
(In Thousands Except Share Data)
(Unaudited)
DECEMBERMarch 31,
SEPTEMBER 30,
1995 1996
------------ -------------1997
---------
(UNAUDITED)ASSETS
Cash and investments................................................ $106,792Investments $ 69,17866,562
Accounts receivable................................................. 56,890 55,229Receivable 55,625
Reinsurance recoverable, net........................................ 101,125 87,670Recoverable, net 69,896
Deferred policy acquisition costs................................... 15,296 14,670Policy Acquisition costs 13,234
Deferred reinsurance premiums....................................... 29,355 22,594Reinsurance Premiums 29,208
Other assets........................................................ 18,337 15,969
--------Assets 13,460
---------
Total assets.............................................. $327,795Assets $ 265,310
========247,985
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Reserve for losses and loss adjustment expenses................... $136,528expenses $ 123,203135,573
Unearned premiums................................................. 79,605 65,996premiums 50,566
Other policy liabilities.......................................... 29,722 1,180liabilities 16,833
Agency payables to insurance companies net....................... 1,736 751
Note payable...................................................... 11,250 13,250(1,463)
Accounts payable and other liabilities............................ 13,859 12,195
--------liabilities 10,690
---------
Total liabilities......................................... 272,700 216,575
-------- ---------
CommitmentsLiabilities 212,199
Commitment and contingent liabilitiesContingent Liabilities
Series B Cumulative Preferred Stock, $.01 par value; 162,857 shares
authorized, 162,857142,857 shares issued and outstanding................. 1,629 1,629outstanding 1,428
Series D Cumulative Convertible Redeemable Preferred Stock, $0.01
par value; 546,200 shares authorized, 350,000 shares issued and
outstanding at December 31, 1996 and 357,875 at March 31, 1997 33,952
Stockholders' equity:
Common Stock, $.01 par value, 21,000,000 shares authorized,
7,121,3807,047,098 shares issued........................................ 71issued 71
Additional paid-in-capital........................................ 45,532 45,555Paid-In Capital 45,600
Unrealized apprec.(deprec.)Depreciation on investment securities,Investment Securities, net of
deferred taxes................................................. 1,029 (252)(467)
Retained earnings................................................. 6,921 1,819Earnings (Deficit) (44,711)
Less --- 73,882 shares of common stock heldCommon Stock Held in the treasury,Treasury, at cost...........................................................cost (87) (87)
--------
---------
Total stockholders' equity................................ 53,466 47,106
--------Stockholders' Equity 406
---------
Total liabilitiesLiabilities and stockholders' equity................ $327,795Stockholders' Equity $ 265,310
========247,985
=========
The accompanying notes are an integral part of these
financial statements.
F-21F-25
68122
AMERICAN EAGLE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS ENDED (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)MARCH 31, 1997 AND 1996
(In Thousands Except Share Data)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1995Three Months Ended
March 31, March 31,
1997 1996
1995 1996
------------- ------------- ------------- ------------------------ -----------
ASSETS
Revenues:
Earned Premiums, Net $ 23,806 $ 32,834
Agency Operations, Net 326 (33)
Investment Income, Net 1,278 1,403
Realized Investment Gains (Losses), Net (58) 153
----------- -----------
Total Revenues Earned premiums, net of reinsurance......... $ 27,171 $ 27,634 $ 72,415 $ 93,965
Agency operations, net...................... 215 225 507 172
Investment income, net...................... 1,351 1,031 4,161 3,478
Realized investment gains (losses), net..... 452 (46) 458 52
--------- --------- --------- ---------
Total revenues...................... 29,189 28,844 77,541 97,667
--------- --------- --------- ---------
Expenses25,352 34,357
----------- -----------
Expenses:
Losses and loss adjustment expenses, netLoss Adjustment Expenses, Net of
reinsurance.............................. 16,347 17,596 45,594 66,255Reinsurance 19,953 27,519
Policy acquisitionAcquisition and other underwriting
expenses................................. 9,109 12,371 23,614 36,845Other Underwriting Expenses 11,142 10,758
Interest expense............................ 256 299 733 834
--------- --------- --------- ---------Expense 250
----------- -----------
Total expenses...................... 25,712 30,266 69,941 103,934
--------- --------- --------- ---------Expenses 31,095 38,527
----------- -----------
Income (loss)(Loss) before income tax expense....... 3,477 (1,422) 7,600 (6,267)
Income tax expense (benefit).................. 1,078 (263) 2,358 (1,800)
--------- --------- --------- ---------Tax Expense (5,743) (4,170)
Income Tax Expense (Benefit) - (1,418)
----------- -----------
Net income (loss).............................Income (Loss) $ 2,399(5,743) $ (1,159)(2,752)
=========== ===========
Net Income (Loss) Available for Common Stockholders(1) $ 5,242(6,552) (2,776)
=========== ===========
Weighted Average Number of Common Shares
Outstanding 7,048,898 7,050,548
=========== ===========
Net Income (Loss) Per Share of Common Stock(1) $ (4,467)
========= ========= ========= =========
Net income (loss) available for common
stockholders(1).............................(0.93) $ 2,375 $ (1,183) $ 5,169 $ (4,540)
========= ========= ========= =========
Weighted average number of common shares
outstanding................................. 7,052,898 7,048,498 7,053,698 7,049,098
========= ========= ========= =========
Net income (loss) per share of common
stock(1).................................... $ 0.34 $ (0.17) $ 0.73 $ (0.64)(0.39)
=========== ===========
- ---------------
(1) After deduction of preferred dividends
The accompanying notes are an integral part of these
financial statements.
F-22F-26
69123
AMERICAN EAGLE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINETHREE MONTHS ENDED (UNAUDITED)
(DOLLARS IN THOUSANDS)MARCH 31, 1997 AND 1996
(In Thousands)
(Unaudited)
SEPTEMBER 30, SEPTEMBER 30,
1995March 31, March 31,
1997 1996
------------- --------------------- --------
Cash and cash equivalents derived from:Cash Equivalents Derived From:
Total provided operating activities............................. $ 2,198 $ (35,521)Provided by (Used in) Operating Activities $(22,358) $(16,795)
-------- --------
Investing activities --Activities-
Net proceeds (purchases) of short-term investments........... (3,917) 24,743investments (2,652) 24,730
Purchases of fixed income securities......................... (18,345) (23,715)securities (15,583) (14,587)
Proceeds from sales of fixed income securities............... 16,862 26,882securities 15,428 6,119
Proceeds from maturities of fixed income securities.......... 3,009 6,885securities 3,065 100
Purchases of property and equipment.......................... (1,308) (1,049)
--------- ---------equipment 1,054 (325)
-------- --------
Total providedProvided by investing activities.................. (3,699) 33,746
--------- ---------(Used in) Investing Activities 1,312 16,037
-------- --------
Financing activities --activities-
Dividends paid on Series B and CD Cumulative Preferred Stock....................................................... (73) (73)Stock (806) (24)
Dividends paid on common stock............................... (635) (846)stock - (282)
Proceeds from issuance of note payable..................................... 2,000 2,000
Increasepreferred stock 785 -
Redemption of Series B Cumulative Preferred Stock (201) -
Total Provided by (Used in) Financing Activities (222) (306)
-------- --------
Net Change in common stock outstanding......................... 26 --
--------- ---------
Total provided by financing activities.................. 1,318 1,081
--------- ---------
Net change in cash and cash equivalents........................... (183) (694) Cash and cash equivalents, beginning of period.................... 1,530 2,922
--------- ---------Cash Equivalents (21,268) (1,064)
Cash and cash equivalents, endCash Equivalents, Beginning of period..........................Period 23,093 2,922
-------- --------
Cash and Cash Equivalents, End of Period $ 1,3471,825 $ 2,228
========= =========1,858
======== ========
The accompanying notes are an integral part of these financial statements.
F-23F-27
70124
AMERICAN EAGLE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODSTHREE MONTHS ENDED SEPTEMBER 30, 1995MARCH 31, 1997 AND 1996
(UNAUDITED)1. BASIS OF PRESENTATIONPRESENTATION:
The accompanying unaudited condensed consolidated financial statements of the
American Eagle Group, Inc. (the "Company") and subsidiaries for the periodsthree
months ended September 30, 1995March 31, 1997 and 1996 have been prepared in accordance with
the
instructions to the Form 10-Qgenerally accepted accounting principles and do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
In the opinion of management, all adjustments (consisting of only normal
recurring accruals) considered necessary for a fair presentation of the results
for the interim period have been included. Operating results for the periodsthree
months ended September 30, 1996March 31, 1997 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1996.1997. These statements should
be read in conjunction with the financial statements and notes thereto for the
year ended December 31, 19951996 included elsewhere in the Company's Annual Report.
SUBSEQUENT EVENT
On November 6, 1996,Proxy Statement.
2. SALE OF OPERATIONS:
As previously announced, the Company announced the terms of a $35 million
investment in the Companyhas entered into transactions to sell its
aviation and the formation of a strategic alliance with
American Financial Group, Inc. ("American Financial Group").
Under the capital termsartisan contractor insurance operations. The closing of the
strategic alliance, American Financial Group
has agreed to purchase 350,000 sharesaviation transaction will require approval by the Company's stockholders,
although stockholders owning a majority of the Company's Series D Preferred Stock
for $35 million. This security willvoting stock have
a 9% dividend, with an option for the
first five yearsagreed to pay the dividendsvote in kind with additional shares of Series D
Preferred Stock. The preferred stock is convertible at a conversion price of
$5.25 per share into common stockfavor of the Company. At the time of issuance, the
Series D Preferred Stock will be convertible into approximately 48% of the
outstanding common stock (calculated on a fully converted basis).transaction. The preferred
stock matures in 20 years with mandatory redemption of 10% of principal per year
beginning in year eleven. The preferred stock is callable at par at any time. In
the event that the preferred stock is called prior to the seventh anniversary of
its issuance, the holder will receive warrants to purchase the Company's common
stock at $5.25 per share exercisable any time during the period between the call
date and the seventh anniversary of the issuance of the preferred stock. The
preferred stock carries limited voting rights equal to 20% of the total votes
eligible to be cast on matters submitted to holders of common stock. Until the
seventh anniversary of the issuance of the preferred stock, American Financial
Group has the right to nominate for election to the Company's Board of Directors
30% of the number of directors. As part of the overall transaction, the Company
has granted to American Financial Group warrants for 800,000 shares of the
Company's common stock with an exercise price of $3.45 per share. Such warrants
will become exercisable in the event that the Company terminates its agreement
with American Financial Group and enters into a competing transaction with
another party. These warrants will be canceled upon closing of the aviation
transaction with American Financial Group.
Proceeds from the transaction will be utilizedis also subject to contribute capital to the
Company's insurance company subsidiary, to reduce bank debt,regulatory approvals and for other general corporate purposes.
In connection with the transaction, the company would record, at the time
ofcustomary
conditions. The closing of the artisan transaction is subject to required
regulatory approvals and licenses and other customary conditions. The Company
has also entered into a recapitalization chargeletter of $15 million before
federal income tax. This recapitalization chargeintent to sell its marine operations. The
closing of the marine transaction is subject to definitive documentation,
Boards' of Directors approvals, required regulatory approvals and licenses and
other customary conditions.
Upon completion of these transactions, the Company expects that it will provide additional
strengthening of American Eagle's balance sheet and overall reserve levels and
is intendedno
longer write new or renewal policies for the foreseeable future. It will
continue to cover contingencies and estimated exposures associated with
various previously reported strategic actions and product line discontinuations.
F-24
71
QUARTERLY FINANCIAL DATA
(UNAUDITED)
The table below sets forthhandle claims on the Company's operating results by quarter for
1995policies that are not assumed as
part of these transactions and 1994.
1995 1994
------------------------------------------------------------- ----------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 TOTAL MAR. 31 JUNE 30
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS)
Revenues
Earned premiums, net of
reinsurance........................ $ 20.6 $ 24.6 $ 27.2 $ 30.0 $ 102.4 $ 16.7 $ 19.2
Agency operations, net.............. 0.3 0.0 0.2 (0.1) 0.4 0.2 0.4
Investment income, net.............. 1.3 1.5 1.4 1.3 5.5 0.9 1.0
Realized investment gains (losses),
net................................ 0.0 0.0 0.4 0.1 0.5 0.0 (0.1)
--------- --------- --------- --------- --------- --------- ---------
Total revenues............... 22.2 26.1 29.2 31.3 108.8 17.8 20.5
Expenses
Losses and loss adjustment expenses,
net of reinsurance................. 13.6 15.6 16.3 45.3 90.9 11.7 13.3
Policy acquisition and other
underwriting expenses.............. 7.0 7.6 9.1 13.6 37.3 4.8 5.2
Interest expense.................... 0.1 0.2 0.3 0.4 1.0 0.2 0.2
--------- --------- --------- --------- --------- --------- ---------
Total expenses............... 20.7 23.4 25.7 59.4 129.2 16.7 18.7
Income (loss) before income tax
expense (benefit).................. 1.5 2.7 3.5 (28.0) (20.4) 1.1 1.8
Income tax expense (benefit)........ 0.5 0.8 1.1 (9.7) (7.3) 0.4 0.5
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)................... $ 1.0 $ 1.9 $ 2.4 $ (18.4) $ (13.1) $ 0.7 $ 1.3
========= ========= ========= ========= ========= ========= =========
Net income (loss) per common share
(primary and fully diluted)........ $ 0.14 $ 0.26 $ 0.34 $ (2.60) $ (1.87) $ 0.11 $ 0.22
========= ========= ========= ========= ========= ========= =========
Weighted average number of common
shares outstanding: share and share
equivalents (primary and fully
diluted)........................... 7,055,298 7,053,998 7,052,898 7,051,398 7,052,998 3,469,448 5,101,985
GAAP Ratios Loss and LAE ratio...... 65.9% 63.6% 60.2% 151.0% 88.8% 70.1% 69.3%
--------- --------- --------- --------- --------- --------- ---------
Expense ratio....................... 33.7 30.7 33.5 45.5 36.4 28.7 26.8
--------- --------- --------- --------- --------- --------- ---------
Combined ratio............... 99.6% 94.3% 93.7% 196.5% 125.2% 98.8% 96.1%
========= ========= ========= ========= ========= ========= =========
SEPT. 30 DEC. 31 TOTAL
--------- --------- ---------
Revenues
Earned premiums, net of
reinsurance........................ $ 23.9 $ 22.9 $ 82.7
Agency operations, net.............. 0.5 (0.2) 0.9
Investment income, net.............. 1.1 1.1 4.1
Realized investment gains (losses),
net................................ 0.0 0.0 (0.1)
--------- --------- ---------
Total revenues............... 25.5 23.8 87.6
Expenses
Losses and loss adjustment expenses,
net of reinsurance................. 15.1 12.6 52.7
Policy acquisition and other
underwriting expenses.............. 6.8 6.9 23.7
Interest expense.................... 0.2 0.2 0.8
--------- --------- ---------
Total expenses............... 22.1 19.7 77.2
Income (loss) before income tax
expense (benefit).................. 3.4 4.1 10.4
Income tax expense (benefit)........ 1.0 1.4 3.3
--------- --------- ---------
Net income (loss)................... $ 2.4 $ 2.7 $ 7.1
========= ========= =========
Net income (loss) per common share
(primary and fully diluted)........ $ 0.33 $ 0.39 $ 1.16
========= ========= =========
Weighted average number of common
shares outstanding: share and share
equivalents (primary and fully
diluted)........................... 7,056,410 7,055,442 5,684,386
GAAP Ratios Loss and LAE ratio...... 63.5% 54.6% 63.7%
--------- --------- ---------
Expense ratio....................... 28.3 30.4 28.6
--------- --------- ---------
Combined ratio............... 91.8% 85.0% 92.3%
========= ========= =========
Management believes that there has been a seasonality patternmaintain the related reserves and assets.
Accordingly, the Company's revenues and earnings capacity will be significantly
lower in the Aviation Division's loss ratio. Losses have historically been higher in the
first half of the year and then declined in the second half, with the highest
losses in the first quarter and the lowest losses in the fourth quarter. The
Company believes that this pattern results primarily from weather-related
factors which contribute to a higher loss frequency in the first two quarters of
the year. The fourth quarter of 1995 includes a special charge to operations of
$20.6 million (after tax) for certain discontinued lines and classes of business
and increases in reserves for incurred but not reported (IBNR) losses and
unearned premiums. The expense ratio has also been higher earlier in the year
primarily as a result of the growth in earned premiums in the latter part of the
year.
F-25future.
F-28
72125
APPENDIX I
[CS[CREDIT SUISSE FIRST BOSTON CORPORATION LETTERHEAD]
November 5, 1996April 11, 1997
Board of Directors
American Eagle Group, Inc.
Board of Directors
American Eagle Insurance Company
12801 North Central Expressway, Suite 800
Dallas,Texas 75243
Gentlemen:
You have asked usThis letter will confirm the advice given to advise you in connection with respect toyour
consideration of the fairness toproposed sale of the aviation business and certain other
assets ("Aviation") of American Eagle Group, Inc. (the "Company") to American
Financial Group, Inc. ("AEG"AFG") on the terms and conditions described to you at
a meeting held on April 11, 1997.
As noted at your meeting, Credit Suisse First Boston Corporation contacted 13
potential purchasers other than AFG. Also, the Company issued a press release
on March 22, 1997 that included the statement that "the Company has engaged
Credit Suisse First Boston to review and develop capital and strategic
alternatives to maximize shareholder value ... including, among other things,
sale of the Company or assets of the Company, a rights offering to
stockholders, a sale of securities, and other alternatives to increase
underwriting capacity." Only one party other than AFG submitted a proposal with
respect to either the Company or Aviation, and we believe this proposal was
less favorable to the Company than the AFG proposal from a financial point of
view ofview.
We also discussed with you the cash
consideration to be received by AEG pursuant to the terms of a Securities
Purchase Agreement, dated November 5, 1996 (the "Purchase Agreement"), by and
between AEG and American Financial Group, Inc. ("AFG"). The Purchase Agreement
provides for, among other things, the purchase by AFG of an aggregate of 350,000
shares of newly authorized Series D Preferred Stock, par value $0.01 per share,
of AEG (the "Series D Preferred Stock") for an aggregate purchase price of $35
million in cash (the "Financing").
In arriving at our opinion, we have reviewed the Purchase Agreement and
certain related documents and certain publicly available business and financial information relating to AEG. We have also reviewed certain other information,
including financial forecasts, provided to us by AEG, and have met with AEG's
management to discuss the businesscondition and prospects of AEG,the
Company, including the distressed financial position of AEGthe Company and the
near-term liquidity needs of, and capital resources available to, AEG.
We have also considered certain financial and stock market data for AEG,
andthe Company.
In particular, we have compared that datanoted the following with similar data for other publicly traded
companies in businesses similar to those of AEG and we have considered,regard to the extent publicly available,Company's current
situation:
o RECENT OPERATING RESULTS: The Company has experienced
deteriorating financial results due to high claims activity and
adverse reserve development in both its non-aviation lines of
business and its core aviation line of business. For 1996, the
financial termsCompany reported a GAAP net loss of certain other significant
equity$44.4 million, including $30
million of reserve additions. American Eagle Insurance Company's
("AEIC") statutory surplus had dropped to $20.4 million as of
December 31, 1996.
o RATINGS DOWNGRADES: The Company's claims-paying ratings were
downgraded twice by A.M. Best during 1996, and equity-linked investments in other publicly traded companies. We also
considered such other information, financial studies, analyses,again on March
25, 1997:
- March 4, 1996 A.M. Best downgraded the Company to B++ from
A- "reflecting the company's decreased capitalization and
investigationsoperating profitability."
- May 24, 1996 A.M. Best downgraded the Company to B and
financial, economic and market criteria which we deem
relevant.
In connection with our review, we have not assumed any responsibility for
independent verification of anyplaced a negative outlook on the rating pending the outcome
of the foregoing information and have relied onCompany's capital-raising efforts.
- March 25, 1997 A.M. Best downgraded the Company from B
("vulnerable") to D ("poor"). Best said the downgrade
"reflects its being complete and accurate in all material respects. With respectview that [the Company's] weakened financial
condition makes it 'extremely vulnerable' to the
financial forecasts, we have assumed that such forecasts have been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the management of AEG as to the future financial performance of
AEG. In addition, we have not made an independent evaluation or appraisal of the
assets or liabilities (contingent or otherwise) of AEG, nor have we been
furnished with any such evaluations or appraisals. Our opinion is necessarily
based on information available to us, and financial, economic, market and other
conditions as they exist and can be evaluated, on the date hereof. In connection
with our engagement we were not requested to, and did not, solicit third party
indications of interest in acquiring all or substantially all of AEG.
We have acted as financial advisor to AEG in connection with the Financing
and will receive a fee for our services, a significant portion of which is
contingent upon consummation of the Financing. CS First Boston has in the past
provided financial services to AEG and AFG unrelated to the proposed Financing,
for which services CS First Boston has received compensation. In the ordinary
course of our business, CS First Boston and its affiliates may actively trade
the equity securities of AEG and both the debt and equity securities of AFG for
their own account and for the accounts of customers and, accordingly, may at any
time hold a long or short position in such securities.
It is understood that this letter is for the information of theunfavorable
126
Board of Directors
American Eagle Group, Inc.
Board of AEGDirectors
American Eagle Insurance Company
April 11, 1997
Page 2
changes in connectionunderwriting or economic conditions. It said it was also
concerned over potential regulatory response to the position of [the
Company), whose capitalization, it said, had fallen below mandatory
control level of risk-based capital."
The Company has advised us that claims-paying ratings are important to the
Company's business and that agents tend to focus on ratings as a key
element in their decision to place insurance with its evaluationa company and that many
insureds, including municipal airports (one of the Financing, does not
constituteCompany's target
markets), require that their insurer have at least an "A" rating from A.M.
Best.
o AFG WRITE DOWN: On March 27, 1997, AFG announced "that it has written
down its $35 million investment in [the Company], effective as of December
31, 1996."
o REGULATORY ACTION: Discussions between the Company, AEIC and their various
regulators.
o FUTURE PROSPECTS: The Company's management has advised us that prospects
for future earnings performance are poor without additional capital and
that the Company's preliminary first quarter results are a recommendationnet loss of
$2.9 million.
o STOCK PRICE PERFORMANCE: In May 1994, the Company sold its common stock
in an initial public offering at $10 per share. The Company's stock price
closed as high as $12 1/8 and closed above $10 as late as February 1996.
Following the Company's report of disappointing fourth quarter 1995
results, including a special charge, during the first quarter of 1996, the
stock price began to deteriorate steadily and traded in a range of $3 3/8
to $4 1/8 prior to the announcement of the sale of the Series D Preferred
Stock to AFG. Following the announcement of the sale of the Series D
Preferred Stock to AFG, the Company's stock price traded as high as $5 1/2
but has dropped to $1 1/2 as of April 9.
Given the Company's financial condition and prospects and the fact that the
solicitation process failed to produce any stockholder asproposals at this time (other than
the AFG proposal and the one other proposal referenced above), we advised you
that a sale of Aviation to how such
73
stockholder should voteAFG at this time, on the proposed Financingterms and is notconditions
described to be quoted or
referred to,you at your meeting of April 11, would result in whole or in part, in any registration statement, prospectus or
proxy statement, or in any other document used in connection with the offering
or sale of securities, nor shall this letter be used for any other purposes,
without CS First Boston's prior written consent.
Based upon and subjectmore value to
the foregoing, it is our opinion that, as of the
date hereof, the cash consideration to be received by AEG pursuant to the
Financing is fair to AEGCompany, from a financial point of view.view, than any other which we together
explored.
Very truly yours,
CS FIRST BOSTON CORPORATION
By: /s/ JONATHAN PLUTZIK
------------------------------------
Jonathan Plutzik
Managing Director
74127
APPENDIX II
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES PURCHASE AGREEMENT
BETWEENAMONG
GREAT AMERICAN FINANCIAL GROUP, INC.,
PURCHASERINSURANCE COMPANY
AND
AMERICAN EAGLE INSURANCE COMPANY
AND
AMERICAN EAGLE GROUP, INC.,
SELLER
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DATED APRIL 11, 1997
75128
TABLE OF CONTENTS
PAGE
------Page
----
ARTICLESECTION 1. Purchase and Sale of Aviation Business . . . . . . . . . . . . 1
INTERPRETATION
1.1 Definitions................................................................ II-1
1.2 Rules of Construction...................................................... II-5
ARTICLE 2 SALE AND PURCHASE OF PURCHASED SECURITIES
2.1 Sale andSECTION 2. Purchase of Purchased Securities.................................. II-5
2.2Other Assets . . . . . . . . . . . . . . . . . . . 1
SECTION 3. Reinsurance of Later Business . . . . . . . . . . . . . . . . 2
SECTION 4. Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
SECTION 5. Purchase Price............................................................. II-5
2.3 DeliveryPrice and Other Payments . . . . . . . . . . . . . . 3
Section 5.1 Purchase Price . . . . . . . . . . . . . . . . . . . . 3
Section 5.2 Additional Payments . . . . . . . . . . . . . . . . . . 5
SECTION 6. Assumption of Warrants....................................................... II-5
2.4 Closing.................................................................... II-5
2.5 UseLiabilities . . . . . . . . . . . . . . . . . . 6
SECTION 7. Change in Name . . . . . . . . . . . . . . . . . . . . . . . . 6
SECTION 8. Further Assurances . . . . . . . . . . . . . . . . . . . . . . 7
SECTION 9. Representations, Warranties and Covenants of Proceeds............................................................ II-6
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELLER
3.1 Corporate Existence........................................................ II-6
3.2 Corporate Power; Authorization............................................. II-6
3.3 Enforceable Obligations.................................................... II-6
3.4 Seller and AEGI . 7
SECTION 10. Representations, Warranties and Covenants of Purchaser . . . . 13
SECTION 11. Covenants of Seller . . . . . . . . . . . . . . . . . . . . . 14
SECTION 12. Conditions to Closing - Purchaser . . . . . . . . . . . . . . 16
SECTION 13. Conditions to Closing - Seller . . . . . . . . . . . . . . . . 17
SECTION 14. Shareholder Approval . . . . . . . . . . . . . . . . . . . . . 18
SECTION 15. Regulatory Approvals . . . . . . . . . . . . . . . . . . . . . 18
SECTION 16. Certain Terminations . . . . . . . . . . . . . . . . . . . . . 18
SECTION 17. Noncompete/No Legal Bar............................................................... II-6
3.5 AbsenceSolicitation and Other Actions . . . . . . . . . 19
SECTION 18. Termination . . . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 19. Effect of Conflicts....................................................... II-6
3.6 Litigation................................................................. II-6
3.7 Financial Condition........................................................ II-7
3.8 No Change.................................................................. II-7
3.9 No Default................................................................. II-7
3.10Termination . . . . . . . . . . . . . . . . . . . . 21
129
- ii -
SECTION 20. Indemnification . . . . . . . . . . . . . . . . . . . . . . 21
Section 20.1 General Indemnification Obligation of Seller and AEGI . 21
Section 20.2 General Indemnification Obligation of Purchaser . . . . 22
Section 20.3 Method of Asserting Claims, Etc. . . . . . . . . . . . 22
Section 20.4 Payment . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 20.5 Other Rights and Remedies Not Affected . . . . . . . . 24
Section 20.6 Limitations on Amount -- Seller and AEGI . . . . . . . 24
Section 20.7 Limitations on Amount - Purchaser . . . . . . . . . . . 24
SECTION 21. Compliance with Laws....................................................... II-7
3.11 Taxes...................................................................... II-7
3.12 ERISA...................................................................... II-7
3.13 Environmental Matters...................................................... II-7
3.14 Investment Company Act..................................................... II-7
3.15 Capitalization of Seller................................................... II-7
3.16 Capitalization of Subsidiaries............................................. II-8
3.17 Title to Assets; Leases.................................................... II-8
3.18 Disclosure................................................................. II-8
3.19 Undisclosed Liabilities.................................................... II-8
3.20 Compliance with Federal Reserve Regulations................................ II-8
3.21Bulk Sales Laws . . . . . . . . . . . . . . 24
SECTION 22. Default under the Agreement . . . . . . . . . . . . . . . . 25
SECTION 23. Transition . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 24. Survival of Representations and Warranties................................. II-8
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF PURCHASER
4.1 RepresentationsWarranties . . . . . . . . . 25
SECTION 25. Fees and WarrantiesExpenses . . . . . . . . . . . . . . . . . . . . . 26
SECTION 26. Press Releases . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 27. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 28. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . 27
SCHEDULES
Schedule 1 Schedule of Purchaser................................ II-8
4.2 Commissions................................................................ II-9
ARTICLE 5 AFFIRMATIVE COVENANTS
5.1 Financial Statements....................................................... II-10
5.2 ConductAviation Business Assets
Schedule 2 Balance Sheet
Schedule 9(d) Uncollectible Accounts Receivable
Schedule 9(g) Existing Condition of Business
Schedule 9(i) Condition of Tangible Assets
Schedule 9(l) Ownership of Software
Schedule 9(p) Agents and MaintenanceBrokers
Schedule 9(r) Legal Actions
Schedule 9(t) Schedule of Existence........................... II-10
5.3 MaintenanceReinsurance Contracts
Schedule 9(u) Consents and Authorizations
Schedule 9(w) Schedule of Property; Insurance......................................... II-10
5.4 Strategic Alliance......................................................... II-11
5.5 Recapitalization Charge.................................................... II-11
ARTICLE 6 OTHER PROVISIONS
6.1 Shareholder Approval....................................................... II-11
6.2 Regulatory Approvals....................................................... II-11
6.3 ReservationMaterial Contracts
Schedule 10(c) Consents Required of Shares...................................................... II-11Purchaser
Schedule 17(b) Schedule of Excluded Employees
II-i
76
PAGE
-----
6.4 Good Faith by Seller....................................................... II-11
6.5 Board of Directors......................................................... II-12
6.6 Voting Agreement........................................................... II-12
6.7 No Solicitation and Other Actions.......................................... II-12
ARTICLE 7 CONDITIONS PRECEDENT TO PURCHASER'S OBLIGATIONS
7.1 Conditions Precedent....................................................... II-13
ARTICLE 8 CONDITIONS PRECEDENT TO SELLER'S OBLIGATIONS
8.1 Conditions Precedent....................................................... II-14
ARTICLE 9 TERMINATION OF AGREEMENT
9.1 Termination................................................................ II-15
9.2 Effect of Termination...................................................... II-15
9.3 Default under the Agreement................................................ II-16
ARTICLE 10 MISCELLANEOUS
10.1 Amendments and Waivers..................................................... II-16
10.2 No Waiver; Cumulative Remedies............................................. II-16
10.3 Notices.................................................................... II-16
10.4 Successors and Assigns..................................................... II-17
10.5 Enforcement Costs.......................................................... II-17
10.6 Counterparts............................................................... II-17
10.7 Term....................................................................... II-17
10.8 Consent to Jurisdiction.................................................... II-17
EXHIBITS130
- iii -
EXHIBITEXHIBITS
Exhibit A Amended Registration RightsQuota Share Reinsurance Agreement
EXHIBITExhibit B Preferred Stock Designation
EXHIBITReinsurance Agreement
Exhibit C Intentionally Omitted
EXHIBITClaims Servicing Agreement
Exhibit D FormComputer System Use Agreement
Exhibit E Mutual Release
Exhibit F Commitment of Registration Rights Agreement
EXHIBIT E Form of Warrant
EXHIBIT F Form of Warrant Registration Rights Agreement
EXHIBIT G Form of Mason Best Commitment
SCHEDULES
SCHEDULE 3.2 Consents
SCHEDULE 3.6 Litigation
SCHEDULE 3.8 Absence of Change
SCHEDULE 3.15 Capitalization of Seller
SCHEDULE 3.16 Capitalization of Subsidiaries
II-ii
77
SECURITIES131
PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT, dated as of April 11, 1997, is made this 5th day of November, 1996,
byentered into
among GREAT AMERICAN INSURANCE COMPANY, an Ohio corporation (hereinafter called
the "Purchaser"), AMERICAN EAGLE INSURANCE COMPANY, a Texas corporation
(hereinafter called the "Seller") and between AMERICAN EAGLE GROUP, INC., a Delaware
corporation ("Seller"(hereinafter called "AEGI").
RECITALS
WHEREAS, Purchaser desires to purchase from Seller and AEGI and Seller
and AEGI desire to sell to Purchaser certain aviation insurance business and
other rights and assets in connection therewith, all as more fully set forth
herein; and
NOW, THEREFORE, in consideration of the foregoing, the Purchase Price
(as hereinafter defined), the release of certain claims, the mutual agreements
and other consideration hereinafter set forth, Purchaser and Seller hereby
agree as follows:
SECTION 1. PURCHASE AND SALE OF AVIATION BUSINESS.
On the basis of the representations and warranties herein contained, for
the consideration and subject to the terms and conditions herein set forth,
Seller hereby agrees to convey, sell, assign, transfer and deliver to Purchaser
on the Closing Date (as defined in Section 4 below), and AMERICAN FINANCIAL GROUP, INC., an Ohio corporationPurchaser agrees to
acquire, receive, assume and accept assignment, transfer and delivery from
Seller on the Closing Date, Seller's right, title, interest and obligations in,
to and under all aviation insurance business, as more fully described on
Schedule 1 attached hereto and incorporated herein by this reference, which was
written or assumed by Seller, during the period commencing January 1, 1993 and
ending March 31, 1997 (the "Aviation Business") which Aviation Business, when
and if renewed through the respective agents and brokers therefor, shall be
effected by the issuance of policies by Purchaser.
SECTION 2. PURCHASE OF OTHER ASSETS.
In addition to the Aviation Business, the following assets will be sold
and conveyed by Seller to Purchaser on the Closing Date (the Aviation Business
and the following assets, collectively referred to as the "Assets"):
(a) All assets and properties reflected on the March 31, 1997 ("Purchaser"Balance
Sheet Date") Balance Sheet, attached hereto as Schedule 2 (the "Balance
Sheet").
ARTICLE 132
- 2 -
(b) All right, title and interest of Seller and AEGI in and to the computer
equipment and software used in connection with the Aviation Business,
and the Reinsured Business (as hereinafter defined) including, without
limitation, any license agreement relating thereto;
(c) All right, title and interest of Seller and AEGI in and to the lease for
the eighth and ninth floors located in the building in which Seller's
offices at 12801 North Central Expressway, Dallas, Texas are located
(the "Office Lease");
(d) All right, title and interest of Seller and AEGI in and to the names
"American Eagle Insurance Company" and "American Eagle Group, Inc."
including, without limitation, any and all trademarks or trademark
applications pertaining thereto and all patents, trademarks, tradenames,
service marks, copyright, the Software (as hereinafter defined), trade
secrets or know-how used in the Aviation Business (the "Intellectual
Property");
(e) All right, title and interest of Seller in and to the Reinsurance
Contracts (as hereinafter defined);
(f) All right, title and interest of Seller and AEGI in and to all
furniture, fixtures and tangible personal property used in connection
with the Aviation Business or the Reinsured Business; and
(g) All right, title and interest of Seller and AEGI in and to all other
tangible and intangible property relating to or used in connection with
the Aviation Business or the Reinsured Business; provided, however, the
assets listed on the attached Schedule 2 shall not be included in the
definition of Assets hereunder.
SECTION 3. REINSURANCE OF LATER BUSINESS.
Seller and Purchaser will enter into a Quota Share Reinsurance Agreement
in the form attached hereto marked Exhibit A and incorporated herein by this
reference effective as of the date hereof pursuant to which Purchaser will
reinsure all aviation business of Seller in force as of April 1, INTERPRETATION1997 and all
aviation business, written or renewed by Seller after March 31, 1997 and before
such time as Purchaser is qualified to issue directly its own policies as
contemplated by Section 23(a) (the "Reinsured Business").
SECTION 1.1 Definitions.4. CLOSING.
The closing for the transactions contemplated by this Agreement shall take
place at the offices of Seller, or such other place as may be agreed to in
writing by Purchaser and Seller, within three (3) business days of the
satisfaction of the conditions of closing set forth in Sections 12 and 13 of
this Agreement, but not later than July 31, 1997 (the "Termination Date"),
unless extended by mutual
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consent in writing by the parties hereto. The date and time of the closing are
referred to herein as the "Closing Date" and the consummation of the
transactions to be consummated on the Closing Date is referred to herein as the
"Closing".
SECTION 5. PURCHASE PRICE AND OTHER PAYMENTS.
Section 5.1 Purchase Price. Subject to the terms and conditions
herein stated, the parties hereto agree that, effective as of the Closing Date:
(a) Seller shall deliver and convey to Purchaser assets having a market
value equal to all liabilities of the Aviation Business and the
Reinsured Business, including, without limitation, all loss and loss
adjustment expense reserves and reserves for incurred but not reported
losses, all as reflected on the Balance Sheet.
(b) In addition to the payment required by subsection 5.1(d) below,
Purchaser shall pay to Seller, as a commission, an amount equal to
thirty percent (30%) of unearned premiums to be transferred to
Purchaser.
(c) In addition to payments required by subsection 5.1(b) above and 5.1(d)
below, Purchaser shall pay to Seller an amount equal to the book value,
adjusted for depreciation (as determined by generally accepted
accounting principles) of all furniture, fixtures and equipment,
including electronic data processing equipment included within the
Assets.
(d) In consideration for conveyance of the Assets to Purchaser, Purchaser
shall convey and deliver to Seller all shares of the Series D Preferred
Stock of AEGI owned by Purchaser, together with undated stock powers
duly endorsed in blank. The shares of Series D Preferred Stock shall be
conveyed free and clear of any liens, mortgages, security interests or
other claims whatsoever.
(e) Within twenty (20) days after the Closing, Purchaser shall prepare a
balance sheet as of the Closing Date ("Closing Date Balance Sheet") for
the Aviation Business using the same format and methodology employed in
preparing the Balance Sheet. Using the amounts reflected on such
Closing Date Balance Sheet, the following capitalized termsadjustments shall be made to
the Investment Account (as hereinafter defined):
(i) If the total of the Assets reflected on the Closing Date
Balance Sheet other than Investments (collectively the "Other Assets")
is greater than the total amount of the Other Assets shown on the
Balance Sheet, the amount reflected on the Balance Sheet as Investments,
(hereafter, the "Investment Account") shall be reduced by such amount;
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(ii) If the total of the Other Assets reflected on the Closing
Date Balance Sheet is less than the total amount of the Other Assets
shown on the Balance Sheet, the Investment Account shall be increased by
such amount;
(iii) If the total of the Liabilities reflected on the Closing
Date Balance Sheet other than Loss and Loss Adjustment Expense Reserves
(which shall be the same as shown on the Balance Sheet) (collectively
the "Other Liabilities") is greater than the total amount of the Other
Liabilities shown on the Balance Sheet, the Investment Account shall be
increased by such amount;
(iv) If the total of the Other Liabilities reflected on the
Closing Date Balance Sheet is less than the total amount of the Other
Liabilities shown on the Balance Sheet, the Investment Account shall be
reduced by such amount;
(v) The Investment Account shall be reduced by all cash claims
paid after March 31, 1997 by the Seller with respect to the Aviation
Business and the Reinsured Business after deducting any amounts paid by
Purchaser under the Quota Share Reinsurance Agreement;
(vi) The Investment Account shall be increased by all
reinsurance premiums payable to the Purchaser (net of ceding commissions
due Seller) under the Quota Share Reinsurance Agreement; and
(vii) If the amount of the Investment Account as adjusted in
accordance with (i) through (vi) above increases, the amount of such
increase shall be paid to Purchaser by delivery of cash or readily
marketable securities. If the amount of the Investment Account
decreases, the amount of such decrease shall be paid to Seller by
delivery of cash or readily marketable securities. Any amounts payable
hereunder shall be due and payable within ten (10) days of the delivery
of the Closing Date Balance Sheet, if there shall not be any dispute
with respect thereto, or within five (5) days after the resolution of
any dispute relating thereto.
(f) Any dispute which may arise between Seller and Purchaser as to the
Closing Date Balance Sheet or the proper amount of the adjustment to
the Investment Account shall be resolved in the following manner:
(i) Seller, if it disputes the Closing Date Balance Sheet or
the amount of the adjustment to the Investment Account, shall notify
Purchaser in writing within ten (10) days after the issuance of the
Closing Date Balance Sheet pursuant hereto that Seller disputes the
Closing Date Balance Sheet or the amount of the adjustment to the
Investment Account; such notice shall specify in reasonable detail the
nature of the dispute;
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(ii) during the ten (10) day period following the date of such
notice, Seller and Purchaser shall attempt to resolve such dispute and
to determine the appropriateness of the Closing Date Balance Sheet or
the adjustment to Investment Account; and
(iii) if at the end of the ten (10) day period specified in
subsection (ii) above, Seller and Purchaser shall have failed to reach a
written agreement with respect to such dispute, the matter shall be
referred to Deloitte & Touche, independent certified public accountants
(the "Arbitrator"), which shall act as an arbitrator and shall issue its
report as to the Closing Date Balance Sheet or the adjustment to
Investment Account within sixty (60) days after such dispute is referred
to the Arbitrator. Each of the parties hereto shall bear all costs and
expenses incurred by it in connection with such arbitration, except that
the fees and expenses of the Arbitrator hereunder shall be borne equally
by Seller and Purchaser. This provision for arbitration shall be
specifically enforceable by the parties and the decision of the
Arbitrator in accordance with the provisions hereof shall be final and
binding and there shall be no right of appeal therefrom.
(g) Seller shall provide to Purchaser the files and records comprising the
underwriting, policy, producer and claims files and related daily report
files maintained by Seller in the operation of the Aviation Business
(the "Files").
(h) Purchaser and Seller shall each execute and deliver such instruments,
and take or cause to be taken such further action as may be reasonably
necessary or desirable in order to consummate the Closing hereunder.
Section 5.2 Additional Payments.
(a) Within 30 days after receipt by Purchaser, Purchaser shall remit to
Seller an amount equal to all funds collected by Purchaser with respect
to all Agent's Balances of the Aviation Business which are in excess of
90 days old as of the Closing Date.
(b) Purchaser shall pay to Seller a commission equal to Four Percent (4%) of
the Renewal Premiums (as hereinafter defined ) received by Purchaser
during the first year following the Closing Date on all Aviation
Business and Reinsured Business transferred to Purchaser.
(c) Purchaser shall pay to Seller a commission equal to Two Percent (2%) of
the Renewal Premiums (as hereinafter defined) received by Purchaser
during the second year following the Closing Date on all Aviation
Business and Reinsured Business transferred to Purchaser.
(d) Purchaser shall pay to Seller a commission equal to One Percent (1%) of
the Renewal Premiums (as hereinafter defined) received by Purchaser
during the third year following the Closing Date on all Aviation
Business and Reinsured Business transferred to Purchaser.
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For purposes of this Agreement, Renewal Premiums shall mean all direct
written premiums on policies renewed after the Closing Date less the sum of any
return premiums or cancellations . Amounts payable to Seller under Sections
5.2(b), (c) and (d) above shall be paid quarterly in arrears within thirty (30)
days after the end of each quarter.
SECTION 6. ASSUMPTION OF LIABILITIES.
At the Closing and except as otherwise specifically provided in this
Section 6, Purchaser shall assume and agree to pay, discharge or perform, as
appropriate, the following liabilities and obligations of Seller:
(a) All liabilities and obligations of Seller in respect of the Aviation
Business existing as of the Balance Sheet Date, but only if and to the
extent that the same are accrued or reserved for on the Balance Sheet
and remain unpaid and undischarged on the Closing Date except Loss and
Loss Adjustment Expense Reserves.
(b) All unpaid losses and unpaid loss adjustment expenses of Seller with
respect to the Aviation Business arising in the regular and ordinary
course on or after January 1, 1993.
(c) The obligations of Seller under the Reinsurance Contracts and the
Contracts identified on Schedule 9(w).
(d) Bad faith liability claims arising under policies identified on Schedule
9(w) and other litigation listed on Schedule 9(r) hereof.
The foregoing described liabilities and the obligations of the Purchaser
under the Quota Share Reinsurance Agreement (Exhibit "A") and the Reinsurance
Agreement (Exhibit "B") are hereinafter referred to as the "Assumed
Liabilities."
NOTWITHSTANDING ANY PROVISION HEREIN TO THE CONTRARY, PURCHASER SHALL
NOT ASSUME OR BECOME LIABLE IN ANY MANNER FOR ANY LIABILITY OR OBLIGATION OF
SELLER OR AEGI, AND SELLER AND AEGI SHALL REMAIN SOLELY RESPONSIBLE FOR ANY AND
ALL LIABILITIES AND OBLIGATIONS OF SELLER AND AEGI, OTHER THAN THE ASSUMED
LIABILITIES.
SECTION 7. CHANGE IN NAME.
On the Closing Date, Seller and AEGI shall deliver to Purchaser all such
executed documents as may be required to change Seller's and AEGI's names on
that date to names bearing no similarity to American Eagle, including but not
limited to a name change amendments with the Secretaries of State of Texas and
Delaware. Within one hundred eighty days (180) after the Closing Date, AEGI
and Seller shall file appropriate name change notices for each state where
Seller and AEGI are
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qualified to do business. Seller and AEGI hereby appoint Purchaser as their
attorney-in-fact to file all such documents on or after the Closing Date.
SECTION 8. FURTHER ASSURANCES.
Seller and AEGI from time to time after the Closing, at Purchaser's
request, will, execute, acknowledge and deliver to Purchaser such other
instruments of conveyance and transfer and will take such other actions and
execute and deliver such other documents, certifications and further assurances
as Purchaser may reasonably require in order to vest more effectively in
Purchaser, or to put Purchaser more fully in possession of, any of the Assets,
or to better enable Purchaser to complete, perform or discharge any of the
Assumed Liabilities. Each of the parties hereto will cooperate with the other
and execute and deliver to the other parties hereto such other instruments and
documents and take such other actions as may be reasonably requested from time
to time by any other party hereto as necessary to carry out, evidence and
confirm the intended purposes of this Agreement.
SECTION 9. REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLER AND AEGI.
Seller and AEGI represent, warrant and covenant to Purchaser as follows:
(a) Corporate Existence, Corporate Power. Each of the Seller and AEGI is a
corporation, duly organized, validly existing and in good standing under
the laws of the state of its incorporation, and, subject to receipt of
requisite shareholder approval, each has the requisite corporate power
and authority to consummate the transactions contemplated and to perform
its respective obligations under this Agreement. The Board of Directors
of Seller and AEGI have approved the execution of this Agreement and
Seller and AEGI will have, prior to the Closing Date, taken all other
corporate action required by law, its respective certificate of
incorporation, by-laws or otherwise, to authorize the execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby.
(b) Enforceability. This Agreement and the other transaction documents have
been, or on or prior to the Closing Date will be, duly executed and
delivered on behalf of the Seller and AEGI, and constitute, or will
constitute, the legal, valid and binding obligation of the Seller and
AEGI, enforceable against them in accordance with their terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or similar laws affecting the enforcement of
creditors' rights generally and by general principles of equity
(regardless of whether enforcement is sought in a proceeding in equity
or at law).
(c) Balance Sheets. The Balance Sheet, including the related notes, fairly
present the financial position, assets and liabilities (whether accrued,
absolute, contingent or otherwise) of the Aviation Business as of the
Balance Sheet Date. The Balance Sheet specifically identifies
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the assets and liabilities which, if the Closing had been held on the
Balance Sheet Date, would have been transferred to or assumed by
Purchaser in accordance herewith.
(d) Accounts Receivable. The accounts receivable of Seller arising from the
Aviation Business and Reinsured Business as set forth on the Balance
Sheet are valid and genuine; have arisen solely out of bona fide sales
and deliveries of goods, performance of services and other business
transactions in the ordinary course of business consistent with past
practice; are not subject to valid defenses, set-offs or counterclaims;
and except as set forth on Schedule 9(d), to Seller's knowledge, are
collectible within ninety (90) days after billing at the full recorded
amount thereof less, in the case of accounts receivable appearing on the
Balance Sheet, the recorded allowance for collection losses on the
Balance Sheet.
(e) Tax and Other Returns and Reports. The Seller and AEGI have filed or
caused to be filed all tax returns which are required to be filed in
connection with the Aviation Business and the Reinsured Business and all
taxes shown to be due and payable on said returns or on any assessments
made against Seller or AEGI, any of their property, and all other taxes,
fees or other charges imposed on Seller or AEGI, or any of their
property by any governmental authority that are due and payable, have
been paid (other than any taxes, fees or other charges the amount or
validity of which are currently being contested in good faith by
appropriate proceedings and with respect to which adequate reserves in
conformity with GAAP have been provided on the books of the Seller or
AEGI); to the knowledge of Seller and AEGI, no tax lien has been filed
and no claim is being asserted, with respect to any such tax, fee or
other charge.
(f) Books of Account. The books, records and accounts of Seller have been
maintained accurately and fairly reflect, in reasonable detail, the
transactions and the assets and liabilities of Seller with respect to
the Aviation Business and Reinsured Business. Seller has not engaged in
any transaction with respect to the Aviation Business and Reinsured
Business, maintained any bank account for the Aviation Business and
Reinsured Business or used any of the funds of Seller in the conduct of
the Aviation Business and Reinsured Business except for transactions,
bank accounts and funds which have been and are reflected in the
normally maintained books and records of the business.
(g) Existing Condition. Except as set forth on Schedule 9(g), since the
Balance Sheet Date, Seller with respect to the Aviation Business and
Reinsured Business has not:
(i) incurred any liabilities, other than liabilities incurred in the
ordinary course of business consistent with past practice, or
discharged or satisfied any lien or encumbrance, or paid any
liabilities, other than in the ordinary course of business
consistent with past practice, or failed to pay or discharge when
due any liabilities of which the failure to pay or discharge has
caused or will cause any material damage or risk of material loss
to it or any of its assets or properties;
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(ii) sold, encumbered, assigned or transferred any assets or
properties, except for the sale of inventory in the ordinary
course of business consistent with past practice;
(iii) made or suffered any amendment or termination of any material
agreement, contract, commitment, lease or plan to which it is
party or by which it is bound, or cancelled, modified or waived
any substantial debts or claims held by it or waived any rights
of substantial value, whether or not in the ordinary course of
business; or
(iv) entered into any transaction other than in the ordinary course of
business consistent with past practice.
(h) Title to Properties. Seller has good and valid title to all of its
properties and assets, real, personal and mixed, which are included in
the Assets (except for inventory sold since the date thereof in the
ordinary course of business consistent with past practice), which Assets
shall be on the Closing Date free and clear of all mortgages, liens,
pledges, security interests, charges, claims, restrictions, other third
party interests, and other encumbrances and defects of title of any
nature whatsoever, except for liens for current real or personal
property taxes not yet due and payable.
(i) Condition of Tangible Assets. All buildings, structures, facilities,
equipment and other material items of tangible property and assets which
are included in the Assets are in good operating condition and repair,
subject only to normal wear and maintenance, are usable in the regular
and ordinary course of business and conform to all applicable laws,
ordinances, codes, rules and regulations, and authorizations relating to
their construction, use and operation. No person other than Seller owns
any equipment or other tangible assets or properties situated on the
premises of Seller or necessary to the operation of the Aviation
Business, except for leased items disclosed on Schedule 9(i).
(j) Employee Benefit Plans and Arrangements.
(i) For the purposes hereof, the term "employee benefit plan"
includes all plans, funds, programs, policies, arrangements,
practices, customs and understandings providing benefits of
economic value to any employee, former employee, or present or
former beneficiary, dependent or assignee of any such employee or
former employee other than regular salary, wages or commissions
paid substantially concurrently with the performance of the
services for which paid. Without limitation, the term "employee
benefit plan" includes all employee welfare benefit plans within
the meaning of section 3(1) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), all employee pension
benefit plans within the meaning of section 3(2) of ERISA.
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(ii) Seller has not directly or indirectly acted in any manner or
incurred any obligation or liability, and will not directly or
indirectly act in any manner in the future or incur any
obligation or liability in the future with respect to any
employee benefit plan which has or could give rise to any liens
on any of the Assets, or which could result in any liability or
obligation to Purchaser, whether arising out of the
establishment, operation, administration or termination of such
benefit plan or the transactions contemplated by this Agreement.
(iii) Seller has timely provided or will timely provide all notices and
any continuation of health benefit coverage (including, without
limitation, medical and dental coverage) required to be provided
to employees, former employees or the beneficiaries or dependents
of such employees or former employees, under Part 6 of Subtitle B
of Title I of ERISA or, as applicable, COBRA to the extent such
notices and continuation of health benefit coverage are required
to be provided by reason of the events occurring prior to or on
the Closing Date or by reason of the transactions contemplated by
this Agreement. To the extent required by COBRA, Seller will
treat its employees (and their dependents and beneficiaries) as
of the Closing Date as having incurred a "qualifying event"
(within the meaning of ERISA Section 603 and, as applicable, Code
Section 4980B(f)(3)) on the Closing Date. Seller will continue
the health benefit coverage required by COBRA.
(k) Intellectual Property Matters. The Seller in the conduct of the
Aviation Business does not infringe upon or unlawfully or wrongfully use
any Intellectual Property owned or claimed by another.
(l) The Software.
(i) Performance. The computer software of Seller included in the
Intellectual Property (the "Software") contains all computer
programs, materials, tapes, know-how, object and source codes,
other written materials, know-how and processes used in
connection with the Aviation Business and the Reinsurance
Business. Seller has delivered to the Purchaser complete and
correct copies of all user and technical documentation related to
the Software.
(ii) Title. Except as set forth on Schedule 9(l), all right, title
and interest in and to the Airpack System and Eagle Express
System is owned by Seller, free and clear of all liens, claims,
charges or encumbrances, are fully transferable to the Purchaser,
and no party other than Seller has any interest in the Software,
including without limitation, any security interest, license,
contingent interest or otherwise. Seller's development, use,
sale or exploitation of the Software does not violate, any rights
of any other person or entity and Seller has not received any
communication alleging such a violation. Seller does not have
any obligation to compensate any person for the development, use,
sale or exploitation of the Software nor has Seller granted to
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any other person or entity any license, option or other rights to
develop, use, sell or exploit in any manner the Software, whether
requiring the payment of royalties or not.
(iii) Delivery of All Copies. All copies of the Software embodied in
physical form are being delivered to the Purchaser at or prior to
the Closing.
(m) Environmental Matters. Except for any violation which, individually or
in the aggregate, would not have a material adverse effect on the
Assets, the Aviation Business or Reinsurance Business, Seller is not in
violation of any laws, rules or regulations relating to pollution or
protection of the environment, including regulations relating to
emissions, discharges, releases or threatened releases of pollutants,
contaminants, chemicals, or industrial, toxic or hazardous substances or
wastes into the environment (including, without limitation, ambient air,
surface water, groundwater, or land), or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage,
disposal, transport, or handling of pollutants, contaminants, chemicals,
or industrial, toxic or hazardous substances or wastes.
(n) Assets. Except for licenses, permits and governmental authorizations
required to operate the Aviation Business and the Reinsurance Business
which are not transferable, the Assets include all rights and property
essential to the conduct of the Aviation Business by Purchaser in the
manner it is presently conducted by Seller and no property excluded from
the Assets constitutes property or rights material to the Aviation
Business.
(o) Solvency. After giving effect to the transactions contemplated by this
Agreement, each of the Seller and AEGI, individually and on a
consolidated basis, will be solvent, able to pay its debts as they
mature, have capital sufficient to carry on its business and all
businesses in which it is about to engage, and
(i) the assets of each of Seller and AEGI, individually and on a
consolidated basis, at a fair valuation, exceed the total
liabilities (including contingent, subordinated, unmatured and
unliquidated liabilities) of Seller and AEGI;
(ii) current projections which are based on underlying assumptions
which provide a reasonable basis for the projections and which
reflect Seller's judgment based on present circumstances, the
most likely set of conditions and Seller's most likely course of
action for the period projected, demonstrate that Seller and
AEGI, individually and on a consolidated basis, will have
sufficient cash flow to enable them to pay their debts as the
mature or the Seller is reasonably satisfied that it will be able
to refinance such debt at or prior to maturity on commercially
reasonable terms; and
(iii) Seller and AEGI do not have an unreasonably small capital base
with which to engage in its anticipated business.
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(p) Agents and Brokers. Schedule 9(p) is a true, complete and accurate list
of the agents and brokers which have generated Aviation Business and
Reinsured Business that is currently in-force with Seller.
(q) Information. The Files include the underwriting, policy, producer and
claims information and records normally generated and maintained by
Seller in the ordinary course of its operation of the Aviation Business
and the Reinsured Business.
(r) Legal Actions. As of the date hereof, except as set forth on Schedule
9(r), to the knowledge of Seller and AEGI, there are no legal actions,
arbitrations, suits or proceedings (other than claims pending for
benefits under insurance policies) in any court or before any
governmental agency or instrumentality pending against the Seller or
AEGI which could materially adversely effect the Aviation Business or
the Reinsured Business. As of the date hereof, to the knowledge of
Seller and AEGI, there are no legal actions, arbitrations, suits, or
proceedings pending in any court or before any governmental agency or
instrumentality against the Seller or AEGI which would prevent the
carrying out of this Agreement or any of the transactions contemplated
hereby or declare the same unlawful or cause the rescission thereof.
Except as disclosed on Schedule 9(r), the Seller has not been charged
with or, to its knowledge, been threatened with or is under any
investigation with respect to, any charge concerning any material
violation of any provision of any federal, state, local or foreign law,
regulation, ordinance, order or administrative ruling affecting the
Insurance Business or the Reinsured Business, and, except as disclosed
on Schedule 9(r), neither Seller nor AEGI is, to its knowledge, in
default with respect to any order, writ, injunction or decree of any
court, arbitration panel, agency or instrumentality affecting the
Aviation Business or the Reinsured Business.
(s) Absence of Conflicts. Assuming the receipt of all consents referred to
in Section 9(u), the execution, delivery, and performance of this
Agreement and the consummation of the transactions contemplated hereby
will not (i) violate, or be in conflict with the charter or by-laws of
the Seller or AEGI, (ii) result in the creation of any security
interest, claim, lien, charge or encumbrance upon the Aviation Business
or the Reinsured Business, (iii) violate any provision of, or result in
the breach of any, applicable law, rule or regulation of any
governmental body or (iv) violate any order, judgment or decree
applicable to the Seller or AEGI, which would materially adversely
affect the Aviation Business or the Reinsured Business or the ability of
the Seller or AEGI to consummate the transactions contemplated by this
Agreement and to perform their obligations hereunder.
(t) Reinsurance Contract. Schedule 9(t) contains a list of all reinsurance
treaties and agreements currently in effect with respect to the Aviation
Business and the Reinsured Business (the "Reinsurance Contracts").
(u) No Legal Bar. Except as set forth on Schedule 9(u), no consent,
authorization, order or approval of, or notice, filing or registration
with, any governmental commission, board or
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other regulatory body or any private party is required for or in
connection with the execution and delivery of this Agreement by Seller
and AEGI and the consummation by Seller and AEGI of the transactions
contemplated hereby, except for those as to which the failure to obtain
or give would not materially adversely affect the consummation of the
transactions contemplated by this Agreement.
(v) Participation by Third Parties. Seller and AEGI shall indemnify and
hold the Purchaser harmless with respect to any claim for any broker's
or finder's fees or commissions with respect to the transactions
contemplated hereby by anyone found to have been acting on behalf of the
Seller or AEGI.
(w) Contracts. Schedule 9(w) sets forth all leases, subleases, license
agreements, assumption of liability agreements and fronting arrangements
(collectively the "Contracts") to be conveyed by Seller to Purchaser on
the Closing Date. Except as set forth on Schedule 9(w) all of the
Contracts are in full force, do not require consent, are enforceable in
accordance with their terms and there exists no default or event of
default, occurrence, condition or act, including, without limitation,
the execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby, which constitutes or would constitute
(with notice or lapse of time or both) a default under any such
Contract.
(x) Disclosure. No representation or warranty made by Seller or AEGI in
this Agreement or in any other document furnished in connection herewith
contains any misrepresentation of a material fact or omits to state any
material fact necessary to make the statements herein or therein not
misleading.
SECTION 10. REPRESENTATIONS, WARRANTIES AND COVENANTS OF PURCHASER.
Purchaser represents, warrants and covenants to Seller and AEGI as
follows:
(a) Corporate Existence/Corporate Power. Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of the
State of Ohio, and has the requisite corporate power and authority to
consummate the transactions contemplated and perform its obligations
under this Agreement and has or will have, prior to the Closing Date,
taken all corporate action required by law, its certificate of
incorporation, by-laws or otherwise, to authorize the execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby.
(b) Enforceability. The execution, delivery and performance of this
Agreement by Purchaser and the consummation of the transactions
contemplated hereby will not (i) violate or be in conflict with the
charter or by-laws of Purchaser, (ii) violate any provision of, or
result in the breach of any, applicable law, rule or regulation of any
governmental body or (iii) violate any order, judgment or decree
applicable to Purchaser, which would materially adversely affect
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the ability of Purchaser to consummate the transactions contemplated
hereby and to perform its obligations hereunder.
(c) Consents. No consent, license, authorization, appointment, order or
approval of, or filing or registration with, any governmental
commission, board or other regulatory body or any private party is
required for or in connection with the execution and delivery of this
Agreement by Purchaser and the consummation by Purchaser of the
transactions contemplated on its part hereby except as set forth on
Schedule 10(c) hereto.
(d) Participation. No outside parties have participated with respect to the
negotiation of this Agreement and the transactions contemplated hereby
on behalf of the Purchaser and the Purchaser shall indemnify and hold
the Seller harmless with respect to any claim for any broker's or
finder's fees or commissions with respect to the transactions
contemplated hereby by anyone found to have been acting on behalf of the
Purchaser.
(e) Voting by Purchaser. Purchaser shall vote all of its shares of common
and preferred stock of AEGI in favor of the transactions contemplated
hereby.
SECTION 11. COVENANTS OF SELLER.
Seller covenants and agrees with Purchaser as follows:
(a) Seller shall give Purchaser and its counsel, accountants and other
representatives access during normal business hours throughout the
period prior to the Closing Date to all of the properties, books,
contracts, commitments and records personnel and the other aspects of
the business of the Seller relating to the Aviation Business and the
Reinsured Business, and Seller will furnish and provide reasonable
assistance to Purchaser during such period with all such documents,
copies of documents and information concerning the Aviation Business and
the Reinsured Business as Purchaser may reasonably request. During the
period from the date of this Agreement through the Closing Date, Seller
and AEGI shall consult in good faith with members of Purchaser's
management: (i) with respect to significant developments, transactions
and decisions involving the operations of the Seller not prohibited
under this Agreement; and (ii) with respect to the development and
implementation of business strategies.
(b) Between the date of this Agreement and the Closing Date, except as
otherwise contemplated by this Agreement or permitted by the prior
consent of Purchaser, and to the extent it is commercially reasonable to
do so Seller (i) will conduct the Aviation Business and the Reinsured
Business in the ordinary course of business and perform its obligations
under all material agreements binding on the Seller relating to the
Aviation Business and the Reinsured Business; (ii) will enter into
agreements relating to the Aviation Business and the
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Reinsured Business only in the ordinary course of business; (iii) will
not make any material change in the operation of the Aviation Business
and the Reinsured Business; and (iv) will not make any loss payment
with respect to the Aviation Business and Reinsured Business in excess
of One Hundred Thousand and 00/100 Dollars ($100,000.00) without prior
notice to Purchaser.
(c) Seller shall pay directly to each employee of the Aviation Business that
portion of all benefits (including the arrangements, plans and programs
set forth in Schedule 9(j)) which has been accrued on behalf of that
employee (or is attributable to expenses properly incurred by that
employee) as of the Closing Date, except accrued vacation and sick days
which shall be assumed by Purchaser ("Accrued Vacation"). No portion of
the assets of any plan, fund, program or arrangement, written or
unwritten, heretofore sponsored or maintained by Seller or AEGI (and no
amount attributable to any such plan, fund, program or arrangement)
shall be transferred to Purchaser, and Purchaser shall not be required
to continue any such plan, fund, program or arrangement after the
Closing Date. The amounts payable on account of all benefit
arrangements (other than as specified in the following subsections)
shall be determined with reference to the date of the event by reason of
which such amounts become payable, without regard to conditions
subsequent, and Purchaser shall not be liable for any claim for
insurance, reimbursement or other benefits payable by reason of any
event which occurs prior to the Closing Date. All employees of Seller
who are employed by Purchaser on or after the Closing Date shall be new
employees of Purchaser; provided, however, that for purposes of vacation
eligibility which Purchaser may make available to its employees, such
employees shall be credited with their respective years of service with
Seller.
(d) Purchaser acknowledges that for business reasons, Seller has not been
able to compile Schedules referred to in Section 9 hereof (together with
copies of the documents referred to therein) and Exhibits contemplated
by this Agreement prior to the date of this Agreement. Seller covenants
that it shall deliver to Purchaser final Schedules (together with copies
of the documents referred to therein) and drafts of the Exhibits within
twenty (20) business days after the execution and delivery of this
Agreement. Purchaser shall have ten (10) business days to review these
Schedules and to determine in the good faith exercise of its business
judgment whether the items referenced therein are acceptable to
Purchaser and review and comment on the Exhibits. If Purchaser, after
reasonable consultation with Seller, determines in the good faith
exercise of its reasonable business judgment that the items referred to
in the Schedules are not acceptable or the parties are unable to
negotiate the terms of the Exhibits, Purchaser may terminate this
Agreement on five (5) business days written notice to Seller and neither
party shall have any further obligations to the other hereunder.
(e) Seller shall give detailed written notice to Purchaser promptly upon the
occurrence of any event that would cause or constitute a material breach
or would have caused a material breach had such event occurred or been
known to Seller prior to the date hereof, of any representations or
warranties of Seller contained in this Agreement or in any Schedule
referred to herein. Notwithstanding the foregoing, Seller shall have
the right from time to
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time after the date hereof to update the final versions of the Schedules
to reflect changes in the Assets or business condition as of the date
hereof until ten (10) days before the scheduled time of Closing.
Updated Schedules shall be promptly furnished to Purchaser, which shall
have five (5) business days to review these Schedules and to determine
in the good faith exercise of its reasonable business judgment that any
items referred to therein are acceptable to Purchaser. If any such
items are not acceptable to Purchaser, Purchaser may terminate this
Agreement on written notice thereof to Seller and, neither party shall
have any further obligations to the other hereunder.
SECTION 12. CONDITIONS TO CLOSING - PURCHASER.
The obligations of Purchaser under this Agreement are, at the option of
Purchaser, subject to the satisfaction, at or prior to the Closing Date, of the
following conditions:
(a) All the terms, covenants and conditions of this Agreement to be complied
with and performed by Seller on or before the Closing Date shall have
been complied with and performed.
(b) Except for changes between the date hereof and the Closing Date
permitted by the terms of this Agreement, the representations and
warranties of Seller in this Agreement or in any document or certificate
delivered to Purchaser pursuant hereto shall be true and correct in all
material respects as of the Closing Date with the same force and effect
as though such representations and warranties had been made at and as of
the Closing Date.
(c) On the Closing Date, no action or proceeding before any court or
governmental body shall be pending or threatened wherein an unfavorable
judgment, decree or order would prevent the carrying out of this
Agreement or any of the transactions or events contemplated hereby,
declare unlawful the transactions or events contemplated by this
Agreement or cause such transactions to be rescinded.
(d) Seller shall have received the necessary regulatory and any other
approval or approvals of the transactions contemplated herein as may be
required by pertinent laws, regulations or agreements.
(e) Seller shall have entered into (i) a Quota Share Reinsurance Agreement
in the form attached hereto marked Exhibit A ceding the Reinsured
Business to Purchaser and (ii) a Reinsurance Agreement in the form of
Exhibit B hereto transferring the Aviation Business to Purchaser.
(f) Seller shall have obtained the consent of reinsurers with respect to at
least eighty percent (80%) of the Aviation Business and the Reinsured
Business to the transfer to and reinsurance thereof by Purchaser and to
the assignment to Purchaser of Seller's rights under the Reinsurance
Contracts with such reinsurers.
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(g) Seller shall have obtained all consents required in order to convey to
Purchaser the Office Lease.
(h) Seller shall have entered into a Claims Servicing Agreement in the form
of Exhibit C and a Computer System Use Agreement in the form set forth
on Exhibit D.
(i) Purchaser shall have received an opinion of Seller's and AEGI's counsel,
in form and substance, reasonably satisfactory to Purchaser.
(j) Seller shall not have entered into any contract or agreement after
December 31, 1996 which would adversely affect Purchaser's ability to
acquire and conduct the Aviation Business and Reinsured Business as
contemplated hereby.
(k) Seller shall have executed the Mutual Release substantially in the form
of the attached Exhibit E.
(l) Purchaser shall have received such other certificates, documents and
instruments as counsel for Purchaser shall reasonably request.
SECTION 13. CONDITIONS TO CLOSING - SELLER.
The obligations of Seller and AEGI under this Agreement are, at the
option of Seller and AEGI, subject to the satisfaction, at or prior to the
Closing Date, of the following conditions:
(a) All the terms, covenants and conditions of this Agreement to be complied
with and performed by Purchaser on or before Closing Date shall have
been complied with and performed.
(b) Except for changes between the date hereof and the Closing Date
permitted by the terms of this Agreement, the representations and
warranties of Purchaser contained in this Agreement or in any document
or certificate delivered to Seller pursuant hereto shall be true and
correct in all material respects at and as of the Closing Date with the
same force and effect as though such representations and warranties had
been made as of the Closing Date.
(c) On the Closing Date, no action or proceeding before any court or
governmental body shall be pending or threatened wherein an unfavorable
judgment, decree or order would prevent the carrying out of this
Agreement or any of the transactions or events contemplated hereby,
declare unlawful the transactions or events contemplated by this
Agreement or cause such transactions to be rescinded.
(d) Purchaser shall have received the necessary regulatory and any other
approval or approvals of the transactions contemplated herein as may be
required by pertinent laws, regulations or agreements.
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(e) Purchaser shall have entered into (i) a Quota Share Reinsurance
Agreement in the form of Exhibit A hereto, and (ii) a Reinsurance
Agreement in the Form of Exhibit B hereto.
(f) Purchaser shall have entered into a Claims Servicing Agreement in the
form of Exhibit C hereto and a Computer System Use Agreement in the form
set forth on Exhibit D hereto.
(g) The shareholders of Seller and AEGI shall have approved the terms of
this Agreement and the transactions contemplated herein.
(h) Seller shall have received an opinion of Purchaser's counsel, in form
and substance, reasonably satisfactory to Seller.
(i) Purchaser and American Financial Group, Inc. shall have executed the
Mutual Release substantially in the form of the attached Exhibit E
hereto.
(j) Seller shall have received such other certificates, documents and
instruments as counsel for Seller shall reasonably request.
SECTION 14. SHAREHOLDER APPROVAL.
The Seller and AEGI shall take such action necessary to obtain
shareholder approval of the transactions contemplated herein as promptly as
practicable after the execution of this Agreement. As soon as practicable
following the date hereof, the Purchaser and AEGI shall cooperate to prepare
promptly and file with the SEC a Proxy or Information Statement with respect to
the transactions contemplated by this Agreement (the "Information Statement").
Promptly after the approval by the staff of the Commission of the Information
Statement, AEGI shall mail the Information Statement to all holders of AEGI's
voting securities. The Purchaser and AEGI shall cooperate with each other in
the preparation of the Information Statement and shall advise the other in
writing if, prior to the vote of the shareholders of AEGI, any such party shall
obtain knowledge of any facts that might make it necessary or appropriate to
amend or supplement the Information Statement in order to make the statements
contained or incorporated by reference therein not misleading or to comply with
applicable law. Notwithstanding the foregoing, each party shall be responsible
for the information and disclosures which it makes or incorporates by reference
in all regulatory filings and the Information Statement.
SECTION 15. REGULATORY APPROVALS.
Seller, AEGI and Purchaser shall promptly apply for and use their
commercially reasonable best efforts to obtain all applicable federal and state
regulatory approvals and other approvals required to effectuate the provisions
of this Agreement, including all filings under Hart-Scott-Rodino and with the
appropriate state insurance commissions.
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SECTION 16. CERTAIN TERMINATIONS.
Upon execution of this Agreement and notwithstanding any subsequent
termination of this Agreement, Purchaser and AEGI's respective obligations
pursuant to Section 5.4 of the Securities Purchase Agreement among the parties
dated November 5, 1996 shall be terminated.
SECTION 17. NONCOMPETE/NO SOLICITATION AND OTHER ACTIONS.
(a) After the execution of this Agreement, neither Seller nor AEGI, nor
anyone acting on behalf of either of them, shall initiate discussions
with any person, concerning a Competing Proposal (as hereinafter
defined). The Seller and AEGI may (i) furnish information to, an
offeror that seeks to engage in discussions or negotiations, requests
information or makes a proposal to acquire the Aviation Business and the
Reinsured Business pursuant to a Competing Proposal, if the Seller's and
AEGI's directors determine in good faith that such action is required
for the discharge of their fiduciary obligations, after consultation
with independent legal and financial advisors, who may be the Seller's
and AEGI's regularly engaged legal counsel and financial advisors (a
"Director Duty"); (ii) comply with Rule 14d-9 or Rule 14e-2 promulgated
under the Securities Exchange Act of 1934 (the "Exchange Act") with
regard to a tender or exchange offer; (iii) make any disclosure to the
Seller's and AEGI's shareholders in accordance with a Director Duty;
(iv) fail to make, modify or amend its recommendations, consents or
approvals referred to herein in accordance with a Director Duty; (v)
terminate this Agreement and enter into an agreement providing for a
Competing Proposal in accordance with a Director Duty; or (vi) take any
other action as may be appropriate in order for the Seller's and AEGI's
Board of Directors to act in a manner that is consistent with their
fiduciary obligations under applicable law. In the event that the
Seller or AEGI or any of their officers, directors, employees, agents,
advisors or other representatives participate in discussions or
negotiations with, or furnish information to an offeror that seeks to
engage in such discussions or negotiations, requests information or
makes a Competing Proposal, then, subject to any confidentiality
requirements of an offeror (i) the Seller and AEGI shall immediately
disclose to the Purchaser the decision of the Seller's and AEGI's
directors; (ii) the identity of the offeror; and (iii) copies of all
information or material not previously furnished to Purchaser which the
Seller or AEGI, or their agents, provides or causes to be provided to
such offeror or any of its officers, directors, employees, agents,
advisors or representatives. For purposes of this Agreement, Competing
Proposal means a bona fide offer to the Seller, AEGI, or the
stockholders of AEGI from a Qualified Third Party (as hereinafter
defined). "Qualified Third Party" means an entity directly or
indirectly having (i) the underwriting capacity of an insurance carrier
rated "A" by A.M. Best Company, (ii) policyholders surplus of Two
Hundred Fifty Million and 00/100 Dollars ($250,000,000.00); and (iii)
agreed to assume all of Purchaser's reinsurance obligations arising
under Section 3 hereof.
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(b) As of the Closing Date, Purchaser shall offer employment to, and Seller
shall use its best efforts to assist Purchaser in employing as new
employees of Purchaser, all persons presently engaged in the Aviation
Business except those persons identified on Schedule 17(b) (the
"Employees"). Seller shall terminate effective as of the Closing Date
all employment agreements it has with any of the Employees, except for
employment agreements of Nick Walton and Bob Conrey, which agreements
shall be assumed by Purchaser. Until the third (3rd) anniversary of the
Closing Date, (1) Seller, AEGI and any of their Affiliates will not
directly or indirectly solicit or offer employment to any Employee (i)
who did not become an employee of Purchaser, (ii) who is then an
employee of Purchaser, or (iii) who has terminated such employment
without the consent of Purchaser within one hundred eighty (180) days of
such solicitation or offer, and (2) Purchaser will not directly or
indirectly solicit or offer employment to any person who, after the
Closing Date is then an employee of Seller or who has terminated such
employment without the consent of Seller within one hundred eighty (180)
days of such solicitation or offer. For purposes hereof, "Affiliate"
means any Person which directly or indirectly controls, or is controlled
by, or is under common control with, any Person. The term "control"
means the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of a Person, whether
through the ownership of voting securities, by contract or otherwise.
The term "Affiliate" does not include the Purchaser nor any of its
subsidiaries or affiliates. "AFG" shall mean American Financial Group, Inc., an Ohio corporation, and
any of its subsidiaries designated to purchase Seller's securities hereunder.
"Agreement" or "this Agreement" means this Securities Purchase Agreement
(including all exhibits and schedules annexed hereto) as originally executed, or
if supplemented, amended, or restated from time to time, as so supplemented,
amended, or restated.
"Amended Registration Rights Agreement" means the Amended Registration
Rights Agreement in the form of Exhibit A, to be executed by Seller and Mason
Best Company L.P. amending the Registration Rights Agreement between such
parties dated March 21, 1994.
"Bank Debt" means the indebtedness of Seller pursuant to the terms of an
Amended and Restated Credit Agreement dated as of December 29, 1994 among
Seller, the lenders described therein and The First National Bank of Chicago, as
Agent, as amended by Amendments to the Restated Credit Agreement dated as of
February 23, 1996, March 18, 1996, May 3, 1996 and September 20, 1996, and as
may be amended in the future.
"Business Day" means any day, except a Saturday, Sunday or legal holiday,
on which commercial banking institutions are open for business in Dallas, Texas,
Cincinnati, Ohio and New York, New York.
"Capitalized Lease" shall mean any lease the obligation for Rentals with
respect to which is required to be capitalized on a balance sheet of the lessee
in accordance with GAAP.
"Certificate of Designation" shall mean the Certificate of Designation of
the terms of the Preferred Stock, in the form of Exhibit B, to be executed and
filed by Seller authorizing the issuance of, and setting forth the terms of, the
Preferred Stock.
"Closing Date" means the fifth Business Day following the date on which all
conditions precedent specified in Article 7 hereof shall have been satisfied in
full or waived in writing, but in any event, such date shall be within one
hundred eighty (180) days of the execution of this Agreement.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"Commission" shall mean the United States Securities and Exchange
Commission and any successor federal agency having similar powers.
"Common Stock" shall mean the voting Common Stock of the Seller, par value
$.01 per share.
"Commonly Controlled Entity" means an entity, whether or not incorporated,
which is under common control with the Seller within the meaning of Section 4001
of ERISA or is part of a group which includes the Seller and which is treated as
a single employer under Section 414 of the Code.
78
"Competing Proposal" means any proposal or offer to the Seller or the
stockholders of the Seller with respect to (i) any merger, consolidation, share
exchange, business combination, or other similar transaction, (ii) any sale,
lease, exchange, transfer or other disposition of all or substantially all of
the assets of the Seller and its material Subsidiaries, taken as a whole, in a
single transaction or series of related transactions, or (iii) any tender,
exchange or other offer for shares of the Seller's Stock.
"Contractual Obligation" means, with respect to any Person, any provision
or requirement of any security issued by such Person or of any agreement,
instrument or other undertaking to which such Person is a party or by which it
or any of its property is bound.
"Convertible Securities" shall mean evidence of indebtedness, shares of
stock or other securities which are directly or indirectly convertible into or
exchangeable for, with or without payment of additional consideration, shares of
Stock, either immediately or upon the arrival of a specified date or the
happening of a specified event.
"Director Duty" has the meaning set forth in Section 6.7 hereof.
"Employee Benefit Plan" means any employee benefit plan within the meaning
of Section 3(3) of ERISA, other than a Multiemployer Plan.
"Environmental Laws" means all federal, state and local laws, rules,
regulations, ordinances, permits, orders, writs, judgments, injunctions,
decrees, determinations, awards and consent decrees relating to hazardous
substances and environmental matters applicable to the business, operations or
activities of the Seller or any Subsidiary of the Seller.
"ERISA" means the Employee Retirement Income Security Act of 1974 and the
rules and regulations issued thereunder, as amended from time to time and any
successor statute.
"ERISA Affiliate" means, in relation to any Person, any trade or business
(whether or not incorporated) which is a member of a group of which that Person
is a member and which is under common control within the meaning of the
regulations promulgated under Section 414 of the Code.
"Exchange" means the New York Stock Exchange, Inc.
"Financial Statements" means those audited consolidated financial
statements of Seller and its Subsidiaries for the periods ended December 31,
1995 and those unaudited statements for the nine months ended September 30,
1996, previously delivered to the Purchaser.
"GAAP" means generally accepted accounting principles in the United States
at the time in effect.
"Guarantee Obligation" means, with respect to any Person, any obligation in
the nature of a guaranty, repurchase arrangement, loan or advancement agreement,
reimbursement obligation, comfort letter, hold harmless, indemnity or
counter-indemnity or similar obligation, with respect to any indebtedness,
lease, dividend or other obligations of any other Person, directly or
indirectly, fixed or contingent, matured or unmatured which is required to be
disclosed in the financial statements of Seller under GAAP; provided, however,
that the term shall not include endorsements of instruments for deposit or
collection in the ordinary course of business. The amount of any Guarantee
Obligation shall be deemed to be the maximum amount for which the guaranteeing
person may be liable pursuant to the terms of the instrument embodying such
Guarantee Obligation, or if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof.
"Indebtedness" means, with respect to any Person at any date, (a) all
indebtedness of such Person for borrowed money, (b) indebtedness of such Person
for the deferred purchase price of services or property, which purchase price is
(i) due twelve (12) months or more from the date of incurrence of the obligation
in respect thereof or (ii) is evidenced by a note, bond, debenture or similar
instrument, (c) all obligations of such Person under Capitalized Leases, (d) all
obligations of such Person in respect of acceptances, letters of credit or
similar facilities issued or created for the account of such Person, and (e) all
liabilities secured by any Lien on any property owned by such Person even though
such Person has not assumed or otherwise become liable for the payment thereof.
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79
"Lien" means any mortgage, pledge, hypothecation, assignment, deposit
arrangement, encumbrance, lien (statutory or other), preference, priority or
other security agreement or preferential arrangement of any kind or nature
whatsoever (including, without limitation, any conditional sale or other title
retention agreement, any Capitalized Lease having substantially the same
economic effect as any of the foregoing, and the filing of any Financing
Statement under the Uniform Commercial Code or comparable law of any
jurisdiction in respect of any of the foregoing). The term "Lien" shall include
reservations, exceptions, encroachments, easements, rights-of-way, covenants,
conditions, restrictions, leases and other title exceptions and encumbrances
affecting property.
"Market Price" per share of Common Stock on any date shall be deemed to be
the average of the daily closing prices for the preceding five business days
before the day in question. The closing price for each day shall be the last
reported sale price regular way or, in case no such reported sale takes place on
such day, the average of the reported closing bid and asked prices regular way,
in either case on the Exchange or, if the Common Stock is not listed or admitted
to trading on the Exchange, on the principal national securities exchange on
which the Common Stock is listed or admitted to trading or, if not listed or
admitted to trading on any national securities exchange, the average of the
closing bid and asked prices as reported by the National Association of
Securities Dealers Automated Quotation System.
"Material Adverse Effect" means a material adverse effect on (a) the
business, operations, property or condition (financial or otherwise) of the
Seller and its Subsidiaries, considered as one entity, (b) the ability of the
Seller to perform its obligations under this Agreement or any other Transaction
Document to which it is a party, or (c) the validity or enforceability of this
Agreement or any of the other Transaction Documents or the rights or remedies of
the Purchaser.
"Multiemployer Plan" means a Plan which is a multiemployer plan as defined
in Section 4001(a)(3) of ERISA.
"Obligations" means, the obligations of the Seller to the Purchaser
presently existing or hereafter arising under any Transaction Documents,
including without limitation, the Seller's obligation to redeem or repurchase
the Preferred Stock in accordance with the terms of the Certificate of
Designation.
"Options" shall mean any options or other rights to subscribe for, purchase
or acquire any Stock.
"PBGC" means the Pension Benefit Guaranty Corporation.
"Permitted Liens" shall mean:
(a) liens securing the Bank Debt;
(b) liens arising by operation of law for taxes not yet due and
payable;
(c) statutory liens of mechanics, materialmen, shippers and
warehousemen for services or materials for which payment is not yet due and
which occur in the ordinary course of business;
(d) liens, charges, encumbrances and priority claims incidental to the
conduct of business or the ownership of properties and assets or other
liens of like general nature incurred in the ordinary course of business
and not in connection with the borrowing of money, provided in each case,
the obligation secured is not overdue or, if overdue is being contested in
good faith and by appropriate and lawful proceedings promptly initiated and
diligently conducted (of which the Seller has given prior written notice to
the Purchaser) and for which appropriate reserves (in accordance with GAAP)
have been established and so long as levy and execution have been and
continue to be stayed;
(e) liens incurred or pledges or deposits made in the ordinary course
of business in connection with workers' compensation, unemployment
insurance and other types of social security; and
(f) liens imposed by law, such as carriers', warehousemen's or
mechanics' liens, incurred by it in good faith in the ordinary course of
business, and liens arising out of a judgment or award against it with
respect to which it will currently be prosecuting an appeal, a stay of
execution pending such appeal having been secured.
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80
"Person" means an individual, partnership,
corporation, business trust, joint stock company, trust, unincorporated
association, joint venture, limited liability company, governmental
authority or other entity of whatever nature.
"Preferred Stock" means the shares(c) Seller, AEGI and each of Series D Preferred Stocktheir affiliates agrees that for a period of
the
Seller issued pursuant to the terms of the Certificate of Designation.
"Preferred Stock Certificate" means the stock certificate of Seller
representing 350,000 shares of Preferred Stock to be issued to Purchaser.
"Purchased Securities" means the 350,000 shares of Preferred Stock
purchased pursuant to the terms of this Agreement.
"Registration Rights Agreement" means the Registration Rights Agreement to
be executed between Seller and Purchaser on or beforethree (3) years after the Closing in the form of
Exhibit D attached hereto.
"Rentals" shall mean and include all fixed rents (including as such all
payments which the lessee is obligated to make to the lessor on termination of
the lease or surrender of the property) payable by theDate, neither Seller, or its
Subsidiaries, as lessee or sublessee under a lease of real or personal property,
but shall be exclusive of any amounts required to be paid by the Seller or its
Subsidiaries (whether or not designated as rents or additional rents) on account
of maintenance, repairs, insurance, taxes and similar charges.
"Reportable Event" means any of the events set forth in Section 4043(b) of
ERISA, other than those events as to which the thirty (30) day notice period is
waived under subsections .13, .14, .16, .18, .19 or .20 of PBGC Reg. Section
2615.
"Requirements of Law" means, with respect to any Person, the Certificate of
Incorporation and By-Laws or other organizational or governing documents of such
Person, and any law, treaty, rule or regulation or determination of any
governmental or political subdivision of any agency, authority, bureau, central
bank, commission, department or any court, arbitrator, or grand jury, in each
case whether foreign or domestic, applicable to or binding upon such PersonAEGI or any of
its property or to which such Person or any of its property is subject.
"Responsible Officer" means, with respect to any Person, the (i) chief
executive officer or the president of such Person, and (ii) with respect to
financial matters, the chief financial officer, or any vice president with
financial responsibilities of such Person.
"Stock" shall mean all classes and categories of the capital stock of the
Seller or any of its Subsidiaries whether then issued or issuable, including
without limitation, the Common Stock.
"Stock Purchase Rights" shall mean Options and Convertible Securities.
"Subsidiary" means, with respect to any Person, a corporation, partnership
or other entity of which shares of stock or other ownership interests having
ordinary voting power to elect a majority of the board of directors or other
managers of such corporation, partnership or other entity are at the time owned,
or the management of which is otherwise controlled,their subsidiaries will, directly or indirectly, through oneown, manage, operate,
join, control or participate in the ownership, management, operation or
control of, any business whether in corporate proprietorship or
partnership form or otherwise as more intermediaries, or both, bythan a five percent (5%) owner in
such Person. Unless otherwise
qualified, all references to a "Subsidiary" or to "Subsidiaries"business where such business is competitive with the Aviation
Business. The parties hereto specifically acknowledge and agree that
the remedy at law for any breach of the foregoing will be inadequate and
that the Purchaser, in this
Agreement shall referaddition to any Subsidiary or all Subsidiariesother relief available to it,
shall be entitled to temporary and permanent injunctive relief without
the necessity of proving actual damage. In the Seller,
whether now in existence or hereafter organized.
"Transaction Documents" means this Agreement,event that the
Warrants, the Preferred
Stock Certificate, the Certificate of Designation, the Warrant Registration
Rights Agreement, the Registration Rights Agreement, the Amended Registration
Rights Agreement, and all other documents, instruments, certificates and other
agreements in connection with the sale of the Purchased Securities.
"Underlying Shares" means shares of Common Stock issued or issuable upon
exercise of conversion rights relating to the Preferred Stock or exercise of
warrants issued upon redemption of Preferred Stock.
"Uniform Commercial Code" or "UCC" means the Uniform Commercial Code in
each case in effect in the jurisdiction where the Collateral is located.
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"Warrant" or "Warrants" means one or more of the Warrants for the purchase
of 800,000 shares of Common Stock issued by Seller to the Purchaser on the date
hereof, a copy of which is attached hereto as Exhibit E.
"Warrant Holder" and "Warrant Holders" shall mean the Purchaser and any
subsequent holder of the Warrants.
"Warrant Registration Rights Agreement" means the Registration Rights
Agreement executed contemporaneously herewith and attached hereto as Exhibit F.
SECTION 1.2 Rules of Construction. (a) Use of Capitalized Terms. For
purposesprovisions of this Agreement, unless the context otherwise requires, the
capitalized terms used in this Agreement shall have the meanings herein assigned
to them, and such definitions shall be applicable to both singular and plural
forms of such terms.
(b) Construction. All references in this Agreement to the single number and
neuter gender shallSection 17 should ever be deemed to meanexceed the non-
competition and include the plural number and all
genders, and vice versa, unless the context shall otherwise require.
(c) Headings. The underlined headings contained herein are for convenience
only and shall not affect the interpretation of this Agreement.
(d) Entire Agreement. This Agreement and the other Transaction Documents
shall constitute the entire agreement ofnon-disclosure restrictions provided by applicable law,
then the parties with respect to the subject
matter hereof.
(e) Severability. Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as tohereto agree that such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
(f) Governing Law. This Agreement and the rights and obligations of the
parties under this Agreement shall be governed by, and construed and interpreted
in accordance with, the law of the State of Delaware.
ARTICLE 2
SALE AND PURCHASE OF PURCHASED SECURITIES
SECTION 2.1 Sale and Purchase of Purchased Securities. Subjectreformed to all of
the terms and conditions hereof and in reliance on the representations and
warranties
set forth or referred to herein, the Seller agrees to issue and sell
to the Purchaser, and the Purchaser agrees to purchase, the Purchased Securities
from the Seller on the Closing Date.
SECTION 2.2 Purchase Price. The aggregate purchase price for the Purchased
Securities is Thirty-Five Million and 00/100 Dollars ($35,000,000.00) (the
"Purchase Price").
SECTION 2.3 Delivery of Warrants. In consideration for the execution and
delivery of this Agreement by Purchaser; contemporaneously withmaximum limitations permitted.
(d) Upon the execution of this Agreement, the Seller shall deliver the Warrants and the Warrant
Registration Rights Agreement to Purchaser. If the Seller terminates this
Agreement on or before the Closing Date pursuant to Section 9.1(e) or (f)
hereof, the Warrants shall become immediately exercisable. Upon Closing (as
defined below), the Warrants and the Warrant Registration Rights Agreement will
be cancelled.
SECTION 2.4 Closing. The Closing of the purchase and sale of the Purchased
Securities (the "Closing") will take place at the offices of the Seller in
Dallas, Texas on the date that all conditions to closing have been met or waived
(the "Closing Date") or such other location and date as the parties may mutually
agree. At the Closing, the Seller will deliver the Purchased Securities to the
Purchaser against payment by the Purchaser of the Purchase Price in immediately
available funds. The Purchased Securities will be issued to the Purchaser on the
Closing Date and registered in the Purchaser's name on the Seller's records.
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SECTION 2.5 Use of Proceeds. Substantially all proceeds of the sale of the
Purchased Securities shall be used by the Seller to pay transaction expenses and
for general corporate purposes. Seller shall also use such proceeds to repay
Bank Debt to the extent repayment is consistent with banking, regulatory and
rating agency considerations of Seller.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF SELLER
In order to induce the Purchaser to enter into this Agreement, the Seller
hereby represents and warrants to the Purchaser that:
SECTION 3.1 Corporate Existence. Each of the Seller and its Subsidiaries
now in existence is a corporation duly organized, validly existing, and in good
standing under the laws of its jurisdiction of incorporation, with full power
and authority to conduct its respective business as presently conducted. Each of
the Seller and its Subsidiaries is duly qualified as a foreign corporation and
in good standing in all other jurisdictions in which their respective activities
or ownership of property requires such qualification, except where the failure
to be so qualified would not have a Material Adverse Effect.
SECTION 3.2 Corporate Power; Authorization. Subject to the approval of the
stockholders of Seller of the transactions contemplated by this Agreement, the
Seller has the corporate power and authority to make, deliver and perform this
Agreement and such other Transaction Documents to which it is a party and has
taken, or by the Closing Date will have taken, all necessary corporate action to
authorize the issuance of the Purchased Securities on the terms and conditions
of this Agreement and to authorize the execution, delivery and performance of
this Agreement and such other Transaction Documents to which it is a party. No
consent or authorization of, or filing with, any Person (including, without
limitation, any governmental authority or agency having jurisdiction over the
Seller or its Subsidiaries), is required to be made or obtained by Seller in
connection with the issuance of the Purchased Securities or the execution,
delivery and performance by the Seller, and the validity or enforceability (with
respect to the Seller) of this Agreement, or such other Transaction Documents to
which Seller is a party, except for consents and filings referred to or
disclosed on Schedule 3.2.
SECTION 3.3 Enforceable Obligations. This Agreement, the Warrant and the
other Transaction Documents have been, or on or prior to the Closing Date will
be, duly executed and delivered on behalf of the Seller, and constitute, or will
constitute, the legal, valid and binding obligation of the Seller, enforceable
against it in accordance with their terms, except as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium, or
similar laws affecting the enforcement of creditors' rights generally and by
general principles of equity (regardless of whether enforcement is sought in a
proceeding in equity or at law).
SECTION 3.4 No Legal Bar. Except as set forth on Schedule 3.2, the
execution, delivery and performance of this Agreement, the Warrant and the other
Transaction Documents and the consummation of the transactions contemplated
thereby, will not violate any Requirements of Law or any Contractual Obligation
of the Seller or its Subsidiaries.
SECTION 3.5 Absence of Conflicts. Except as set forth on Schedule 3.2,
neither the execution and delivery of this Agreement, the Warrant or the other
Transaction Documents, the consummation of the transactions contemplated by such
documents nor the performance of or compliance with the terms and conditions of
such documents will (i) result in a breach of or a default under any agreement
or instrument to which the Seller or any Subsidiary of the Seller is a party or
by which their properties may be subject or bound, or (ii) except as
contemplated by such documents, result in the creation or imposition of any Lien
upon any property of the Seller or any Subsidiary of the Seller.
SECTION 3.6 Litigation. Except as set forth on Schedule 3.6, to the
knowledge of the Seller, no litigation, investigation or proceeding of or before
any arbitrator or governmental authority is pending or threatened by or
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against the Seller or against any Subsidiary of the Seller or any of their
properties or revenues, existing or future which could have a Material Adverse
Effect.
SECTION 3.7 Financial Condition. The Financial Statements delivered to
Purchaser fairly present the assets, liabilities and financial condition of the
Seller and its Subsidiaries, as of the dates thereof and in accordance with GAAP
(except that any unaudited Financial Statements may not contain any or all of
the footnotes required by GAAP and are subject to usual year-end audit
adjustments not materially affecting the results of operations). The Financial
Statements of Seller and its Subsidiaries contain no omissions or misstatements
which are or may be material to the Seller and its Subsidiaries, treated as one
entity. There has been no material adverse change in the assets, liabilities,
business or financial condition of the Seller and its Subsidiaries, treated as
one entity, since the date of such Financial Statements. Except for trade
payables arising in the ordinary course of business since the dates reflected in
such Financial Statements, the Seller and its Subsidiaries have no Indebtedness
and no Guarantee Obligations other than as reflected in such Financial
Statements. The Financial Statements of Seller and its Subsidiaries, including
the related schedules and notes thereto, have been prepared in accordance with
GAAP consistently applied throughout the periods involved (except that any
unaudited Financial Statements may not contain any or all of the footnotes
required by GAAP and are subject to year end audit adjustments).
SECTION 3.8 No Change. Except as set forth on Schedule 3.8, since September
30, 1996 through the date of this Agreement, to the knowledge of the Seller,
there has been no development or event, which has had or could reasonably be
expected to have a Material Adverse Effect, and no dividends or other
distributions have been declared, paid or made upon any shares of the Stock of
the Seller or its Subsidiaries, nor has any of such Stock been redeemed,
retired, purchased or otherwise acquired for value by the Seller or its
Subsidiaries.
SECTION 3.9 No Default. Neither the Seller nor any Subsidiary of the Seller
is in default under or with respect to any of its Contractual Obligations in any
respect which could reasonably be expected to have a Material Adverse Effect.
SECTION 3.10 Compliance with Laws. Except for any violation which,
individually or in the aggregate, would not have a Material Adverse Effect,
Seller and its Subsidiaries are in compliance with all Requirements of Law.
SECTION 3.11 Taxes. The Seller has filed or caused to be filed all tax
returns which are required to be filed by it or any of its Subsidiaries and all
taxes shown to be due and payable on said returns or on any assessments made
against it, any Subsidiary or any of their property, and all other taxes, fees
or other charges imposed on Seller, any Subsidiary of Seller or any of their
property by any governmental authority that are due and payable, have been paid
(other than any taxes, fees or other charges the amount or validity of which are
currently being contested in good faith by appropriate proceedings and with
respect to which adequate reserves in conformity with GAAP have been provided on
the books of the Seller or such Subsidiary); to the knowledge of Seller, no tax
Lien has been filed and no claim is being asserted, with respect to any such
tax, fee or other charge.
SECTION 3.12 ERISA. Seller and its ERISA Affiliates are in compliance, in
all material respects, with any applicable provisions of ERISA and the
regulations thereunder and the Code, with respect to all Employee Benefit Plans.
SECTION 3.13 Environmental Matters. Except for any violation which,
individually or in the aggregate, would not have a Material Adverse Effect,
neither the Seller nor any of its Subsidiaries is in violation of any
Environmental Law.
SECTION 3.14 Investment Company Act. Neither the Seller nor any of its
Subsidiaries is an "investment company" or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended.
SECTION 3.15 Capitalization of Seller. Schedule 3.15 hereto states the
authorized capitalization of the Seller and the number of shares of each class
of Stock of the Seller issued and outstanding thereof. All such issued and
outstanding shares have been duly authorized and validly issued, are fully paid
and nonassessable
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and free of any claims of preemptive rights. Other than as created pursuant to
this Agreement and stock option plans adopted prior to the date hereof by
Seller, there are no outstanding Stock Purchase Rights issued by the Seller.
SECTION 3.16 Capitalization of Subsidiaries. Schedule 3.16 attached hereto
contains a list of the Subsidiaries of the Seller, the jurisdictions of
incorporation applicable thereto and the percentage of the voting common stock
or other issued capital stock thereof owned by the Seller or its Subsidiaries.
There are no Stock Purchase Rights issued by any Subsidiary of the Seller. The
Seller or its Subsidiaries, as the case may be, have good and valid title to all
shares they purport to own of the capital stock of each such Subsidiary, free
and clear in each case of any Lien, except liens securing the Bank Debt. All
Stock of each Subsidiary has been duly issued and is fully paid and
non-assessable.
SECTION 3.17 Title to Assets; Leases. The Seller and its Subsidiaries will
own all of the assets reflected in the Financial Statements as of the Closing
Date, subject to no Liens other than Permitted Liens except for assets sold
prior thereto in the ordinary course of business. Each of the Seller and its
Subsidiaries enjoys peaceful and undisturbed possession, and is in compliance
with the terms of all leases of real property on which facilities operated by
them are situated and of all leases of personal property, except where failure
to enjoy such possession or such noncompliance would not have a Material Adverse
Effect.
SECTION 3.18 Disclosure. No representation or warranty made by the Seller
in this Agreement or in any other document furnished in connection herewith
contains any misrepresentation of a material fact or omits to state any material
fact necessary to make the statements herein or therein not misleading.
SECTION 3.19 Undisclosed Liabilities. Neither the Seller nor any Subsidiary
of Seller has any material obligation or liability (whether accrued, absolute,
contingent, unliquidated, or otherwise, whether due or to become due) arising
out of transactions entered into at or prior to the Closing Date, or any action
or inaction at or prior to the Closing Date, except liabilities reflected on the
Financial Statements or notes thereto; liabilities incurred in the ordinary
course of business (none of which are liabilities for breach of contract, breach
of warranty, torts, infringements, claims or lawsuits); liabilities or
obligations disclosed in the schedules hereto; and liabilities or obligations
incurred pursuant to the Transaction Documents.
SECTION 3.20 Compliance with Federal Reserve Regulations. None of the
transactions contemplated in the Agreement will violate or result in a violation
of Section 7 of the Securities Exchange Act of 1934, as amended, or any
regulation issued pursuant thereto, including, without limitation, Regulations
G, T, U and X of the Board of Governors of the Federal Reserve System, 12
C.F.R., Chapter II.
SECTION 3.21 Survival of Representations and Warranties. The foregoing
representations and warranties are made by the Seller with the knowledge and
intention that the Purchaser will rely thereon and shall survive the execution
and delivery of this Agreement until the Closing Date.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF PURCHASER
SECTION 4.1 Representations and Warranties of Purchaser. In order to induce
the Seller to enter into this Agreement, the Purchaser hereby represents and
warrants to the Seller as set forth in this Section 4.1.
(a) Corporate Existence. The Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation.
(b) Corporate Power; Authorization.
(i) Authorization and Compliance With Law. The Purchaser has the
corporate power and authority to make, deliver and perform this
Agreement and the other Transaction Documents to which it is a party.
The execution, delivery and performance of this Agreement by the
Purchaser and such other Transaction Documents to which it is a party,
and the acquisition of the Warrant and the Purchased Securities pursuant
to the terms hereof or thereof, have been duly authorized by all
necessary action, corporate and otherwise, on the part of the Purchaser.
The execution, delivery and
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performance of this Agreement by the Purchaser and such other
Transaction Documents to which it is a party, the acquisition and
ownership of the Warrant or the Purchased Securities issued to the
Purchaser and the consummation of the transactions contemplated by the
foregoing, do not and will not violate any Requirements of Law
applicable to the Purchaser or any Contractual Obligation of the
Purchaser.
(ii) Approvals. No authorization, consent, approval, license or
filing with any Person (including, without limitation, any governmental
authority or agency having jurisdiction over the Purchaser) is or will
be necessary for the valid execution, delivery or performance of this
Agreement by the Purchaser and such other Transaction Documents to which
it is a party, the acquisition and ownership of the Warrant and/or the
Purchased Securities issued to the Purchaser or the consummation of the
transactions contemplated by the foregoing, or the validity or
enforceability (with respect to the Purchaser) of this Agreement, or
such other Transaction Documents to which the Purchaser is a party.
(c) Enforceable Obligations. This Agreement and the other Transaction
Documents to which the Purchaser, is a party have been, or on or prior to
the Closing Date will be, duly executed and delivered on behalf of the
Purchaser, and constitute or will constitute the legal, valid and binding
obligation of the Purchaser, enforceable against it in accordance with
their terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, or similar laws
affecting the enforcement of creditors' rights generally and by general
principles of equity (regardless of whether enforcement is sought in a
proceeding in equity or at law).
(d) Investment Representations of the Purchaser.
(i) No Distributive Intent; Restricted Securities. The Purchaser is
acquiring the Purchased Securities and Warrants for its own account with
no present intention of reselling or otherwise distributing any of the
Purchased Securities or the Warrants or participating in a distribution
of such Purchased Securities or Warrants in violation of the Securities
Act, or any applicable state securities laws. The Purchaser acknowledges
that it has been advised and is aware that (A) the Seller is relying
upon an exception under the Securities Act predicated upon the
Purchaser's representations and warranties contained in this Agreement
in connection with the issuance of the Purchased Securities and the
Warrants pursuant to this Agreement, (B) the Purchased Securities and
the Warrants in the hands of the Purchaser will be "restricted
securities" within the meaning of Rule 144 promulgated by the Commission
pursuant to the Securities Act and, unless and until registered under
the Securities Act, will be subject to limitations on resale (including,
among others, limitations on the amount of securities that can be resold
and the timing and manner of resale) set forth in Rule 144 or in
administrative interpretations of the Securities Act by the Commission
or in other rules and regulations promulgated thereunder by the
Commission, in effect at the time of the proposed sale or other
disposition of the Purchased Securities or the Warrants, and (C) the
Purchaser has no registration rights except as provided for in the
Registration Rights Agreement, and the Seller has no plans to register
any securities except in accordance with those rights.
(e) Survival of Representations and Warranties. The foregoing
representations and warranties are made by the Purchaser with the knowledge
and intention that the Seller will rely thereon and shall survive the
execution and delivery of this Agreement.
SECTION 4.2 Commissions. (a) No Commissions of Purchaser. No outside
parties have participated with respect to the negotiation of this Agreement and
the transactions contemplated hereby on behalf of the Purchaser and the
Purchaser shall indemnify and hold the Seller harmless with respect to any claim
for any broker's or finder's fees or commissions with respect to the
transactions contemplated hereby by anyone found to have been acting on behalf
of the Purchaser.
(b) No Commissions of Seller. Seller shall indemnify and hold the Purchaser
harmless with respect to any claim for any broker's or finder's fees or
commissions with respect to the transactions contemplated hereby by anyone found
to have been acting on behalf of the Seller.
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ARTICLE 5
AFFIRMATIVE COVENANTS
SECTION 5.1 Financial Statements. So long as any of the Warrants or
Purchased Securities are outstanding, the Seller will comply, and will cause
each of its Subsidiaries, where applicable, to comply, with the following
provisions:
(a) Year End Report. If the Seller has no securities registered under
Section 12 of the Securities Exchange Act of 1934, as amended, as soon as
available, but in any event within ninety (90) days after the end of each
fiscal year of the Seller, Seller shall deliver to the Purchaser copies of
the audited consolidated financial statements of the Seller and its
Subsidiaries including the balance sheets as at the end of such year and
the related statements of income and retained earnings and of cash flows
for such year, in each case containing in comparative form the figures for
the previous year. Such financial statements shall be accompanied by an
opinion of a firm of independent certified public accountants of nationally
recognized standing reasonably acceptable to the Purchaser, stating that
such financial statements fairly present the respective financial positions
of the Seller and its Subsidiaries, as the case may be, and the results of
operations and changes in financial position for the fiscal year then ended
in conformity with GAAP.
(b) Quarterly Reports. If the Seller has no securities registered
under Section 12 of the Securities Exchange Act of 1934, as amended, as
soon as available, but in any event not later than forty-five (45) days
after the end of each fiscal quarter (except the last fiscal quarter) of
each fiscal year, the Seller shall deliver to the Purchaser copies of the
unaudited consolidated balance sheets of the Seller and its Subsidiaries as
at the end of such quarter and the related unaudited statements of income
and retained earnings and of cash flows for such quarter and the portion of
the fiscal year through the end of such quarter, setting forth in each case
in comparative form the figures for the previous year, certified by a
Responsible Officer of the Seller as being properly prepared, complete and
correct in all material respects (subject to normal year-end audit
adjustments).
All of such financial statements shall be complete and correct in all material
respects and be prepared in reasonable detail and in accordance with GAAP
applied consistently throughout the periods reflected therein and with prior
periods.
(c) Commission and Other Reports. Promptly upon becoming available,
Seller shall furnish, or if necessary cause its Subsidiaries to furnish,
one copy of each financial statement, report, notice or proxy statement
required to be sent by the Seller or any of its Subsidiaries to
stockholders generally and of each regular or periodic report filed by the
Seller or any of its Subsidiaries with any securities exchange or the
Commission or any successor agency, and copies of any orders in any
proceedings to which the Seller or any of its Subsidiaries is a party,
issued by any governmental agency, federal or state, having jurisdiction
over the Seller or any of its Subsidiaries, which could have a Material
Adverse Effect.
SECTION 5.2 Conduct of Business and Maintenance of Existence. Prior to the
Closing Date, Seller will, and will cause each of its Subsidiaries to, preserve,
renew and keep in full force and effect its corporate existence and take all
reasonable action to maintain all rights, privileges and franchises necessary or
desirable in the normal conduct of its business. Seller shall, and shall cause
each of its Subsidiaries to, comply with all Contractual Obligations and
Requirements of Law, except to the extent the failure to comply therewith could
not be reasonably expected to have a Material Adverse Effect.
SECTION 5.3 Maintenance of Property; Insurance. Prior to the Closing Date,
the Seller will maintain, preserve and keep, and will cause its Subsidiaries to
maintain, preserve and keep, its properties which are used or useful in the
conduct of its business (whether owned in fee or a leasehold interest) in good
repair and working order and from time to time make all necessary repairs,
replacements, renewals and additions so that at all times the efficiency
thereof, in all material respects, shall be maintained. Seller shall maintain,
and shall cause each of its Subsidiaries to maintain, with financially sound and
reputable insurance companies, insurance on all of their real and personal
property in such forms and amounts and against such risks as are
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usually insured against in the same general area by companies engaged in the
same or a similar business; and furnish to the Purchaser, upon written request,
full information as to the insurance carried.
SECTION 5.4 Strategic Alliance. (a) After the Closing, the Purchaser agrees
to provide to Seller a facility that will permit Seller to offer workers
compensation insurance to its aviation insureds.
(b) After the Closing, Purchaser and Seller shall negotiate, in good faith,
the terms of an underwriting management agreement pursuant to which Seller shall
offer to provide underwriting and claims management services to Purchaser for
those lines of aviation insurance that Seller currently underwrites, and
Purchaser shall offer to provide Seller, where commercially desirable,
underwriting capacity of an insurance carrier rated "A" by A.M. Best Company.
(c) The Purchaser and Seller agree to fulfill their respective obligations
under this Section through their appropriate subsidiaries. The Purchaser and
Seller agree to negotiate, in good faith, terms of agreements that are mutually
agreeable.
SECTION 5.5 Recapitalization Charge. Seller agrees that it will record a
Fifteen Million and 00/100 Dollar ($15,000,000.00) (pre-tax) recapitalization
charge in its financial results for the quarter in which this transaction is
recorded.
ARTICLE 6
OTHER PROVISIONS
SECTION 6.1 Shareholder Approval. The Seller shall take such action
necessary to obtain shareholder approval of the transactions contemplated herein
as promptly as practicable after the execution of this Agreement. As soon as
practicable following the date hereof, the Purchaser and the Seller shall
cooperate to prepare promptly and file with the SEC a Proxy or Information
Statement with respect to the transactions contemplated by this Agreement (the
"Information Statement"). Promptly after the approval by the staff of the
Commission of the Information Statement, the Seller shall mail the Information
Statement to all holders of the Seller's Common Stock. The Purchaser and the
Seller shall cooperate with each other in the preparation of the Information
Statement and shall advise the other in writing if, prior to the vote of the
shareholders of the Seller, any such party shall obtain knowledge of any facts
that might make it necessary or appropriate to amend or supplement the
Information Statement in order to make the statements contained or incorporated
by reference therein not misleading or to comply with applicable law.
Notwithstanding the foregoing, each party shall be responsible for the
information and disclosures which it makes or incorporates by reference in all
regulatory filings and the Information Statement.
SECTION 6.2 Regulatory Approvals. Seller and Purchaser shall promptly apply
for and use their commercially reasonable best efforts to obtain all applicable
federal and state regulatory approvals and other approvals required to
effectuate the provisions of this Agreement, including all filings under
Hart-Scott-Rodino and with the appropriate state insurance commissions.
SECTION 6.3 Reservation of Shares. The Seller agrees to authorize and
reserve for issuance a sufficient number of authorized but unissued shares of
Common Stock and Preferred Stock for the purposes of this Agreement and to take
such action as may be necessary to ensure that all shares of Common Stock issued
upon exercise of the Warrants or upon conversion of the Preferred Stock will be
duly and validly authorized and issued, fully paid and nonassessable and that
all shares of Preferred Stock issued at the Closing or thereafter issued to
Purchaser pursuant to the Certificate of Designation will be duly and validly
authorized and issued, fully paid and nonassessable.
SECTION 6.4 Good Faith by Seller. The Seller will not, by amendment to its
certificate of incorporation or through any reorganization, reclassification, or
any other means, avoid or seek to avoid the observance or performance of any of
the terms of Articles 6 hereof, but will at all times in good faith carry out
all such terms and take all such action as may be necessary or appropriate to
protect the rights of the Purchaser.
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SECTION 6.5 Board of Directors. Purchaser shall have the rights set forth
in this Section until the earlier of (i) the time that Purchaser and its
Affiliates no longer own Preferred Stock and Underlying Shares representing in
the aggregate the ownership, or right to acquire ownership, of fifty-one percent
(51%) of the Underlying Shares or (ii) the seventh anniversary of the Closing
Date. Purchaser may nominate for election to Seller's Board of Directors and the
Seller shall place on the proxy sent to its shareholders, applicable nominees
who represent thirty percent (30%) (rounded up to the next director) of the
number of directors serving at any one time, and at least one of the directors
representing the Purchaser shall serve on each of the standing committees of the
Board of Directors. Notwithstanding the foregoing, the number of directors which
the Purchaser shall be entitled to nominate pursuant to this Section 6.5 shall
be reduced to the extent and by the number of directors the holders of Preferred
Stock are entitled to elect as a class under the terms of the Certificate of
Designation. In the event the Purchaser's representatives fail to be elected as
directors, Seller agrees that Purchaser shall be entitled to have an equal
number of representatives in place of such directors attend each meeting of the
Board of Directors. Such representatives shall be entitled to receive all
materials and information provided to Seller's Board of Directors and shall
receive the same notice as is given to the Seller's Board of Directors.
SECTION 6.6 Voting Agreement. For so long as Purchaser and its Affiliates
shall beneficially own Preferred Stock or Underlying Shares which represent in
the aggregate the ownership, or right to acquire ownership, of at least
fifty-one percent (51%) of the Underlying Shares, the Purchaser shall and shall
cause its Affiliates, to vote all shares of Preferred Stock and Common Stock
held by Purchaser or its Affiliates as follows:
(a) With respect to any matter on which the holders of Common Stock
have the right to vote, if Purchaser and its Affiliates hold any
combination of Preferred Stock and Common Stock that represents the right
to vote more than 20% of the total votes eligible to be voted on such
matter, then Purchaser agrees to vote all of its votes in excess of such
20% in proportion to the actual vote of holders of all remaining votes
(including the Purchaser's 20% vote);
(b) The voting agreement contained in this Section will terminate and
expire on the date that is three years and one hundred eighty (180) days
after the Closing Date.
(c) Purchaser agrees that all certificates representing shares of
Preferred Stock or Underlying Shares shall contain a legend referencing the
foregoing restrictions on voting rights for so long as such restrictions
are applicable.
SECTION 6.7 No Solicitation and Other Actions. (a) From and after the date
of this Agreement and except as set forth in subsection 6.7(b), the Seller shall
not, and the Seller shall direct and use its reasonable best efforts to cause
the officers, directors, employees, agents, advisors and other representatives
of the Seller not to, directly or indirectly, (i) solicit, initiate, knowingly
encourage, or participate in discussions or negotiations regarding, any
proposals or offers from any Person (an "Offeror") relating to any Competing
Proposal, or (ii) furnish to any other Offeror any non-public information or
access to such information with respect to, or otherwise concerning, any
Competing Proposal. The Seller shall immediately cease and cause to be
terminated any existing discussions or negotiations with any Person conducted
heretofore with respect to any proposed Competing Proposal.
(b) Notwithstanding anything to the contrary contained in this Section 6.7
or in any other provision of this Agreement, until the Shareholders of the
Seller have approved the transactions contemplated by this Agreement, the Seller
shall not be prohibited by this Agreement from (i) participating in discussions
or negotiations with, and, during such period, the Seller may furnish
information to, an Offeror that seeks to engage in discussions or negotiations,
requests information or makes a proposal to acquire the Seller pursuant to a
Competing Proposal, if the Seller's directors determine in good faith that such
action is required for the discharge of their fiduciary obligations, after
consultation with independent legal and financial advisors, who may be the
Seller's regularly engaged legal counsel and financial advisors (a "Director
Duty"); (ii) complying with Rule 14d-9 or Rule 14e-2 promulgated under the
Securities Exchange Act of 1934 (the "Exchange Act") with regard to a tender or
exchange offer; (iii) making any disclosure to the Seller's shareholders in
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accordance with a Director Duty; (iv) failing to make, modifying or amending its
recommendations, consents or approvals referred to herein in accordance with a
Director Duty; (v) terminating this Agreement and entering into an agreement
providing for a Competing Proposal in accordance with a Director Duty; or (vi)
take any other action as may be appropriate in order for the Seller's Board of
Directors to act in a manner that is consistent with its fiduciary obligations
under applicable law. In the event that the Seller or any of its officers,
directors, employees, agents, advisors or other representatives participate in
discussions or negotiations with, or furnish information to an Offeror that
seeks to engage in such discussions or negotiations, requests information or
makes a Competing Proposal, then, subject to any confidentiality requirements of
an Offeror (i) the Seller shall immediately disclose to the Purchaser the
decision of the Seller's directors; (ii) the identity of the Offeror; and (iii)
copies of all information or material not previously furnished to Purchaser
which the Seller, or its agents, provides or causes to be provided to such
Offeror or any of its officers, directors, employees, agents, advisors or
representatives.
ARTICLE 7
CONDITIONS PRECEDENT TO PURCHASER'S OBLIGATIONS
SECTION 7.1 Conditions Precedent. The obligation of the Purchaser to
purchase the Purchased Securities pursuant to this Agreement on the Closing Date
is subject to the satisfaction or waiver in writing of the following conditions
precedent (in form, substance and action as is reasonably satisfactory to
Purchaser):
(a) Certified Copies of Charter Documents. The Purchaser shall have
received from the Seller and each of its Subsidiaries a copy, certified by
a duly authorized officer of the Seller to be true and complete on and as
of the Closing Date, of each of the charter or other organization documents
and by-laws of the Seller or each Subsidiary each as in effect on such date
of certification (together with all, if any, amendments thereto);
(b) Proof of Appropriate Action. The Purchaser shall have received
from the Seller a copy, certified by a duly authorized officer of the
Seller to be true and complete on and as of the Closing Date, of the
records of all action taken by the board of directors and shareholders of
the Seller to authorize the execution and delivery of this Agreement, each
of the Transaction Documents and any other agreements entered into on the
Closing Date and to which it is a party or is to become a party as
contemplated or required by this Agreement, and its performance in all
material respects of all of its agreements and obligations under each of
such documents;
(c) Incumbency Certificates. The Purchaser shall have received from
the Seller an incumbency certificate, dated the Closing Date, signed by a
duly authorized officer of the Seller and giving the name and bearing a
specimen signature of each individual who shall be authorized to sign, in
the name and on behalf of the Seller this Agreement and each of the other
Transaction Documents to which such person is or is to become a party on
the Closing Date, and to give notices and to take other action on behalf of
the Seller under such documents;
(d) Representations and Warranties. Each of the representations and
warranties made by and on behalf of the Seller and its Subsidiaries to the
Purchaser in this Agreement and in the other Transaction Documents shall be
true and correct when made and the representations and warranties contained
in Sections 3.15 and 3.16 hereof shall be true and correct as of the
Closing Date;
(e) Transaction Documents. Each of the Transaction Documents shall
have been duly and properly authorized, executed and delivered to the
Purchaser and filed by Seller, if required of Seller to be effective and
shall be in full force and effect on and as of the Closing Date;
(f) Legality of Transactions. No change in applicable law shall have
occurred as a consequence of which it shall have become and continue to be
unlawful for the Purchaser to perform any of its agreements or obligations
under this Agreement, or under any of the other Transaction Documents, or
for the Seller or any Subsidiary of the Seller to perform any of its
agreements or obligations under this Agreement or under any of the other
Transaction Documents;
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(g) Performance, Etc. The Seller shall have duly and properly
performed, complied with and observed its respective covenants, agreements
and obligations contained in each of the Transaction Documents in all
material respects.
(h) Legal Opinions. The Purchaser shall have received a written legal
opinion of counsel to Seller, addressed to the Purchaser, dated the Closing
Date, which shall be reasonably acceptable to the Purchaser;
(i) Consents. The Purchaser and Seller shall have received all
consents necessary for the completion of the transactions contemplated by
this Agreement and each of the Transaction Documents, including any
regulatory approvals and all instruments and documents incidental thereto.
(j) Amended Registration Rights Agreement. Mason Best Company L.P. and
Seller shall have entered into the Amended Registration Rights Agreement.
(k) Commitment of Mason Best Company L.P. Within five (5) days after
the date hereof, the Purchaser shall have received
a written commitment from Mason Best Company L.P. substantially in the
form of the attached Exhibit "G"F that, among other matters, it will vote
its shares of Common Stockthe common stock of AEGI in favor of (i)
the transactions contemplated herein and (ii) the representatives of
Purchaser to be elected as directors of the Seller.
(l) Adjustment to Stock Option Exercise Price. The Seller shall have
adjusted the exercise price of existing Stock Options granted to continuing
officers and directors of Seller or its Subsidiaries pursuant to its 1991
Nonqualified Stock Option Plan, 1994 Stock Incentive Plan and 1994
Directors Option Plan effective on the Closing Date to the market price on
the date of adjustment (the "Reset Options"). The Reset Options shall have
a vesting period of three (3) years, with one-third ( 1/3) of the Options
vesting on each anniversary of the date of the Reset Options.
ARTICLE 8
CONDITIONS PRECEDENT TO SELLER'S OBLIGATIONS
SECTION 8.1 Conditions Precedent. The obligation of the Seller to sell the
Purchased Securities pursuant to this Agreement on the Closing Date is subject
to the satisfaction or waiver in writing of the following conditions precedent
(in form, substance and action as is reasonably satisfactory to the Seller):
(a) Proof of Appropriate Action. The Seller shall have received from
the Purchaser a copy, certified by a duly authorized officer of the
Purchaser to be true and complete on and as of the Closing Date, of the
records of all action taken by the Board of Directors or Executive
Committee of the Purchaser to authorize the execution and delivery of this
Agreement and any other agreements entered into on the Closing Date and to
which it is a party or is to become a party as contemplated or required by
this Agreement, and its performance of all of its agreements and
obligations under each of such documents;
(b) Incumbency Certificates. The Seller shall have received from the
Purchaser an incumbency certificate, dated the Closing Date, signed by a
duly authorized officer of the Purchaser and giving the name and bearing a
specimen signature of each individual who shall be authorized (i) to sign,
in the name and on behalf of the Purchaser, this Agreement and each of the
other Transaction Documents to which such person is or is to become a party
on the Closing Date, and (ii) to give notices and to take other action on
behalf of the Purchaser under such documents;
(c) Representations and Warranties. Each of the representations and
warranties made by and on behalf of the Purchaser to the Seller in this
Agreement and in the other Transaction Documents shall be true and correct
when made;
(d) Transaction Documents. Each of the Transaction Documents shall
have been duly and properly authorized, executed and delivered to the
Seller by the respective party or parties thereto and shall be in full
force and effect on and as of the Closing Date;
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(e) Legality of Transactions. No changes in applicable law shall have
occurred as a consequence of which it shall have become and continue to be
unlawful (i) for the Purchaser to perform any of its agreements or
obligations under this Agreement, or under any of the other Transaction
Documents, or (ii) for the Seller or any Subsidiary of the Seller to
perform any of its agreements or obligations under this Agreement or under
any of the other Transaction Documents;
(f) Approvals and Consents. The Seller shall have received all
approvals and consents necessary for the completion of the transactions
contemplated by the Agreement and each of the Transaction Documents,
including Shareholder approval as contemplated by Section 6.1 hereof and
regulatory consent as contemplated by Section 6.2 hereof; and
(g) Performance, Etc. The Purchaser shall have duly and properly
performed, complied with and observed its respective covenants, agreements
and obligations contained in each of the Transaction Documents.
ARTICLE 9
TERMINATION OF AGREEMENTherein.
SECTION 9.1 Termination.18. TERMINATION.
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Notwithstanding any other provision of this
Agreement,contained herein, this Agreement may
be terminated at any time prior to the Closing Date:
(a) by mutual written consent of the Seller, AEGI and the Purchaser;
(b) by the Seller, AEGI or the Purchaser, upon written notice to the other
party, if the Closing shall not have occurred on or prior to March 31, 1997
(the "Outside Date"),the
Termination Date, unless such failure of consummation shall be due to
the failure of the party seeking such termination to perform or observe
in all material respects the covenants and agreements hereof to be
performed or observed by such party;
(c) by the Seller, AEGI or the Purchaser, upon written notice to the other
party,parties, if a governmental authority of competent jurisdiction shall
have issued an injunction, order or decree enjoining or otherwise
prohibiting the consummation of the transactions contemplated by this
Agreement, and such injunction, order or decree shall have become final
and non-appealable or if a governmental authority has otherwise made a
final determination that any required regulatory consent would not be
forthcoming; provided, however, that the party seeking to terminate this
Agreement pursuant to this clause has used all requiredcommercially reasonable
efforts to remove such injunction, order or decree;
(d) by the Seller or AEGI if prior to approval by the Shareholders of the
Seller of the transactions contemplated by this Agreement, the Board of Directors of the Seller or AEGI
determines in accordance with a Director Duty that such termination is
required by reason of a Competing Proposal; or
(e) by the Seller, AEGI or the Purchaser if prior to approval by the
Shareholders of the Seller of the transactions contemplated by this
Agreement, the Board of Directors of the
Seller and AEGI shall have withdrawn or modified in a manner materially
adverse to the Purchaser its approval of the adoption of this Agreement,
because the BoardBoards of Directors hashave determined to recommend to the
Seller's and AEGI's shareholders or approve a Competing Proposal, in
accordance with a Director Duty; provided, however, that any
communication that advises that Seller or AEGI has received a Competing
Offer or is
engaging in any activity permitted under Section 6.7(b) with respect to a
Competing OfferProposal shall in no event be deemed a withdrawal or modification
adverse to the Purchaser of its approval of this Agreement.
SECTION 9.2 Effect of Termination.19. EFFECT OF TERMINATION.
In the event that this Agreement is terminated pursuant to clause 9.1(d)18(d)
or 9.1(e)18(e) hereof, the Warrants issued to
the Purchaser pursuant to Section 2.3 hereof shall become immediately
exercisable andthen the Purchaser shall have allbe entitled to a cash payment within
five (5) days of the benefitstermination date from Seller of One Million Seven Hundred
Fifty Thousand and 00/100 Dollars ($1,750,000.00).
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SECTION 20. INDEMNIFICATION.
Section 20.1 General Indemnification Obligation of Seller and AEGI.
From and after the Closing, each of Seller and AEGI, jointly and severally,
will reimburse, indemnify and hold harmless Purchaser and its successors and
assigns (an "Indemnified Purchaser Party") against and in respect of:
(a) Any and all damages, losses, deficiencies, liabilities, costs and
expenses incurred or suffered by any Indemnified Purchaser Party that
result from, relate to or arise out of:
(i) any and all liabilities and obligations of Seller of any nature
whatsoever, except for the Assumed Liabilities; or
(ii) any misrepresentation, breach or warranty or nonfulfillment of
any agreement or covenant on the part of Seller or AEGI under
this Agreement, or from any misrepresentation in or omission from
any certificate, schedule, statement, document or instrument
furnished to Purchaser pursuant hereto or in connection with the
negotiation, execution or performance of this Agreement; and
(b) Any and all actions, suits, claims, proceedings, investigations,
demands, assessments, audits, fines, judgments, costs and other expenses
(including, without limitation, reasonable legal fees and expenses)
incident to any of the Warrant
Registration Rightsforegoing or to the enforcement of this Section
20.1.
Section 20.2 General Indemnification Obligation of Purchaser. From and
after the Closing, Purchaser will reimburse, indemnify and hold harmless
Seller, AEGI and their successors or assigns (an "Indemnified Seller Party")
against and in respect of:
(a) Any and all damages, losses, deficiencies, liabilities, costs and
expenses incurred or suffered by any Indemnified Seller Party that
result from, relate to or arise out of:
(i) the Assumed Liabilities; or
(ii) any misrepresentation, breach of warranty or non-fulfillment of
any agreement or covenant on the part of Purchaser under this
Agreement, or from any misrepresentation in or omission from any
certificate, schedule, statement, document or instrument
furnished to Seller pursuant hereto or in connection with the
negotiation, execution or performance of this Agreement; and
(b) any and all actions, suits, claims, proceedings, investigations,
demands, assessments, audits, fines, judgments, costs and other expenses
(including, without limitation, reasonable legal fees and expenses)
incident to any of the foregoing or to the enforcement of this Section
20.2.
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Section 20.3 Method of Asserting Claims, Etc. In the event that any
claim or demand for which Seller or AEGI would be liable to an Indemnified
Purchaser Party hereunder is asserted against or sought to be collected from
an Indemnified Purchaser Party by a third party, the Indemnified Purchaser
Party shall promptly notify Seller and AEGI of such claim or demand, specifying
the nature of such claim or demand and the amount or the estimated amount
thereof to the extent then feasible (which estimate shall not be conclusive of
the final amount of such claim and demand) (the "Claim Notice"). Seller and
AEGI shall have ten (10) days from the personal delivery or mailing of the
Claim Notice (the "Notice Period") to notify the Indemnified Purchaser Party,
(A) whether or not they dispute their liability to the Indemnified Purchaser
Party hereunder with respect to such claim or demand and (B) notwithstanding
any such dispute, whether or not they desire, at their sole cost and expense,
to defend the Indemnified Purchaser Party against such claims or demand.
(a) In the event that Seller or AEGI notifies the Indemnified Purchaser
Party within the Notice Period that they desire to defend the
Indemnified Purchaser Party against such claim or demand then, except as
hereinafter provided, Seller or AEGI, respectively, shall have the right
to defend the Indemnified Purchaser Party by appropriate proceedings,
which proceedings shall be promptly settled or prosecuted by them to a
final conclusion in such a manner as to avoid any risk of Indemnified
Purchaser Party becoming subject to liability for any other matter;
provided, however, Seller and AEGI shall not, without the prior written
consent of the Indemnified Purchaser Party, consent to the entry of any
judgment against the Indemnified Purchaser Party or enter into any
settlement or compromise which does not include, as an unconditional
term thereof, the giving of the claimant or plaintiff to the Indemnified
Purchaser Party of a release, in form and substance satisfactory to the
Indemnified Purchaser Party, as the case may be, from all liability in
respect of such claim or litigation. If any Indemnified Purchaser Party
desires to participate in, but not control, any such defense or
settlement, it may do so at its sole cost and expense.
(b) (i) If Seller or AEGI elects not to defend the Indemnified Purchaser
Party against such claim or demand, whether by not giving the
Indemnified Purchaser Party timely notice as provided above or
otherwise, then the amount of any such claim of demand, or if the
same be defended by Seller or AEGI or by the Indemnified
Purchaser Party (but no further rightsIndemnified Purchaser Party shall have
any obligation to defend any such claim or demand), then that
portion thereof as to which such defense is unsuccessful, in each
case shall be conclusively deemed to be a liability of Seller and
AEGI hereunder.
(ii) In the event an Indemnified Purchaser Party should have a claim
against Seller or AEGI hereunder that does not involve a claim or
demand being asserted against or sought to be collected from it
by a third party, the Indemnified Purchaser Party shall promptly
send a Claim Notice with respect to such claim to Seller and
AEGI. If Seller or AEGI does not notify the Indemnified
Purchaser Party within the Notice
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Period that it disputes such claim, the amount of such claim
shall be conclusively deemed a liability of Seller or AEGI,
respectively, hereunder.
(c) All claims for indemnification by an Indemnified Seller Party under this
Agreement shall be asserted and resolved under the procedures set forth
above substituting in the appropriate place "Indemnified Seller Party"
for "Indemnified Purchaser Party" and variations thereof and "Purchaser"
for "Seller and AEGI."
Section 20.4 Payment. Upon the determination of the liability under
Section 20.3 hereof, the appropriate party shall pay to the other, as the case
may be, within ten days after such determination, the amount of any claim for
indemnification made hereunder. In the event that the indemnified party is not
paid in full for any such claim pursuant to the foregoing provisions promptly
after the other party's obligation to indemnify has been determined in
accordance herewith, it shall have the right, notwithstanding any other rights
that it may have against any other person, firm or corporation, to setoff the
unpaid amount of any such claim against any amounts owed by it under any
agreements entered into pursuant to this Agreement or any of the documents
executed in connection herewith. Upon the payment in full of any claim, either
by setoff or otherwise, the entity making payment shall be subrogated to the
rights of the indemnified party against any person, firm or corporation with
respect to the subject matter of such claim.
Section 20.5 Other Rights and Remedies Not Affected. The
indemnification rights of the parties under this Section 20 are independent of
and in addition to such rights and remedies as the parties may have at law or
in equity or otherwise for any misrepresentation, breach of warranty or failure
to fulfill any agreement or covenant hereunder on the part of any party hereto,
including without limitation the right to seek specific performance, rescission
or restitution, none of which rights or remedies shall be affected or
diminished hereby.
Section 20.6 Limitations on Amount -- Seller and AEGI. Seller and AEGI
will have no liability (for indemnification or otherwise) with respect to the
matters described in Section 20.1 until the total of all damages actually paid
or incurred by an Indemnified Purchaser Party with respect to such matters
exceeds One Million and 00/100 Dollars ($1,000,000.00), and then only for the
amount by which such damages actually paid or incurred by an Indemnified
Purchaser Party exceed One Million and 00/100 Dollars ($1,000,000.00). The
maximum aggregate obligation of Seller and AEGI with respect to all matters for
which an Indemnified Purchaser Party may seek indemnification under Section
20.1(ii) of this Agreement for misrepresentation or breach of warranty shall
not exceed Twenty Million and 00/100 Dollars ($20,000,000.00).
Section 20.7 Limitations on Amount - Purchaser. The maximum aggregate
obligation of Purchaser to the Seller and AEGI with respect to all matters for
which AEGI or Seller may seek indemnification under Section 20.2(ii) of this
Agreement for misrepresentation or breach of warranty shall not exceed Twenty
Million and 00/100 Dollars ($20,000,000.00).
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Section 20.8 Applicable Definitions. For purposes of this Agreement, a
Person shall be deemed to have "Knowledge" or "knowledge" of a particular fact
or other matter if such individual is terminatedactually aware of such fact or other
matter, or an individual who is not negligent could be expected to discover or
otherwise become aware of such fact or other matter in the course of conducting
a reasonably comprehensive investigation of the books and records concerning
the existence of such fact or other matter. A Person (other than an
individual) will be deemed to have "Knowledge" of a particular fact or other
matter if any individual who is serving, as a director, officer, partner,
executor or trustee of such Person (or in any similar capacity) has, or at any
time had, Knowledge of such fact or other matter.
SECTION 21. COMPLIANCE WITH BULK SALES LAWS.
Purchaser and Seller hereby waive compliance by Purchaser and Seller
with the bulk sales law and any other similar laws in any applicable
jurisdiction in respect of the transactions contemplated by this Agreement.
Seller and AEGI shall indemnify Purchaser from, and hold it harmless against,
any liabilities, damages, costs and expenses resulting from or arising out of
(i) the parties' failure to comply with any of such laws in respect of the
transactions contemplated by this Agreement, or (ii) any action brought or levy
made as a result thereof, other than those liabilities which have been
expressly assumed, on such terms as expressly assumed, by Purchaser pursuant to
any other
clause of Section 9.1, the Warrants shall be cancelled and neither party shall
have any further rights or obligations under this Agreement, the Warrant
Registration Rights Agreement or the Warrant Subscription Agreement.
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SECTION 9.3 Default under the Agreement.22. DEFAULT UNDER THE AGREEMENT.
If eitherany party shall default in the performance of its obligations
hereunder, the non-defaulting partyparties shall retain all rights and remedies,
whether arising in equity or at law, including actions for specific performance
and damages, as a result of the default by the other party under this
Agreement.
ARTICLE 10
MISCELLANEOUSAgreement, unless, the non-defaulting party, after receipt of written notice of
such default elects to consummate the transactions hereunder.
SECTION 10.1 Amendments23. TRANSITION.
(a) Purchaser shall use its best efforts to accomplish as soon as possible
all necessary operational, systems, contractual and Waivers. The Sellerlegal requirements
on its part to issue where commercially desirable, policies of insurance
as the Aviation Business and the Reinsured Business renews. This
undertaking by Purchaser may amendshall terminate, at Purchaser's option, upon
Purchaser's good faith belief that the Closing shall not occur by the
Termination Date.
(b) From and after the Closing Date, upon either party's request, the
parties shall cooperate with each other in all reasonable respects, and
execute and deliver such documents and take such other actions as are
necessary to effectuate the transfer of the Aviation Business and the
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Reinsured Business to Purchaser and Purchaser's continuation thereof as
contemplated by this Agreement. In this regard, Seller shall, if
requested by Purchaser, continue to renew policies of insurance included
in the Aviation Business and the Reinsured Business in a manner
consistent with Seller's prior practices and underwriting standards, to
the extent that, despite Purchaser's best efforts, Purchaser is not
operationally capable of issuing its own policy of insurance upon
renewal of such policies; provided, however, that no such policy shall
be issued by Seller with an effective date after July 31, 1997.
SECTION 24. SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
The representations, warranties, covenants and agreements of Seller,
AEGI and Purchaser contained in this Agreement or in any document delivered
pursuant to the terms of this Agreement, shall survive the Closing hereunder
for a period of one (1) year.
SECTION 25. FEES AND EXPENSES.
Each of the parties hereto shall be responsible for their own expenses
(including, but not limited to, legal and accounting expenses) incident to the
execution of this Agreement and the consummation of the transactions
contemplated hereby whether or not such transactions shall be consummated.
SECTION 26. PRESS RELEASES.
Neither party shall make any press release or public announcement
concerning this Agreement or the other Transaction Documents to which they are parties, andtransactions contemplated hereby without the
Purchaser may waive future compliance by the Seller with any provision of
this Agreement or such other Transaction Documents, but no such amendment or
waiver shall be effective unless in a written instrument executed by an
authorized officerconsent of the Purchaserother party.
SECTION 27. NOTICES.
All notices, requests, demands and Seller.
SECTION 10.2 No Waiver; Cumulative Remedies. No failure to exercise and no
delay in exercising, on the part of the Purchaser or Seller, any right, remedy,
power or privilegeother communications hereunder shall operate as a waiver thereof; nor shall any
single or partial exercise of any right, remedy, power or privilege hereunder
preclude any other or further exercise thereof or the exercise of any other
right, remedy, power or privilege. The Purchaser or Seller, as the case may be,
shall not be deemed to have waived any of its' rights hereunder or under any
other agreement, instrument or paper signed by it unless such waiver shallmust
be in writing and signed by the Purchaser or Seller, as the case may be. The rights,
remedies, powers and privileges herein provided are cumulative and not exclusive
of any rights, remedies, powers and privileges provided by law, and are
supplemental and in addition to such rights, remedies, powers and privileges
provided in Transaction Documents.
SECTION 10.3 Notices. All notices, consents, requests and demands to or
upon the respective parties hereto shall be in writing and, unless otherwise
expressly provided herein, shall be deemed to have been duly given or made when(a) upon receipt if
delivered by hand, and (b) three days after mailing if mailed by first-class,
registered or when deposited in thecertified mail, return receipt request, postage and registry fees
prepaid or, in the
case of telex, telegraphic or telecopy notice, when sent,and addressed as follows:
If to the Purchaser:
Great American Financial Group, Inc.
One East FourthInsurance Company
580 Walnut Street Suite 919
Cincinnati, Ohio 45202
Attention: SamuelGary J. Simon
Telephone: (513) 579-2542
Telecopy: (513) 579-2113
With a copy to:
Keating, Muething & Klekamp, P.L.L.
1800 Provident Tower
Cincinnati, Ohio 45202
Attention: Paul V. Muething
Telephone: (513) 579-6517
Telecopy: (513) 579-6957Gruber
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If to the Seller:
American Eagle Group, Inc.Insurance Company
12801 NorthN. Central Expressway, Suite 800
Dallas, Texas 75243
Attention: Chairman of the Board
Telephone: (972) 448-1460
Telecopy: (972) 448-1401
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With a copy to:
Frederick G. Anderson
Senior Vice President
and General CounselIf to AEGI:
American Eagle Group, Inc.
12801 NorthN. Central Expressway, Suite 800
Dallas, Texas 75243
Telephone: (972) 448-1431
Telecopy: (972) 448-1401
Notices of changes of addressAttention: President
Addresses may be changed by notice in writing signed by the addressee.
SECTION 28. MISCELLANEOUS.
This Agreement shall be givenconstrued and enforced in accordance with and
governed by the same manner.
SECTION 10.4 Successorslaws of the State of Ohio. Neither this Agreement nor any
terms hereof may be changed, waived, discharged or terminated orally, but only
by an instrument in writing signed by the party against whom or which
enforcement of such change, waiver, discharge or termination is sought. In the
event a court of competent jurisdiction modifies any provision of this
Agreement, the remaining provisions of this Agreement shall remain in full
force and Assigns.effect and the modified provision shall be abided by the parties as
so modified by the court. The invalidity or unenforceability of any term or
provision, or any clause, or portion thereof, of this Agreement shall in no way
impair or affect the validity or enforceability of any other term or provision
of this Agreement, which shall remain in full force and effect. This Agreement
and the Schedules attached hereto embody the entire agreement and understanding
between the parties hereto and supersede all prior agreements and
understandings relating to the subject matter hereof. No party hereto has made
any representation, warranty or covenant in connection with the matters set
forth herein except as expressly stated herein. All the terms of this
Agreement shall be binding upon the successors and assigns of the parties
hereto and shall inure to the benefit of and be enforceable by the Seller, the Purchaser andparties
hereto, their respective successors and permitted assigns. For so long as Purchaser has any rights or
obligations specified in Sections 6.5 and 6.6 hereof,assigns; provided however, that this Agreement may
not be assigned by either party hereto without the Purchaser and any of
its Affiliates may assign or transfer to any Person (including a group as
defined in Section 13(d)(3)prior written consent of the
Securities Exchange Actother, which consent shall not be unreasonably withheld. Failure to insist
upon strict compliance with any terms, covenants or conditions hereof shall not
be deemed a waiver of 1934, as amended),
the sharessuch terms, covenants or conditions, nor shall any waiver
or relinquishment of Preferred Stocksuch right at any other time or Underlying Shares, representing in the
aggregate ownership,times be deemed a waiver
or therelinquishment of such right to acquire ownership, of at least fifty-one
percent (51%) of the Underlying Shares and all of their rights under Section 6.5
above, only if such Person assumes all of the obligations under Section 6.6
above.
SECTION 10.5 Enforcement Costs. All reasonable costs and expenses incurred
by a party to enforce the termsany other time or times. The headings of
this Agreement are for purposes of reference only and performance by the other
party of its obligations hereunder including, without limitation, stationery and
postage, telephone and telegraph, secretarial and clerical expenses, the fees or
salaries of any collection agents utilized, and all attorneys' fees and legal
expenses incurred in connection herewith whether through judicial proceedingsshall not limit or
otherwise or in enforcing or protecting its rights and interests under this
Agreement or under any other instrument or document delivered pursuant hereto,
or in protectingaffect the rights of any holder or holders with respect thereto, or in
defending or prosecuting any actions or proceedings arising out of or relating
to the transactions contemplated hereby, shall be paid by the party which does
not prevail in such action or proceeding, upon demand.
SECTION 10.6 Counterparts.meaning thereof. This Agreement may be executed
by one or moresimultaneously in several counterparts, each of the parties to this Agreement on any number of separate counterparts and all of
said counterparts taken togetherwhich shall be deemed to constitute one and
the same instrument. SECTION 10.7 Term. This Agreement shall terminate upon the latestSchedules and Exhibits are made a part of (i)
the redemption of all shares of the Preferred Stock, or (ii) seven (7) years
from the Date of Issuance.
SECTION 10.8 Consent to Jurisdiction. The Seller hereby absolutely and
irrevocably consents and submits to the jurisdiction of the courts of the State
of Ohio and of any federal court located in the said state in connection with
any actions or proceedings brought against the Seller by the Purchaser arising
out of or relating to this Agreement
or any other Transaction Documents. The
Seller hereby waives and shall not assertas though set forth in any such action or proceeding, in
each case, to the fullest extent permitted by applicable law, any claim that (a)
the Seller is not personally subject to the jurisdictionfull herein.
158
- 28 -
[Remainder of any such court, (b)
the Seller is immune from any legal process (whether through service or notice,
attachment prior to judgment, attachment in aid of execution, execution or
otherwise) with respect to it or its property, (c) any such suit, action or
proceeding is brought in an inconvenient forum, (d) the venue of any such suit,
action or proceeding is improper, or (e) this Agreement or any Transaction
Documents may not be enforced in or by any such court. In any such action or
proceeding, the Seller hereby absolutely and irrevocably waives personal service
of any summons, complaint, declaration or other process and hereby absolutely
and irrevocably agrees that the service thereof may be made by certified,
registered first-class mail directed to the Seller. Anything hereinbefore to the
contrary notwithstanding, the Purchaser hereof may sue the Seller in the courts
of any other country, state of the United States or place where the Seller or
any of the property or assets may be found or in any other appropriate
jurisdictions.
II-17page intentionally left blank. Signature Page follows.]
94159
- 29 -
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement by their
duly authorized officers as ofon the
date first above written.
SELLER:GREAT AMERICAN INSURANCE COMPANY
BY:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
AMERICAN EAGLE INSURANCE COMPANY
BY:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
AMERICAN EAGLE GROUP, INC.
By:
------------------------------------
Its:
------------------------------------
PURCHASER:
AMERICAN FINANCIAL GROUP, INC.
By:
------------------------------------
Its:
------------------------------------
II-18BY:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
95
APPENDIX III
CERTIFICATE OF DESIGNATION
OF
SERIES D PREFERRED STOCK160
PROXY
AMERICAN EAGLE GROUP, INC., a corporation duly organized
12801 NORTH CENTRAL EXPRESSWAY, SUITE 800, DALLAS, TEXAS 75243
SOLICITED BY THE BOARD OF DIRECTORS FOR THE
ANNUAL MEETING OF STOCKHOLDERS ON JULY 30, 1997
The undersigned hereby appoints M. Philip Guthrie and existing under
the lawsFrederick G.
Anderson, and each of the State of Delaware (the "Company"), DOES HEREBY CERTIFY:
That pursuantthem, his/her Proxies, with full power to authority conferred upon the Board of Directors of the
Company by the Certificate of Incorporation,appoint his
substitute, and hereby authorizes them to represent and to vote, as amended, of the Company (the
"Certificate of Incorporation") and pursuant to the provisions of Section 151 of
the General Corporation Law of the State of Delaware, the Board of Directors of
the Company duly adopted the following resolutions at a meeting held on November
4, 1996.
"RESOLVED: That pursuant to the authority vested in the Board of Directors
of the Company pursuant to the Certificate of Incorporation of the Company, the
Board of Directors of the Company hereby creates the Series D Preferred Stock of
the Company from the authorized but unissued preferred stock, $.01 par value, of
the Company and fixes the number of shares, designation, powers, preferences and
relative rights of such Series D Cumulative Preferred Stock as follows:
1. DESIGNATION AND NUMBER. The distinctive designation of the series shall
be the Series D Preferred Stock (the "Series D Preferred Stock"); the number of
shares of the Series D Preferred Stock which the Company is authorized to issue
shall be 546,200.
2. DEFINITIONS. For purposes of this resolution, the following terms shall
have the meanings indicated.
(a) As used herein:
(i) The term "Commission" means the Securities and Exchange Commission
or any other federal agency at the time administering the Securities Act.
(ii) The term "Common Stock" means the $0.01 par value voting Common
Stock of the Company.
(iii) The term "Current Market Price" per share of Common Stock on any
date shall be deemed to be the average of the daily closing prices for 30
consecutive business days commencing 45 business days before the day in
question. The closing price for each day shall be the last reported sale
price regular way or, in case no such reported sale takes place on such
day, the average of the reported closing bid and asked prices regular way
for such day, in each case on the New York Stock Exchange or, if the Common
Stock is not listed or admitted to trading on the New York Stock Exchange,
on the principal national securities exchange on which the shares of Common
Stock are listed or admitted to trading or, if not listed or admitted to
trading on any national securities exchange the average of the closing bid
and asked prices of the Common Stock in the over-the-counter market as
reported by the National Association of Securities Dealers Automated
Quotations National Market System (or any comparable system) or, if the
Common Stock is not quoted on such National Market System (or any
comparable system), the average of the closing bid and asked prices in the
over-the-counter market as furnished by any New York Stock Exchange member
firm selected from time to time by the Board of Directors for that purpose
or, in the absence of such quotations, such other method of determining
market value as the Board of Directors shall in good faith from time to
time reasonably deem to be fair. In the absence of one or more such
quotations, the Company shall determine the current market price on the
basis of such quotations as it considers appropriate.
(iv) The term "Date of Issuance" means the date on which the Company
initially issues any shares, regardless of the number of times transfer of
such share is made on the stock records maintained by or for the Company
and regardless of the number of certificates which may be issued to
evidence such share.
96
(v) The term "Event of Default" with respect to the Preferred Stock
shall mean a continuing default in the payment of any dividend under
Section 3 hereof for at least two consecutive quarters or any mandatory
redemption payment under Section 7(b) hereof.
(vi) The term "Junior Stock" means the Common Stock anddesignated
hereon, all other shares of capital stock of the Company that are junior to the Series D
Preferred Stock with respect to the payment of dividends and payments or
distributions upon Liquidation.
(vii) The term "Liquidation" means the voluntary or involuntary
liquidation, distribution of assets (other than payment of dividends),
dissolution or winding-up of the Company.
(viii) The term "outstanding", when used with reference to shares of
stock, means issued shares, excluding shares held by the Company or a
subsidiary.
(ix) The term "Person" means any corporation, partnership, trust,
organization, association or other entity or individual.
(x) The term "Registration Rights Agreement" shall mean that certain
Registration Rights Agreement between the Company and American FinancialEagle Group, Inc. in the form attached as Exhibit D to that certain Securities
Purchase Agreement between the Company and American Financial Group, Inc.
dated November 5, 1996.
(xi) The term "Securities Act" means the Securities Actheld of
1933, as
amended, or any successor federal statute, and the rules and regulations of
the Commission thereunder.
(xii) The term "Senior Stock" means the Series B Cumulative Preferred
Stock and all other shares of capital stock that are senior to the Series D
Preferred Stock with respect to the payment of dividends and payments and
distributions upon Liquidation.
(xiii) The term "Series D Preferred Stock" means the series of the
preferred stock, $0.01 par value, of the Company as defined by the terms
and provisions hereof and designated the Series D Preferred Stock.
(xiv) The term "Transfer" means any transfer or disposition of shares
of Series D Preferred Stock, or any interest thereon.
(xv) The term "Warrant Subscription Agreement" means that certain
Warrant Subscription Agreement between the Company and American Financial
Group, Inc. in the form attached hereto as Annex A.
(b) All accounting terms used herein and not expressly defined herein
shall have the meanings given to them in accordance with generally accepted
accounting principles as of the Date of Issuance.
3. DIVIDENDS. (a) Subject to the rights of the holders of Senior Stock, the
holders of each share of Series D Preferred Stock shall be entitled to receive,
when and as declared by the Company's Board of Directors and to the extent
permitted under the laws of the State of Delaware, cumulative preferential cash
dividends at an annual rate of $9.00 per share, of which cash dividends of $2.25
per share will be payable on the first business day of each January, April, July
and October beginning April 1, 1997; provided, however, in the event that the
Date of Issuance is not the first business day of either January, April, July or
October, the initial dividend payment shall be prorated based upon the actual
number of days elapsed since the Date of Issuance. The holders of record of the
Series D Preferred Stock entitled to receive a particular dividend payment shall
be determined on the date 15 days prior to the date scheduled for such payment.
(b) For a term of five years beginning on the first Date of Issuance for
any shares of Series D Preferred Stock, at the option of the Company, dividends
on outstanding shares of Series D Preferred Stock may be paid in shares of
Series D Preferred Stock having a liquidation preference approximately equal to
the amount of the dividend payable. No fractional shares of Series D Preferred
Stock will be issued. In the event that the Company elects to pay dividends by
issuing shares of Series D Preferred Stock, the Company may maintain an
accounting of the fractional shares that would have been issued to each holder
and at any time such fractions
III-2
97
equal or exceed one share, such shares shall be issued with fractions remaining
in closed accounts paid in cash in lieu of fractional shares. In the
alternative, the Company may pay cash in lieu of fractional shares. Cash
payments in lieu of fractions will be based on the liquidation value of $100.00
per share.
(c) The Company shall not declare or pay or set apart for payment any
dividend (other than dividends payable in shares of Junior Stock) for any period
upon any Junior Stock or any stock of the Company ranking on a parity with the
Series D Preferred Stock as to dividends, nor shall the Company redeem or
purchase any such shares or pay any money to a sinking fund for the redemption
or repurchase of any such shares unless all dividends on the Series D Preferred
Stock, including all accrued and unpaid dividends, have been paid in full.
Notwithstanding this Paragraph 3(c), the Company may pay dividends on the shares
of the Series D Preferred Stock and shares of stock of the Company ranking on a
parity therewith as to dividends ratably in proportion to the sums which would
be payable on such shares if all dividends, including accumulations, if any,
were declared and paid in full.
(d) Cash dividends upon shares of the Series D Preferred Stock shall be
payable by check or wire transfer, at the option of the Company, and shares of
Series D Preferred Stock issued in lieu of cash dividends shall be issued to the
registered holders of Series D Preferred Stock at the address set forth in the
books and records of the Company or any transfer agent and/or registrar
appointed for the Series D Preferred Stock and shall commence to accrue and be
cumulative from their respective Dates of Issuance. Accumulations of dividends
on any shares of the Series D Preferred Stock shall bear interest at 9% per
annum, compounded quarterly.
4. LIQUIDATION. Subject to the rights of holders of Senior Stock, in the
event of any Liquidation, before any payment or distribution of the assets of
the Company (whether capital or surplus), or the proceeds thereof, shall be made
or set apart for the holders of shares of Junior Stock, holders of shares of
Series D Preferred Stock shall be entitled to receive payment of $100.00 per
share of Series D Preferred Stock held by them plus all accrued and unpaid
dividends thereon to the date of such payment. If the assets of the Company
shall be insufficient to pay in full such preferential amounts to the holders of
Series D Preferred Stock and the holders of any other shares of capital stock of
the Company ranking on a parity with holders of Series D Preferred Stock as to
payments or distributions upon Liquidation, then such assets shall be
distributed among such holders of Series D Preferred Stock and such other stock
ratably in accordance with the respective amounts which would be payable on such
shares of Series D Preferred Stock and such other stock if all amounts payable
thereon were paid in full.
5. VOTING RIGHTS. The holders of shares of Series D Preferred Stock shall
be entitled to the voting rights as set forth below for the first seven years
following the first Date of Issuance of any shares of Series D Preferred Stock.
After the seventh anniversary of the Date of Issuance, the holders of shares of
Series D Preferred Stock will have no voting rights, except as set forth in
subsections (c) and (d) below or as otherwise provided by law.
(a) With regard to any matter to be submitted to a vote of the holders
of the Common Stock of the Company either to be voted upon at a meeting
called for the purpose of considering such matter or submitted to holders
for purposes of obtaining their written consent, the holders of all
outstanding shares of Series D Preferred Stock shall (except as set forth
in subsection (b) below) be entitled to collectively exercise voting rights
which, in the aggregate, afford to such holders the right to cast votes
equal to 20% of the votes eligible to be cast with respect to any such
vote. In order to determine the number of votes which the holder of any
share of Series D Preferred Stock may cast in any such vote, the total
number of votes attributable to the Common Stock and any other class or
series of capital stock entitled to vote shall be divided by .80, and the
difference between such quotient and the total number of votes attributable
to the Common Stock and any other class or series of capital stock entitled
to vote with the Common Stock shall be the aggregate number of votes (the
"Total Series D Votes") which the holders of all outstanding shares of
Series D Preferred Stock shall be entitled to cast. The holder of each
share of Series D Preferred Stock shall be entitled to cast the number (or
a fraction thereof) of votes equal to the Total Series D Votes divided by
the number of shares of Series D Preferred Stock outstanding on the record
date established with respect to such vote.
III-3
98
(b) Not withstanding the terms of paragraph (a) above, in the event
that the aggregate number of shares of Common Stock into which the
outstanding shares of Series D Preferred Stock is convertible represents
less than 20% of the aggregate number of all shares of Common Stock
outstanding, then each holder of a share of Series D Preferred Stock shall
be entitled to cast the number of votes equal to the number of shares of
Common Stock into which the Series D Preferred Stock is then convertible,
with respect to any such matter.
(c) Notwithstanding the other terms of this Section 5, upon the
occurrence and continuation of an Event of Default, each share of Series D
Preferred Stock shall be entitled to cast the number of votes equal to the
number of shares of Common Stock into which the Series D Preferred Stock is
then convertible, on any matter submitted for the consideration of the
holders of the Common Stock of the Company. In addition, the holders of the
Series D Preferred Stock voting as a separate class shall be entitled at
the next annual meeting of shareholders or the next special meeting of
shareholders, to elect such number of directors which is a majority
(rounded up) of the directors to be elected. Any director who shall have
been elected by the holders of the Series D Preferred Stock as a class
pursuant to this Section 5(c) shall hold office for a term expiring on the
earlier of the termination of the Event of Default and the next annual
meeting of shareholders and during such term may be removed for cause at
any time, but may be removed without cause only by the affirmative votes of
holders of record of a majority of the then outstanding shares of Series D
Preferred Stock given at a special meeting of such shareholders called for
such purpose.
(d) So long as any shares of Series D Preferred Stock are outstanding,
the Company shall not, in any manner, whether by amendment to its
Certificate of Incorporation or By-Laws, by merger (whether or not the
Company is the surviving corporation in such merger), by consolidation, or
otherwise, without the written consent or the affirmative vote at a meeting
called for that purpose of the holders of at least a majority of the votes
of the shares of Series D Preferred Stock then outstanding, voting
separately as a class, (i) amend, alter or repeal any of the provisions of
any resolution or resolutions establishing the Series D Preferred Stock so
as to affect adversely the powers, preferences or special rights of such
Series D Preferred Stock, or (ii) authorize the issuance of, or authorize
any obligation or security convertible into or evidencing the right to
purchase shares of, any additional class or series of stock ranking prior
to the Series D Preferred Stock in the payment of dividends or the
preferential distribution of assets.
Nothing in this Subsection (d) shall be deemed to require any vote or
consent of the holders of shares of Series D Preferred Stock in connection
with the authorization or issuance of any series of Preferred Stock ranking
on a parity with or junior to the Series D Preferred Stock as to dividends
and/or distribution of assets.
6. CONVERSION RIGHTS. (a) Shares of Series D Preferred Stock may be
converted at the option of the holder thereof at any time prior to the close of
business on the business day next preceding the date fixed for redemption of
such shares pursuant to Section 7 hereof, into fully paid and nonassessable
shares of Common Stock of the Corporation at the rate of 19.0476 shares of
Common Stock of the Company as now constituted for each share of Series D
Preferred Stock surrendered for conversion. The conversion rate expressed may
also be expressed as a conversion price of $5.25 (the "Conversion Price") taking
each share of Series D Preferred Stock at a value of $100.00. The Conversion
Price shall be subject to adjustment from time to time as follows:
(i) In case the Company shall declare a dividend or other distribution
on shares of Common Stock which is payable in Common Stock, then the
Conversion Price in effect immediately prior to the declaration of such
dividend or distribution shall be reduced to the quotient obtained by
dividing (a) the product of (x) the number of shares of Common Stock
outstanding immediately prior to such declaration, multiplied by (y) the
then effective Conversion Price, by (b) the total number of shares of
Common Stock outstanding immediately after such dividend or other
distribution is paid. The registered holder of each share of Series D
Preferred Stock shall thereafter be entitled to purchase, at the Conversion
Price resulting from such adjustment, the number of shares of Common Stock
obtained by
III-4
99
multiplying the Conversion Price in effect immediately prior to such
adjustment by the number of shares of Common Stock issuable pursuant hereto
immediately prior to such adjustment and dividing the product thereof by
the Conversion Price resulting from such adjustment.
(ii) In case outstanding shares of Common Stock shall be subdivided
into a greater number of shares of Common Stock, the Conversion Price in
effect at the opening of business on the day immediately prior to the day
upon which such subdivision becomes effective shall be proportionately
reduced and the number of shares of Common Stock issuable pursuant hereto
immediately prior to such subdivision shall be proportionately increased,
and, conversely, in case outstanding shares of Common Stock shall be
combined into a smaller number of shares of Common Stock, the Conversion
Price in effect at the opening of business on the day immediately prior to
the day upon which such combination becomes effective shall be
proportionately increased and the number of shares of Common Stock issuable
pursuant hereto immediately prior to such combination shall be
proportionately reduced, such reduction or increase, as the case may be, to
become effective immediately after the opening of business on the day
following the day upon which such subdivision or combination becomes
effective.
(iii) The reclassification of Common Stock into securities other than
Common Stock (other than any reclassification upon a consolidation or
merger to which Section 6(h) below applies) shall be deemed to involve (x)
a distribution of securities other than Common Stock to all holders of
Common Stock (and the effective date of such reclassification shall be
deemed to be the Record Date within the meaning of Subparagraph 6(a)(iv)
below), and (y) a subdivision or combination, as the case may be, of the
number of shares of Common Stock outstanding immediately prior to such
reclassification into the number of shares of Common Stock outstanding
immediately thereafter (and the effective date of such reclassification
shall be deemed to be "the day upon which such subdivision becomes
effective" and "the day upon which such combination becomes effective" as
the case may be, within the meaning of Subparagraph 6(a)(ii) above.)
(iv) In case the Company shall issue rights, options, or warrants or
shall issue securities convertible or exchangeable for shares of Common
Stock ("Convertible Securities") to all holders of its outstanding Common
Stock, without any charge to such holders, entitling them (for a period
within forty five (45) days after the record date mentioned below) to
subscribe for or purchase shares of Common Stock at a price per share which
is lower at the record date fixed for the determination of stockholders
entitled to receive such rights, options, warrants or Convertible
Securities (other than pursuant to a dividend reinvestment plan or pursuant
to any employee or director benefit or stock option plan) (the "Record
Date") than the then Current Market Price per share of Common Stock, the
number of shares of Common Stock issuable pursuant hereto shall be
determined by multiplying the number of shares of Common Stock issuable
pursuant hereto upon Conversion of each share of Series D Preferred Stock
by a fraction, of which the numerator shall be the number of shares of
Common Stock outstanding at the close of business on the Record Date of
such rights, options, warrants or Convertible Securities plus the number of
additional shares of Common Stock offered for subscription or purchase, and
of which the denominator shall be the number of shares of Common Stock
outstanding at the close of business on the Record Date of such rights,
options, warrants or Convertible Securities plus the number of shares of
Common Stock which the aggregate offering price of the total number of
shares of Common Stock so offered would purchase at the then Current Market
Price per share of Common Stock. Such adjustment shall be made whenever
such rights, options, warrants or Convertible Securities are issued, and
shall become effective immediately after the opening of business on the day
following the Record Date for the determination of stockholders entitled to
receive such rights, options, warrants or Convertible Securities. Upon the
foregoing adjustment having been made, the Conversion Price then in effect
shall be adjusted by multiplying such Conversion Price in effect
immediately prior to such adjustment by a fraction, of which the numerator
shall be the number of shares of Common Stock issuable pursuant hereto
immediately prior to such adjustment, and of which the denominator shall be
the number of shares of Common Stock issuable pursuant hereto immediately
thereafter. For the purpose of this subparagraph 6(a)(iv), the number of
shares of Common Stock at any time outstanding shall not include shares
held in the treasury of the Company or issuable pursuant to warrants held
in or issued to treasury but
III-5
100
shall include shares issuable in respect of scrip certificates issued in
lieu of fractions of shares of Common Stock.
(v) In case the Company shall distribute to all holders of its shares
of Common Stock evidences of its indebtedness or assets (excluding cash
dividends or distributions payable out of consolidated earnings or earned
surplus and the extraordinary events referred to in subparagraphs 6(a)(i)
through 6(a)(iii) above) or rights, options or warrants, or convertible or
exchangeable securities containing the right to subscribe for or purchase
evidences of such indebtedness or assets, then in each case the Conversion
Price shall be reduced by multiplying the Conversion Price in effect
immediately prior to the close of business on the date fixed for the
determination of stockholders entitled to receive such a distribution by a
fraction, of which the numerator shall be the then Current Market Price per
share of Common Stock on the date of such distribution, less the then fair
value (as determined in good faith by the Board of Directors of the
Company, whose determination shall in the absence of manifest error be
conclusive) of the portion of the assets or evidences of indebtedness so
distributed and of which the denominator shall be the then Current Market
Price per share of Common Stock. Such adjustment shall be made whenever any
such distribution is made, and shall become effective immediately prior to
the opening of business on the day following the record date for the
determination of stockholders entitled to receive such distribution.
In the event of a distribution by the Company to all holders of its
shares of Common Stock of capital stock of a subsidiary or rights, options,
warrants or Convertible Securities for such stock, then in lieu of an
adjustment in the Conversion Price, the holder of each share of Series D
Preferred Stock, upon the conversion thereof at any time after such
distribution shall be entitled to receive the stock or other securities to
which such holder would have been entitled if such holder had converted the
shares of Series D Preferred Stock into Common Stock immediately prior to
such distribution.
(vi) In case the Company shall issue or sell Convertible Securities
(excluding issuances or sales referred to in subparagraph 6(a)(iv) above),
there shall be determined the price per share for which shares of Common
Stock are issuable upon the conversion or exchange thereof, such
determination to be made by dividing (a) the total amount received or
receivable by the Company as consideration for the issue or sale of such
Convertible Securities, plus the average of the maximum and minimum
aggregate amount of additional consideration, if any, payable to the
Company upon the conversion or exchange of all such Convertible Securities
by (b) the maximum number of shares of Common Stock of the Company issuable
upon conversion or exchange of all of such Convertible Securities; and such
issue or sale shall be deemed to be an issue or sale for cash (as of the
date of issue or sale of such Convertible Securities) of such maximum
number of shares of Common Stock at the price per share so determined.
If such Convertible Securities shall by their terms provide for an
increase or increases, with the passage of time, in the amount of
additional consideration, if any, payable to the Company, or in the rate of
exchange, upon the conversion or exchange thereof, the adjusted Conversion
Price shall, forthwith upon any such increase becoming effective, be
readjusted (but to no greater extent than originally adjusted) to reflect
the same.
(vii) In case the Company shall grant any rights, warrants or options
to subscribe for, purchase or otherwise acquire shares of Common Stock
(excluding grants pursuant to employee or director stock option or benefit
plans), there shall be determined the minimum price per share for which a
share of Common Stock is issuable upon the exercise of all such rights,
warrants or options, such determination to be made by dividing (a) the
total amount, if any, received or receivable by the Company as
consideration for the granting of such rights, warrants or options, plus
the average of the maximum and minimum aggregate amount of additional
consideration payable to the Company upon the exercise of such rights,
warrants or options by (b) the maximum number of shares of Common Stock of
the Company issuable upon the exercise of all such rights, warrants or
options, and the granting of all such rights, warrants or options shall be
deemed to be an issue or sale for cash (as of the date of the granting of
such rights, warrants or options) of such maximum number of shares of
Common Stock at the price per share so determined.
III-6
101
If such rights, warrants or options shall by their terms provide for
an increase or increases, with the passage of time, in the amount of
additional consideration payable to the Company upon the exercise thereof,
the adjusted Conversion Price shall, forthwith upon any such increase
becoming effective, be readjusted (but to no greater extent than originally
adjusted) to reflect the same.
(viii) In case the Company shall grant any rights, warrants or options
to subscribe for, purchase or otherwise acquire Convertible Securities,
such Convertible Securities shall be deemed, for the purposes of
subparagraph 6(a)(vi), to have been issued and sold (as of the actual date
of issue or sale of such Convertible Securities) for the total amount
received or receivable by the Company as consideration for the granting of
such rights, warrants or options plus the average of the maximum and
minimum aggregate amount of additional consideration, if any, payable to
the Company upon the exercise of all such rights, warrants or options.
If such rights, warrants or options shall by their terms provide for
an increase or increases, with the passage of time, in the amount of
additional consideration payable to the Company upon the exercise thereof,
the adjusted Conversion Price shall, forthwith upon any such increase
becoming effective, be readjusted (but to no greater extent than originally
adjusted) to reflect the same.
(ix) In case the Company shall issue or sell its shares of Common
Stock or be deemed to have issued or sold Common Stock in accordance with
the provisions of subparagraphs 6(a)(vi), 6(a)(vii) or 6(a)(viii) above,
for a consideration per share which is below the then Current Market Price
per share for its shares of Common Stock, then the following provisions
shall apply. An Adjusted Fair Market Value shall be computed (to the
nearest cent, a half cent or more being considered a full cent) by
dividing:
a) the sum of (x) the result obtained by multiplying the number of
shares of Common Stock of the Company outstanding immediately prior to
such issue or sale by the then Current Market Price, plus (y) the
consideration, if any, received by the Company upon such issue or sale;
by
b) the number of shares of Common Stock of the Company outstanding
immediately after such issue or sale.
The resulting number shall be deemed to be the Adjusted Fair Market
Value per share. Thereafter, the Conversion Price shall be adjusted to be
equal to the product of the Conversion Price in effect immediately prior to
such actions, multiplied by a fraction the numerator of which is the
Adjusted Fair Market Value per share and the denominator of which is the
Current Market Price per share immediately prior to such actions. Upon any
such adjustment of the Conversion Price hereunder, the number of shares of
Common Stock issuable upon conversion of a share of Series D Preferred
Stock will be adjusted to the number of shares determined by multiplying
the Conversion Price in effect immediately prior to such adjustment by the
number of shares of Common Stock issuable upon conversion of a share of
Series D Preferred Stock immediately prior to such adjustment and dividing
the product thereof by the Conversion Price resulting from such adjustment.
The provisions of this subparagraph 6(a)(ix) shall not apply to an
issuance or sale of shares of the Company's Common Stock in connection with
an underwritten public offering for cash, unless the underwritten public
offering is in the form of a transaction exempted from registration in the
United States under Regulation S.
(b) No adjustment in the number of shares of Common Stock issuable upon
conversion of shares of Series D Preferred Stock hereunder shall be required
unless such adjustment would require an increase or decrease of at least one
percent (1%) in the number of shares of Common Stock issuable upon conversion;
provided, however, that any adjustments which by reason of this paragraph 6(b)
are not required to be made shall be carried forward and taken into account in
any subsequent adjustment. All calculations shall be made to the nearest
one-thousandth of a share.
(c) No adjustment in the number of shares of Common Stock issuable upon
conversion need be made under subparagraphs 6(a)(iv) and 6(a)(v) if the Company
issues or distributes to each holder of shares of
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102
Series D Preferred Stock the rights, options, warrants, or convertible or
exchangeable securities, or evidence of indebtedness or assets referred to in
those subparagraphs which each holder of Shares of Series D Preferred Stock
would have been entitled to receive had the Series D Preferred Stock been
converted prior to the happening of such event or the record date with respect
thereto. No adjustment in the number of shares of Common Stock issuable upon
conversion need be made for sales of Common Stock pursuant to a Company plan for
reinvestment of dividends or interest. No adjustment need be made for a change
in the par value of the Common Stock. No such adjustment need be made in respect
of the issuance and subsequent exercise of employee or director benefit or stock
options shares of Common Stock.
(d) For the purpose of this Section 6, the term "shares of Common Stock"
shall mean (i) the class of stock designated as the Common Stock of the Company
at the date of this Agreement, or (ii) any other class of stock resulting from
successive changes or reclassification of such shares consisting solely of
changes in par value, or from par value to no par value, or from no par value to
par value. In the event that at any time, as a result of an adjustment made
pursuant to subparagraph 6(a)(iii) above, the Holders shall become entitled to
purchase any shares of the Company other than shares of Common Stock, thereafter
the number of such other shares so issuable upon conversion and the Conversion
Price of such shares shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the provisions with
respect to the Common Stock contained in subparagraph 6(a)(i) through 6(a)(ix),
inclusive, above, and the provisions of subsections 6(f) through 6(g),
inclusive, with respect to the Common Stock, shall apply on like terms to any
such other shares.
(e) Upon the expiration of any rights, options, warrants or conversion or
exchange privileges, if any thereof shall not have been exercised, the
Conversion Price and the number of shares of Common Stock issuable upon
conversion shall, upon such expiration, be readjusted and shall thereafter be
such as it would have been had it been originally adjusted (or had the original
adjustment not been required, as the case may be) as if (A) the only shares of
Common Stock so issued were the shares of Common Stock, if any, actually issued
or sold upon the exercise of such rights, options, warrants or conversion or
exchange rights and (B) such shares of Common Stock, if any, were issued or sold
for the consideration, if any, actually received by the Company for the
issuance, sale or grant of all such rights, options, warrants or conversion or
exchange rights whether or not exercised; provided, further, that no such
readjustment shall have the effect of increasing the Conversion Price by an
amount in excess of the amount of the adjustment initially made in respect to
the issuance, sale of grant of such rights, options, warrants or conversion or
exchange rights.
(f) Upon any issuance or sale for a consideration other than cash, or a
consideration part of which is other than cash, of any shares of Common Stock or
Convertible Securities or any rights or options to subscribe for, purchase or
otherwise acquire any shares of Common Stock or Convertible Securities, the
amount of the consideration other than cash received by the Company shall be
deemed to be the fair value of such consideration as determined in good faith by
the Board of Directors of the Company. In case any shares of Common Stock or
Convertible Securities or any rights, options or warrants to subscribe for,
purchase or otherwise acquire any shares of Common Stock or Convertible
Securities shall be issued or sold together with other shares, stock or
securities or other assets of the Company for a consideration which covers both,
the consideration for the issue or sale of such shares of Common Stock or
Convertible Securities or such rights or options shall be deemed to be the
portion of such consideration allocated thereto in good faith by the Board of
Directors of the Company.
(g) Whenever the number of shares of Common Stock issuable upon conversion
or the Conversion Price of the shares of Series D Preferred Stock is adjusted,
as herein provided, the Company shall promptly mail by first class mail, postage
prepaid, to each holder of shares of Series D Preferred Stock notice of such
adjustment or adjustments and shall obtain a certificate from a firm of
independent public accountants selected by the Board of Directors of the Company
(who may be the regular accountants employed by the Company) setting forth the
number of shares of Common Stock issuable upon conversion and the Conversion
Price after such adjustment, setting forth a brief statement of the facts
requiring such adjustment and setting forth the computation by which such
adjustment was made. Such certificate shall be conclusive evidence of the
correctness of such adjustment.
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103
(h) In case of any consolidation of the Company with or merger of the
Company into another corporation or in case of any sale, transfer or lease to
another corporation of all or substantially all the property of the Company, the
Company or such successor or purchasing corporation, as the case may be, shall
expressly provide that each holder of Series D Preferred Stock shall have the
right to receive upon conversion of the Series D Preferred Stock the kind and
amount of shares and other securities and property which he would have owned or
have been entitled to receive after the happening of such consolidation, merger,
sale, transfer or lease had such conversion taken place immediately prior to
such action; provided, however, that no adjustment in respect of dividends,
interest or other income on or from such shares or other securities and property
shall be made until conversion of the Shares of Series D Preferred Stock. The
provisions of this subsection (h) shall similarly apply to successive
consolidations, mergers, sales, transfers or leases.
(i) Irrespective of any adjustments in the Conversion Price or the number
or kind of shares purchasable upon conversion, shares of Series D Preferred
Stock theretofore or thereafter issued may continue to express the same price
and number and kind of shares as are stated in the Series D Preferred Stock
initially issuable pursuant to this Certificate of Designation.
(j) The holder of any shares of Series D Preferred Stock may exercise its
option to convert such shares into shares of Common Stock by surrendering for
such purpose to the Company at its principal office the certificates
representing the shares to be converted, accompanied by written notice that such
holder elects to convert such shares. Said notice shall also state the name in
which the certificate for shares of Common Stock which shall be issuable on such
conversion shall be issued. Each certificate or certificates surrendered for
conversion shall, unless the shares issuable on conversion are to be issued in
the same name as that in which such certificate or certificates are registered,
be accompanied by instruments of transfer, in form satisfactory to the Company,
duly executed by the holder or his duly authorized attorney. Each conversion
shall be deemed to have been effected on the date on which such certificate
shall have been surrendered and such notice received by the Company as
aforesaid. As promptly as practicable on or after the conversion date, the
Company shall issue and deliver to the person entitled to receive the same a
certificate representing the number of full shares of Common Stock issuable upon
such conversion.
(k) Upon any conversion of shares of Series D Preferred Stock, no
allowance, adjustment or payment shall be made with respect to accrued but
unpaid dividends upon such Series D Preferred Stock or with respect to dividends
on the Common Stock to be issued upon conversion.
(l) In connection with the conversion of shares of Series D Preferred Stock
into Common Stock, no fractional shares of Series D Preferred Stock or of Common
Stock shall be issued, but the Company shall pay a cash adjustment in respect of
such fractional interest, calculated based on the market price of the Common
Stock on the date of conversion.
(m) The issuance of stock certificates on conversions shall be made without
charge to converting shareholders for any tax in respect of the issuance
thereof. The Company shall not, however, be required to pay any tax which may be
payable in respect of any registration of transfer involved in the issue and
delivery of stock in any name other than that of the holder of the shares of
Series D Preferred Stock converted, and the Company shall not be required to so
issue or deliver any stock certificate unless and until the person or persons
requesting the registration of transfer shall have paid to the Company the
amount of such tax.
(n) The Company shall at all times reserve and keep available out of its
authorized Common Stock the full number of shares of Common Stock deliverable
upon the conversion of all outstanding shares of Series D Preferred Stock.
7. REDEMPTION. (a) The Company may, at its option, redeem shares of Series
D Preferred Stock for cash, at any time and from time to time, in whole or in
part, by vote of its Board of Directors; provided, however, in the event that
any share of Series D Preferred Stock is redeemed by the Company on or before
the seventh anniversary of the first Date of Issuance, in addition to the cash
payable to the holder of each such share, the holder shall receive a warrant to
purchase one share of Common Stock of the Company for each share of Common Stock
into which such share of Series D Preferred Stock is then convertible,
exercisable at $5.25 per share of Common Stock, or, in the event of any
adjustment to the Conversion Price hereunder, at
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104
the adjusted Conversion Price, at any time prior to the seventh anniversary of
the first Date of Issuance. Such warrants shall be issued in the form attached
to the Warrant Subscription Agreement and such warrants and the shares of Common
Stock issuable upon exercise of the warrants shall be entitled to the benefits
of the Registration Rights Agreement.
(b) To the extent permitted under the laws of the State of Delaware, the
Company shall redeem shares of Preferred Stock as follows: (i) 10% of the shares
of Series D Preferred Stock outstanding shall be redeemed on the first business
day of each year beginning 2008, and (ii) all remaining outstanding shares of
Series D Preferred Stock shall be redeemed on the first business day of the year
2018. If the Company cannot legally redeem all shares of Preferred Stock
required to be redeemed by it on any particular date, then the Company shall
redeem such shares as soon as it can legally do so. The redemption price of each
share of Series D Preferred Stock (the "Redemption Price") shall be $100.00 per
share plus an amount equal to all unpaid dividends, whether or not earned or
declared, accrued to the date fixed for redemption.
(c) Notice of any optional or mandatory redemption of all or any of the
shares of the Series D Preferred Stock shall be sent by the Secretary of the
Company by first-class mail, postage prepaid, at least 30 but not more than 60
days prior to the date fixed for such redemption (the "Redemption Date"), to the
holders of the shares of the Series D Preferred Stock to be redeemed, at their
respective addresses appearing on the books of the Company. The Company shall
pay the Redemption Price in immediately available funds to the holders of shares
to be redeemed on the latter of the Redemption Date or the date such holder
surrenders the certificate representing the shares to be redeemed to the Company
at its principal office. Notwithstanding that any certificate for Shares of
Series D Preferred Stock so called for redemption shall not have been
surrendered for cancellation, the shares represented thereby shall no longer be
deemed outstanding, the dividends thereon shall cease to accrue from and after
the Redemption Date, and all rights with respect to the Series D Preferred Stock
so called for redemption shall forthwith after such Redemption Date cease and
terminate, excepting only the right of the holder to receive the Redemption
Price thereof plus accrued and unpaid dividends to the Redemption Date without
interest.
(d) If any proposed redemption of shares of the Series D Preferred Stock
shall be of less than all then outstanding shares of Series D Preferred Stock,
such redemption shall be made on a pro rata basis, as nearly as possible, among
all holders of shares of the Series D Preferred Stock outstanding at the time of
redemption in the same proportion that each such holder's then respective
holding of such shares shall bear to the aggregate number of such shares then
outstanding.
8. RESTRICTIONS ON TRANSFER. (a) No transfer of any shares of Series D
Preferred Stock, nor any interest therein, shall be made except upon the
conditions specified in this Section 8, which conditions are intended to ensure
compliance with the provisions of the Securities Act and all applicable state
securities laws in respect of the Transfer of any of such securities or any
interest therein.
(b) Each certificate for shares of Series D Preferred Stock shall include a
legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 AND NEITHER THESE SECURITIES NOR ANY
INTEREST THEREIN MAY BE SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF
IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH
ACT, APPLICABLE STATE SECURITIES LAWS AND THE RULES AND REGULATIONS
THEREUNDER. BY ACCEPTANCE HEREOF, THE HOLDER OF THIS CERTIFICATE REPRESENTS
THAT IT IS ACQUIRING THESE SECURITIES FOR INVESTMENT AND AGREES TO COMPLY
IN ALL RESPECTS WITH SECTION 8 OF THE CERTIFICATE OF DESIGNATION OF THE
SERIES D CUMULATIVE PREFERRED STOCK OF THE COMPANY, A COPY OF WHICH MAY BE
OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS
CERTIFICATE TO THE SECRETARY OF THE COMPANY AT ITS PRINCIPAL EXECUTIVE
OFFICE.
(c) The holder of each certificate representing Series D Preferred Stock by
acceptance thereof agrees to comply in all respects with the provisions of this
Section 8. Prior to any proposed Transfer of any Shares of
III-10
105
Series D Preferred Stock, the holder thereof shall give written notice to the
Company of such holder's intention to effect such Transfer. Each such notice
shall describe the manner and circumstances of the proposed Transfer in
reasonable detail, and shall be accompanied by (a) a written opinion of counsel
to the Company, addressed to the Company, to the effect that the proposed
Transfer may be effected without registration under the Securities Act and any
applicable state securities laws of the Series D Preferred Stock, or (b) written
assurance from the staff of the Commission and any applicable state agency or
commission that it will not recommend that any action be taken by the Commission
or such agency or commission in the event such Transfer is effected without
registration under the Securities Act or any applicable state securities law.
Such proposed Transfer may be effected only if the Company shall have received
such notice and such opinion of counsel or written assurance, whereupon the
holder of such Shares shall be entitled to Transfer such Shares of Series D
Preferred Stock in accordance with the terms of the Notice delivered by the
holder to the Company. Each certificate evidencing the Series D Preferred Stock
so transferred shall bear the legend set forth in Paragraph (b) of this Section
8.
9. GENERAL. (a) The section headings contained in this resolution are for
reference purposes only and shall not affect, in any way, the meaning of this
resolution.
(b) Shares of Series D Preferred Stock which have been issued and have been
converted, redeemed, repurchased or reacquired in any manner by the Company
shall become authorized and unissued shares of the Company's undesignated
preferred stock, $.01 par value, but shall not be reissued as shares of Series D
Preferred Stock.
IN WITNESS WHEREOF, the Company has caused this Certificate to be signed by the undersigned officers this dayon _________, 1997, at the Annual Meeting of
, 1996.
AMERICAN EAGLE GROUP, INC.
By:
------------------------------------
Its:
------------------------------------
ATTEST:
- ------------------------------------------------------
III-11
106
- --------------------------------------------------------------------------------
AMERICAN EAGLE GROUP, INC.
12801 NORTH CENTRAL EXPRESSWAY, SUITE 800, DALLAS, TEXAS 75243
SOLICITED BY THE BOARD OF DIRECTORS FOR THE
ANNUAL MEETING OF STOCKHOLDERS ON DECEMBER 30, 1996
P
R The undersigned hereby appoints M. Philip Guthrie and Frederick G. Anderson, and each of them, his/her
O Proxies, with full power to appoint his substitute, and hereby authorize them to represent and to
X vote, as designated hereon, all shares of capital stock of American Eagle Group, Inc. held of record
Y by the undersigned on December 4, 1996, at the Special Meeting of Stockholders to be held on December
30, 1996,Stockholders to be held on July 30, 1997, and any adjournments thereof, and
hereby further authorizes each of them, in their discretion, to vote upon any
other business that may properly come before the meeting.
(Change of address)
-------------------------------
-------------------------------
-------------------------------
-------------------------------
Ifaddress - Comments)
----------------------------------------
----------------------------------------
----------------------------------------
----------------------------------------
(If you have written in the above space,
please mark the corresponding box on
the reverse side of this card.)
You are encouraged to specify your choicechoices by marking the appropriate boxes,
SEE REVERSE SIDE, but you need not mark any boxes with regard to the Proposala particular
proposal if you wish to vote FOR such Proposal.proposal. The Proxies cannot vote your
shares unless you sign and return this card.
-----------
SEE REVERSE
SIDE
-----------
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107
PLEASE MARK YOUR
VOTES AS IN THIS
[X] EXAMPLE.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN. IF NO DIRECTION
IS MADE, THIS PROXY WILL BE VOTED FOR THE PROPOSAL.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL.
- ----------------------------
FOR AGAINST ABSTAIN
1. TO APPROVE THE PROPOSAL [ ] [ ] [ ] 2. IN THEIR DISCRETION,
AS FURTHER DESCRIBED IN THE PROXIES ARE
THE ACCOMPANYING PROXY AUTHORIZED TO VOTE
STATEMENT UPON SUCH OTHER
BUSINESS AS MAY
PROPERLY COME
BEFORE THE SPECIAL
MEETING.
ADDRESS CHANGE [ ]
SIGNATURE(S)____________________________________ DATE ____________________ THE SIGNERS HEREBY REVOKES ALL PROXIES
NOTE: PLEASE SIGN EXACTLY AS NAME APPEARS HEREON, JOINT OWNERS SHOULD EACH SIGN. HERETOFORE GIVEN BY THE SIGNER TO VOTE AT SAID
WHEN SIGNING AS ATTORNEY, EXECUTOR, ADMINISTRATOR TRUSTEE OR GUARDIAN PLEASE MEETING OR ANY ADJOURNMENTS THEREOF.
GIVE FULL TITLE AS SUCH.
[X] Please mark your
votes as in this
example.
This proxy when properly executed will be voted in the manner directed herein.
If no direction is made, this proxy will be voted for the election of directors
and FOR proposals 1 and 3.
- --------------------------------------------------------------------------------
The Board of Directors recommends a vote FOR both nominees listed and FOR
proposals 1 and 3.
- --------------------------------------------------------------------------------
1. To approve the Proposal for the sale FOR AGAINST ABSTAIN
of the general aviation insurance [ ] [ ] [ ]
business of American Eagle Insurance
Company and the change of the Company's
name as further described in the
accompanying proxy statement.
2. Election of Directors. FOR WITHHELD
Nominees: Richard M. Kurz and [ ] [ ]
Howard D. Putnam
[ ]
FOR, except vote withheld from the following nominee:
----------------------------------------------------
Comments/Address
Change [ ]
3. Approval of independent accountants. FOR AGAINST ABSTAIN
[ ] [ ] [ ]
- --------------------------------------------------------------------------------
SIGNATURE(S) DATE
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NOTE: Please sign exactly as name appears hereon. Joint owners should each sign.
When signing as attorney, executor, administrator, trustee or guardian,
please give full title as such.
The signer hereby revokes all proxies heretofore given by the signer to vote at
said meeting or any adjournments thereof.