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SCHEDULE 14C
(Rule 14c-101)
INFORMATION REQUIRED IN INFORMATION STATEMENT
SCHEDULE 14C INFORMATION
Information Statement Pursuant to Section 14(c)
of the Securities Exchange Act of 1934
(Amendment No.)
Check the appropriate box:
[ ] Preliminary Information Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14c-5(d)(2))
[X] Definitive Information Statement
PRESERVER GROUP, INC.
(Name of Registrant As Specified In Charter)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
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):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[X] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1) Amount Previously Paid: $1,958.34*
2) Form, Schedule or Registration Statement No: Schedule TO
3) Filing Party: Preserver Group, Inc.
4) Date Filed: January 15, 2002
*This calculation assumes the purchase of 401,310 shares of common stock, par
value $0.50, of Preserver Group, Inc., at a price per share of $7.75 in cash.
These shares represent the balance of the shares of common stock issued and
outstanding as of March 1, 2002 held by third parties and not purchased in the
previously reported tender offer, other than an aggregate of 1,022,870 shares
beneficially owned by Archer McWhorter, Alvin E. Swanner and William E. Lobeck,
Jr., and their affiliates, which shares will not be cashed out in the Merger.
The amount of the filing fee, calculated in accordance with Rule 0-11 of the
Securities Exchange Act of 1934, as amended, equals 1/50th of one percent of the
value of the transaction.
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PRESERVER GROUP, INC.
95 Route 17 South
Paramus, New Jersey 07653
INFORMATION STATEMENT
March 28, 2002
NOTICE OF ACTION BY SHAREHOLDERS WITHOUT A MEETING PURSUANT TO
SECTION 14A:5-6(2)(B) OF THE NEW JERSEY BUSINESS CORPORATION ACT
TO THE SHAREHOLDERS OF PRESERVER GROUP, INC.:
Notice is hereby given to the shareholders of the common stock, par
value $.50 per share, of Preserver Group, Inc., a New Jersey corporation (the
"Company") that the Board of Directors and the holders of in excess of two
thirds of the outstanding shares of common stock have (i) approved an amendment
to the Company's certificate of incorporation confirming appraisal rights of the
shareholders and (ii) approved the second step merger of the Company with
Preserver Group Acquisition Corp., a New Jersey corporation formed for the
purpose of completing the merger with and into the Company by which each
shareholder other than the Executive Committee and its affiliates would receive
$7.75 per share (collectively, the "Corporate Actions").
Our Board of Directors approved the Corporate Actions on March 27,
2002. The holders of in excess of two thirds of the outstanding shares of common
stock approved the Corporate Actions by written consent in lieu of a meeting, on
March 27, 2002, in accordance with the provisions of Section 14A:5-6(2) of the
New Jersey Business Corporation Law. Accordingly, your consent is not required
and is not being solicited in connection with this action. You are hereby being
provided with notice of approval of the Corporate Actions and pursuant to the
Securities Exchange Act of 1934, as amended, along with this letter, you are
being furnished with an information statement relating to the Corporate Actions.
The record date for determining shareholders entitled to receipt of
this notice was March 27, 2002. This notice is first being mailed to such
shareholders, on or about March 28, 2002. The amendment to the certificate of
incorporation and the certificate of merger will not be filed with the
Department of the Treasury of the State of New Jersey or become effective until
April 18, 2002, at least 20 calendar days after such mailing.
By Order of the Board of Directors,
/s/ Peter K. Barbano
Peter K. Barbano
Secretary
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PRESERVER GROUP, INC.
95 Route 17 South
Paramus, New Jersey 07653
INFORMATION STATEMENT
March 28, 2002
PURSUANT TO SECTION 14(c) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
RULE 14(c) AND SCHEDULE 14C THEREUNDER
GENERAL INFORMATION
This information statement has been filed with the Securities and
Exchange Commission and is being furnished, pursuant to Section 14(c) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), to you, as the
holders of common stock, par value $.50 per share, of Preserver Group, Inc., a
New Jersey corporation ("Preserver Group" or the "Company"), commencing on or
about March 28, 2002, to provide you with notice in connection with the previous
approval of the corporate actions referred to below (the "Corporate Actions")
approved by the Board of Directors and in excess of two-thirds of the
shareholders of Preserver Group on March 27, 2002, in accordance with Section
14A:5-6(2) of the New Jersey Business Corporation Act ("NJBCA"). Accordingly,
all necessary corporate approvals in connection with the matters referred to
herein have been obtained and your consent is not required and is not being
solicited in connection with the approval of the Corporate Actions. This
information statement is furnished solely for the purpose of informing you, in
the manner required under the Exchange Act, of the Corporate Actions before such
actions take effect, and of the dissenters' rights, as set forth herein, of
non-consenting shareholders. The record date for determining the shareholders
entitled to receive this information statement has been established as the close
of business on March 27, 2002.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
CORPORATE ACTIONS TAKEN
In accordance with the terms and provisions of the Offer to
Purchase, dated January 14, 2002 (the "Offer to Purchase"), as amended by the
supplement thereto, dated February 11, 2002 and in the related letter of
transmittal, which, together with the Offer to Purchase, as amended or
supplemented from time to time, constitute the Offer (the "Offer"), which are
herein incorporated by reference, and which were previously furnished to you
by mail and filed with the Securities and Exchange Commission on January 15,
2002 and February 12, 2002, respectively, under Schedule TO and amendment no.
1 thereto, Preserver Group completed its tender offer to purchase up to
1,101,510 shares of its issued and outstanding common stock, par value $0.50
per share, at a purchase price of $7.75 per share, net to the seller in cash,
without interest thereon, by purchasing, on February 28, 2002, the 700,200
shares of common stock which were properly tendered and not withdrawn in
connection with the Offer. This was the first step in its "going private"
transaction. As contemplated by the Offer and the Agreement for Self-Tender
Offer, Financing and Second-Step Merger (the "Agreement" or the "Merger
Agreement"), dated January 14, 2002, among Preserver Group and Archer
McWhorter, Chairman of the Board of Preserver Group, William E. Lobeck, Jr.,
a director of Preserver Group, and Alvin E. Swanner, a director of Preserver
Group, all of whom constitute the Executive Committee of the Board of
Directors of Preserver Group (the "Executive Committee") and their respective
affiliates (Gail McWhorter, Sleepy Lagoon Ltd., Brion Properties, William E.
Lobeck Revocable Trust and Kathryn L. Taylor Revocable Trust), pursuant to
which the Offer was made, the Board of Directors and the holders of in excess
of two-thirds of the outstanding shares of common stock have (i) approved an
amendment to Preserver Group's certificate of incorporation to expressly
confirm dissenters' rights to non-consenting shareholders in connection with
the merger (the "Merger") and (ii) adopted and approved a plan of merger
between Preserver Group and Preserver Group Acquisition Corp., a New Jersey
corporation formed for the purpose of completing the Merger ("PGAC"),
providing for the merger of PGAC with and into Preserver Group as more fully
described below (collectively, the "Corporate Actions"). The Merger will
constitute the second and final step of the "going private" transaction of
Preserver Group.
Preserver Group formed an independent committee of the Board of
Directors to evaluate the Offer and "going private" transaction to be made by
Preserver Group and financed by two members of the Executive Committee and
their affiliates. The Board of Directors appointed an independent committee
consisting of George P. Farley, Robert S. Fried and Malcolm Galatin, each of
whom serves on the Board of Directors but none of whom is employed by or
otherwise affiliated with Preserver Group or the Executive Committee except
in their capacities as directors (collectively the "Independent Committee").
On December 18, 2001, the Independent Committee met, heard the opinion of
Cochran, Caronia & Co., the Independent Committee's financial advisor, as
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to the fairness of the price of the proposed transaction from a financial
point of view, and unanimously determined to recommend to the Board of
Directors that each of the Offer, the Merger and the other transactions
contemplated by the Agreement was fair to, and in the best interest of,
Preserver Group's shareholders (other than the Executive Committee and its
affiliates) and unanimously determined to recommend that the Board of
Directors approve the Offer and the Merger and the transactions contemplated
thereby.
At a meeting of the Board of Directors held immediately thereafter
at which all of the Directors of Preserver Group participated, based upon the
unanimous recommendation of the Independent Committee, the Board of
Directors, with Archer McWhorter, Archer McWhorter, Jr., Alvin E. Swanner and
William E. Lobeck, Jr. abstaining, unanimously approved and adopted the terms
of the proposed Offer and Merger and unanimously determined that the terms of
the Offer and Merger are fair to and in the best interests of all of
Preserver Group's shareholders. The proposed transaction was approved by all
of the directors who are not employees of Preserver Group.
The information contained in Preserver Group's Offer as filed with the
Securities and Exchange Commission on January 14, 2002, as supplemented, is
incorporated herein by reference. See "Available Information."
Upon the completion of the Merger, each share of common stock of
Preserver Group (other than shares owned by Preserver Group or by PGAC, or held
by shareholders who did not tender their shares in connection with the Offer and
are demanding appraisal for such shares in accordance with the terms of the
Merger) shall be automatically converted into the right to receive $7.75, in
cash, without interest, the same consideration paid to tendering shareholders in
the Offer. Preserver Group currently anticipates that the Merger will be
completed on April 18, 2002 or as promptly as practicable thereafter.
The Offer provides that dissenting shareholders shall be entitled to
dissent from the Merger and receive payment in cash for the fair value of their
shares and, if the parties cannot agree on fair value, for fair value to be
determined by a judicial proceeding in accordance with the provisions of the
NJBCA. The amendment of Preserver Group's certificate of incorporation is
intended to expressly confirm these dissenters' rights in the context of the
Merger and any future merger involving Preserver Group.
On March 18, 2002, the Company filed its Form 15 to deregister our
common stock under the Exchange Act and delisted our common stock from the
NASDAQ National Market.
The Board of Directors of Preserver Group approved the Corporate
Actions on March 27, 2002. The holders of in excess of two-thirds of the
issued and outstanding voting shares of common stock approved the Corporate
Actions by written consent in lieu of a meeting on March 27, 2002 in
accordance with the provisions of NJBCA Section 14A:5-6(2). Accordingly, your
consent is not required and is not being solicited in connection with these
actions. Pursuant to NJBCA Section 14A:5-6(2), you are hereby being provided
with notice of approval of the Corporate Actions and pursuant to the Exchange
Act, along with this letter, you are being furnished with an information
statement relating to the Corporate Actions.
A copy of the Certificate of Amendment of the Amended and Restated
Certificate of Incorporation is set forth at Annex 1. A copy of the Certificate
and Plan of Merger is set forth at Annex 2.
THIS INFORMATION STATEMENT IS DATED MARCH 28, 2002
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TABLE OF CONTENTS
Page
Summary ..................................................................... 1
General; Required Vote; Shareholders' Written Consent ....................... 4
Payment for Shares........................................................... 5
Approval of Corporate Actions................................................ 6
Dissenters' Rights........................................................... 6
Amendment to Preserver Group's Certificate of Incorporation.................. 8
The Merger................................................................... 8
Background of the Offer and the Merger.............................. 8
Reasons for the Merger..............................................21
Opinion of Financial Advisor .......................................21
Interest of Certain Persons in the Merger...........................27
Certain Federal Income Tax Consequences of the Merger...............29
The Merger Agreement................................................29
Selected Financial Data......................................................32
Selected Pro Forma Consolidated Financial Information........................33
Company Projections For Year Ended December 31, 2001 ........................38
Market Prices and Dividends..................................................38
Incorporation of Certain Documents by Reference..............................38
Available Information........................................................39
Information Concerning the Company and PGAC..................................40
Outstanding Voting Stock of Preserver Group..................................40
Security Ownership of Certain Beneficial Owners and Management...............40
Approval of Directors........................................................44
Annex 1 Form of Certificate of Amendment of the Amended and Restated
Certificate of Incorporation confirming Dissenters' Rights
Annex 2 Certificate and Plan of Merger
Annex 3.1 Notice to Shareholders of Right to Dissent
Annex 3.2 Notice of Dissent and Intention to Demand Payment
Annex 3.3 Notice of Demand for Payment of Fair Value
Annex 4 Excerpts of Chapter 11 of New Jersey Business Corporation Act
Annex 5.1 Opinion of Cochran, Caronia & Co. dated December 18, 2001
Annex 5.2 Bring down letter of Cochran, Caronia & Co. dated February 28, 2002
Annex 6 Amended and Restated Agreement for Self Tender Offer,
Financing and Second Step Merger dated as of January 14, 2002.
Accompanying this information statement are copies of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2000 as
amended on Form 10-K/A and the Quarterly Report on Form 10-Q for the quarter and
nine months ended September 30, 2001. A signed copy of the accompanying
Independent Accountant's Report dated April 16, 2001 has been filed with the
Commission in conjunction with this definitive information statement.
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SUMMARY
The following is a summary of certain information contained elsewhere
in this information statement. You are referred to the more detailed information
contained, or incorporated by reference, in this information statement and the
Annexes hereto. Unless otherwise defined herein, capitalized terms used in this
summary have the respective meanings ascribed to them elsewhere in this
information statement.
YOU ARE URGED TO READ THIS INFORMATION STATEMENT AND THE ANNEXES HERETO IN THEIR
ENTIRETY. WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US
A PROXY.
THE COMPANIES
The Company. Preserver Group, Inc. (which we sometimes refer to as
the "Company" or "Preserver Group"), is a New Jersey corporation. The Company
is the parent of a group of five wholly-owned subsidiaries, two of which
comprise the Preserver Insurance Group which provides property and casualty
insurance services. The Preserver Insurance Group consists of Preserver
Insurance Company, which writes small commercial and homeowners insurance
presently in New Jersey, and Mountain Valley Indemnity Company, which writes
small and mid-sized commercial insurance presently in New England and New
York. The Preserver Insurance Group is rated B++ (Very Good) by A.M. Best
Company. American Colonial Insurance Company plans to commence operations in
New York in 2002, writing commercial lines in tandem with Mountain Valley.
Motor Club of America Insurance Company writes private passenger automobile
insurance in New Jersey and is rated B (Fair) by A.M. Best Company. North
East Insurance Company writes private passenger automobile and small
commercial lines insurance in the State of Maine and is rated B (Fair) by
A.M. Best Company. The address of the Company's principal executive offices
is 95 Route 17 South, Paramus, New Jersey 07653 and the Company's telephone
number is (201) 291-2000.
Preserver Group Acquisition Corp. Preserver Group Acquisition Corp.,
which we refer to in this information statement as PGAC, is a newly-incorporated
New Jersey corporation organized for purposes of the Merger. Subsequent to the
Offer, the Executive Committee and its affiliates will contribute to PGAC all of
the 1,022,870 shares of common stock and 700,200 shares of non-voting preferred
stock of the Company owned by them and receive the same number and kind of
shares of PGAC. As a result, PGAC now owns approximately 72% of the outstanding
shares of common stock of the Company and PGAC is owned by the Executive
Committee and its affiliates. PGAC has not conducted any business other than in
connection with the proposed Merger and PGAC will disappear in the Merger. The
principal executive offices of PGAC are located at 95 Route 17 South, Paramus,
New Jersey 07653 and its telephone number is (201) 291-2000.
On March 18, 2002, the Company filed its Form 15 to deregister our
common stock under the Exchange Act and delisted our common stock from the
NASDAQ National Market. Prior to such filing we were subject to the
informational requirements of the Exchange Act and in accordance therewith,
we filed reports, proxy statements and other information with the Commission.
These reports, proxy statements and other information can be inspected and
copied at the public reference facilities of the Commission or at the
Commission's website as set forth below under "Available Information." The
Form 15 filing deregistered our common stock under the Exchange Act and as a
result, we no longer make periodic filings with the Commission. See "General;
Required Vote; Shareholder Written Consent."
GENERAL
We are furnishing to you this information statement in connection with
the amendment of our charter to specifically confirm to all shareholders their
appraisal rights under New Jersey law and the proposed Merger of PGAC into the
Company.
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AMENDMENT TO PRESERVER GROUP'S CERTIFICATE OF INCORPORATION
Immediately before the Merger takes effect, we will amend our
charter to specifically confirm therein to all shareholders of the Company
the appraisal rights set forth in NJBCA Chapter 11 in connection with any
merger of the Company, including the Merger. See "Amendment to Preserver
Group's Certificate of Incorporation" and Annex 1.
SECOND STEP MERGER
As a result of the Merger, the Company will be wholly owned by the
Executive Committee and its affiliates through their ownership of PGAC and each
issued and outstanding share of common stock (other than any shares which are
held by shareholders who shall have properly demanded appraisal for such shares
in accordance with New Jersey law) will be converted into the right to receive
$7.75 in cash, without interest. We refer to this amount as the Merger
Consideration. See the Certificate and Plan of Merger attached hereto at Annex
2.
The Merger is the second step of a two-step transaction designed to
take the Company private. The first step was the Offer pursuant to which the
Company purchased 700,200 shares of common stock, as a result of which,
immediately after the Offer, the Executive Committee's ownership of 1,022,870
shares of common stock represented approximately 72% of the issued and
outstanding common stock of the Company. Subsequent to the Offer, the Executive
Committee and its affiliates contributed to PGAC all of the 1,022,870 shares of
common stock of the Company owned by them, as well as the 700,200 shares of
non-voting preferred stock of the Company owned by them as a result of
converting loans made to the Company by the Executive Committee to effect the
purchase of the 700,200 shares and received the same number and kind of shares
of PGAC. As a result, PGAC will own approximately 72% of the Company prior to
the effective date of the Merger. In the second-step of the transaction, which
is the Merger, all shareholders (other than PGAC and shareholders who have
properly demanded appraisal rights) who did not tender their shares in the Offer
will receive $7.75 in cash per share, the same price paid for shares tendered in
the Offer. All shares of the Company owned by PGAC will be cancelled without any
consideration. Each share of common stock and non-voting preferred stock of PGAC
held by the members of the Executive Committee and their affiliates will be
converted into shares of the common stock of the Company. See "The Merger."
Since, as a result of the Offer, we have fewer than 300 shareholders
of record, we filed with the Commission on March 18, 2002, a Form 15 to
deregister our common stock under the Exchange Act and became a private
company. Upon filing the Form 15, we have been relieved of our obligation to
file periodic reports with the Commission, including 10-Qs, 10-Ks and 8-Ks.
Ninety (90) days after we file the Form 15, we will also no longer be subject
to the proxy rules under the federal securities laws, and our 10%
shareholders, directors and officers will be relieved of obligations to
comply with the short swing profit and reporting rules of the Exchange Act.
When we filed our Form 15, we also delisted our common stock from the NASDAQ
National Market.
CORPORATE ACTIONS TAKEN; REQUIRED VOTE
Under New Jersey law and our charter, the affirmative vote of a
majority of our issued and outstanding common stock is required to approve
the amendment to the Company's certificate of incorporation and the
affirmative vote of two-thirds of the issued and outstanding common stock is
required to approve and adopt the Certificate and Plan of Merger. As a result
of the Offer, the Executive Committee and its affiliates own approximately
72% of the common stock of the Company, more than the two-thirds required to
approve the Merger. Under NJBCA Section 14A:5(6)(2), except as otherwise
provided in a company's certificate of incorporation, any action by the
shareholders (other than the annual election of directors) may be taken
without a meeting, without prior notice and without a vote, upon the written
consent of shareholders who would have been entitled to cast the minimum
number of votes which would be necessary to authorize such action at a
meeting at which all shareholders entitled to vote thereon were present and
voting (e.g., the majority and two-thirds, respectively). The Executive
Committee and its affiliates, by such a written consent dated March 27, 2002,
approved the amendment to the Company's certificate of incorporation and the
Merger. Accordingly, all necessary corporate approvals required of the
shareholders of the Company to approve the amendment to the Company's
certificate of incorporation and the Merger have been obtained and no consent
is required of or being solicited from any other shareholder. Only
shareholders of record at the close of business on March 27, 2002 (the
"Record Date") are entitled to receive notice of the action taken. See
"Approval of Corporate Actions."
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PAYMENT OF SHARES
Upon or prior to the effective date of the Merger, Archer McWhorter and
Alvin E. Swanner will loan to the Company which in turn will make available to
First Union National Bank, as paying agent (the "Paying Agent") for the holders
of record of our shares, the aggregate amount of cash to be paid in the Merger,
namely $3,110,513 or $7.75 per share for the 401,310 shares of common stock not
held by the Executive Committee and its affiliates. A letter of transmittal will
be sent to all of our shareholders under separate cover. The letter of
transmittal will advise you of the procedures for surrendering to the Paying
Agent certificates evidencing your shares in exchange for $7.75 per share, in
cash, without interest. All certificates so surrendered will be cancelled. Upon
consummation of the Merger and your surrender of a certificate evidencing
shares, together with a duly executed letter of transmittal, you will receive
$7.75 in cash per share, without interest. Any cash held by the Paying Agent
that remains unclaimed by shareholders for one year after the effective time
of the Merger will be returned to the Company, upon demand and thereafter
shareholders may look only to the Company for payment for their shares. See
"Payment for Shares."
APPRAISAL RIGHTS
Under New Jersey law and the Company's certificate of incorporation, as
it will be amended immediately prior to the Merger, holders of shares who
strictly comply with applicable requirements of the NJBCA may dissent from the
Merger and demand payment in cash from us of the fair value of their shares.
See "Dissenters' Rights" and Annexes 3 and 4.
THE MERGER
Background of the Merger. For a description of the events leading up to
the approval of the Merger by the Board of Directors of the Company and in
excess of two-thirds of our shareholders, see "The Merger--Background of the
Offer and the Merger."
Recommendation of the Company's Board of Directors. On December 18,
2001, based on the unanimous recommendation of the Independent Committee of the
Board of Directors, the Board of Directors determined that the Merger Agreement
and the transactions contemplated thereby, which would include the Offer, the
Merger, and the financing for these events by Archer McWhorter and Alvin E.
Swanner, are advisable, fair to and in the best interests of the shareholders of
the Company (other than the Executive Committee and its affiliates), and
approved the Merger Agreement and such transactions contemplated thereby. See
"The Merger--Background of the Offer and the Merger."
The Board of Directors' decision to approve the two-step Offer and
Merger was, among other things, based upon its analysis of the historical market
prices of the shares and recent trading activity of the shares, the Company's
competitive position in the industry, especially in light of certain adverse
business conditions affecting its private passenger automobile insurance
business in New Jersey, the recommendation of the Independent Committee and the
opinion of its financial advisor that the consideration to be received by the
shareholders in the Offer and the Merger is fair to such shareholders from a
financial point of view. See "The Merger--Background of the Offer and the
Merger."
Opinion of Financial Advisor. Cochran, Caronia & Co., the financial
advisor engaged by the Independent Committee, delivered to the Independent
Committee its written opinion to the effect that, as of December 18, 2001,
the cash consideration of $7.75 per share to be received by the shareholders
pursuant to the Offer and the Merger is fair to such shareholders from a
financial point of view. Cochran, Caronia & Co. confirmed this opinion by
letter, dated February 28, 2002, the expiration date of the Offer. The
complete opinion of Cochran, Caronia & Co., which sets forth the assumptions
made, matters considered and limits of its review is attached as Annex 5.1.
The subsequent bring down letter of Cochran, Caronia & Co. is attached to
this information statement as Annex 5.2. See "The Merger--Opinion of
Financial Advisor."
Interests of Certain Persons in the Merger. For a description of the
interests in the Merger of certain members of the Company's Board of Directors,
see "The Merger--Interests of Certain Persons in the Merger."
Purpose of the Merger. Since the Offer has been completed, the purpose
of the Merger is to cash out all public shareholders who did not tender their
shares in the Offer so the Company will be a private company owned only by the
Executive Committee and its affiliates. See "The Merger -- Background of the
Offer and the Merger" for the Company's reasons for engaging in the two-step
Offer and Merger.
Conditions to the Merger. The Merger was subject to the consummation
of the Offer and approval of the Company's shareholders. The Offer was
consummated February 28, 2002, with the Company purchasing 700,200 shares.
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On March 27, 2002, the Company obtained approval of the Merger by in excess of
two-thirds of the Company's shareholders by written consent, subject to
notification requirements to non-consenting shareholders under the Exchange Act
and New Jersey law. We are fulfilling these requirements by mailing this
information statement to our shareholders. It is expected that the Merger will
be consummated on April 18, 2002, or as promptly as practicable thereafter. See
"The Merger --The Merger Agreement."
Federal Income Tax Consequences of the Merger. The receipt of cash in
the Merger or the exercise of appraisal rights will be a taxable transaction for
federal income tax purposes. See "The Merger--Certain Federal Income Tax
Consequences of the Merger." You are urged to consult your own tax advisor as to
the particular tax consequences of the Merger to you, including the
applicability and the effect of federal, state, local, foreign and other tax
laws.
Regulatory Matters. We are not aware of any federal or state regulatory
requirements to be complied with in order to consummate the Merger.
GENERAL; REQUIRED VOTE; SHAREHOLDERS WRITTEN CONSENT
This information statement is being furnished in connection with: (i)
the proposed amendment to the Company's certificate of incorporation to confirm
to its shareholders their dissenter's rights in connection with any merger,
including the Merger and (ii) the Merger of PGAC into the Company pursuant to
the Certificate and Plan of Merger. As a result of the Merger, the Company will
be wholly owned by the Executive Committee and its affiliates and each issued
and outstanding share (other than any shares owned by PGAC and any shares which
are held by shareholders who have not voted in favor of the Merger or consented
thereto in writing and who shall have demanded appraisal for such shares in
accordance with New Jersey law) will be converted into the right to receive
$7.75 in cash, without interest.
The Merger is the second step of a two-step transaction designed to
take the Company private. The first step was the Offer pursuant to which the
Company purchased 700,200 shares, as a result of which, immediately after the
Offer, the ownership of 1,022,870 shares by the Executive Committee and its
affiliates represented approximately 72% of the outstanding common stock of
the Company. Subsequent to the Offer, the Executive Committee and its
affiliates contributed to PGAC all of the 1,022,870 shares of common stock of
the Company owned by them, as a result of which PGAC currently owns
approximately 72% of the outstanding shares of common stock of the Company.
Prior to the closing of the Offer, the ownership of the Executive Committee
and its affiliates represented about 48% of the Company. Thus, solely for the
limited purposes of Section 14a of the Exchange Act, the closing of the Offer
is deemed to have constituted a change of control of the Company. Two members
of the Executive Committee will also contribute to PGAC all of the 700,200
shares of non-voting preferred stock of the Company which they receive as a
result of converting their loan to the Company, the proceeds of which were
used to finance the Offer. In return for their respective contributions of
Company stock to PGAC, each member of the Executive Committee and its
affiliates receive a like number and kind of common stock and non-voting
preferred stock of PGAC. In the second-step of the transaction, which is the
Merger, all shareholders (other than PGAC and shareholders who have properly
demanded appraisal rights) who did not tender their shares in the Offer will
receive $7.75 in cash per share, the same price paid for shares tendered in
the Offer. All shares of the Company held by PGAC will be cancelled without
any consideration and each share of common stock and non-voting preferred
stock of PGAC held by the members of the Executive Committee and their
affiliates will be converted into shares of the common stock of the Company.
See "The Merger--The Merger Agreement."
Since, as a result of the Offer, the Company has fewer than 300
shareholders of record, on March 18, 2002 the Company filed with the
Commission, a Form 15 to deregister its common stock under the Exchange Act.
Upon filing the Form 15, the Company was relieved of its obligation to file
periodic reports with the Commission, including 10-Qs, 10-Ks and 8-Ks. Ninety
(90) days after filing of the Form 15, the Company will also no longer be
subject to the proxy rules under the federal securities laws, and 10%
shareholders, directors and officers will be relieved of their requirement to
comply with the short swing profit and reporting rules of the Exchange Act.
Contemporaneously with its filing of the Form 15, the Company delisted its
common stock from the NASDAQ National Market.
Under New Jersey law and the Company's certificate of incorporation,
the affirmative vote of a majority of the issued and outstanding common stock
is required to approve the amendment to the Company's certificate of
incorporation to confirm to shareholders their dissenters' rights in
connection with any merger, including the Merger and the affirmative vote of
two-thirds of the issued and outstanding common stock is required to approve
and adopt the Merger Agreement. As a result of the Offer, PGAC owns
approximately 72% of the Company, more than the majority and two-thirds
required, respectively, to approve the amendment to the certificate of
incorporation and the Merger. Under NJBCA Section 14A:5(6)(2), except as
otherwise provided in a company's certificate of incorporation, any action by
the shareholders (other than the annual election of directors) may be taken
without a meeting, without prior notice and without a vote, upon the written
consent of shareholders who would have been entitled to cast the minimum
number of votes which would be necessary to authorize such action at a
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meeting at which all shareholders entitled to vote thereon were present and
voting. PGAC, by written consent in lieu of a meeting dated as of March 27,
2002, approved the amendment to the certificate of incorporation and the
Merger. Accordingly, all necessary corporate approvals required of the
shareholders of the Company to approve the amendment to the certificate of
incorporation and approve the Merger have been obtained and no consent is
required of or being solicited from any other shareholder. Only shareholders
of record at the close of business on the Record Date are entitled to receive
notice of the action taken. THE COMPANY CURRENTLY ANTICIPATES THAT THE MERGER
WILL BE CONSUMMATED ON APRIL 18, 2002, OR AS PROMPTLY AS PRACTICABLE
THEREAFTER. See "Approval of Corporate Actions."
The Merger will become effective upon the filing of a certificate of
merger with the Department of the Treasury of the State of New Jersey in
accordance with the NJBCA. As used in this information statement, "Effective
Time" means the effective time of the Merger under the NJBCA.
PAYMENT FOR SHARES
General. Upon or prior to the consummation of the Merger, Archer
McWhorter and Alvin E. Swanner will make available to the Paying Agent on behalf
of the holders of record of shares, after the Effective Time, the aggregate
amount of cash to be paid in respect of the shares converted into cash pursuant
to the Merger. Holders of record should use a letter of transmittal (described
below) to effect the surrender of certificates evidencing shares in exchange for
$7.75 per share, in cash, without interest. All certificates so surrendered will
be cancelled. Upon consummation of the Merger and surrender of certificates
evidencing shares, together with a duly executed letter of transmittal, the
holder of record thereof will receive in exchange for each share surrendered
$7.75, in cash, without interest. Any cash held by the Paying Agent that remains
unclaimed by shareholders for one year after the Effective Time will be
returned to the Company upon demand and thereafter shareholders may look only to
the Company, as the Surviving Corporation, for payment thereof. Archer McWhorter
and Alvin E. Swanner have agreed to lend the Company sufficient funds to pay the
Merger Consideration for all shares surrendered in the Merger.
Letter of Transmittal. A letter of transmittal will be sent to all
shareholders of record of the Company as of the Effective Time under separate
cover. The letter of transmittal will advise such holders of the procedures for
surrendering to the Paying Agent certificates evidencing shares in exchange for
cash.
Valid Surrender of Shares. For shares to be validly surrendered
pursuant to the Merger, a letter of transmittal (or a manually signed facsimile
thereof), properly completed and duly executed, with any required signature
guarantees, must be received by the Paying Agent, at one of its addresses set
forth in the letter of transmittal and either (i) certificates representing
shares must be received by the Paying Agent or (ii) such shares must be
delivered by book-entry transfer.
Book-Entry Transfer. The Paying Agent will establish an account with
respect to the shares at The Depository Trust Company (the "Book-Entry Transfer
Facility") for purposes of the Merger. Any financial institution that is a
participant in the Book-Entry Transfer Facility's systems may make book-entry
delivery of shares by causing the Book-Entry Transfer Facility to transfer such
shares into the Paying Agent's account at the Book-Entry Transfer Facility in
accordance with the Book-Entry Transfer Facility's procedure for such transfer.
Signature Guarantees. No signature guarantee is required on the letter
of transmittal (i) if the letter of transmittal is signed by the registered
holder (which term includes any participant in the Book-Entry Transfer
Facility's systems whose name appears on a security position listing as the
owner of the shares) of shares delivered therewith and such registered holder
has not completed either the box entitled "Special Delivery Instructions" or the
box entitled "Special Payment Instructions" on the letter of transmittal or (ii)
if such shares are delivered for the account of a financial institution
(including most commercial banks, savings and loan associations and brokerage
houses) that is a participant in the Securities Transfer Agents Medallion
Program (an "Eligible Institution"). In all other cases, all signatures on the
letter of transmittal must be guaranteed by an Eligible Institution. If
certificates are registered in the name of a person other than the signer of the
letter of transmittal, or if payment is to be made to a person other than the
registered holder of the certificates surrendered, the delivered certificates
must be endorsed or accompanied by appropriate stock powers, signed exactly as
the name or names of the registered holders appear on the certificates, with the
signatures on the certificates or stock powers guaranteed as described above.
THE METHOD OF DELIVERY OF CERTIFICATES FOR SHARES, THE LETTER OF
TRANSMITTAL AND ANY OTHER REQUIRED DOCUMENTS, INCLUDING DELIVERY THROUGH THE
BOOK-ENTRY TRANSFER FACILITY, IS AT THE OPTION AND RISK OF THE SHAREHOLDER AND
THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE PAYING
AGENT. IF DELIVERY IS MADE BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT
REQUESTED, PROPERLY INSURED, IS RECOMMENDED.
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Backup Federal Income Tax Withholding. Under the federal income tax
laws, unless an exception applies under the applicable rules and regulations,
the Paying Agent will be required to withhold 30% of the amount of any payments
made to shareholders pursuant to the Merger. To prevent such backup federal
income tax withholding with respect to the $7.75 per share, in cash, without
interest, payable to a shareholder, such shareholder must generally provide the
Paying Agent with such shareholder's correct taxpayer identification number and
certify that such shareholder is not subject to backup federal income tax
withholding by completing the substitute Form W-9 included in the letter of
transmittal. If the shareholder is a nonresident alien or foreign entity not
subject to backup withholding, such shareholder must give the Paying Agent a
completed Form W-8BEN Certificate of Foreign Status prior to the receipt of any
payments.
APPROVAL OF CORPORATE ACTIONS
Preserver Group has taken all corporate actions required under New
Jersey law to approve the amendment to the certificate of incorporation and the
Certificate and Plan of Merger, such approval to be final as of the Effective
Date. In addition, as a separate requirement, since the shareholder approval of
the Corporate Actions were obtained by written consent rather than at a meeting
of the shareholders, the Exchange Act requires that the Corporate Actions may
not become effective until the expiration of at least 20 calendar days from the
date that this information statement was mailed to the shareholders of Preserver
Group. Accordingly, the Corporate Actions will become effective on the later of
April 18, 2002 or the date that the Certificate of Merger is filed with the
Department of the Treasury of the State of New Jersey.
DISSENTERS' RIGHTS
Under the NJBCA, shareholders are not entitled to dissenters' rights of
appraisal with respect to Preserver Group's amendment to its certificate of
incorporation to provide for dissenters' rights in the event of any merger.
Any shareholder of the Company has the right to dissent from the
Merger. The rights of dissenting shareholders are set forth in Chapter 11 of the
NJBCA and are summarized herein and in further detail in Annexes 3 and 4. A
shareholder who may wish to dissent should review carefully, alone or with
his/her/its adviser, all of Chapter 11, and, specifically, NJBCA Section
14A:11-2 relating to the notice of dissent. The form of the notice of dissent
which may be given by non-consenting shareholders is set forth at Annex 3.2.
NJBCA Section 14A:11-2 is set forth in Annex 4.
A SHAREHOLDER WHO WISHES TO DISSENT FROM THE MERGER MUST FILE WITH PRESERVER
GROUP, NO LATER THAN APRIL 18, 2002, A WRITTEN NOTICE OF SUCH DISSENT STATING
THAT THE SHAREHOLDER INTENDS TO DEMAND APPRAISAL FOR HIS SHARES IF THE MERGER IS
COMPLETED. THE FORM OF SUCH NOTICE IS SET FORTH AT ANNEX 3.2.
The notice must be sent to Preserver Group, Inc., at the following
address: Preserver Group, Inc., 95 Route 17 South, Paramus, New Jersey 07653,
Attention: Secretary. The notice must include the name of the dissenting
shareholder, his/her/its residence address and the number of shares of common
stock owned by the dissenting shareholder. Thereafter, within 10 days after the
Merger is completed, Preserver Group shall give notice, by certified mail, to
all shareholders who previously have filed a written notice of dissent and
intention to demand payment with Preserver Group, that the Merger has been
completed whereupon the following procedural steps would apply:
(1) Within 20 days of the mailing of such notice of completion of the
Merger, a shareholder who previously timely filed notice of his dissent may make
written demand on Preserver Group for payment of the fair value of his shares as
of March 26, 2002, the day prior to the day of receipt and tabulation by
Preserver Group of the required shareholder consents ("Fair Value Date"). The
form of this demand is set forth at Annex 3.3.
(2) Within 20 days after making this written demand for payment, the
dissenting shareholder must submit his common stock certificate(s) to Preserver
Group for the notation thereon by Preserver Group that a dissenter's demand has
been made to Preserver Group, whereupon the common stock certificate(s) will be
returned to the dissenting shareholder.
(3) Within 30 days after the mailing of the notice of completion of the
Merger (10 days after the last possible day for a dissenting shareholder to file
his written demand for appraisal of the fair value of his shares), Preserver
Group must mail to each dissenting shareholder a copy of its balance sheet and
surplus statement, as of the Fair Value Date. The balance sheet and surplus
statement may be accompanied by a written offer from Preserver Group to pay each
dissenting shareholder for his shares at a specified price deemed by Preserver
Group to be the fair value thereof. All dissenting holders of shares of common
stock must be offered the same price.
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(4) If the fair value of the shares is not agreed upon within 30 days
after Preserver Group's mailing as set forth in (3) above, any dissenting
shareholder may give Preserver Group a written demand to commence an action in
New Jersey Superior Court within an additional 30 days in order to determine
fair value. If Preserver Group fails to take such action, any dissenting
shareholder may commence this action within an additional 60 day period.
(5) The New Jersey Superior Court retains jurisdiction of all actions
to determine fair value, including the power to appoint an appraiser to assist
in such determination.
(6) Any judgment of the New Jersey Superior Court shall include
interest at an equitable rate determined by the Court from the date of the
dissenter's demand for payment. The Court also has the power to apportion and
assess the costs of the court proceeding between Preserver Group and the
dissenter(s) on a equitable basis.
(7) A dissenting shareholder may request the withdrawal of his demand
for payment of the fair value of his shares at any time, but such withdrawal is
effective only with the written consent of Preserver Group.
(8) The enforcement by a dissenting shareholder of his right to
receive payment for his shares shall preclude such dissenting shareholder from
enforcing any other right to which he might otherwise be entitled by virtue of
share ownership, except claims based on alleged, unlawful or fraudulent acts by
Preserver Group relating to such dissenting shareholder or claims that Preserver
Group exceeded its statutory powers.
(9) A dissenting shareholder who accepts payment of the fair value of
his shares ceases to have any rights of a shareholder of Preserver Group from
the time he makes his demand for payment.
(10) A dissenting shareholder who, with Preserver Group's consent,
withdraws his demand for appraisal, continues to be a shareholder of Preserver
Group.
If a dissenting shareholder fails to take each of the steps described
above within the time limits specified, such shareholder will lose all rights to
dissent and to receive the fair value of such shareholder's shares of common
stock of Preserver Group.
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AMENDMENT TO PRESERVER GROUP'S CERTIFICATE OF INCORPORATION
On March 27, 2002, the Board of Directors and the holders of in
excess of a majority of the outstanding shares of common stock of Preserver
Group approved the amendment to Preserver Group's Amended and Restated
Certificate of Incorporation, as amended, to confirm to the shareholders of
Preserver Group dissenters' rights in the event that Preserver Group is
involved in any merger transaction, including the Merger. The Board of
Directors considers the amendment to be a formalization of the contract
rights afforded to shareholders pursuant to the Agreement entered into by
Preserver Group and the members of the Executive Committee. The general
purpose and effect of the amendment is to confirm to dissenting shareholders'
the full spectrum of rights described in the NJBCA as more fully set forth in
the context of the Merger in "Dissenters' Rights" above. The form of the
amendment is set forth in Annex 1.
THE MERGER
BACKGROUND OF THE OFFER AND THE MERGER
Archer McWhorter, William E. Lobeck, Jr. and Alvin E. Swanner have
served as directors of the Company and as members of the Executive Committee of
the Board of Directors since 1986. In March 1994, they acquired 801,303 shares,
representing approximately 39% of the Company's then issued and outstanding
shares, and which together with shares already held by them constituted
approximately 44% of the Company's then issued and outstanding shares.
Beginning in 1998, the Company determined to pursue a business strategy
designed to (i) increase the Company's identification as a provider of small and
mid-sized commercial line insurance; and (ii) expand and diversify its insurance
operations outside the State of New Jersey. This strategy was in response to the
Board's perception that the Company was being increasingly undervalued by the
market due to its identification with the private passenger automobile ("PPA")
insurance in the State of New Jersey, the only State in which it provided such
insurance at that time, and that its other property casualty business within the
State of New Jersey was not recognized despite its favorable growth and
profitability trends. The Board attributed this circumstance to pending and
enacted PPA insurance legislation in the State of New Jersey.
To fund the commencement of this strategy and for general working
capital purposes, on September 14, 1998, the Company entered into a $3 million
revolving credit facility with Dresdner Bank (the "Bank Loan") and drew on the
entire amount of the Bank Loan on September 30, 1998. The Bank Loan was repaid
in full on December 27, 1999, to avoid triggering an event of default in
connection with the Company's acquisition of North East Insurance Company
("NEIC"). The weighted-average effective rate of interest on the loan was 7.28%
and 7.0625% in 1999 and 1998, respectively.
In furtherance of this strategy, the Company acquired NEIC in September
1999. NEIC writes private passenger automobile and small commercial lines
insurance in the State of Maine. To finance this acquisition, private placement
of equity and/or convertible debt was at that time considered an effective
financing structure as it could be accomplished in the timeframe of the
acquisition and was believed to have a greater likelihood of success than other
alternatives. Accordingly, the Company retained Cochran, Caronia & Co, as
placement agent on behalf of the Company, to solicit from existing Company
shareholders a private placement of $10 million principal amount of 10 year
fixed 8.44% subordinated convertible debt securities convertible into Company
common stock at $15.49 per share. The conversion price was defined as 130% of
the average trading price of the Company's Common Stock over the 20-day period
prior to September 23, 1999. The private placement offering was circulated to a
number of prospective accredited and institutional investors who were
shareholders of the Company prior to the NEIC closing. The investors who
accepted the private placement offering were the three members of the Executive
Committee of the Company, Messrs. Lobeck, McWhorter and Swanner, who subscribed
for an aggregate of $9,253,785 of debentures and a third party investor who
subscribed for the remaining $746,215 of such debentures. Cochran, Caronia & Co.
issued an opinion to the Board of Directors that the financing transaction was
fair to the unaffiliated public shareholders of the Company and the Board of
Directors, upon the unanimous recommendation of the Special Committee consisting
of Robert S. Fried and Malcolm Galatin unanimously approved this transaction
(with Archer McWhorter, Archer McWhorter, Jr., William E. Lobeck, Jr. and Alvin
E. Swanner abstaining) .
The Board believed that the acquisition of additional insurance
companies that present opportunities to write small and mid-sized commercial
lines insurance would be in the best interest of the Company. Accordingly, the
Company acquired Mountain Valley Indemnity Company ("Mountain Valley") on March
1, 2000. Mountain Valley writes small and mid-size commercial insurance in New
England and New York. To finance the Mountain Valley acquisition, the Executive
Committee provided to the Company $11,500,000 of unsecured financing bearing
interest at 10.605% per year, which debt matures on February 28, 2002. This
unsecured loan was extended by the Company through February 28, 2003 and now
bears interest at 11.605% and may be extended for up to four additional years
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upon 30 days notice prior to expiration with an associated increase of 100
basis points in the loan interest rate.
On March 16, 2000, the Company announced that it was reviewing
strategies to improve the profitability of its New Jersey PPA business and to
otherwise enhance shareholder value.
From March 27 to 29, 2000, the Executive Committee and its affiliates
purchased on the open market 10,000 shares at $8.375 each and 56,900 shares at
$7.00 each.
In the second quarter of 2000, the Company entered into discussions
with a third party insurer concerning the sale of the Company's PPA insurance
business conducted in New Jersey ("NJPPA"). The third party executed a
confidentiality agreement with the Company and was provided with significant
operating information concerning the Company's NJPPA operations. In the course
of these discussions, the third party provided that continued discussions
regarding any transaction involving the Company's NJPPA would be contingent on
the following conditions: (i) the price would not exceed an amount to be
composed of various elements to be negotiated and (ii) the agreement of the New
Jersey Department of Banking and Insurance ("NJDOBI") to permit the third party
to modify rates, possibly terminate certain NJPPA agents of the Company and
include such other regulatory approvals as deemed necessary by the third party's
due diligence. The maximum price possible under the proposed transaction would
have caused the Company to incur a significant loss to the book value of its
NJPPA subsidiary. The Company was prepared to incur such a loss, which would
have reduced the overall book value of the Company, if the regulatory conditions
could be met. However, initial discussions with the NJDOBI indicated that such
regulatory approvals would not be forthcoming and the Company's discussions with
the third party insurer terminated in the fourth quarter 2000.
In June and August 2000, the Executive Committee and its affiliates
purchased 15,500 shares at $8.125 each; 2,000 shares at $8.0938 each; 2,000
shares at $8.0625 each; and 6,000 shares at $8.00 each.
In the third quarter of 2000, an investment advisor representing
another third party insurer contacted the Company concerning a possible
transaction. The Company determined that there was sufficient interest to
execute a confidentiality agreement and conduct preliminary discussions with
this third party. These preliminary discussions involved consideration of a
possible transaction whereby the Company's NJPPA operations would be spun-off to
its shareholders and then control of the resulting public company would be sold
to the third party. Although the Company was responsive to the requests of the
third party's investment advisor and members of Company management met with the
owners of the third party, the preliminary discussions did not progress any
further and discussions ended in the first quarter 2001.
The NEIC and Mountain Valley acquisitions helped to establish the
Company as a regional commercial lines company in the New England and
Mid-Atlantic regions and in the Company's fiscal 2000 Annual Report circulated
to its shareholders in April 2001, the Company reported that only 44% of its
consolidated revenues for fiscal 2000 emanated from New Jersey private passenger
automobile insurance products, the lowest percentage in the Company's history.
In May 2001, the Executive Committee and its affiliates purchased
18,099 shares at $7.25 each and 10,000 shares at $7.00 each.
In June 2001, the Executive Committee and its affiliates purchased
9,500 shares at $7.25 each. No further purchases of shares of common stock have
been made since June 15, 2001.
On July 31, 2001, the Board retained Cochran, Caronia & Co. as its
financial advisor to evaluate alternatives available to the Company to seek to
enhance shareholder value.
Cochran, Caronia & Co. rendered its report to the Board of Directors at
a meeting of the Board of Directors on September 7, 2001. The report highlighted
the barriers to the market appreciating the inherent value of the Company's
operations and advised that the Company's strategic alternatives to enhance
shareholder value were limited. In the report, Cochran, Caronia & Co. stated
that a sale of the Company's NJPPA subsidiary was not a viable alternative
because of the unattractive nature of the NJPPA operations and due to a limited
buyer universe. Further, Cochran, Caronia & Co. reported that execution of a
withdrawal plan from the NJPPA business would require operational changes and
could take at least several years to effect. Cochran, Caronia & Co. believed a
sale of the entire Company was unlikely, as the NJPPA segment would deter most
potential buyers and the Company lacked the critical mass that is typically
necessary to attract large, well capitalized buyers. Cochran, Caronia & Co. also
noted that the Company operations were being undertaken in a public entity,
which had advantages and disadvantages. One disadvantage is the estimated
$500,000 of annual expenses associated with being a public company, which has
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a significant impact on the inherent value of a company of this size. The
consensus of the Board was that the Company had insufficient working capital
to seek to buy back its shares in a manner designed to provide enhanced
liquidity and shareholder value. This determination was consistent with the
oral advice of Cochran, Caronia & Co. and was supported (i) by the fact that
of the Company's regulated subsidiaries, only Mountain Valley could pay
dividends to the parent although the surplus of Mountain Valley was being
retained to maintain it's A.M. Best rating and regulatory ratios; and (ii)
the assumption that the Company would continue to be limited to no more than
$250,000 per quarter, if any at all, in obtaining excess working capital at
the unregulated parent company level. It was also the view of the Board that
was shared by Cochran, Caronia & Co. that the Company was foreclosed from
borrowing from commercial lending sources for the purpose of a share buyback
or dividend program of any nature whether partial or otherwise. The members
of the Executive Committee had not considered providing working capital to
the Company at that time and this possibility was not considered by the Board
at this meeting.
At the next meeting of the Board of Directors on October 31, 2001, at
which representatives of Cochran, Caronia & Co. and Company outside counsel were
present, Stephen A. Gilbert, President of the Company and a member of the Board
of Directors, suggested that the Executive Committee could be the source of
financing for a Company share buy-back program. William E. Lobeck, Jr., a member
of the Executive Committee, responded that in his continuing evaluation of his
investment in the Company, he and the other members of Executive Committee would
consider being the source of financing for the Company if the Company was to
undertake a self-tender offer of the common stock held by the public
shareholders. Mr. Lobeck stated that the members of the Executive Committee
would not consider selling their shares to a third-party.
At the meeting, the Board of Directors determined that it was advisable
to form an Independent Committee to evaluate a possible self-tender offer by the
Company financed by the Executive Committee. The Board of Directors appointed an
Independent Committee consisting of George P. Farley, Robert S. Fried and
Malcolm Galatin, each of whom serves on the Board of Directors but none of whom
is employed by or otherwise affiliated with the Company or the Executive
Committee except in their capacities as directors.
The Independent Committee was authorized by the Board of Directors to
retain legal and financial advisors to assist it in its examination of potential
transactions which might arise from the availability of financing from its
Executive Committee and make recommendations, if any, to the Board. The meeting
of the Board of Directors was then adjourned to November 14, 2001, the other
directors left the meeting, and the Independent Committee met with
representatives of Company outside counsel, who reviewed with the Independent
Committee the fiduciary duties of the members of the Independent Committee under
applicable law. Representatives of Company counsel then left the meeting and the
members of the Independent Committee continued their meeting among themselves
and concluded that Company outside counsel could independently represent the
Independent Committee and the interests of the Company's shareholders (other
than the Executive Committee and its affiliates). Representatives of Company
outside counsel were invited back into the meeting of the Independent Committee
and the Independent Committee retained Company counsel to act as its legal
advisor in connection with its evaluations. The basis of the Independent
Committee's decision to retain Company counsel was that Company counsel had
represented the Company and the independent directors prior to the Executive
Committee members purchase of 801,303 shares in March 1994; did not represent
any member or affiliate of the Executive Committee other than through
representation of the Company and that the Executive Committee would be advised
by its own separate counsel.
On November 5, 2001, the Independent Committee met with its counsel and
reviewed the history of the Executive Committee's investment with the Company
and the various strategic alternatives available to the Company. The Independent
Committee reviewed the Company's prior and ongoing relationships with Cochran,
Caronia & Co. at this meeting and came to no determination as to whom the
Independent Committee would retain as its investment advisor. The Independent
Committee also reviewed the prior engagement letter of July 2001 under which
Cochran, Caronia & Co. had advised the Board of Directors of the Company and
requested the Independent Committee's counsel to obtain a draft engagement
letter from Cochran, Caronia & Co. pursuant to which the investment advisor
would report directly to the Independent Committee.
On November 9, 2001, the Independent Committee met with its counsel and
Cochran, Caronia & Co. to review the proposed Cochran, Caronia & Co. engagement
letter and after a discussion concerning Cochran, Caronia & Co.'s qualifications
and commitments, the Independent Committee retained Cochran, Caronia & Co. as
its investment advisor. The meeting continued with a report from the Independent
Committee's counsel as to the Independent Committee's due diligence and ongoing
deliberations and evaluations. Later in the meeting, the Independent Committee
met with its counsel, and from time to time, representatives of Company
management, to review the Company's excess loss accounts and net operating
losses and the dates at which those tax characteristics would expire.
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Over the next several weeks, on behalf of the Independent Committee,
Cochran, Caronia & Co. conducted a review of the financial condition, results of
operations, prospects, business strategy and competitive position of the Company
in the context of the industry in which it operated in order to evaluate
potential strategic alternatives intended to enhance shareholder value.
At the Independent Committee's request, Cochran, Caronia & Co. spoke
with Archer McWhorter, Chairman of the Board, as to the price at which the
Executive Committee would contemplate providing funding to the Company for a
possible transaction, such as a self-tender offer, and Cochran, Caronia & Co.
was provided a value of $7.50 per share.
On November 14, 2001, George P. Farley, on behalf of the Independent
Committee, met at the Company's offices with representatives of the Independent
Committee's counsel and, from time to time, representatives of Company
management and the Company's outside accountants to again review the Company's
federal and state income tax situation. Later that day, the Independent
Committee next met at the Company's offices with its counsel, Cochran, Caronia &
Co., and from time to time, representatives of Company management, and again
reviewed in detail the presentation made by Cochran, Caronia & Co. to the Board
of Directors on September 7, 2001, as well as the updated projections management
subsequently provided to Cochran, Caronia & Co. at the Independent Committee's
request. Cochran, Caronia & Co. reported that in preliminary discussions with
the Executive Committee as to the funding of a possible transaction, the
Executive Committee proposed $7.50 per share for financing a Company self-tender
offer. Cochran, Caronia & Co. also presented a tentative valuation of the
Company based upon a premiums paid analysis; a trading multiple analysis; a
transaction multiple valuation analysis and a discount cash-flow analysis. This
tentative valuation presented at this and subsequent presentations to the
Independent Committee utilized the procedures followed, bases and methods
utilized in Cochran, Caronia & Co.'s opinion dated December 18, 2001 and took
into account the Company's estimated losses arising from the September 11, 2001
terrorist assault on the World Trade Center. The total valuation range that
Cochran, Caronia & Co calculated for the Company was $14.1 million - $33.7
million, or approximately $6.62 - $15.85 per share. After considering this
indicated valuation range, Cochran, Caronia & Co. then selected a fair market
valuation range for the Company of approximately $17.5-$22.5 million. See
"Opinion of the Financial Advisor." The Independent Committee instructed Cochran
Caronia & Co. to consider a range of minority discounts. At the conclusion of
the Independent Committee meeting, a conference call was initiated and the full
Board of Directors resumed its meeting of October 31, 2001. At that time, the
Board approved certain reimbursement and indemnification matters concerning the
Independent Committee and confirmed the engagement of Cochran, Caronia & Co. as
financial advisor to the Independent Committee.
On November 19, 2001, the Independent Committee met at the offices of
its counsel to review the structure of a possible self-tender offer transaction.
Concern was raised that in a single step self-tender offer, there existed the
possibility that non-tendering shareholders would be stranded in a highly
illiquid private company without the benefit of appraisal rights that would be
available in a second-step-merger.
On November 26, 2001, counsel to the Independent Committee requested
Company management provide the Independent Committee with a model showing
Company projections based upon a withdrawal of the Company's Motor Club of
America Insurance Company subsidiary ("Motor Club") from the NJPPA market, the
only market in which it participates.
On November 30, 2001, the Independent Committee met with Cochran,
Caronia & Co. and reviewed the preliminary report of its evaluation analysis.
The Independent Committee compared the results of this evaluation with the
evaluation analysis that Cochran, Caronia & Co. provided to the Board of
Directors at the Board's September 7, 2001 meeting, and questioned Cochran,
Caronia & Co. concerning its underlying assumptions in the evaluation analysis.
Cochran, Caronia & Co. presented a revised tentative valuation of the Company
utilizing the same procedures, bases and methods as before but with a range of
minority discounts. Taking into account the minority discount of 10% - 20%, the
total valuation range that Cochran, Caronia & Co calculated for the Company was
$11.4 million - $30.7 million, or approximately $5.39 - $14.44 per share. The
Independent Committee instructed Cochran, Caronia & Co. to consider the
Company's valuation based upon Motor Club's withdrawal from the NJPPA market and
to assume a 7% rate increase was approved for the NJPPA business.
On December 4, 2001, counsel for the Independent Committee requested
that Company management utilize certain underlying assumptions to support the
Company's proposed projections based upon Motor Club's withdrawal from the NJPPA
market.
On December 7, 2001, the Independent Committee met with its counsel and
Cochran, Caronia & Co. to review the withdrawal projections provided by Company
management to Cochran Caronia & Co. and the Independent Committee. Cochran,
Caronia & Co. presented a revised tentative valuation of the Company based upon
the withdrawal projections provided by Company management. Prior to taking
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into account the minority discount, the total valuation range that Cochran,
Caronia & Co calculated for the Company was $11.5 million - $30.7 million, or
approximately $5.40 - $14.44 per share. Taking into account the minority
discount of 10% - 20%, the total valuation range that Cochran, Caronia & Co
calculated for the Company was $9.2 million - $27.6 million, or approximately
$4.32 - $13.00 per share. After considering this indicated valuation range,
Cochran, Caronia & Co. then selected a fair market valuation range for the
Company of approximately $15 to $20 million (approximately $7.06 to $9.41 per
share). On the same day, the Company received certain supplemental NJPPA
relief from the NJDOBI. The Independent Committee members were individually
told of this development during the course of the day. The Independent
Committee then requested that management update its withdrawal projections
based upon a continuation of this supplemental relief. The Independent
Committee instructed Cochran, Caronia & Co. to revise its tentative valuation
to take into account the supplemental NJPPA relief received that day and to
shift the five year projection period from 2001 through 2005 to 2002 through
2006. The Company issued a press release regarding the receipt of the relief
after the financial markets closed that same day.
These revised projections reflecting the supplemental relief were
reviewed by the Independent Committee at its December 12, 2001 meeting. On
December 12, 2001 Cochran, Caronia & Co. presented to the Independent Committee
a revised tentative valuation of the Company based upon the supplemental NJDOBI
relief received on December 7, 2001 and the shifted projection period. Prior to
taking into account the minority discount, the total valuation range that
Cochran, Caronia & Co calculated for the Company was $11.5 million - $29.3
million, or approximately $5.40 - $13.77 per share. Taking into account the
minority discount range of 10% - 20%, the total valuation range that Cochran,
Caronia & Co calculated for the Company was $9.2 million - $26.3 million, or
approximately $4.32 - $12.39 per share. After considering this indicated
valuation range, Cochran , Caronia & Co. then selected a fair market valuation
range for the Company of approximately $15 to $20 million (approximately $7.06
to $9.41 per share). See below for an explanation of relief from NJPPA
"Take-All-Comers" obligations. At the meeting, Independent Committee members
Messrs. Farley and Galatin called Archer McWhorter, Chairman of the Board, and
advised him that the Executive Committee's offer of $7.50 per share to finance a
Company self-tender offer was not adequate, although it might be within a
possible range of fairness. Messrs. Farley and Galatin set forth alternative
ranges of value to Mr. McWhorter that the Independent Committee suggested were
more appropriate. Mr. McWhorter advised Messrs. Farley and Galatin that he would
refer their comments to the other members of the Executive Committee and contact
them later. On December 13, 2001, Mr. McWhorter advised the Independent
Committee that the Executive Committee might be willing to increase its offer
but that Mr. Lobeck would not be participating in any such revised offer because
he did not believe a higher price would constitute a good investment for himself
personally.
On December 14, 2001, the Independent Committee met at the offices of
its counsel, together with Cochran, Caronia & Co. and from time to time,
representatives of Company management. The Independent Committee considered the
negotiations with the Executive Committee to date and that the loss of one of
the Executive Committee members in the financing arrangement could adversely
affect whether a financing arrangement could be accomplished at all if
negotiations continued. Later that day, Messrs. Farley and Galatin called Mr.
McWhorter, and Mr. McWhorter confirmed that a price of $7.75 per share had been
under discussion and was their best and final offer. Mr. McWhorter confirmed
that Mr. Lobeck had dropped out of the commitment to finance a possible
transaction because Mr. Lobeck did not feel the funding proposal and subsequent
purchase was a good investment for himself personally at $7.75 per share. Mr.
McWhorter confirmed that Mr. Lobeck, together with the rest of the Executive
Committee and their affiliates, would continue holding his shares and would not
tender shares into any contemplated Company self-tender offer. At that time, the
Independent Committee representatives said they believed that they would be able
to recommend the proposal to the full Board at the next meeting of the Board of
Directors, subject to the Independent Committee's receipt of a satisfactory
fairness opinion from Cochran, Caronia & Co., no material change in the business
occurring between then and the next scheduled Board meeting and the transaction
proceeding in accordance with a certain non-binding term sheet which had been
prepared by the Independent Committee and provided to Mr. McWhorter.
On December 18, 2001, the Independent Committee met at the offices of
its counsel together with Cochran, Caronia & Co. to consider the prospective
terms of the issuer self-tender offer, second-step merger and going private
transaction as then structured. Cochran, Caronia & Co. presented its financial
analysis to the Independent Committee regarding the fairness of the price of the
proposed transaction from a financial point of view and the Independent
Committee's counsel again reviewed with the Independent Committee its fiduciary
duties. Cochran, Caronia & Co. then delivered to the Independent Committee its
oral opinion, later confirmed in writing, to the effect that, based upon and
subject to certain stated assumptions and limitations, as of December 18, 2001,
the $7.75 per share price to be received by the shareholders of the Company
(other than the Executive Committee and its affiliates) in the Offer and the
Merger was fair from a financial point of view to the Company's shareholders.
After further discussion and deliberation, the Independent Committee: (i)
unanimously determined to recommend to the Board of Directors that each of the
Offer, the Merger and the other transactions contemplated by the proposed
agreement for self-tender offer, financing and second step merger (the
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"Proposed Agreement") was fair to and in the best interests of the Company's
shareholders (other than the Executive Committee and its affiliates) and (ii)
unanimously determined to recommend that the Board of Directors approve the
Offer and the Merger and the transactions contemplated by the Proposed
Agreement. The Independent Committee did not make any recommendation as to
whether any shareholder should tender any or all such shareholder's shares
pursuant to the Offer. It was the view of the Independent Committee that each
shareholder must make such shareholder's own decision whether to tender
shares and if so, how many shares to tender.
At a meeting of the Board of Directors held immediately thereafter, at
which all of the Directors of the Company participated, based upon the unanimous
recommendation of the Independent Committee, the Board of Directors, with Archer
McWhorter, Archer McWhorter, Jr., William E. Lobeck, Jr. and Alvin E. Swanner
abstaining, unanimously approved and adopted the terms of the proposed Offer and
Merger and unanimously determined that the terms of the Offer and Merger are
fair to and in the best interests of all of the Company's shareholders. The
proposed transaction was approved by a majority of the directors of the Company
who are not employees of the Company; of the five directors who voted on the
proposal, Messrs. Gilbert and Haveron are members of Company management and the
remaining three directors are the members of the Independent Committee.
The Board of Directors did not make any recommendation as to whether
any shareholder should tender any or all such shareholder's shares pursuant to
the Offer. It was the view of the Board of Directors that each shareholder must
make such shareholder's own decision whether to tender shares and if so, how
many shares to tender.
The terms of the proposed Offer and Merger were publicly announced
on December 18, 2001, the Proposed Agreement was finalized and executed on
January 14, 2002 (the "Agreement" or "Merger Agreement") and the Offer
commenced January 15, 2002. The Agreement was amended on February 4, 2002 to
further limit the circumstances under which it could be terminated. A copy of
the amendment was mailed to Company shareholders as an Annex to that certain
Supplement to the Offer on February 12, 2002. A copy of the Amended and
Restated Agreement is set forth at Annex 6.
The Independent Committee. On December 18, 2001, the Independent
Committee unanimously determined that the terms of each of the Offer, the Merger
and the other transactions contemplated by the Proposed Agreement are fair to,
and in the best interest of, the shareholders of the Company, and unanimously
determined to recommend that the Board of Directors (i) determine that the
Offer, the Merger and the other transactions contemplated by the Proposed
Agreement are fair to and in the best interests of the shareholders of the
Company (other than the Executive Committee and its affiliates) and (ii) approve
the Offer, the Merger and the transactions contemplated by the Proposed
Agreement. At a meeting held on December 18, 2001, the Board of Directors
unanimously determined to accept the Independent Committee's recommendation and
determined that the terms of each of the Offer, the Merger and the other
transactions contemplated by the Proposed Agreement are fair to and in the
best interests of the shareholders of the Company (other than the Executive
Committee and its affiliates) and unanimously approved the Offer, the Merger
and the Proposed Agreement and the transactions contemplated thereby.
In reaching the conclusions described above, the Independent Committee
considered a number of factors, including but not limited to the following:
(i) the opinion of Cochran, Caronia & Co. that, based upon and subject
to the assumptions and limitations set forth therein, as of the date of the
opinion, the $7.75 per share cash consideration to be received by the Company's
shareholders (other than the Executive Committee and its affiliates) in the
Offer and Merger was fair from a financial point of view to such shareholders
see --"Opinion of the Financial Advisor";
(ii) the presentations of Cochran, Caronia & Co. that involved various
valuation analyses of the Company regarding the fairness of the consideration to
be received in the Offer and the Merger from a financial point of view (see
"--Opinion of the Financial Advisor");
(iii) the historical market prices of the shares and recent trading
activity of the shares, including that the $7.75 per share price represents a
premium of more than 29% over the $6.00 closing sale price on the NASDAQ
National Market System on October 30, 2001, the last full trading day prior to
the appointment of the Independent Committee and a premium of more than 49% over
the $5.20 closing sale price on December 17, 2001, the last full trading day
prior to the approval of the Offer (see "--Opinion of the Financial Advisor");
(iv) the historic limited liquidity of the market for the shares as
evidenced by the shares actually trading on only 90 out of a possible 239
trading days for the period from January 1, 2001 to December 17, 2001 and that
the Offer and Merger provide a liquidity opportunity not provided by the recent
historic public market;
(v) the book value per share as of December 31, 2001 was estimated to
be approximately $14.15 per share (giving effect to projected operating earnings
for fiscal 2001, the anticipated annual change in shareholders' equity for the
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Company's minimum pension liability (an internal estimate which expects an
increase in the minimum pension liability based on sharply lower interest rates)
and adjustments to shareholders' equity for changes in the fair value of fixed
maturity investments accounted for as available-for-sale securities) and that as
of December 17, 2001, the shares had traded below per share book value since
August 2, 1999 and had traded at below half of book value per share since
mid-March 2001, other than the one day of June 19, 2001;
(vi) the Company's business, financial condition, results of
operations, prospects, current business strategy, competitive position in its
industry, including market share, and position in each state and general
economic and stock market conditions, including the fact that approximately 40%
of the Company's operations are conducted by Motor Club in the NJPPA insurance
market, and Motor Club is currently under administrative supervision by state
regulatory authorities because under the New Jersey "take-all-comers"
regulations, Motor Club had been required to write more business than its
capital and surplus could support;
(vii) that the combination of these numerous factors resulted in only
de minimis institutional research being published by analysts, the absence of
which was believed to have reduced the public awareness of the shares in the
public trading market further limiting liquidity for the shares;
(viii) the Executive Committee's ownership of (i) approximately 48% of
the outstanding Company common stock; (ii) $9,253,785 of the Company's
convertible debentures due 2009; and (iii) $11,500,000 of unsecured financing
which matured on February 28, 2002, and the effects of such ownership on the
alternatives available to the Company, especially in light of the assertion by
the members of the Executive Committee that they would not consider selling
their shares to a third party;
(ix) that the terms of the Offer were determined through arm's-length
negotiations between the Executive Committee and the Independent Committee and
its financial and legal advisors, all of whom are unaffiliated with the
Executive Committee, which led to a 3.3% increase in the original price offered
by the Executive Committee, a requirement for implementing the second-step
Merger and the condition that a minimum of 676,140 shares be tendered; and that
as a result of such negotiations, the Independent Committee believed that a
price higher than $7.75 per share could not likely be obtained;
(x) the likelihood that the Offer and the Merger would be consummated,
including that there are no unusual requirements or conditions to the Offer, and
the fact that Archer McWhorter and Alvin E. Swanner have represented to the
Company that they have the financial resources to consummate the Offer and the
Merger expeditiously;
(xi) that the consideration to be paid to holders of shares in the
Offer and the Merger is all cash, eliminating any uncertainties in valuing the
consideration to be received by the public holders;
(xii) that the transaction has been structured to include a first-step
cash tender offer for all of the outstanding shares, thereby enabling
shareholders who tender their shares to promptly receive $7.75 per share in
cash, and that any shareholders who do not tender their shares will receive the
same cash price per share in the subsequent Merger;
(xiii) that the Agreement contemplates that Archer McWhorter and Alvin
E. Swanner will finance the Offer on an interest free basis, with all such debt
converting into shares of non-voting Series A preferred stock of the Company at
the $7.75 Offer Price so as to maintain the level of shareholders equity in the
Company, which the Independent Committee believed would be evaluated favorably
by A.M. Best in rating the Company after completion of the Offer and pending
completion of the Merger;
(xiv) that the transaction has been structured in a manner designed to
facilitate the Executive Committee in forming a parent company to seek to
consummate the Merger without a shareholders meeting in accordance with
applicable state law, thereby enabling shareholders who do not tender their
shares to receive the merger consideration as quickly as possible;
(xv) the possible conflicts of interest of certain directors and
members of management of both the Company and the Executive Committee (see
"Interests of Certain Persons in the Offer and the Merger");
(xvi) that shareholders who do not tender their shares pursuant to the
Offer will have the right in connection with the proposed second-step Merger to
demand appraisal of the fair value of their shares under the applicable state
law, whether or not a shareholder vote is required (see "Dissenters' Rights");
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(xvii) that regulatory restrictions by various states limited or
precluded the ability of the Company's insurance subsidiaries, particularly
Motor Club, to return capital to the Company in such a manner as to improve
value to shareholders in the form of dividends or engage in other transactions
that would improve the return to shareholders; accordingly, the Independent
Committee did not believe there was a realistic near term prospect of the
Company being able to pay dividends on its shares;
(xviii) that a sale of the entire Company was not feasible in light of
its NJPPA exposure and that in the alternative, the Motor Club subsidiary could
not withdraw from the NJPPA market in a manner that would be timely,
cost-effective or not materially damaging to the Company's other profitable New
Jersey insurance operations and thus provide value to shareholders;
(xix) that the terms of the Offer permitted the Independent Committee
to recommend any subsequent alternative transaction that presented itself prior
to the consummation of the Offer and terminate the Offer without making any
payment or "break-up fee" to the members of the Executive Committee financing
the Company's self-tender Offer; and
(xx) that to engage in a more limited share repurchase program
customary in the public trading markets when share price is below levels deemed
appropriate by the Independent Committee was not a viable alternative and would
only serve to exacerbate the other issues considered by the Independent
Committee, not reduce them.
The individual members of the Independent Committee may have given
different weights to different factors and may have viewed some factors more
positively or negatively than others.
In addition, the Independent Committee's recommendation to the Board on
December 18, 2001, that the Offer, the Merger and the other transactions
contemplated by the Proposed Agreement were fair to and in the best interests of
the Company's shareholders (other than the Executive Committee and its
affiliates) was based in part on the Independent Committee's consideration and
rejection of other alternatives. As previously discussed, the sale of Motor
Club's regulated NJPPA business had been explored with a prospective purchaser
in the second quarter of 2000 and while a significant loss of the NJPPA book
value would have occurred and was considered, regulatory impediments to
completing such a transaction caused it to be rejected as a viable alternative.
No proposals had been received in the subsequent year despite the Company's
continuing decrease in share price ultimately to approximately 37% of book value
(i.e., $5.20 share price compared to estimated $14.15 book value). As discussed
in connection with the Independent Committee's November and December 2001
meetings, the Independent Committee explored the alternative of obtaining access
to Motor Club's NJPPA book value by withdrawing from the NJPPA market. That
process was rejected as a viable alternative due to: (i) the period of time for
the process to be accomplished, particularly with regard to when access to the
book value associated with the NJPPA business could occur (in the form of
dividends to the parent company); (ii) the regulatory impediments to executing
such a strategy, including the possible adverse impact to the Company's
profitable other New Jersey property and casualty business; and (iii) the costs
of administration of the withdrawal process.
As discussed in connection with the Independent Committee's meeting of
November 19, 2001, the Independent Committee reviewed the possibility of partial
share buyback programs and rejected this alternative as the Independent
Committee believed such a program would only temporarily boost the stock price
and it would have stranded continuing public shareholders in the Company with an
even more illiquid shareholder structure. The Independent Committee assessed the
possible alternative of the sale of the entire Company which it did not believe
to be viable based upon the ownership structure of the Company's shares,
convertible debentures and debt. The Independent Committee recognized this
alternative would be preserved in the sense that the Company's potential future
financial performance would have been publicly disclosed and the Independent
Committee retained the ability to terminate the Offer in the event a superior
third party proposal was received. Finally, the Independent Committee assessed
the possible alternative of not proceeding with the Offer and, thereafter, the
Merger, at all. This alternative was not foreclosed by the structure of the
Offer, which was conditioned upon the tender of at least 676,140 shares by
Company shareholders (other than the Executive Committee and its affiliates).
Explanation of Relief from NJPPA "Take-All-Comers" Obligations. Most
insurance regulations are designed to protect the interests of policyholders
rather than shareholders and other investors. This system of regulation,
generally is administered by a department of insurance in each state in which
the Company's subsidiaries do business. In particular, the New Jersey private
passenger automobile ("NJPPA") market has historically been subject to
regulatory and legislative volatility which has, at times, adversely affected
the profitability of this line of business, despite New Jersey having among the
highest average premium rates in the United States. New Jersey insurance law
presently requires insurers to write all eligible PPA coverage presented to them
from drivers with eight points or less on their driving record. This is commonly
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referred to as "take-all-comers". The NJDOBI may grant an insurer relief, by
written notification, from writing new NJPPA business pursuant to the
take-all-comers provisions of New Jersey law if a showing finds, among other
criteria, that the insurer's premium to surplus ("leverage") ratio exceeds 3 to
1. Motor Club's applicable leverage ratio for the twelve months ended September
30, 2001 was 4.23 to 1.
On July 18, 2001, Motor Club was placed under administrative
supervision and granted certain relief by the NJDOBI with regard to its NJPPA
operations, which was designed to improve Motor Club's deteriorating financial
condition. Motor Club's premium to surplus ratio no longer met industry
standards, its share of urban enterprise zone ("UEZ") business (where it wrote
double its required amount) was disproportionately high, and A.M. Best had
recently downgraded Motor Club's rating. The relief included the immediate
cessation of accepting new business in UEZ's, the non-renewal of a number of UEZ
risks and relief from assigned risk business. On December 7, 2001, Motor Club
received supplemental relief to that previously received on July 18, 2001 from
the NJDOBI. NJDOBI ordered that effective immediately, Motor Club was relieved
of its obligations under the NJPPA "take-all-comers" laws. The relief is in
effect as of the date of this information statement and will continue
indefinitely until modified or vacated by the NJDOBI based on Motor Club's
financial condition.
The Independent Committee noted that the relief from "take-all-comers"
was projected to improve Motor Club's discounted cash flow in the next several
years but this would not translate into dividendable capital to the Company. The
Independent Committee believed that the NJDOBI would not permit any
distributions from Motor Club while Motor Club was under administrative
supervision and that even when that status was lifted, currently estimated to be
in 2004, that the NJDOBI would proceed very cautiously in permitting
distributions from Motor Club to the Company. The Independent Committee believed
that Motor Club's administrative supervision would end when its premium to
surplus ratio dropped sufficiently below 3 to 1 to safely resume writing new
business. The Independent Committee noted however, that once this condition was
removed, it was likely that Motor Club would be required to comply with the
NJPPA "take-all-comers" regulations, which could limit Motor Club's ability to
make cash distributions to the Company.
Summary of Independent Committee Analysis of Factors Affecting Fairness
of the Offer and the Merger. In summary, the Independent Committee's analysis of
the various factors it considered focused on the disparity between the fair
market valuation range for the Company of approximately $7.06 to $9.41 per share
and the Company's share price decline since 1999 from a high of $14.875 per
share to $5.20 per share one month prior to the initial public announcement with
respect to the Offer. The Independent Committee believed this disparity was
based upon the market's perceived identification of the Company with NJPPA
business despite the acquisition of NEIC in September 1999 and Mountain Valley
in March 2000 and the reluctance of investors to become exposed to that business
by investing in the Company. The Independent Committee believed that there was a
real basis for investors to avoid exposure to the NJPPA business and for the
shares to trade at below book value. This reluctance in investing in the Company
led to limited liquidity of the market for the shares as evidenced by the shares
actually trading on only 90 out of a possible 239 trading days from January 1,
2001 to December 17, 2001. Further, the Independent Committee considered that
the Company had no distinctive features that could permit it to enhance market
value and several features that detracted from a greater market value. Despite
40% of its business being in NJPPA, Motor Club was rated only as approximately
the 20th largest NJPPA insurer measured in number of drivers insured. Features
that detracted from a greater market value included (i) the Company's financial
statements had been significantly restated in April 2001 as a result of the
accounting treatment of the 1992 insolvency of its Oklahoma property and
casualty subsidiary and the final elimination of net operating losses and excess
loss accounts would not take place until 2006; (ii) Motor Club had been put
under NJDOBI administrative supervision which the Independent Committee believed
was being generally viewed by investors as a basis for further discounting the
Company market value; (iii) the Company's market share in property and casualty
insurance business in the other states it did business in was not significant.
and (iv) the Executive Committee's then 48% ownership of the Company's shares
and source of $20.75 million of the Company's $21.5 million debt further limited
the willingness of investors to invest in the Company's shares.
As a result of the foregoing, investors seeking to sell their shares in
the Company found only a limited market and such sales in even limited
quantities led to significant reductions in the share price.
The Independent Committee believed that the Executive Committee's
initial willingness to fund a partial buyback of Company shares in an issuer
self tender offer offered an opportunity to permit but not require Company
shareholders to sell their shares at a better price than that being provided by
the market. Further, by using the issuer self tender offer as a means of widely
distributing the Company's projections; setting forth the Company's reduced
participation in the NJPPA market and the terms of Motor Club's supplemental
relief, the Independent Committee believed that Company shareholders could
better assess the Company's current fair market value range, the Company's
projected financial performance through 2006, and be able to compare these
values with the value of $7.75 per share in cash obtainable by accepting the
Offer.
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It was the view of the Independent Committee that the structure and
terms of the Offer were such as to permit it to proceed only if holders of a
substantial number of shares (676,140 or more, excluding the Executive Committee
and its affiliates) thought it was in their best interest to do so, and if so,
then the remaining non-tendering shareholders would have appraisal rights in the
second-step Merger to determine and be paid fair value under applicable state
law.
Finally, if there were third parties which proposed a subsequent
alternative transactions prior to the consummation of the Offer in a manner the
Independent Committee determined would likely provide a superior value to the
shareholders (other than the Executive Committee and its affiliates), the
Independent Committee was free to delay or terminate the Offer.
The Company Board. In reaching its determination that the terms of the
Offer, the Merger and the financing, as set forth in the Agreement, are fair to
and in the best interests of the shareholders (other than the Executive
Committee and its affiliates), the Board of Directors adopted (i) the
conclusions and recommendations of the Independent Committee, and (ii) the
factors referred to above as having been taken into account by the Independent
Committee.
The members of the Board of Directors, including the members of the
Independent Committee, evaluated the Offer and the Merger in light of their
knowledge of the business, financial condition, results of operations,
prospects, current business strategy and competitive position of the Company,
and based upon the advice of financial and legal advisors.
The Board of Directors, including the members of the Independent
Committee, believes that the Offer and Merger are procedurally fair because,
among other things: (i) the Independent Committee consisted of independent
directors appointed to represent the interest of shareholders (other than the
management members of the Board and the Executive Committee); (ii) the
Independent Committee retained and was advised by Company outside legal counsel
experienced in advising on similar transactions; (iii) the Independent Committee
retained and was advised by Cochran, Caronia & Co., as its independent financial
advisor, to assist it in evaluating a potential transaction with the Executive
Committee; (iv) the nature of the deliberations pursuant to which the
Independent Committee evaluated the Offer and the Merger and alternatives
thereto; (v) that the $7.75 per share price resulted from active arm's-length
bargaining between representatives of the Independent Committee, on the one
hand, and representatives of the Executive Committee, on the other; (vi) that
the Offer is conditioned upon a minimum number of shares being tendered; and
(vii) that the Independent Committee is a mechanism well established under New
Jersey law in transactions of this type.
The Board of Directors and the Independent Committee recognize that the
Offer was not structured to require the approval of a majority of the
shareholders of the Company. However, the terms of the Offer required that
676,140 shares, or more than 61% of the 1,101,510 issued and outstanding shares
not held by the Executive Committee and its affiliates, be tendered, which the
Independent Committee believed would indicate that holders of approximately 61%
of the Company's shareholders (other than the Executive Committee and its
affiliates) viewed the Offer to be in their best interests.
The Independent Committee did not attempt to solicit competing
acquisition proposals because the Independent Committee believed that the
absence of any `break-up' fee or other `lock-up' provisions in the Agreement and
that the Independent Committee was free to consider any transaction proposed by
a third party after the announcement of the Offer on December 18, 2001 despite
the execution of the Agreement.
Since the Company's announcement of the proposed self-tender
transaction on December 18, 2001, the Company has not received any inquiries
regarding a possible competing bid or alternative transaction. Furthermore, the
Independent Committee had been advised by Cochran, Caronia & Co. that, in its
view, any of the companies that Cochran, Caronia & Co. considered as viable
potential candidates to acquire the Company would have likely expressed its
interest when the Company's market capitalization dropped below the Company's
book value in August 1999. Finally, the Independent Committee considered that,
given the Executive Committee's ownership of 48% of the outstanding shares of
common stock and beneficial ownership of 59.5% (assuming conversion of
$9,253,785 of Convertible Debentures at $15.49 per share), no acquisition could
likely be approved by the Company's shareholders without the affirmative vote of
at least a portion of the Executive Committee, the members of which have
indicated to the Company their unwillingness to sell their shares to a third
party. Further, if any other acquisition proposal were presented to the
shareholders, the members of the Executive Committee could prevent the approval
of any such proposal by exercising their right to convert all or a portion of
their Convertible Debentures into shares and then vote their shares in
opposition to the proposal.
The Independent Committee and the Company Board also recognized that,
while consummation of the Offer and the Merger will result in all shareholders
(other than the Executive Committee and their affiliates) being entitled to
receive $7.75 in cash for each of their shares, it will eliminate the
opportunity for current shareholders (other than the Executive Committee and
their affiliates) to participate in the benefit of increases, if any, in the
value of the Company's business following the Merger. Nevertheless, the
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Independent Committee and the Board of Directors concluded that this fact did
not justify foregoing the receipt of the immediate cash premium represented
by the $7.75 per share price.
The Independent Committee considered the liquidation of the Company's
NJPPA business for purposes of evaluating the Offer and Merger, but did not
consider liquidation to be a viable course of action due to the extended period
that withdrawal from the PPA insurance industry would require and the discounts
to book value being sought by prospective third party purchasers of NJPPA
business.
In view of the wide variety of factors considered in connection with
their respective evaluations of the Offer and the Merger, neither the
Independent Committee nor the Board of Directors found it practicable to, and
did not, quantify or otherwise attempt to assign relative weights to the
specific factors they considered in reaching their determinations.
The foregoing discussion of the information and factors considered and
given weight by the Independent Committee and the Board of Directors is not
intended to be exhaustive but is believed to include all material factors
considered by the Independent Committee and the Board of Directors.
The Board of Directors, based upon the unanimous recommendation of the
Independent Committee, (a) unanimously determined that the terms of each of the
Offer, the Merger and the transactions contemplated by the Agreement are fair to
and in the best interests of the Company's shareholders and (b) unanimously
approved the Offer, the Merger, the Agreement and the transactions contemplated
by the Agreement.
Position of the Executive Committee Regarding Fairness of the Offer and
the Merger. The purposes of providing financing to effect the Offer and the
Merger at this time are to enable the Executive Committee and its affiliates to
acquire the entire equity interest in the Company; and to provide the Company's
shareholders (other than the Executive Committee and its affiliates) with an
opportunity to liquidate their investment in the Company for cash at a
significant premium to the market prices for Company common stock prior to the
announcement of the Company's Offer.
The financing members of the Executive Committee determined that it was
an appropriate time to commit to fund the Offer and the Merger based on the
Executive Committee's knowledge of the property and casualty insurance business,
the Executive Committee's belief that the trading price of the Company's common
stock undervalued the Company and the Executive Committee's desire to take
advantage of the benefits of taking the Company private. The Executive Committee
also believes that following the Offer and Merger, the Executive Committee will
have the resources and flexibility to take advantage of growth opportunities and
to focus on improving the Company's business without the constraints and
distractions caused by the public market's evaluation of the Company and its
business, results of operations and financial condition.
The transaction was structured as an issuer tender offer and then
second-step merger because the Executive Committee believes this structure to be
an efficient means to obtain the entire equity interest in the Company and to
provide the Company's other shareholders with cash for their shares.
In evaluating the fairness of the Offer and the Merger to the Company's
other shareholders, the Executive Committee and its affiliates considered a
number of factors including but not limited to the following material factors
with respect to substantive and procedural fairness:
(i) that the $7.75 per share price represents a premium of more than
29% over the $6.00 closing sale price on the NASDAQ National Market System on
October 30, 2001, the last full trading day prior to the appointment of the
Independent Committee and a premium of 49% over the $5.20 closing sale price on
December 17, 2001, the last full trading day prior to the announcement of the
Offer;
(ii) that an Independent Committee was formed, comprised entirely of
directors who were not current officers or employees of the Company and would
not have an economic interest in the Company following the Offer and the Merger,
and the Independent Committee retained its own financial and legal advisors,
which advisors have extensive experience with transactions similar to the Offer
and the Merger and which assisted the Independent Committee in its negotiations
with the Executive Committee;
(iii) the procedures utilized by the Independent Committee to negotiate
and approve the Offer, the Merger and the Agreement and the nature of the
negotiations with respect to the Agreement, as understood by the Executive
Committee;
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(iv) the terms and conditions of the Offer, the Merger and the
Agreement, including the amount and form of the consideration, as well as the
parties' mutual representations, warranties and covenants, and the conditions to
their respective obligations, which allow the Independent Committee to negotiate
with any person or entity that makes a proposal to acquire the Company and to
terminate the Agreement if deemed to be in the best interests of the Company's
shareholders (other than the Executive Committee and its affiliates);
(v) that the Independent Committee unanimously recommended to the Board
of Directors, with the members of the Executive Committee abstaining, that the
Agreement be adopted, and both the Independent Committee and Board of Directors
determined that the Offer and the Merger are fair to and in the best interests
of the shareholders of the Company (other than the Executive Committee and its
affiliates);
(vi) that the Independent Committee received the opinion of Cochran,
Caronia & Co. dated December 18, 2001, as to the fairness, from a financial
point of view, of the $7.75 price per share to be paid to Company's shareholders
of the Company (other than the Executive Committee and its affiliates); and
(vii) that the Offer must be accepted by shareholders holding 676,140
shares or approximately 61% of the shares not held by the Executive Committee
and its affiliates.
In summary, the analysis of the Executive Committee and its affiliates
of the various factors it considered focused on the disparity in the Executive
Committee's view that the public trading price of the Company shares undervalued
the inherent worth of the Company. The Chairman's letter in the Company's 2000
Annual Report and the Executive Committee Schedule 13D filings of April 7, 2000,
August 30, 2000 and June 5, 2001 stated that the Company's shares were
considered to be undervalued. Nonetheless, the Company's share price declined
since 1999 from a high of $14.875 per Share to $5.20 per Share one month prior
to the initial public announcement with respect to the proposed Offer. The
Executive Committee believed that this decline in price was based upon the
market's perceived identification of the Company with the NJPPA business despite
the Chairman's letter in the Company's 2000 Annual Report that only 42% of the
Company's business was conducted in the NJPPA market. The Executive Committee
appreciated as did the Independent Committee that the sale of the Company's
NJPPA business to a third party could only be accomplished with a significant
loss of the NJPPA book value and meeting significant regulatory impediments and
that the liquidation value of the Company whether in whole or in part by sale of
the NJPPA business or by withdrawal were not viable alternatives. All the
members of the Executive Committee recognized its initial funding offer of $7.50
per share to be less than half of the $15.22 book value per share of the Company
as of September 30, 2001 and the final negotiated Offer price of $7.75 per share
(as to which only Archer McWhorter and Alvin E. Swanner would finance) is
approximately 56% of the Company's estimated $14.15 book value per share as of
December 31, 2001. William E. Lobeck, Jr., the third member of the Executive
Committee, declined to participate in funding at the final negotiated Offer
price of $7.75 per share because he did not feel the funding proposal and
subsequent purchase was a good investment for himself.
After considering the foregoing, each of the members of the Executive
Committee and their affiliates has indicated that he, she or it believes the
terms of the Offer, the Merger and the transactions contemplated by the
Agreement to be fair to the Company's shareholders (other than the Executive
Committee and its affiliates) from a financial point of view on both a
substantive and procedural basis. The substantive basis on which fairness is
premised includes that (i) the $7.75 per share price represents a premium of
more than 29% over the $6.00 closing sale price on the NASDAQ National Market
System on October 30, 2001, the last full trading day prior to the appointment
of the Independent Committee and a premium of 49% over the $5.20 closing sale
price on December 17, 2001, the last full trading day prior to the announcement
of the Offer and (ii) that the Independent Committee received the opinion of
Cochran, Caronia & Co. dated December 18, 2001, as to the fairness, from a
financial point of view, of the $7.75 price per Share to be paid to the
Company's shareholders (other than the Executive Committee and its affiliates).
In addition, despite the fact that the transaction as structured does not
require the approval of shareholders, the Executive Committee and its affiliates
determined the transaction to be procedurally fair based upon the following: (i)
that an Independent Committee was formed, comprised entirely of directors who
were not current officers or employees of the Company and would not have an
economic interest in the Company following the Offer and the Merger, (ii) that
the Independent Committee retained its own independent financial and legal
advisors, and (iii) that the terms of the Offer were determined through
negotiations between the Executive Committee and the Independent Committee and
its financial and legal advisors which led to a 3.3% increase in the original
price offered by the Executive Committee, a requirement for implementing the
second-step Merger and that a minimum of 676,140 shares be tendered. The
Executive Committee and its affiliates recognized that 676,140 shares, the
minimum tender offer requirement, represented approximately 61% of the 1,101,510
issued and outstanding shares not held by the Executive Committee and its
affiliates.
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In reaching its determination as to fairness, none of the members of
the Executive Committee and their affiliates assigned specific weights to
particular factors, but rather considered all factors as a whole.
The Executive Committee and its affiliates have filed a combined
Schedule TO-T/13e-3 with the Commission disclosing their participation in
this transaction. See "Available Information."
The Offer. On January 15, 2002, the Company commenced the Offer. The
Company offered to purchase all of the outstanding shares at a price of $7.75
per share, in cash, without interest, upon the terms and subject to the
conditions set forth in the Offer to Purchase on Schedule TO-I/13e-3 filed with
the Commission on January 15, 2002, as supplemented by the Supplement to the
Offer to Purchase filed with Commission on February 12, 2002, and in the related
Letter of Transmittal. See "Available Information.' The Offer was conditioned
upon, among other things (i) there being validly tendered and not withdrawn
prior to the expiration of the Offer 676,140 shares; and (ii) the financing by
certain members of the Executive Committee of the Company's purchase of the
shares in the Offer and the Merger. The members of the Executive Committee and
their affiliates agreed not to tender the 1,022,870 shares beneficially owned by
them in the aggregate. The Offer expired at 5:00 p.m. New York City time, on
February 28, 2002, after the original expiration date of February 14, 2002, was
extended. Following the expiration of the Offer, the Company accepted for
payment 700,200 shares (approximately 64% of the issued and outstanding shares
not held by the Executive Committee and its affiliates) validly tendered and not
withdrawn pursuant to the Offer.
COMPANY'S REASONS FOR THE MERGER
The purpose for the Merger is for the Company to cash-out all remaining
shares not tendered by the public in the Offer and for the Executive Committee
and its affiliates to own the Company as a non-pubic entity for the reasons set
forth above.
OPINION OF FINANCIAL ADVISOR
The Independent Committee of the Board of Directors of the Company
engaged Cochran, Caronia & Co. to evaluate the fairness, from a financial point
of view, to the shareholders of the Company of a possible self-tender offer
financed by two members of the Executive Committee. On December 18, 2001, at a
meeting of the Independent Committee of the Board of Directors of the Company
held to evaluate the proposed transaction, Cochran, Caronia & Co. delivered to
the Company's Independent Committee of the Board of Directors an oral opinion to
the effect that, as of the date of the opinion and based on and subject to the
matters described in the opinion, the $7.75 per share consideration to be paid
to the shareholders of the Company in connection with the Offer and the
subsequent second-step Merger was fair, from a financial point of view, to the
shareholders.
In arriving at its opinion, Cochran, Caronia & Co.:
o reviewed a draft of the agreement for self-tender offer, financing and
second-step merger;
o examined audited annual and unaudited quarterly financial statements of
the Company;
o examined internal business, operating and financial information and
forecasts of the Company, prepared by the senior management of the
Company;
o examined certain other publicly available information relating to the
Company;
o analyzed financial, stock market and other publicly available
information relating to the businesses of other companies whose
operations are similar to those of the Company;
o considered publicly available information and financial terms of
certain comparable transactions in the property and casualty insurance
industry;
o held discussions with senior officers, directors and other
representatives and advisors of the Company concerning the business,
operations and prospects of the Company; and
20
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o considered other matters that it deemed relevant to its inquiry and has
taken into account such accepted financial and investment banking
procedures and considerations as it deemed relevant.
In rendering its opinion, Cochran, Caronia & Co. assumed and relied,
without independent verification, on the accuracy and completeness of all
financial and other information and data that it reviewed or considered. With
respect to financial projections and information and data, senior management of
the Company advised Cochran, Caronia & Co. that such projections, information
and data were prepared on reasonable bases reflecting the best currently
available estimates and judgments of senior management of the Company as to the
future financial performance of the Company.
Cochran, Caronia & Co. was also advised that the actuarial reserve
analyses relating to the Company prepared by the Company's independent actuaries
were prepared on bases reflecting the best currently available estimates and
judgments of the actuaries as to the Company's reserves. Cochran, Caronia & Co.
is not an actuarial firm and its services did not include any actuarial
determinations or evaluations by it or an attempt to evaluate actuarial
assumptions, nor did Cochran, Caronia & Co. express any views as to matters
relating to the Company's reserves, including, without limitation, the adequacy
of the Company's reserves. Cochran, Caronia & Co. did not make and, except for
the actuarial reserve analyses prepared by the Company's independent actuaries,
was not provided with an independent evaluation or appraisal of the assets,
liabilities (contingent or otherwise) or reserves of the Company, and did not
make any physical inspection of the properties or assets of the Company.
Cochran, Caronia & Co. assumed, with the Company's consent, that in the course
of obtaining the necessary regulatory approvals for the Offer, no limitations,
restrictions or conditions would be imposed that would have a material adverse
effect on the ability of the parties to complete the Offer. Cochran, Caronia &
Co. further assumed that the transaction contemplated by the Agreement would be
completed along the lines of the terms described within the draft of the
Agreement reviewed by Cochran, Caronia & Co., without the waiver of any material
rights, terms or conditions thereof by the Company.
Cochran, Caronia & Co. expressed no view as to, and its opinion does
not address, the relative merits of the Offer as compared with any alternative
business strategies that might exist for the Company or the effect of any other
transaction in which the Company might engage. Cochran, Caronia & Co.'s opinion
was necessarily based on information available, and financial, stock market and
other conditions and circumstances existing and disclosed to Cochran, Caronia &
Co., as of the date of its opinion. Although Cochran, Caronia & Co. evaluated
the fairness to the Company's shareholders of the consideration to be paid to
the Company's shareholders in the Offer from a financial point of view, Cochran,
Caronia & Co. was not asked to and did not recommend the specific form or amount
of consideration to be paid in the Offer. The form and amount of such
consideration was determined through arm's-length negotiations between the
Independent Committee of the Board of Directors of the Company and the Executive
Committee. No other instructions or limitations were imposed by the Company on
Cochran, Caronia & Co. with respect to the investigations made or procedures
followed by Cochran, Caronia & Co. in rendering its opinion.
THE FULL TEXT OF COCHRAN, CARONIA & CO.'S WRITTEN OPINION DATED DECEMBER 18,
2001, WHICH DESCRIBES THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND
LIMITATIONS ON THE REVIEW UNDERTAKEN, IS SET FORTH IN ANNEX 5. COCHRAN,
CARONIA & CO.'S OPINION IS DIRECTED TO THE COMPANY'S INDEPENDENT COMMITTEE OF
THE BOARD OF DIRECTORS AND RELATES ONLY TO THE FAIRNESS TO THE COMPANY'S
SHAREHOLDERS OF THE CONSIDERATION TO BE PAID TO THE COMPANY'S SHAREHOLDERS IN
THE OFFER AND THE MERGER FROM A FINANCIAL POINT OF VIEW. COCHRAN, CARONIA &
CO.'S OPINION DOES NOT ADDRESS ANY OTHER ASPECT OF THE OFFER, MERGER OR ANY
RELATED TRANSACTION.
In preparing its opinion, Cochran, Caronia & Co. performed a variety of
financial and comparative analyses, including those described below. The summary
of these analyses is not a complete description of the analyses underlying
Cochran, Caronia & Co.'s opinion. The preparation of a fairness opinion is a
complex analytical process involving various determinations as to the most
appropriate and relevant methods of financial analysis and the application of
those methods to the particular circumstances and, therefore, a fairness opinion
is not readily susceptible to summary description. Accordingly, Cochran, Caronia
& Co. believes that its analyses must be considered as a whole and that
selecting portions of its analyses and factors, without considering all analyses
and factors, could create a misleading or incomplete view of the processes
underlying its analyses and opinion.
In its analyses, Cochran, Caronia & Co. considered industry
performance, general business, economic, market and financial conditions and
other matters existing as of the date of its opinion, many of which are beyond
the control of the Company. No company, transaction or business used in those
analyses as a comparison is identical to the Company or the proposed Offer, and
an evaluation of those analyses is not entirely mathematical. Rather, the
analyses involve complex considerations and judgments concerning financial and
21
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operating characteristics and other factors that could affect the
acquisition, public trading or other values of the companies, business
segments or transactions analyzed.
The estimates contained in Cochran, Caronia & Co.'s analyses and the
valuation ranges resulting from any particular analyses 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 its analyses. In
addition, analyses relating to the value of businesses or securities do not
necessarily purport to be appraisals or to reflect the prices at which
businesses or securities actually may be sold. Accordingly, Cochran, Caronia &
Co.'s analyses and estimates are inherently subject to substantial uncertainty.
Cochran, Caronia & Co.'s opinion and analyses were only one of many
factors considered by the Company's Independent Committee of the Board of
Directors in its evaluation of the transaction and should not be viewed as
determinative of the views of the Company's Independent Committee of the Board
of Directors with respect to the consideration payable to the Company's
shareholders or the proposed Offer and second-step Merger.
Overview of Analysis. Cochran, Caronia & Co. analyzed the value of the
Company using four commonly utilized valuation methodologies of insurance
companies. Following the completion of the various valuation analyses, Cochran,
Caronia & Co. applied a minority discount of 10% - 20% to the total valuation
range indicated by the valuation analysis. Cochran, Caronia & Co. believed this
minority discount was appropriate based on an analysis of small capitalization
property and casualty insurance companies. Cochran, Caronia & Co.'s analysis
indicated that small capitalization property and casualty insurance companies
with insider ownership of less than 30% were, on average, valued at 26.8%
greater than small capitalization property and casualty insurance companies with
insider ownership of greater than 30% based on current price to GAAP book value
multiples. Insider ownership is defined as the percentage of a company's total
shares outstanding held by management, directors or employees.
Applying the minority discount to our total valuation range yielded an
adjusted total valuation range. Cochran, Caronia & Co. then chose its selected
valuation range based on the total valuation range adjusted for the 10% - 20%
minority discount.
The following is a summary of the material financial analyses performed
by Cochran, Caronia & Co. in connection with rendering its opinion:
Premiums Paid Analysis. Cochran, Caronia & Co. performed a premiums
paid analysis based on comparable public property and casualty transactions
announced since 1998. Cochran, Caronia & Co. chose to analyze the period after
1998 for its premiums paid analysis because it believes the premiums paid in the
most recent comparable public property and casualty transactions provide the
most relevant data. Cochran, Caronia & Co. analyzed the premiums paid by buyers
for the target's stock one day prior to the announcement of the transaction and
one month prior to the announcement of the second-step Merger transaction. The
median premium paid by a buyer for a target's stock for the selected
transactions one day prior to announcement of a transaction was 24.8% and one
month prior to the announcement of a transaction was 25.7%. Cochran, Caronia &
Co. compared these premiums paid with the proposed premium of 49.0% to the
Company's stock price of $5.20 one day prior to the announcement of the
transaction (December 17, 2001) and with the proposed premium of 49.0% to the
Company's stock price of $5.20 one month prior to the announcement of the
transaction (November 17, 2001).
Trading Multiple Valuation Analysis. Using publicly available
information, Cochran, Caronia & Co. analyzed the market values and trading
multiples of certain selected publicly traded small capitalization property and
casualty insurance companies, which are listed below. Although there were no
public companies with precisely the same mix of businesses and financial
conditions as the Company, Cochran, Caronia & Co. believes the following
publicly traded small capitalization property and casualty insurance companies
listed below were reasonably comparable. The following publicly traded companies
were selected for this analysis because they are regionally focused insurance
companies that write both personal lines and commercial lines insurance
products:
o Acceptance Insurance Companies, Inc.
o American Country Holdings, Inc.
o Donegal Group, Inc.
o GAINSCO, INC.
o Merchants Group, Inc.
o National Security Group, Inc.
o Unico American Corporation
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All valuation multiples were based on stock prices available as of
December 14, 2001.
Estimated financial data for the selected companies were based on
research analysts' estimates, and estimated financial data for the Company were
based on internal estimates of the Company's management. Cochran, Caronia & Co.
examined market values of the selected companies as a multiple of, among other
things, calendar year 2001 and 2002 estimated earnings computed in accordance
with generally accepted accounting principles, commonly known as GAAP, and GAAP
book value as of September 30, 2001. The ranges of market values to calendar
year 2001 and 2002 estimated earnings multiples calculated by Cochran, Caronia &
Co. for companies comparable to the Company were 10.7x to 20.0x and 9.1x to
11.5x, respectively. The range of market values to GAAP book value multiples
calculated by Cochran, Caronia & Co. for companies comparable to the Company was
0.34x to 0.81x.
Cochran, Caronia & Co. then applied a range of selected multiples
derived from the selected companies of calendar year 2001 and 2002 estimated
GAAP earnings and latest GAAP book value as of September 30, 2001, adjusted for
a $4.5 million accrued pension benefit liability, to corresponding financial
data of the Company, in order to derive an implied equity reference range for
the Company. Cochran, Caronia & Co. determined the range of multiples
appropriate for the Company to be 9.0x - 11.0x 2001 estimated earnings, 7.0x -
9.0x 2002 estimated earnings and 0.60x - 0.80x GAAP book value. Cochran, Caronia
& Co. primarily relied upon the valuation ranges produced as a result of the
application of the selected 2002 estimated earnings valuation multiples to the
Company's 2002 estimated earnings and the application of the selected GAAP book
value valuation multiples to the Company's adjusted GAAP book value, as the
application of our selected 2001 estimated earnings multiples to the Company's
2001 estimated earnings indicated an extremely low value due to the Company's
poor estimated earnings results for 2001. Prior to the application of a minority
discount, the result of this analysis yielded an equity value of $12.4 million -
$22.2 million, or $5.84 to $10.45 per share, for the Company. After the
application of a minority discount, the result of this analysis yielded an
equity value of $9.9 million - $20.2 million, or $4.67 to $9.41 per share, for
the Company.
Transaction Multiple Valuation Analysis. Using publicly available
information, Cochran, Caronia & Co. reviewed the financial terms and implied
transaction value multiples paid or proposed to be paid in certain selected
transactions in the property and casualty insurance industries. Although no
transaction utilized in this analysis was identical to the Offer, Cochran,
Caronia & Co. believes the selected transactions listed below were most
reasonably comparable.
<Table>
<Caption>
ACQUIRER TARGET
American National Insurance Company Farm Family Holdings, Inc.
Leucadia National Corporation Reliance Group Holdings, Inc.
Ohio Farmers Insurance Company Old Guard Group, Inc.
Fairfax Financial Holdings, Ltd. Sen-Tech International Holdings, Inc.
Prudential Insurance Company of America THI Holdings, Inc.
Motor Club of America* Mountain Valley Indemnity Company
White Mountains Insurance Group Consolidated Insurance Group
Millers American Group, Inc. Phoenix Indemnity Insurance Co.
United Fire & Casualty Group American Indemnity Financial Corp.
Unitrin, Inc. Valley Group, Inc.
Motor Club of America* North East Insurance Company
American Financial Group Worldwide Insurance Company
Commerce Group, Inc. Automobile Club Insurance Company
Kingsway Financial Services, Inc. Walshire Assurance Company
Fund American Enterprises Holdings Folksamerica Holding Company, Inc.
Donegal Mutual Insurance Company Southern Heritage Insurance Company
Queensway Financial Holdings, Ltd. North Pointe Financial Services, Inc.
</Table>
* Indicates transaction by the Company.
Cochran, Caronia & Co. compared purchase prices in the selected
transactions as a multiple of, among other things, trailing twelve-month GAAP
earnings and GAAP book value for the most recent quarter prior to the
announcement date of each acquisition. The range of multiples for the Company
calculated by Cochran, Caronia & Co. from the review of the selected
transactions was 8.9x to 31.8x trailing twelve-month GAAP earnings and 0.26x to
1.25x GAAP book value for the most recent quarter prior to the announcement date
of each acquisition.
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Cochran, Caronia & Co. then applied a range of selected multiples
derived from the selected transactions of trailing twelve-month GAAP earnings
and GAAP book value to the Company's trailing twelve months GAAP earnings and
GAAP book value as of September 30, 2001, adjusted for a $4.5 million accrued
pension benefit liability, in order to derive an implied equity reference range
for the Company. Cochran, Caronia & Co. determined the valuation range multiples
appropriate for the Company to be 14.0x to 16.0x trailing twelve months GAAP
earnings and 0.50 to 0.90x adjusted GAAP book value. Cochran, Caronia & Co.
primarily relied upon the valuation range produced as a result of the
application of the selected GAAP book value valuation multiples to the Company's
adjusted GAAP book value, as the application of our selected trailing twelve
months GAAP earnings multiples to the Company's trailing twelve months earnings
indicated an extremely low value due to the Company's poor earnings stream.
Prior to the application of the minority discount, the result of this analysis
yielded a selected equity value range of $13.9 million - $25.0 million, or $6.53
- - $11.76 per share, for the Company. After the application of a minority
discount, the result of this analysis yielded an equity value of $11.1 million -
$22.5 million, or $5.23 to $10.58 per share, for the Company.
Discounted cash flow analysis. As part of its valuation analysis,
Cochran, Caronia & Co. performed a discounted cash flow analysis of the
Company's projected dividendable cash flows during calendar year 2002 through
2006 based on internal estimates of the Company's management. Cochran, Caronia &
Co. derived an implied equity reference range for the Company by applying a
terminal value multiples of 5.0x to 7.0x to the Company's 2006 estimated GAAP
earnings and 0.70x to 0.90x to the Company's 2006 estimated GAAP book value and
a range of selected discount rates up to 19%. Prior to the application of the
minority discount, the result of this analysis yielded an equity value range of
$10.5 million - $20.1 million, or $4.96 - $9.45 per share, for the Company.
After the application of a minority discount, the result of this analysis
yielded an equity value of $8.4 million - $18.1 million, or $3.97 to $8.50 per
share, for the Company.
Component valuation analysis. Cochran, Caronia & Co. performed a
valuation of each of the components of the Company, including its book of
business, surplus, the run-off of its loss and loss adjustment expense reserves
and the equity in the unearned premium. This valuation methodology values the
Company as if it were to be shut down. Although Cochran, Caronia & Co.
considered this analysis in determining the value of the Company, it did not
rely heavily on this methodology due to its inherent uncertainty and
unlikelihood of its occurrence. Prior to the application of the minority
discount, the result of this analysis yielded an equity value range of $14.5
million - $29.3 million, or $6.82 - $13.77 per share, for the Company. After the
application of a minority discount, the result of this analysis yielded an
equity value of $11.6 million - $26.3 million, or $5.46 to $12.39 per share, for
the Company.
Other factors. In rendering its opinion, Cochran, Caronia & Co. also
reviewed and considered other factors, including:
o historical and projected financial data for the Company,
including the Company's financial performance and financial
position;
o historical trading prices and volumes for the Company's common
stock; and
o projected operating environment in the New Jersey automobile
insurance industry.
Valuation results. Prior to the application of the minority discount,
the results of the valuation analysis yielded an equity value range of $10.5
million - $29.3 million, or $4.96 - $13.77 per share, for the Company. Taking
into account the minority discount range of 10% - 20%, the total valuation range
that Cochran, Caronia & Co calculated for the Company was $8.4 - $26.3 million,
or approximately $3.97 - $12.39 per share. After considering this indicated
valuation range, Cochran, Caronia & Co. then selected a fair market valuation
range for the Company of approximately $15.0-$20.0 million (approximately $7.06
to $9.41 per share).
A COPY OF COCHRAN, CARONIA & CO.'S PRESENTATION TO THE INDEPENDENT COMMITTEE
ON DECEMBER 18, 2001 IS INCLUDED AS ANNEX A - SECTION 2 TO THE OFFER, COPIES
OF WHICH HAVE BEEN PREVIOUSLY MAILED TO COMPANY SHAREHOLDERS (SEE "AVAILABLE
INFORMATION").
Company Projections. The model developed by Cochran, Caronia & Co.
incorporated certain estimates and projections of the Company's management as to
the potential future financial performance of the Company, including the
following estimates with respect to the 2001 through 2006 fiscal years (in
thousands):
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<Table>
<Caption>
FY FY FY FY FY FY
2001 2002 2003 2004 2005 2006
(Est) (Est) (Est) (Est) (Est) (Est)
-------------- -------------- -------------- -------------- ------------- -------------
Net Premiums Earned $ 92,372 $105,584 $111,675 $118,408 $124,652 $129,435
Pre-Tax Income (108) 2,800 6,045 8,867 10,862 12,586
Net Income 72 1,848 3,990 5,852 7,169 8,307
End of Year Book Value 30,064 31,912 35,902 41,754 48,923 57,230
</Table>
The Company's book value is forecast to decrease to approximately
$14.15 per share at December 31, 2001 from $15.22 per share at September 30,
2001. The estimated change gives effect to projected operating earnings for
fiscal 2001, the anticipated annual change in shareholders' equity for the
Company's minimum pension liability (an internal estimate which expects an
increase in the minimum pension liability based on sharply lower interest rates)
and adjustments to shareholders' equity for changes in the fair value of fixed
maturity investments accounted for as available-for-sale securities.
The Company does not, as a matter of course, make public forecasts or
projections as to future revenues, earnings or other income statement data,
including the information set forth above, and such information was not prepared
with a view to public disclosure. Such information was included in the Offer to
Purchase and is included in this document for the limited purpose of providing
the Company's shareholders access to financial projections prepared by the
Company's management and made available to the Independent Committee and the
entire Board of Directors in connection with their respective consideration of
the Offer and Merger and considered by Cochran, Caronia & Co. in rendering its
opinion.
The projections contained herein were not prepared with a view toward
public disclosure or compliance with published guidelines of the Securities and
Exchange Commission, the guidelines established by the American Institute of
Certified Public Accountants for preparation and presentation of financial
projections, or generally accepted accounting principles, nor do they comply in
certain respects with those guidelines. Ernst & Young LLP, the Company's
independent public accountants, had no role or responsibility in preparing this
information and had no association with these projections. Accordingly, Ernst &
Young LLP does not express an opinion or any other form of assurance concerning
the information or the projections. There can be no assurance that any of these
projections will be realized. The information set forth above is not a complete
presentation of the projections. The Company included in these projections only
the information for net premiums earned, pre-tax income, net income and end of
year book value, because the Company believed those amounts were likely to be
the most relevant to the Company's shareholders in evaluating whether to tender
their shares in this Offer.
The projections were based upon a variety of assumptions made by
Company management at the time the projections were prepared, including the
ability to achieve strategic goals, objectives and targets over the applicable
period. These assumptions involved judgments about future economic, competitive,
regulatory and financial market conditions, and about future business decisions,
all of which are difficult or impossible to predict accurately and many of which
are beyond the control of the Company. The Company's projections anticipate that
the Company's operations will remain consistent with the Company's stated
business strategy and those operations currently in place. This includes but is
not limited to, the estimated continuation of Motor Club's regulatory relief
from the NJDOBI through 2004, the continued growth of the Company's commercial
lines programs with stable loss ratios, no new acquisition of other insurance
companies, and no unusual fluctuations in the Company's expenses (including the
cost of reinsurance), investment portfolios or operating environment.
Many important factors could cause results to differ materially from
those expressed in this forward-looking information. These factors include, but
are not limited to, economic and other market conditions in which the Company
operates, cyclical and seasonal fluctuations in operating results, the cyclical
nature of the property casualty insurance industry, the unpredictable and
volatile nature of the New Jersey private passenger automobile insurance market
which represents approximately 40% of the Company's business, the impact of
competition, product demand and pricing, claims development and the process of
estimating reserves, the level of the Company's retentions, catastrophe and
storm losses, legislative and regulatory developments, the status of Motor
Club's regulatory relief and its impact on the Company's future operations,
changes in the ratings assigned to the Company by rating agencies, investment
results, availability of reinsurance (particularly with regard to terrorism
exposures), availability of dividends from the Company's insurance company
subsidiaries, investing substantial amounts in the Company's information systems
and technology, the ability of the Company's reinsurers to pay reinsurance
25
<Page>
recoverables owed to the Company, the Company's entry into new markets, the
Company's acquisition of NEIC on September 24, 1999 and the Company's
acquisition of Mountain Valley on March 1, 2000, and the Company's successful
integration of these acquisitions, potential future tax liabilities related
to an insolvent subsidiary and state regulatory and legislative actions which
can affect the profitability of certain lines of business and impede the
Company's ability to charge adequate rates, and other risks detailed from
time to time in the Company's filings with the Securities and Exchange
Commission and matters affecting business generally. Accordingly, the Company
cautions against undue reliance on the information contained in these
projections. There can be no assurance that the projected results would be
realized or that actual results would not be significantly higher or lower
than those set forth above. The Company does not intend to update or revise
these projections to reflect circumstances existing after the date they were
prepared or to reflect the occurrence of future events, except and to the
extent otherwise required by law.
Subsequent Bring Down Letter. On February 28, 2002, Cochran, Caronia &
Co. delivered to the Independent Committee its oral advice, later that day
confirmed in writing, that there had been no material change in circumstance
that would cause them to modify their prior fairness opinion dated December 18,
2001. A copy of the subsequent bring down letter is attached to this information
statement as Annex 5.
Miscellaneous. The Independent Committee of the Board of Directors of
the Company engaged Cochran, Caronia & Co. as its financial advisor based upon
the familiarity of Cochran, Caronia & Co. with the Company's operations arising
from its advice in the Company's acquisitions of NEIC and Mountain Valley in
1999 and 2000, respectively, and the nationally recognized experience and
expertise of Cochran, Caronia & Co. in the insurance industry. Cochran, Caronia
& Co. is a full service investment bank focused exclusively on the insurance
industry and regularly engages in the valuation of insurance company securities
in connection with business combinations, investments and other transactions.
Under the terms of its engagement dated July 31, 2001, the Company paid
Cochran, Caronia & Co. $100,000 to present its evaluation of the Company's
strategic alternatives. In addition, pursuant to the terms of the engagement
letter dated November 7, 2001 negotiated with the Independent Committee, the
Company agreed to pay Cochran, Caronia & Co. an additional $150,000 to deliver
to the Independent Committee the fairness opinion of Cochran, Caronia & Co. The
Company also has agreed to reimburse Cochran, Caronia & Co. for reasonable
travel and other out-of-pocket expenses incurred by Cochran, Caronia & Co. in
performing its services, including the fees and expenses of its legal counsel,
and to indemnify Cochran, Caronia & Co. and related persons against liabilities,
including liabilities under the federal securities laws, arising out of its
engagement.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
On December 18, 2001, Archer McWhorter, William E. Lobeck, Jr. and
Alvin E. Swanner together with certain of their affiliates agreed in
principle with Preserver Group for the Offer to take place and on January 14,
2002 executed the Agreement, a copy of which is set forth as Annex B to the
Offer previously filed by Preserver Group with the Commission on January 15,
2002. The Agreement was amended on February 4, 2002 to further limit the
circumstances under which it could be terminated. A copy of the Amended and
Restated Agreement is set forth at Annex 6.
Under the Agreement, the Executive Committee and their affiliates
holding 1,022,870 issued and outstanding shares did not tender in the Offer. It
was contemplated that if 676,140 shares were tendered and the Offer consummated,
the Executive Committee and their affiliates would accomplish a short-form
merger, under the NJBCA, if they owned (through PGAC, the company created to be
the merger entity) more than 90% of the voting shares of Preserver Group after
completion of the Offer and if they owned (through PGAC) less than 90% of the
voting shares of Preserver Group after completion of the Offer, they would vote
their shares in favor of a long-form merger.
Archer McWhorter, William E. Lobeck, Jr. and Alvin E. Swanner have
served as directors of Preserver Group as members of its Executive Committee of
the Board of Directors since 1986. In March 1994, they acquired 801,303 shares
representing approximately 39% of Preserver Group's then issued and outstanding
shares of common stock, which together with the shares previously held by them
constituted approximately 44% of Preserver Group's then issued and outstanding
shares.
Robert S. Fried, a member of the Independent Committee who owned 1,000
shares tendered his shares in the Offer.
The two management directors of Preserver Group, Stephen A. Gilbert and
Patrick J. Haveron who held 28,000 and 9,350 issued and outstanding shares,
respectively, together with four other executive officers of Preserver Group who
owned 20,570 Shares, tendered their shares pursuant to the Offer.
26
<Page>
Convertible Debentures. In connection with Preserver Group's
acquisition of NEIC, on September 23, 1999, Preserver Group issued $10 million
of convertible subordinated debentures ("Convertible Debentures"), in one
series, under a plan previously approved by its shareholders. The Convertible
Debentures are due on September 23, 2009 and bear an interest rate of 8.44%,
which was 2.5% over the London Interbank Offered Rate, fixed as of September 23,
1999, the date the series was issued.
At each holder's option, the Convertible Debentures are convertible
at any time, in whole in part, into 645,578 shares of the Company's common
stock ($10 million divided by 130% of the average trading price of the
Company's common stock over the twenty day period immediately prior to
September 23, 1999 ("Conversion Price")). The applicable Conversion Price is
$15.49. The Executive Committee purchased $9,253,785 of the $10 million in
Convertible Debentures issued. Based on the shares outstanding as of December
18, 2001, if the Executive Committee had elected to convert those Convertible
Debentures in full, their percentage ownership in Preserver Group's common
stock would have substantially increased from the then current 48.1% to
59.5%. Based on the shares outstanding as of this information statement, if
the Executive Committee elects to convert those Convertible Debentures in
full, their percentage ownership in Preserver Group's common stock will
substantially increase from the then current 72% to 85%.
Interest paid on the Convertible Debentures was $844,000, $844,000 and
$232,100 in 2001, 2000 and 1999, respectively. The fair value of the Convertible
Debentures was estimated to be $11,669,864, $11,950,282 and $12,648,876 at
December 31, 2001, 2000 and 1999, respectively. Fair value for the Convertible
Debentures are estimated using a model that considers both the debt and equity
components of the value for the Convertible Debentures. As to the debt
component, fair value was estimated by considering the Debentures estimated
credit quality, similar instruments and its remaining average life. As to the
equity component, fair value was estimated using the Black-Scholes option
pricing model based on the following assumptions for 2001, 2000 and 1999;
risk-free interest rate of 4.96%, 5.19% and 6.44%; volatility of 46.2%, 47.6%
and 50.5%; and expected life of 7.75 years in 2001, 8.75 years in 2000 and 9.75
years in 1999. Preserver Group does not pay a dividend on its common stock.
Unsecured Notes. In connection with the acquisition of Mountain
Valley, the Executive Committee extended unsecured debt financing to
Preserver Group ("Notes") in the amount of $11.5 million to finance the
transaction and to provide additional working capital to Preserver Group. The
Notes have been extended one year and now mature on February 28, 2003 and pay
interest quarterly at a rate of 11.605%. At Preserver Group's election, if
acceptable financing is not identified by the Company, the Notes can be
extended for up to four years utilizing successive one-year renewals, in
exchange for an increased interest rate on the Notes.
Fees and Other Rights of the Independent Committee. Members of the
Independent Committee were each paid by Preserver Group a fee of $15,000
in consideration of his service on the Independent Committee. In addition,
Preserver Group has agreed to reimburse each member for all out-of-pocket
expenses incurred in connection with his service on the Independent
Committee. In the event that additional services of the members are required
after the consummation of the Offer, Preserver Group has agreed to compensate
each member of the Independent Committee at a rate of $300 per hour.
Pursuant to Indemnification Agreements by and among each member of the
Independent Committee and Preserver Group, each member of the Independent
Committee is entitled to be indemnified by Preserver Group with respect to
certain matters in connection with the Offer and Merger.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following discussion, subject to the limitations set forth herein,
describes the material federal income tax consequences of the Merger to holders
of shares who hold their shares as capital assets and exchange their shares for
cash pursuant to the Merger (including any cash amounts received by dissenting
shareholders pursuant to the exercise of appraisal rights). The tax consequences
to a specific shareholder may vary depending upon such shareholder's particular
tax situation, and the discussion set forth below may not apply to certain
categories of holders of shares subject to special treatment under the Internal
Revenue Code of 1986, as amended (the "Code"), such as foreign shareholders,
securities dealers, broker-dealers, insurance companies, financial institutions,
tax-exempt entities and shareholders who acquired their shares pursuant to an
exercise of an employee stock option or otherwise as compensation or who hold
restricted stock. The discussion is based on the Code as in effect on the date
of this information statement, as well as the rules and regulations thereunder,
existing administrative interpretations and court decisions currently in effect,
all of which are subject to change, retroactively or prospectively, and to
possible differing interpretations and does not address state, local or foreign
tax laws.
27
<Page>
The receipt of cash for shares in the Merger will be a taxable
transaction for federal income tax purposes and may also be a taxable
transaction under applicable state, local or foreign tax laws. In general, a
shareholder will recognize gain or loss for federal income tax purposes equal to
the difference between the amount of cash received in exchange for the shares
surrendered in the Merger and such shareholder's adjusted tax basis in such
shares. Assuming the shares constitute capital assets in the hands of the
shareholder, such gain or loss will be capital gain or loss. If, at the time of
the Merger, the shares surrendered in the Merger have been held for more than
one year, such gain or loss will be a long-term capital gain or loss. Under
current law, long-term capital gains of individuals are, under certain
circumstances, taxed at lower rates than items of ordinary income.
A shareholder (other than certain exempt shareholders including, among
others, all corporations and certain foreign individuals and entities) that
sells shares may be subject to a 30% backup withholding unless the shareholder
provides its Taxpayer Identification Number, or unless an exemption applies. If
backup withholding applies to a shareholder, the Paying Agent is required to
withhold 30% from payments to such shareholder. Backup withholding is not an
additional tax. Rather, the amount of the backup withholding can be credited
against the federal income tax liability of the person subject to the backup
withholding, provided that the required information is given to the IRS. If
backup withholding results in an overpayment of tax, a refund can be obtained by
the shareholder upon filing an income tax return.
THE FOREGOING DISCUSSION MAY NOT BE APPLICABLE TO CERTAIN TYPES OF SHAREHOLDERS
SUBJECT TO SPECIAL TREATMENT UNDER THE CODE, INCLUDING SHAREHOLDERS WHO ACQUIRED
SHARES PURSUANT TO THE EXERCISE OF EMPLOYEE STOCK OPTIONS OR OTHERWISE AS
COMPENSATION, INDIVIDUALS WHO ARE NOT CITIZENS OR RESIDENTS OF THE UNITED STATES
AND FOREIGN CORPORATIONS, OR SHAREHOLDERS WHO HOLD RESTRICTED STOCK. THE
FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY AND IS BASED UPON PRESENT LAW. SHAREHOLDERS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES
OF THE MERGER AND THE APPLICATION AND EFFECT OF THE ALTERNATIVE MINIMUM TAX,
AND STATE, LOCAL AND FOREIGN TAX LAWS.
THE MERGER AGREEMENT
The following is a summary of the material terms of the Merger
Agreement, as amended, a copy of which is set forth at Annex 6. Capitalized
terms not otherwise defined in the following description of the Merger
Agreement have the respective meanings ascribed to them in the Merger
Agreement, as amended. This summary is not a complete description and is
qualified in its entirety by reference to the Merger Agreement, as amended.
The Offer. Pursuant to the Agreement, the Company was obligated to
commence the Offer as soon as practicable after the date of the Agreement at the
offer price of $7.75 per share. The Offer was to expire on February 14, 2002,
twenty (20) business days after its commencement unless extended by the Company.
The Offer was extended to February 28, 2002 by the terms of the Supplement to
the Offer dated February 11, 2002. Following the expiration of the Offer, the
Company accepted for payment 700,200 shares (approximately 64% of the issued and
outstanding shares not held by the Executive Committee and its affiliates)
validly tendered and not withdrawn pursuant to the Offer.
Financing. Two of the three members of the Executive Committee,
Archer McWhorter and Alvin E. Swanner, agreed to advance to the Company in
one or more loans in the aggregate principal amount of the product of
1,101,510 shares and the offer price ($7.75), pursuant to the terms of a
certain Loan Agreement, which is attached as an exhibit to the Merger
Agreement. The loan is interest-free and evidenced by a promissory note that
will automatically convert into shares of non-voting Series A preferred stock
(otherwise equivalent to the Company's common stock) of the Company (the
"Financing Preferred Stock") at the conversion price of $7.75 per share sixty
(60) days after the consummation of the Offer, subject to the Company's right
to earlier convert the loan into the non-voting Series A preferred stock.
Under the Loan Agreement, the proceeds of the loan may be used only to
finance the purchase of shares pursuant to the Offer and to cash-out minority
shareholders in the second-step Merger, including holders of Dissenting
shares. Loan proceeds may not be used to pay the fees of the financial
advisors or the legal fees of counsel to the Independent Committee. On
February 28, 2002, the Company drew down on the Loan in the amount of
$5,426,550 to pay for the 700,200 shares tendered in the Offer. This amount
was converted into 700,200 shares of Financing Preferred Stock on March 18,
2002. The amount payable by the Company to acquire, pursuant to the Merger,
the remaining 401,310 shares outstanding as of March 27, 2002, totals
$3,110,153.
28
<Page>
The Company will obtain such funds from under the Loan Agreement. The Merger
is not contingent upon obtaining financing. The form of the Financing
Agreement, together with the form of Note, are exhibits to the Merger
Agreement.
The Second-Step Merger. The Merger Agreement provides that, as soon
as is practicable after the date of the Merger Agreement, the Executive
Committee will form a New Jersey corporation to serve as the Merger Company.
PGAC was formed to act as Merger Company and prior to the effective date,
under the terms of the Merger Agreement, the members of the Executive
Committee and their affiliates will contribute to PGAC all of the shares of
common stock and the Financing Preferred Stock owned by them and PGAC will
have issued to them the same number of shares of common stock and non-voting
preferred stock of Merger Company. The Merger Agreement provides that as soon
as practicable after consummation of the Offer and in accordance with the
provisions of the Merger Agreement, the Certificate and Plan of Merger, the
NJBCA and applicable federal and state securities laws, the Merger Company
will be merged with and into the Company, the Company shall continue its
corporate existence under the NJBCA as the surviving corporation in the
Merger (the "Surviving Corporation") and the separate corporate existence of
the Merger Company shall cease. The name of the Surviving Corporation shall
continue to be "Preserver Group, Inc." All rights, privileges, powers and
franchises (of a public as well as of a private nature), of the Company and
the Merger Company shall vest in the Company as the Surviving Corporation,
and all debts, liabilities and duties of the Company and the Merger Company
shall become the debts, liabilities and duties of the Surviving Corporation.
The parties to the Merger also agreed to take all actions as may be required
by the NJBCA and any applicable federal and state securities laws to perform
the Merger in compliance therewith, including, but not limited to, making all
requisite mailings and notifications to the minority shareholders of the
Company.
Conversion Of Securities In The Merger. After the completion of the
Offer and at the Effective Time of the Merger, by virtue of the Merger and
without any action on part of the holders thereof:
(a) Each outstanding share of common stock of the Company held by
the Company as a treasury share (which includes all shares tendered in the
Offer) and each outstanding share of common stock and Series A preferred
stock of the Company owned by Merger Company shall be cancelled and retired
and no payment shall be made with respect thereto.
(b) Each other outstanding share of common stock of the Company, which
would constitute all of the shares held by non-tendering shareholders, other
than shares held by holders who have exercised their appraisal rights under New
Jersey law, shall be converted into the right to receive an amount of cash
(without interest) equal to the $7.75 offer price paid per share in the Offer.
(c) Each share of common stock and preferred stock of Merger Company
issued and outstanding immediately prior to the Effective Time of the Merger
shall be converted into one fully paid and nonassessable share of Common Stock
of the Company as the Surviving Corporation.
Employee Options. The Company has issued to its employees the following
options under the Company's employee stock option plans: options to purchase
60,000 shares at an exercise price of $12.75 per share; options to purchase
28,500 shares at an exercise price of $11.75 per share; options to purchase
31,000 shares of common stock at $12.875 per share; options to purchase 36,000
shares at $8.125 per share; and options to purchase 38,500 shares at $7.21 per
share (which 38,500 options do not vest until June 2002). As to each such option
(collectively, the "Options") granted under the Company's employee stock option
plans, whether or not then exercisable, which is outstanding prior to the Offer
and which has not been exercised prior to the acquisition of shares pursuant to
the Offer, the holder thereof shall continue to hold the Option to purchase
after the Effective Time of the Merger, the same number of shares of the
Surviving Corporation as the Option entitled such holder to purchase of the
Company and on all of the same terms and conditions as the Options.
Convertible Debentures. The Company has outstanding $10,000,000 in
principal of debentures convertible into 645,578 shares at $15.49 per share (the
"Convertible Debentures"), of which $9,253,785 of Convertible Debentures is
owned by members of the Executive Committee and their affiliates. The
Second-Step Merger will have no effect on the Convertible Debentures.
Going Private. The Merger Agreement provides that if a sufficient
number of shareholders tender their shares such that, following the Offer,
the Company has fewer than 300 holders of record of its shares, the Company,
immediately upon completion of the Offer, will take all required action to
deregister its shares under the Exchange Act and delist its shares from the
NASDAQ National Market System. If, following the Offer, the Company has
greater than 300 holders of record, the Merger Agreement requires that the
Company take all required action to deregister its shares under the Exchange
Act and delist its shares from NASDAQ following the second-step Merger. As a
result of the Offer, the Company has fewer than 300 holders of record and on
29
<Page>
March 18, 2002, the Company filed a Form 15 deregistering its common stock
under the Exchange Act and delisted its shares from the NASDAQ Stock Market.
Representations and Warranties. The Merger Agreement contains
various customary representations and warranties of the parties thereto
including representations by the Company as to its organization and capital
structure. The Merger Agreement also contains a representation from the
Financing Related Parties as to their ability to finance the Offer and the
Merger. The Merger Agreement also requires each of the parties to use its
best efforts to take all actions necessary, proper or advisable to consummate
and make effective, in an expeditious manner, the Offer and the Merger.
Conditions to the Merger. The Merger is subject to the consummation
of the Offer and approval of the Company's shareholders. The Offer was
consummated February 28, 2002 with the Company purchasing 700,200 shares. The
Company has obtained shareholder approval by written consent, subject to
notification requirements to non-consenting shareholders under the Exchange
Act and New Jersey law. This information statement addresses such
requirements. Accordingly, it is expected that the Merger will be consummated
on April 18, 2002, or as promptly as practicable thereafter.
Termination. The Merger Agreement contains provisions allowing its
termination by the Company, the Executive Committee and/or the Financing Related
Parties under certain circumstances prior to the commencement or consummation of
the Offer. Since the Offer has been consummated, these termination provisions no
longer apply. Prior to the consummation of the Offer, one or more respective
parties would have been entitled to terminate the Merger Agreement if, among
other things: (i) the Financing Related Parties breached their representations
or obligations relating to the financing; (ii) fewer than 676,410 shares were
tendered in the Offer; (iii) any governmental entity had issued an order, decree
or ruling or taken any other action permanently enjoining, restraining or
otherwise prohibiting the payment for the shares pursuant to the Offer; (iv)
there was a material adverse change in the business, condition, or operations of
the Company; or (v) the Company received a proposal which the Independent
Committee determined, in the exercise of its fiduciary duties, to be more
favorable to the shareholders (other than the Executive Committee and its
affiliates) than the Offer and the Merger.
Expenses. The Company is responsible for payment of all fees and
expenses of the Offering and the Merger. The Company anticipates that fees and
expenses for the Offer and Merger, including but not limited to, filing, legal,
accounting, investment advisory fees, solicitation expenses and printing costs,
will be approximately $500,000. These fees and expenses will be paid out of
existing Company working capital.
30
<Page>
SELECTED FINANCIAL DATA
Set forth below is certain selected consolidated financial data with
respect to the Company, excerpted or derived from the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000, as well as the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2001, each as
filed with the Commission pursuant to the Exchange Act. More comprehensive
financial information is included in such reports and other documents filed by
the Company with the Commission. Such reports and other documents are available
for inspection, and copies thereof are obtainable in the manner set forth below
under "Available Information" below.
<Table>
<Caption>
Nine months ended
September 30, Years ended December
---------------------- ---------------------------------------------------------------
2001 2000 2000(1) 1999(2)(3) 1998(3) 1997(3) 1996(3)
---- ---- ------- ---------- ------- ------- -------
(in thousands, except as to per share data)
Operating Results:
Revenues from operations $ 70,669 $ 62,115 $ 83,631 $ 55,951 $ 53,347 $ 51,102 $ 46,525
Realized gains on sale
of investments $ 231 $ 8 83 36 28 -- 50
Realized gain on sale
of subsidiary -- -- -- -- 702
Net investment income $ 4,956 $ 4,674 6,413 5,081 4,305 3,595 3,087
---------- ---------- ------------- ---------- ---------- ---------- ----------
Total revenues $ 75,856 $ 66,797 $ 90,127 $ 61,068 $ 57,680 $ 54,697 $ 50,319
========== ========== ============= ========== ========== ========== ==========
Income before federal
income taxes $ (464) $ 2,353 $ 3,000 $ 102 $ 5,719 $ 4,630 $ 3,297
---------- ---------- ------------- ---------- ---------- ---------- ----------
Net income $ (306) $ 1,538 $ 1,960 $ 91 $ 3,778 $ 3,357 $ 5,330
========== ========== ============= ========== ========== ========== ==========
Financial Condition:
Total assets $ 232,484 $ 201,930 $ 208,889 $ 156,588 $ 130,999 $ 102,761 $ 97,128
Convertible subordinated
debentures $ 10,000 $ 10,000 $ 10,000 $ 10,000 -- -- --
Note payable $ 11,500 $ 11,500 $ 11,500 -- $ 3,000 -- --
Shareholders' equity $ 32,337 $ 29,992 $ 29,992 $ 26,909 $ 28,814 $ 24,415 $ 20,381
Per Common share:
Net income - Basic $ (0.14) $ 0.73 $ .92 $ .04 $ 1.79 $ 1.62 $ 2.61
Net income - Diluted $ (0.14) $ 0.71 $ .91 $ .04 $ 1.78 $ 1.60 $ 2.56
Book Value $ 15.22 $ 13.80 $ 14.12 $ 12.67 $ 13.56 $ 11.66 $ 9.95
Weighted average number of
shares outstanding:
Basic 2,124,387 2,124,387 2,124,387 2,117,912 2,108,722 2,074,473 2,045,590
Diluted 2,124,387 2,769,965 2,770,075 2,121,697 2,121,366 2,102,395 2,081,080
Significant Insurance
Indicators:
Net premiums written $ 83,255 $ 62,784 $ 89,204 $ 54,508 $ 64,303 $ 51,680 $ 47,337
Loss and loss expense ratio 72.1% 66.4% 66.7% 72.8% 68.6% 65.1% 64.5%
Expense ratio 33.8% 35.3% 35.3% 36.4% 29.1% 33.3% 37.9%
--------- --------- ------------- ---------- ---------- ---------- ----------
Combined ratio 105.9% 101.7% 102.0% 109.2% 97.7% 98.4% 102.4%
========= ========= ============= ========== ========== ========== ==========
</Table>
(1) Includes Mountain Valley's balance sheet as of December 31, 2000 and results
of operations for the ten months ended December 31, 2000.
(2) Includes North East's balance sheet as of December 31, 1999 and results of
operations for the three months ended December 31, 1999.
(3) The financial data as of and for the years ended December 31, 1996, 1997,
1998 and 1999 have been restated as described in Note V in the Notes to the
Consolidated Financial Statements of the Annual Report on Form 10-K (as
amended) for the year ended December 31, 2000.
(4) The financial data as of and for the nine months ended September 30, 2000
has been restated as described in Note 7 of the Quarterly Report on Form 10Q
for the nine months ended September 30, 2001.
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SELECTED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
Set forth below is certain unaudited pro forma consolidated financial
information for the nine months ended September 30, 2001 and the year ended
December 31, 2000 adjusted for certain costs and expenses to be incurred as a
result of the purchase of shares in the Offer and Merger. This summary unaudited
pro forma consolidated financial information should be read in conjunction with
the historical financial information contained in the Company's Quarterly Report
on Form 10-Q for the period ended September 30, 2001 and Annual Report on Form
10-K, as amended, for year ended December 31, 2000, incorporated by reference
into this information statement. See "Incorporation by Reference."
UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF
PRESERVER GROUP, INC.
The following unaudited pro forma condensed consolidated financial
statements present the historical consolidated balance sheet and statements of
income of the Company after giving effect to the Offer and the Merger. These
statements are prepared using accounting principles generally accepted in the
United States and are based on the assumptions set forth in the notes thereto.
The unaudited pro forma condensed consolidated balance sheet at September 30,
2001 gives effect to the Offer and the Merger as if it had occurred at September
30, 2001. The unaudited pro forma condensed consolidated statements of income
for the year ended December 31, 2000 and the nine months ended September 30,
2001 gives effect to the Offer and the Merger as if they had occurred on January
1, 2000.
The following unaudited pro forma condensed consolidated financial
information has been prepared from, and should be read in conjunction with, the
audited and unaudited historical consolidated financial statements and related
notes thereto of the Company, which are incorporated by reference herein.
The unaudited pro forma condensed consolidated financial information is
for illustrative purposes only. You should not rely on the pro forma condensed
consolidated financial information as being indicative of the historical results
that would have been achieved or the future results that the Company will
experience after the Offer and the Merger.
32
<Page>
PRESERVER GROUP, INC.
UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 2001
--------------------------
<Table>
<Caption>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
ASSETS
Investments........................ $ 99,511,267 $ 99,511,267
Cash and cash equivalents.......... 14,432,819 14,432,819
Premiums receivable................ 50,718,217 50,718,217
Reinsurance balances receivable.... 36,953,088 36,953,088
Notes and accounts receivable...... 281,840 281,840
Deferred policy acquisition costs.. 19,755,266 19,755,266
Prepaid reinsurance premiums....... 3,283,743 3,283,743
Deferred tax asset................. 626,157 626,157
Fixed assets, net.................. 3,227,990 3,227,990
Federal income tax receivable...... 12,413 12,413
Goodwill........................... 1,445,630 1,445,630
Other assets....................... 2,235,517 2,235,517
------------ ------------ ------------
Total Assets.................... $232,483,947 $ -- $232,483,947
============ ============ ============
<Caption>
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Losses and loss expenses........... $100,394,525 $100,394,525
Unearned premiums.................. 65,047,963 65,047,963
Other liabilities.................. 13,204,119 $ 500,000 (D) 13,704,119
Notes payable...................... 11,500,000 -- (B) 11,500,000
Convertible subordinated debenture. 10,000,000 10,000,000
------------ ------------ ------------
Total liabilities............... 200,146,607 500,000 200,646,607
============ ============ ============
Shareholders' Equity:
Common stock....................... 1,062,194 (550,755)(A) 511,439
Preferred stock.................... -- 8,536,703 (B) 8,536,703
Paid in additional capital......... 2,066,089 (1,071,286)(A) 994,803
Accumulated other comprehensive
Loss............................ (122,988) (122,988)
Retained earnings 29,332,045 (7,414,662)(D) 21,917,383
------------- ----------- ------------
Total Shareholders' Equity.... 32,337,340 (500,000) 31,837,340
------------- ----------- ------------
Total Liabilities and
Shareholders' Equity.......... $ 232,483,947 $ -- $232,483,947
============= =========== ============
</Table>
The accompanying notes are an integral part of these pro forma condensed
consolidated financial statements.
33
<Page>
PRESERVER GROUP, INC.
UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
--------------------------
<Table>
<Caption>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
REVENUES
Insurance premiums................. $ 70,575,516 $ 70,575,516
Net investment income.............. 4,956,096 4,956,096
Realized gains on sales of
investments (net) ............... 230,740 230,740
Other revenues..................... 93,966 93,966
------------- ------------
Total revenues.................. 75,856,318 75,856,318
------------ ------------
LOSSES AND EXPENSES
Losses and loss expenses incurred.. 50,875,530 50,875,530
Amortization of deferred policy
acquisition costs............... 20,722,305 20,722,305
Other operating expenses........... 3,111,285 3,111,285
Interest expense................... 1,547,681 1,547,681
Amortization of goodwill 63,522 63,522
------------ ------------
Total losses and expenses....... 76,320,323 76,320,323
------------ ------------
Loss before Federal income taxes... (464,005) -- (464,005)
Benefit for Federal income taxes... 157,758 -- (C) 157,758
------------ ------------ ------------
NET LOSS ($306,247) -- ($306,247)
============ ============ ============
NET LOSS PER COMMON SHARE:
Basic......................... ($0.14) ($0.30)(E)
====== ======
Diluted....................... ($0.14) ($0.30)(E)
====== ======
WEIGHTED AVERAGE COMMON AND
POTENTIAL COMMON SHARES
OUTSTANDING:
Basic......................... 2,124,380 (1,101,510)(A) 1,022,870
============ ============ ============
Diluted....................... 2,124,380 (1,101,510)(A) 1,022,870
============ ============ ============
</Table>
The accompanying notes are an integral part of these pro forma condensed
consolidated financial statements.
34
<Page>
PRESERVER GROUP, INC.
UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2000
--------------------------
<Table>
<Caption>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
REVENUES
Insurance premiums................. $ 83,467,481 $ 83,467,481
Net investment income.............. 6,412,884 6,412,884
Realized gains on sales of
investments (net)............... 82,949 82,949
Other revenues..................... 163,833 163,833
------------ ------------
Total revenues..................... 90,127,147 90,127,147
------------ ------------
LOSSES AND EXPENSES
Losses and loss expenses incurred 55,708,052 55,708,052
Amortization of deferred policy
acquisition costs............... 25,135,714 25,135,714
Other operating expenses........... 3,977,827 3,977,827
Mountain Valley merger-related expenses
354,097 354,097
Amortization of goodwill........... 84,695 84,695
Interest expense................... 1,867,085 1,867,085
------------ ------------
Total losses and expenses....... 87,127,470 87,127,470
------------ ------------
Income before Federal income
Taxes........................... 2,999,677 -- 2,999,677
Provision for Federal income taxes. (1,039,758) -- (C) (1,039,758)
------------ ------------ ------------
Net income......................... $ 1,959,919 -- $ 1,959,919
============ ============ ============
NET INCOME PER COMMON SHARE:
Basic......................... $0.92 $1.92(E)
===== =====
Diluted....................... $0.91 $1.51(E)
===== =====
WEIGHTED AVERAGE COMMON AND
POTENTIAL COMMON SHARES
OUTSTANDING:
Basic......................... 2,124,380 (1,101,510)(A) 1,022,870
============ ------------ ============
Diluted....................... 2,770,068 (1,101,510)(A) 1,668,558
============ ============ ============
</Table>
The accompanying notes are an integral part of these pro forma condensed
consolidated financial statements.
35
<Page>
PRESERVER GROUP, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION: The unaudited pro forma condensed consolidated
balance sheet and pro forma condensed consolidated statements of income assume
the purchase of 1,101,510 outstanding common shares, par value $0.50, of the
Company, at a price per share of $7.75 in cash. The total purchase price for the
shares is therefore assumed to be $8,536,703. Under the par value method of
accounting for treasury stock, the excess of cost over par value is charged
proportionally to Paid in Additional Capital and then to Retained Earnings. The
proportional computation is based upon the number of shares assumed to be
purchased in the Offer and the Merger transaction of 1,101,510 divided by the
total shares outstanding at the time of the Offer and the Merger of 2,124,380.
Paid in Additional Capital is reduced proportionally by this ratio and the
balance is then applied to Retained Earnings.
NOTE B - FINANCING AND RELATED PARTY TRANSACTIONS: Two members of the Company's
Board of Directors, Archer McWhorter and Alvin E. Swanner (together with one or
more affiliates under their control) (the "Financing Related Parties") have
agreed to provide the Company the financing for the Company's Offer and the
Merger. Pursuant to the terms of an agreement among the Financing Related
Parties, William E. Lobeck, Jr., a director of the Company (together with one or
more affiliates under his control), the Kathryn L. Taylor Revocable Trust and
the Company, the Financing Related Parties shall from time to time advance to
the Company $8,536,703 pursuant to a loan agreement ("Loans"). The Loans shall
be interest-free and will be automatically convertible 60 days after the
consummation of the Offer into shares of non-voting preferred stock otherwise
equivalent to the common stock of the Company ("Preferred Stock"), at the offer
price of $7.75 per share. The unaudited pro forma condensed consolidated balance
sheet as of September 30, 2001 assumes the Loans have been converted into
Preferred Stock.
The members of the Executive Committee and their affiliates collectively
constitute the "13D Group" and on September 30, 2001 owned 1,022,870 shares of
common stock. The 13D Group also owns $9,253,785 of the Company's Convertible
Subordinated Debentures ("Convertible Debentures") that are convertible into an
additional 597,404 shares of the Company's common stock at a conversion price of
$15.49 per share. The Company has issued $10 million in Convertible Debentures
in total, convertible into 645,578 additional common shares in total.
NOTE C - FEDERAL INCOME TAXES: At September 30, 2001, the Company had net
operating loss and capital loss carryforwards (the "Carryforwards") of
$11,913,000 which expire in varying amounts between 2001 and 2015. Pursuant to
Section 382 of the Internal Revenue Code, the Company's Carryforwards are
subject to certain limitations based upon the total purchase price paid, times
an interest rate stipulated by the United States Government (the "Limitation").
An annual Limitation of approximately $800,000 has been estimated.
NOTE D - TENDER-OFFER RELATED EXPENSES: Merger-related fees and expenses,
consisting primarily of SEC filing fees, fees and expenses of investment
bankers, attorneys and accountants, and other related charges, are estimated to
be approximately $500,000. These fees and expenses have been reflected in the
unaudited pro forma condensed consolidated balance sheet as of September 30,
2001. These charges are not reflected in the unaudited pro forma condensed
consolidated statements of income or the pro forma consolidated per share data.
It is estimated that costs of approximately $500,000 will be saved annually from
the elimination of consolidated public reporting and compliance costs. The
unaudited pro forma condensed consolidated financial statements do not reflect
the benefits from the expected savings.
NOTE E - EARNINGS PER SHARE: The pro forma basic weighted average number of
outstanding common shares has been adjusted to reflect the shares of the
Company's common stock which are assumed to be purchased and retired as
described in Note A.
36
<Page>
COMPANY PROJECTIONS FOR YEAR ENDED DECEMBER 31, 2001
Based on Company management current estimates, the Company's net
premium earned, pre-tax income, net income and end of the year book value as of
and for the year ended December 31, 2001 will not vary materially from that
projected at December 18, 2001 as provided to Cochran, Caronia & Co. See
"Opinion of Financial Advisor - Company Projections".
MARKET PRICES AND DIVIDENDS
Prior to the close of business on March 18, 2002, the Company's
shares were listed and traded on the NASDAQ National Market System under the
symbol PRES. On March 18, 2002, the Company filed with the Commission a Form
15 deregistering its common stock under the Exchange Act and delisted its
shares from quotation on the NASDAQ Stock Market. The following table sets
forth, for the quarters indicated, the high and low sales prices per share on
the NASDAQ as reported by published financial sources:
<Table>
<Caption>
HIGH LOW
1999:
First Quarter $ 14.875 $ 13.00
Second Quarter 14.00 12.00
Third Quarter 13.50 10.00
Fourth Quarter 10.875 7.50
2000:
First Quarter $ 8.75 $ 6.00
Second Quarter 8.50 6.9375
Third Quarter 9.25 7.25
Fourth Quarter 10.00 7.25
2001:
First Quarter $ 9.875 $ 7.1875
Second Quarter 8.00 6.625
Third Quarter 8.00 6.625
Fourth Quarter 8.20 4.6875
2002:
First Quarter thru March 18, 2002 $ 7.75 $ 7.63
</Table>
On December 17, 2001, the last full trading day prior to the initial
public announcement with respect to the proposed Offer and the execution of the
Merger Agreement on December 18, 2001, the last sales price per share as
reported on the NASDAQ national market was $5.20. On March 18, 2002, the last
sales price per share as reported on NASDAQ was $7.745.
The Company does not pay a dividend on its common stock.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company incorporates by reference herein the following documents
filed with the Commission pursuant to the Exchange Act:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000, as amended on Form 10-K/A No. 1 filed June 11, 2001.
2. The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2001.
3. The Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2001.
4. The Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001.
5. The Company's Current Report on Form 8-K dated April 3, 2001.
37
<Page>
6. The Company's Current Report on Form 8-K dated April 17, 2001.
7. The Company's Current Report on Form 8-K dated April 30, 2001.
8. The Company's Current Report on Form 8-K dated May 17, 2001.
9. The Company's Current Report on Form 8-K dated July 18, 2001.
10. The Company's Current Report on Form 8-K dated August 14, 2001.
11. The Company's Current Report on Form 8-K dated September 14, 2001,
as amended on Form 8-K/A dated September 14, 2001.
12. The Company's Current Report on Form 8-K dated September 21, 2001.
13. The Company's Current Report on Form 8-K dated November 14, 2001.
14. The Company's Current Report on Form 8-K dated November 15, 2001.
15. The Company's Current Report on Form 8-K dated December 7, 2001.
16. The Company's Current Report on Form 8-K dated December 18, 2001.
17. The Company's Annual Report on Form 10-K/A No. 1 dated January 10,
2002, relating to the fiscal year ended December 31, 1999.
18. The Company's Annual Report on Form 10-K/A No. 1 dated January 10,
2002, relating to the fiscal year ended December 31, 1998.
19. The Company's Current Report on Form 8-K dated January 15, 2002.
20. The Company's Current Report on Form 8-K dated February 12, 2002.
21. The Company's Current Report on Form 8-K dated February 28, 2002.
22. The Company's Form 15 dated March 18, 2002.
Copies of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000, as amended on Form 10-K/A, and the Quarterly Report on
Form 10-Q for the quarter ended September 30, 2001 are being furnished to
shareholders along with the information statement.
THIS INFORMATION STATEMENT INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER THAN EXHIBITS TO
SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE)
ARE AVAILABLE, WITHOUT CHARGE, TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, TO
WHOM THIS INFORMATION STATEMENT IS DELIVERED, ON WRITTEN OR ORAL REQUEST TO
PRESERVER GROUP, INC, 95 ROUTE 17 SOUTH, PARAMUS, NEW JERSEY 07653 (TELEPHONE
NUMBER (201) 291-2000), ATTENTION: SECRETARY OF THE COMPANY.
AVAILABLE INFORMATION
Until we filed the Form 15 deregistering Preserver Group's common stock
under the Exchange Act, the Company was subject to the information filing
requirements of the Exchange Act and in accordance therewith filed reports,
proxy and information statements and other information with the Securities and
Exchange Commission. The Tender Offer Statement on Schedule TO-I/13e-3 filed by
the Company, the Tender Offer Statement on Schedule TO-T/13e-3 filed by the
Executive Committee and the Recommendation Statement on Schedule 14D-9 filed by
the Company, each in connection with the Offer and each as amended, and the
respective exhibits thereto, as well as such reports, proxy and information
statements and other information filed by the Company with the Securities and
Exchange Commission may be inspected and copied at the public reference
facilities maintained by the Securities and Exchange Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such material
can also be obtained from the principal office of the Securities and
38
<Page>
Exchange Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. The Securities and Exchange Commission also maintains
an internet website at http://www.sec.gov that contains reports, proxy
statements and other information filed by the Company and the Executive
Committee.
INFORMATION CONCERNING THE COMPANY AND PGAC
The Company. Preserver Group, Inc. is a New Jersey corporation. The
Company is the parent of a group of five wholly-owned subsidiaries, two of
which comprise The Preserver Insurance Group which provides property and
casualty insurance services. The Preserver Insurance Group consists of
Preserver Insurance Company, which writes small commercial and homeowners
insurance presently in New Jersey, and Mountain Valley Indemnity Company,
which writes small and mid-sized commercial insurance presently in New
England and New York. The Preserver Insurance Group is rated B++ (Very Good)
by A.M. Best Company. American Colonial Insurance Company which plans to
commence operations in New York in 2002, writing commercial lines in tandem
with Mountain Valley. Motor Club of America Insurance Company writes private
passenger automobile insurance in New Jersey and is rated B (Fair) by A.M.
Best Company. North East Insurance Company writes private passenger
automobile and small commercial lines insurance in the State of Maine and is
rated B (Fair) by A.M. Best Company. The address of the Company's principal
executive offices is 95 Route 17 South, Paramus, New Jersey 07653 and the
Company's telephone number is (201) 291-2000.
Preserver Group Acquisition Corp. Preserver Group Acquisition Corp.,
which we refer to in this information statement as PGAC, is a
newly-incorporated New Jersey corporation organized for purposes of the
Merger. Subsequent to the Offer and prior to the Effective Date, the
Executive Committee and its affiliates will contribute to PGAC all of the
1,022,870 shares of common stock and 700,200 shares of non-voting preferred
stock of the Company owned by them and received the same number and kind of
shares of PGAC. As a result, PGAC will own approximately 72% of the
outstanding shares of common stock of the Company and PGAC is owned by the
Executive Committee and its affiliates. PGAC has not conducted any business
other than in connection with the proposed Merger and PGAC will disappear in
the Merger. The principal executive offices of PGAC are located at 95 Route
17 South, Paramus, New Jersey 07653 and its telephone number is (201)
291-2000.
OUTSTANDING VOTING STOCK OF PRESERVER GROUP
As of the record date, there were 2,124,380 shares of capital stock
issued and outstanding of which 1,022,870 shares of issued and outstanding
common stock and 700,200 shares of non-voting preferred stock were held by the
Executive Committee and its affiliates and 700,200 of common stock were held by
Preserver Group as treasury shares having been purchased in the Offer. Each
share of issued and outstanding common stock (not including shares held in
treasury) entitles the holder thereof to one vote on all matters submitted to
the shareholders.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table identifies as of the record date information
regarding the current directors and executive officers of Preserver Group and of
those persons or entities who beneficially own more than 5% of Preserver Group
common stock. On March 27, 2002, there were 1,424,280 shares of common stock
issued and outstanding and 700,200 shares of non-voting Series A preferred
common stock equivalent issued and outstanding for a total of 2,124,380 shares
of capital stock issued and outstanding. Unless otherwise noted, each person has
a business address of 95 Route 17 South, Paramus, New Jersey 07653. Each person
identified below is a United States citizen.
39
<Page>
<Table>
<Caption>
=============================================================================================================
Capital Stock of the
Company Owned Beneficially
Years in Which at March 27, 2002
Person Has ----------------------------
Served the Number Percent
Company of of
Name and Age Principal Occupations (Inclusive) (A) Shares Class
- ------------------------------ -------------------------------- ---------------- -------------- -------------
- -------------------------------------------------------------------------------------------------------------
A. Directors
Archer McWhorter, 80
(B)(C)(D)..................... Chairman of the Board of 1986-2002 548,790(E) 23.59
Directors of Preserver 350,100(F) 15.05
Group, Inc. and its ------- -----
subsidiaries; from 1995 to 898,890 38.64
March 1997, Director of
National Car Rental
Systems, Inc. and
affiliated corporations, a
car rental enterprise
(NCR); from 1995 to
February 1997, one-third
owner of Santa Ana
Holdings, Inc. (Santa
Ana), which exchanged its
90% stock interest in NCR
for stock in Republic
Industries, Inc. (now
known as AutoNation,
Inc.); from February 1997
to February 1998,
consultant of NCR
Stephen A. Gilbert, 62........ President and Chief Executive 1984-2002 28,750(E) 1.3
Officer of Companies in
the Preserver Group;
Chairman of the Board and
Chief Executive Officer of
North East Insurance
Company
Robert S. Fried, 72 (G)....... Senior Vice President of 1956-2002 -- --
Companies in the Preserver
Group from 1956 to 1992
Director from 1956 to
present
William E. Lobeck, Jr., 61
(C)(D) ....................... From March 1997 to August 1986-2002 524,700(E) 22.63
1999, President and COO of
the Automotive Rental
Group of AutoNation, Inc.;
from 1995 to May 1997,
CEO, President and
Director of NCR; from 1995
to February 1997,
one-third owner of Santa
Ana, which exchanged its
90% stock interest in NCR
for stock in Republic
Industries, Inc. (now
known as AutoNation,
Inc.); President of The
Numbered Car Co., a car
dealership
=============================================================================================================
</Table>
40
<Page>
<Table>
<Caption>
=============================================================================================================
Capital Stock of the
Company Owned Beneficially
Years in Which at March 27, 2002
Person Has ----------------------------
Served the Number Percent
Company of of
Name and Age Principal Occupations (Inclusive) (A) Shares Class
- ------------------------------ -------------------------------- ---------------- -------------- -------------
- -------------------------------------------------------------------------------------------------------------
Alvin E. Swanner, 73 (C)(D) .. From 1995 to March 1997, 1986-2002 546,784(E) 23.51
Chairman of the Board and 350,100(F) 15.00
Director of NCR; from 1995 ------- -----
to February 1997, 896,884 38.56
one-third owner of Santa
Ana which exchanged its
90% stock interest in NCR
for stock in Republic
Industries, Inc. (not
known as AutoNation,
Inc.); from February 1997
to February 1998,
consultant of NCR;
President of Swanner &
Associates, Inc., formerly
a car rental company;
President of Chateau,
Inc., a golf and country
club, and Chateau
Development Company, Inc.,
a development company;
President of 135 St.
Charles, Inc., a hotel
development company
Malcolm Galatin, 62 (G) ...... Professor of Economics, The 1987-2002 -- --
City College of The City
University of New York
Patrick J. Haveron, 40 ....... Executive Vice President, 1994-2002 24,375(E) 1.15
Chief Executive Officer
and Chief Financial
Officer of the Preserver
Group, Executive Vice
President and Chief
Financial Officer of
Companies in the Preserver
Group; Treasurer of the
Insurance Companies
Archer McWhorter, Jr., 57
(B)........................... Associate Professor, 1998-2002 -- --
University of Houston
George P. Farley, 63 (G) ..... Partner and Associate of BDO 2001-2002 -- --
Seidman from 1962 to 1995;
Senior Vice President of
Finance and Chief
Financial Officer of Twin
County Grocers, Inc. from
1995 to 1997; Director,
Chief Financial Officer
and Consultant for Talk
America, Inc. from 1995 to
2000; self-employed
Financial consultant from
1999 to present
B. Executive Officers
=============================================================================================================
</Table>
41
<Page>
<Table>
<Caption>
=============================================================================================================
Capital Stock of the
Company Owned Beneficially
Years in Which at March 27, 2002
Person Has ----------------------------
Served the Number Percent
Company of of
Name and Age Principal Occupations (Inclusive) (A) Shares Class
- ------------------------------ -------------------------------- ---------------- -------------- -------------
- -------------------------------------------------------------------------------------------------------------
Peter K. Barbano, 51 ......... Secretary and Vice 1998-2002 8,750(E) 0.41
President-Claims
Francis J. Fenwick, 46 ....... Vice President-Finance 2001-2002 -- --
Ronald A. Libby, 58 .......... Vice President-Regional 2001-2002 625(E) 0.03
Operations - New England
B. Kim Martin, 50 ............ Vice President-Operations and 2001-2002 625(E) 0.03
Claims
G. Bruce Patterson, 57 ....... Vice President-Marketing 1989-2002 8,750(E) 0.41
Charles J. Pelosi, 56 ........ Vice President-Information 1984-2002 8,750(E) 0.41
Services
Myron Rogow, 58 .............. Vice President-Underwriting
and Regional Operations -
Mid-Atlantic 1987-2002 8,750(E) 0.41
C. Other 5% or Greater
Shareholders
Heartland Advisors Inc. N/A N/A 203,000(H) 9.55
789 North Water Street
Milwaukee, WI 53202
=============================================================================================================
</Table>
(A) Includes years during any portion of which the person served as director or
executive officer.
(B) Archer McWhorter is the father of Archer McWhorter, Jr., who presently is a
beneficiary of his father's family trust (25%) and limited partnership (14.5%);
Mr. Archer McWhorter, Jr. disclaims any beneficial ownership in his father's
Debentures and Common Stock.
(C) Member of Executive Committee.
(D) Shares held by these parties will have been contributed to PGAC prior to the
Effective Date of the Merger in exchange for the same number of shares of common
stock and preferred stock of PGAC.
(E) Includes (1) stock options for Common Stock which are currently exercisable
or exercisable within 60 days of March 27, 2002; for Mr. Gilbert 28,750
shares; for Mr. Haveron 24,375 shares; for Messrs. Barbano, Patterson, Pelosi
and Rogow 8,750 shares each; and for Ms. Martin and Mr. Libby 625 shares each;
(2) Debentures for Common stock which are currently convertible; for Mr. Archer
McWhorter 201,819 shares by a limited partnership of which he is general
partner, for Mr. Lobeck 193,767 shares, and for Mr. Swanner 201,818 shares owned
by a Louisiana partnership in commendam of which he is general partner; and (3)
for Mr. Archer McWhorter 301,635 shares of Common stock which are owned by a
family trust of which he is trustee, 43,336 shares of Common stock owned by the
limited partnership of which he is general partner and 2,000 shares of Common
stock owned by his wife in which he disclaims beneficial ownership; for Mr.
Lobeck 20,083 shares of Common stock which are owned by the William E. Lobeck
Revocable Trust of which he is trustee, and 21,665 shares of common stock which
are owned by the Kathryn L. Taylor Revocable Trust (Kathryn L. Taylor is Mr.
Lobeck's wife, and Mr. Lobeck disclaims beneficial ownership in the shares owned
by his wife's Revocable Trust); and for Mr. Swanner 43,331 shares of Common
stock which are owned by the Louisiana partnership in commendam of which he is
general partner.
(F) Consists of 700,200 shares of non-voting series A preferred common stock
equivalent issued upon conversion at $7.75 per share of interest free
financing of $5,426,550 advanced to the Company on February 28, 2002 to
finance the Company's purchase in its tender offer of 700,200 shares of
common stock at $7.75 per share.
(G) Member of Independent Committee.
(H) Based on the most recent Schedule 13G which indicates sole dispositive
power as to 203,000 but only sole voting power as to 3,000 of such shares.
APPROVAL OF DIRECTORS
The contents and the sending of this information statement have been
approved by the Board of Directors of Preserver Group.
Dated March 28, 2002.
/s/ Peter K. Barbano
Peter K. Barbano
Secretary
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ANNEX 1
CERTIFICATE OF AMENDMENT TO THE
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF
PRESERVER GROUP, INC.
Pursuant to the provisions of Section 14A:9-2(4) and Section 14A:9-4(3)
of the New Jersey Business Corporation Act, Preserver Group, Inc., a New Jersey
corporation (the "Company"), does hereby certify as follows:
FIRST: The name of the corporation is Preserver Group, Inc.
SECOND: The following amendment to the Amended and Restated
Certificate of Incorporation, as amended, of the Company, to provide for an
additional Article, ARTICLE EIGHTH, confirming dissenters' rights to dissenting
shareholders in the event that the Company is a party to a merger transaction,
was unanimously approved by the Board of Directors of the Company and was
adopted by in excess of two-thirds of the shareholders of the Company by written
consent dated as of March 27, 2002:
RESOLVED, that the Amended and Restated Certificate
of Incorporation, as amended, of the Company be, and it hereby
is, amended to provide an additional Article EIGHTH as
follows:
"EIGHTH: The shareholders of the Company
shall have the right to dissent from any merger of
the Company and shall be afforded the rights
prescribed for dissenting shareholders under the New
Jersey Business Corporation Act in such regard. It is
expressly intended and provided hereby that the
dissenters' rights confirmed by this provision are
intended to be afforded to the shareholders of the
Company who are shareholders of the Company at the
Effective Time of the Merger to which the Plan of
Merger, dated as of March 27, 2002 relates."
THIRD: The Company has one class of voting common stock, $.50 par value
per share, of which 1,424,180 shares are issued and outstanding. The holders of
in excess of two-thirds of the shares of common stock entitled to vote approved
the amendment pursuant to their written consent without a meeting of the
shareholders; the number of shares of issued and outstanding common stock
represented by such consents is 1,022,870. The date of said consent and approval
was as of March 27, 2002.
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IN WITNESS WHEREOF, the Company has caused this Certificate of
Amendment to be executed by its President and Chief Executive Officer and
attested to by its Secretary on March 27, 2002.
PRESERVER GROUP, INC.
By: /s/ Stephen A. Gilbert
--------------------------
Name: Stephen A. Gilbert
Title: President
ATTEST:
By: /s/ Peter K. Barbano
----------------------------
Name: Peter K. Barbano
Title: Secretary
2
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ANNEX 2
CERTIFICATE OF MERGER
OF
PRESERVER GROUP ACQUISITION CORP.
WITH AND INTO
PRESERVER GROUP, INC.
PURSUANT TO N.J.S.A. 14A:10-1 AND 14A:10-3
To the Department of the Treasury
State of New Jersey
Pursuant to the provisions of Sections 14A:10-1, 14A:10-3 and 14A:10-4.1 of the
New Jersey Business Corporation Act, it is hereby certified that:
FIRST: This is a merger of two domestic corporations pursuant to
Section 14A:10-1 of the New Jersey Business Corporation Act.
The names and jurisdictions of incorporation of each of the constituent
corporations of the merger are as follows:
Name Jurisdiction of Incorporation
---- -----------------------------
Preserver Group Acquisition Corp. New Jersey
Preserver Group, Inc. New Jersey
The Surviving Corporation of the merger is Preserver Group, Inc. The
Merged Corporation of the merger is Preserver Group Acquisition Corp.
SECOND: The Plan of Merger (the "Plan of Merger") for the merging of
Preserver Group Acquisition Corp. with and into Preserver Group, Inc. is
attached hereto and made a part hereof as EXHIBIT A in the form approved by
the directors and shareholders entitled to vote of each of the constituent
corporations.
THIRD: The Board of Directors of Preserver Group Acquisition Corp., the
parent corporation, approved the Plan of Merger on March 27, 2002 and the
Board of Directors of Preserver Group, Inc., the Surviving Corporation, approved
the Plan of Merger on December 18, 2001.
FOURTH: Preserver Group, Inc. has only one class or series of voting
securities outstanding, common stock, $.50 par value per share, of which
1,424,180 shares are issued and outstanding and the number of such shares owned
by Preserver Group Acquisition Corp. is 1,022,870 shares. Preserver Group, Inc.
also has designated 1,101,510 shares of non-voting Series A preferred stock,
without par value, of the 10,000,000 shares of preferred stock authorized, of
which 700,200 shares are issued and outstanding and all of which are held by
Preserver Group Acquisition Corp. The holders of in excess of two-thirds of the
shares of common stock entitled to vote of Preserver Group approved of the Plan
of Merger (and of the Amendment to the Certificate of Incorporation contained
therein) pursuant to their written consent without a meeting of the
shareholders; the number of the shares of issued and outstanding common stock
represented by such consents is 1,022,870. The date of said consent and approval
was March 27, 2002.
FIFTH: Preserver Group Acquisition Corp. has only one class or series
of voting securities outstanding, common stock, $.50 par value per share, of
which 1,022,870 shares are issued and outstanding. Preserver Group Acquisition
Corp. also has designated 2,000,000 shares of non-voting Series A preferred
stock, without par value, of which 700,200 shares are issued and outstanding.
The number of shares of Preserver Group Acquisition Corp. which were entitled to
vote at the time of the approval of the Plan of Merger by its shareholders was
1,022,870 all of which are of one class. All of such shares were voted in favor
of the Plan of Merger.
SIXTH: A copy of the Plan of Merger was mailed to each minority
shareholder of record of Preserver Group, Inc. on March 28, 2002.
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SEVENTH: Preserver Group, Inc., the Surviving Corporation, shall
continue its existence as the Surviving Corporation under its present name,
"Preserver Group, Inc." pursuant to the provisions of the New Jersey Business
Corporation Act.
EIGHTH: The merger herein provided for shall become effective at such
time as this Certificate of Merger is duly filed and declared effective by the
Department of the Treasury of the State of New Jersey.
IN WITNESS WHEREOF, each of Preserver Group, Inc. and Preserver Group
Acquisition Corp. has caused this Certificate of Merger to be executed on its
behalf as of March 27, 2002 and filed with the Department of the Treasury of the
State of New Jersey on April , 2002.
PRESERVER GROUP ACQUISITION CORP.
By: /s/ Archer McWhorter
--------------------------------
Name: Archer McWhorter
Title: Authorized Signatory
ATTEST:
By: /s/ Alvin E. Swanner
-----------------------------
Name: Alvin E. Swanner
Title: Secretary
PRESERVER GROUP, INC.
By: /s/ Stephen A. Gilbert
--------------------------------
Name: Stephen A. Gilbert
Title: President
ATTEST:
By: /s/ Peter K. Barbano
-----------------------------
Name: Peter K. Barbano
Title: Secretary
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EXHIBIT A
PLAN OF MERGER OF
PRESERVER GROUP ACQUISITION CORP.
WITH AND INTO
PRESERVER GROUP, INC.
Plan of Merger approved on March 27, 2002 by the shareholders of
Preserver Group Acquisition Corp., a New Jersey corporation ("PARENT"), and by
its Board of Directors on March 27, 2002 and approved on March 27, 2002 by
the shareholders of Preserver Group, Inc., a New Jersey corporation (the
"COMPANY"), and by its Board of Directors on December 18, 2001.
1. MERGER. Upon the terms and subject to the conditions set forth in
this Plan of Merger, and in accordance with the relevant provisions of the New
Jersey Business Corporation Act ("NJBCA"), Parent shall be merged with and into
the Company at the Effective Time (as defined below). Following the Effective
Time, the separate corporate existence of Parent shall cease and the Company
shall be the surviving corporation (the "SURVIVING CORPORATION") of the Merger
and shall succeed to and assume all of the rights and obligations of Parent and
the Company in accordance with the NJBCA.
2. EFFECTIVE TIME. Subject to the provisions of this Plan of Merger, as
soon as practicable following the date hereof, the Merger shall be consummated
by filing a certificate of merger or other appropriate documents (in any such
case, the "CERTIFICATE OF MERGER") executed in accordance with the relevant
provisions of the NJBCA and all other filings or recordings required under the
NJBCA shall be made in accordance with the provisions thereof. The Merger shall
become effective at such time as the Certificate of Merger is duly filed with,
and declared effective by, the Department of the Treasury of the State of New
Jersey (the time the Merger becomes effective being hereinafter referred to as
the "EFFECTIVE TIME").
3. EFFECT OF THE MERGER. The Merger shall have the effects set forth in
Section 14A:10-6 of the NJBCA. The laws which are to govern the Surviving
Corporation are the laws of the State of New Jersey.
4. CERTIFICATE OF INCORPORATION. The Certificate of Incorporation of
the Company at the Effective Time shall be the Certificate of Incorporation of
the Surviving Corporation and shall continue in full force and effect until
changed, altered or amended as therein provided and in the manner prescribed by
the provisions of the NJBCA.
5. BY-LAWS. The By-laws of the Company at the Effective Time of the
Merger will be the By-laws of the Surviving Corporation and shall continue in
full force and effect until changed, altered or amended as therein provided and
in the manner prescribed by the provisions of the NJBCA.
6. DIRECTORS AND OFFICERS. The directors and officers of the Company
immediately prior to the Effective Time shall be the first directors and
officers of the Surviving Corporation, each to hold office in accordance with
the Certificate of Incorporation and By-laws of the Surviving Corporation until
the election and qualification of their respective successors.
7. SUBSEQUENT ACTIONS. If at any time after the Effective Time, the
Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments, assurances or any other actions or things are necessary or
desirable to vest, perfect or confirm of record or otherwise in the Surviving
Corporation its right, title or interest in, to or under any of the rights,
properties or assets of either of the Company or Parent acquired or to be
acquired by the Surviving Corporation as a result of, or in connection with, the
Merger or otherwise to carry out this Plan of Merger, the officers and directors
of the Surviving Corporation shall be authorized to execute and deliver, in the
name and on behalf of either the Company or Parent, all such deeds, bills of
sale, instruments of conveyance, assignments and assurances and to take and do,
in the name and on behalf of each of such corporations or otherwise, all such
other actions and things as may be necessary or desirable to vest, perfect or
confirm any and all right, title and interest in, to and under such rights,
properties or assets in the Surviving Corporation or otherwise to carry out this
Plan of Merger.
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8. EFFECT ON CAPITAL STOCK. As of the Effective Time, by virtue of the
Merger and without any action on the part of Parent, or the Company:
(a) CONVERSION OF COMPANY COMMON STOCK INTO MERGER
CONSIDERATION. Each outstanding share of common stock of the Company (the
"COMMON STOCK") not held by Parent immediately prior to the Effective Time shall
be converted into the right to receive an amount of cash (without interest)
equal to $7.75 (the "MERGER CONSIDERATION") and each such share of Common Stock
shall no longer be outstanding and shall be cancelled and retired and shall
cease to exist automatically, and each holder of such shares of Common Stock
(each a "SHAREHOLDER") shall cease to have any rights with respect thereto,
except the right to receive the Merger Consideration.
(b) CANCELLATION OF COMPANY COMMON STOCK AND SERIES A
PREFERRED STOCK HELD BY PARENT. Each outstanding share of Common Stock and of
non-voting series A preferred stock, without par value per share (the "SERIES A
PREFERRED STOCK"), of the Company held by Parent immediately prior to the
Effective Time shall be cancelled and retired and shall cease to exist
automatically and no Merger Consideration shall be paid with respect thereto.
(c) CANCELLATION OF TREASURY STOCK. Each outstanding share of
Common Stock held by the Company in the treasury of the Company shall
automatically be cancelled and retired and no Merger Consideration shall be paid
with respect thereto.
(d) CONVERSION OF PARENT COMMON AND SERIES A PREFERRED STOCK.
Each share of common stock, par value $.50 per share, and of non-voting series A
preferred stock, without par value per share, of Parent issued and outstanding
immediately prior to the Effective Time shall be converted into one fully paid
and nonassessable share of Common Stock of the Surviving Corporation and the
shares of common stock and preferred stock of the Parent shall be cancelled and
retired.
9. EXCHANGE OF CERTIFICATES FOR MERGER CONSIDERATION.
(a) PAYING AGENT. The Company has entered into an agreement
with its transfer agent (the "PAYING AGENT") and shall deposit with the
Paying Agent as of the Effective Time, for the benefit of the Shareholders,
for exchange in accordance with this Section 9 through the Paying Agent, such
as shall be necessary to effect payment to the Shareholders of the Merger
Consideration (such monies are collectively the "MERGER FUND").
(b) EXCHANGE PROCEDURES. As soon as reasonably practicable
after the Effective Time, the Paying Agent shall mail to each Shareholder (A)
a letter of transmittal ("LETTER OF TRANSMITTAL") (which shall specify that
delivery shall be effected, and risk of loss of the Common Stock shall pass,
only upon delivery to the Paying Agent of the certificates representing same
(collectively, the "CERTIFICATES"), and shall be in such form and have such
other provisions as the Company may reasonably specify) and (B) instructions for
use in surrendering the Certificates in exchange for the Merger Consideration.
Upon the surrender and exchange of a Certificate to the Paying Agent,
together with the Letter of Transmittal, duly executed, and such other documents
as may reasonably be required by the Paying Agent, the holder of such
Certificate shall be paid, without interest thereon, the Merger Consideration to
which he is entitled and the Certificates so surrendered shall forthwith be
cancelled. If a surrendered Certificate is not registered in the transfer
records of the Company under the name of the person surrendering such
Certificate, the Merger Consideration may be delivered to the surrendering
person only if such Certificate has been properly endorsed for transfer and the
surrendering person pays any applicable transfer or other taxes. Until so
surrendered and exchanged as contemplated by this Section 9(b), each Certificate
shall be deemed at any time after the Effective Time to represent solely the
right to receive, upon such surrender, the Merger Consideration into which the
shares of Common Stock theretofore represented shall have been converted and the
holder thereof shall not be entitled to be paid any cash to which such holder
otherwise would be entitled.
(c) DISTRIBUTIONS WITH RESPECT TO UNSURRENDERED SHARES.
With respect to any unsurrendered Certificate, any interest, dividends or other
distributions otherwise payable to the holder therefor shall be included in the
Merger Fund, in each case until the surrender of such Certificate in accordance
with this Section 9. Subject to the effect of applicable escheat or similar
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laws, following surrender of any such Certificate there shall be paid to the
holder of the Certificate an amount in cash equal to the Merger Consideration.
IN WITNESS WHEREOF, each of Parent and Company has caused this Plan of
Merger to be executed on its behalf as of March 27, 2002.
PRESERVER GROUP ACQUISITION CORP.
By: /s/ Archer McWhorter
----------------------------------
Name: Archer McWhorter
Title: Authorized Signatory
ATTEST:
By: /s/ Alvin E. Swanner
----------------------------------
Name: Alvin E. Swanner
Title: Secretary
PRESERVER GROUP, INC.
By: /s/ Stephen A. Gilbert
----------------------------------
Name: Stephen A. Gilbert
Title: President
ATTEST:
By: /s/ Peter K. Barbano
----------------------------------
Name: Peter K. Barbano
Title: Secretary
3
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ANNEX 3.1
FORM OF NOTICE OF DISSENT
NOTICE TO SHAREHOLDERS OF RIGHT TO DISSENT
THIS NOTICE TO SHAREHOLDERS OF RIGHT TO DISSENT is given this 28th
day of March, 2002 pursuant to a resolution of the Board of Directors of
Preserver Group, Inc., a New Jersey corporation and Section 14A:5-6(2) and
Chapter 11 of the New Jersey Business Corporation Act (the "Act").
1. In accordance with the terms and provisions of the Offer to
Purchase, dated January 14, 2002 (the "Offer to Purchase"), as amended by the
supplement thereto, dated February 11, 2002 and in the related letter of
transmittal, which, together with the Offer to Purchase, as amended or
supplemented from time to time, constitute the Offer (the "Offer"), which are
herein incorporated by reference, and which were previously furnished to you
by mail, Preserver Group completed its tender offer to purchase up to
1,101,510 shares of its issued and outstanding common stock, par value $0.50
per share, at a purchase price of $7.75 per share, net to the seller in cash,
without interest thereon, by purchasing on February 28, 2002 the 700,200
shares of common stock which were properly tendered and not withdrawn in
connection with the Offer. This was the first step in its "going private"
transaction. As contemplated by the Offer and the Agreement for Self-Tender,
Financing and Second-Step Merger, dated January 14, 2002, among Preserver
Group and Archer McWhorter, Chairman of the Board of Preserver Group, William
E. Lobeck, Jr., a director of Preserver Group, and Alvin E. Swanner, a
director of Preserver Group, all of whom constitute the Executive Committee
of the Board of Directors (the "Executive Committee") and their respective
affiliates (Gail McWhorter, Sleepy Lagoon Ltd., Brion Properties, William E.
Lobeck Revocable Trust and Kathryn L. Taylor Revocable Trust), pursuant to
which the Offer was made, the Board of Directors and the holders of in excess
of two thirds of the outstanding shares of common stock have (i) approved an
amendment to Preserver Group's certificate of incorporation to expressly
provide for dissenters' rights to non-consenting shareholders in connection
with the merger and (ii) adopted and approved a plan of merger between
Preserver Group and Preserver Group Acquisition Corp., a New Jersey
corporation formed for the purpose of completing the merger ("PGAC"),
providing for the merger of PGAC with and into Preserver Group as more fully
described below (collectively, the "Corporate Actions"). The merger will
constitute the second and final step of the "going private" transaction of
Preserver Group, Inc.
2. On March 27, 2002 the Board approved the plan of merger of PGAC
with and into Preserver Group, the distribution of an information statement to
all shareholders, the distribution of this notice and the consummation of
certain other transactions in connection therewith (all as more fully described
in the information statement) subject to the approval, by written consent, of
the shareholders entitled to cast at least the minimum number of votes which
would be necessary to authorize such actions at a meeting. A copy of the
information statement accompanies this Notice to Shareholders of Right to
Dissent.
3. On March 27, 2002, the Board of Directors of Preserver Group
received the written consent to such actions from in excess of two thirds of
the shareholders entitled to vote thereon.
4. You are hereby notified that the proposed effective date of the
amendment to the certificate of incorporation and the merger is April 18, 2002
and that you have certain rights as a non-consenting shareholder, including the
right to dissent and be paid fair value ("Fair Value") for your shares.
5. To exercise your right to dissent and receive Fair Value for your
shares, you must provide, on or before April 18, 2002 (i.e., within 20 days
of the mailing hereof), written notice to Preserver Group of your dissent and
intention to demand payment for Fair Value in the form attached hereto as
Annex 3.2 and made a part hereof ("Notice of Dissent and Intention to Demand
Payment").
6. Within ten (10) days after the date on which the merger takes
effect, Preserver Group shall give written notice by certified letter to each
dissenting shareholder confirming that the merger took place.
7. Within twenty (20) days after the mailing of the certified letter
referred to in Paragraph 6, any shareholder who has timely filed the Notice of
Dissent and Intention to Demand Payment may make a further written demand
("Notice of Demand for Payment of Fair Value") on the Preserver Group for the
payment of the Fair Value of the shareholder's shares.
8. Notice of Dissent and Intention to Demand Payment and Notice of
Demand for Payment of Fair Value may be supplied to:
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Preserver Group, Inc.
95 Route 17 South
Paramus, New Jersey 07653
Attention: Secretary
9. After timely sending your written Notice of Demand for Payment of
Fair Value, you must submit your share certificates or certificates representing
your shares (the "Certificates") of common stock of Preserver Group at the above
address for notation on such Certificate that such Notice of Demand for Payment
of Fair Value has been made. Preserver Group must receive such Certificates no
later than twenty (20) days after your Notice of Demand for Payment of Fair
Value and such Certificates shall be returned to you with such notation. Upon
making such Notice of Demand of Payment of Fair Value, you shall cease to have
any of the rights of a shareholder except the right to be paid Fair Value for
your shares and any other rights of a dissenting shareholder under the Act. Fair
Value shall be determined as of March 26, 2002, the day prior to the day that
Preserver Group received written consents from more than two thirds (2/3rds) of
the shareholders entitled to vote thereon approving the merger.
10. Your rights as a dissenting shareholder shall cease if: (1) you
fail to present your certificates for notation within twenty (20) days of your
Notice of Demand for Payment of Fair Value; (2) your Notice of Demand for
Payment of Fair Value is withdrawn with the written consent of the Preserver
Group; (3) Fair Value is not agreed upon and no action to determine the Fair
Value is commenced within the time periods provided below in paragraphs 13, 14
and 15; (4) the Superior Court of the State of New Jersey determines that you
are not entitled to payment for your shares; (5) the merger is abandoned or
rescinded; or (6) a competent court having jurisdiction permanently enjoins or
sets aside the merger.
11. Not later than ten (10) days after the expiration of the period
within which you may provide a Notice of Demand for Payment of Fair Value of
your shares, Preserver Group shall mail to you the balance sheet and the surplus
statement of Preserver Group, as of the latest available date (which shall not
be earlier than 12 months prior to the making of such offer) and a profit and
loss statement or statements representing not less than a 12-month period ended
on the date of such balance sheet. Preserver Group may accompany such mailing
with a written offer to pay you for your shares at a specified price deemed by
Preserver Group to be the Fair Value thereof. Such offer shall be made at the
same price per share to all dissenting shareholders.
12. If, not later than thirty (30) days after the expiration of the
10-day period specified in paragraph 11 above, Fair Value is agreed upon between
you and Preserver Group, payment therefor shall be made upon surrender of the
Certificate to Preserver Group.
13. If Fair Value is not agreed upon within the 30-day period specified
in paragraph 12 above, you may serve upon Preserver Group a written demand (a
"Determination Demand") that it commence an action in the Superior Court for the
determination of the Fair Value of the shares. Such Determination Demand shall
be served not later than thirty (30) days after the expiration of the 30-day
period specified in this paragraph for making the Determination Demand and such
action shall be commenced by Preserver Group not later than thirty (30) days
after receipt by Preserver Group of such Determination Demand, but nothing
herein shall prevent Preserver Group from commencing such action at any earlier
time.
14. If Preserver Group fails to commence the action as provided in
paragraph 13, you may do so in the name of Preserver Group, not later than sixty
(60) days after the expiration of the time limited by paragraph 13 in which
Preserver Group may commence such an action.
15. In any action to determine the Fair Value of shares, the Superior
Court of New Jersey shall (i) have jurisdiction to proceed in a summary manner,
(ii) make all dissenting shareholders parties to the action, (iii) have
discretion to appoint an appraiser to receive evidence and report to the court
on the question of Fair Value and (iv) have the power to render judgment against
Preserver Group in the amount of the Fair Value of the shares. A judgment in any
such action shall be payable upon surrender to the Preserver Group of the
Certificate. The costs and expenses of bringing any such action, including the
fees and expenses of any appraiser but excluding fees and expenses of counsel
and any experts you may employ, will be determined by the Superior Court and
apportioned among the parties to the action, but if the Superior Court finds
that the offer of payment made by Preserver Group pursuant to paragraph 11 was
not made in good faith, or if no such offer was made, the Superior Court in its
discretion may award to any dissenting shareholder who is a party to the action
reasonable fees and expenses of his counsel and of any experts employed by the
dissenting shareholder.
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ANNEX 3.2
NOTICE OF DISSENT AND INTENTION TO DEMAND PAYMENT
The undersigned is the registered owner of __________ shares of common stock of
Preserver Group, Inc., a New Jersey corporation, bearing certificate number(s)
___________ (the "Shares").
The undersigned acknowledges receipt from Preserver Group of a copy of a Notice
to Shareholders of Right to Dissent dated March 28, 2002. In compliance with
the terms of Section 14A:5-6(2) and Chapter 11 of the New Jersey Business
Corporation Act, the undersigned hereby notifies the Company that such
shareholder dissents from the merger (as defined in the Notice to Shareholders
of Right to Dissent) and intends to demand payment of Fair Value (as defined in
the Notice to Shareholders of Right to Dissent) for the Shares.
Print Name of Registered Owner:
--------------------------------------------
Dated:
--------------------------------------------
Signature:
--------------------------------------------
<Page>
ANNEX 3.3
NOTICE OF DEMAND FOR PAYMENT OF FAIR VALUE
The undersigned is the registered owner of __________ shares of common stock of
Preserver Group, Inc., a New Jersey corporation, bearing certificate number(s)
___________ (the "Shares").
The undersigned acknowledges receipt from Preserver Group of a copy of a Notice
to Shareholders of Right to Dissent dated March 28, 2002. In compliance with
the terms of Section 14A:5-6(2) and Chapter 11 of the New Jersey Business
Corporation Act, the undersigned hereby notifies the Company that such
shareholder demands payment of Fair Value (as defined in the Notice to
Shareholders of Right to Dissent) for the Shares.
Print Name of Registered Owner:
--------------------------------------------
Dated:
--------------------------------------------
Signature:
--------------------------------------------
<Page>
ANNEX 4
EXCERPTS FROM THE BUSINESS CORPORATION ACT OF
THE STATE OF NEW JERSEY RELATING TO
THE RIGHTS OF DISSENTING SHAREHOLDERS
14A:11-1. Right of shareholders to dissent.
(1) Any shareholder of a domestic corporation shall have the right to
dissent from any of the following corporate actions
(a) Any plan of merger or consolidation to which the corporation is a
party, provided that, unless the certificate of incorporation otherwise provides
(i) a shareholder shall not have the right to dissent from any plan of
merger or consolidation with respect to shares
(A) of a class or series which is listed on a national securities
exchange or is held of record by not less than 1,000 holders on the record date
fixed to determine the shareholders entitled to vote upon the plan of merger or
consolidation; or
(B) for which, pursuant to the plan of merger or consolidation, he will
receive (x) cash, (y) shares, obligations or other securities which, upon
consummation of the merger or consolidation, will either be listed on a national
securities exchange or held of record by not less than 1,000 holders, or (z)
cash and such securities;
(ii) a shareholder of a surviving corporation shall not have the right
to dissent from a plan of merger, if the merger did not require for its approval
the vote of such shareholders as provided in section 14A:10-5.1 or in subsection
14A:10-3(4), 14A:10-7(2) or 14A:10-7(4);
(iii) a shareholder of a corporation shall not have the right to
dissent from a plan of merger, if the merger did not require, for its approval,
the vote of the shareholders as provided in subsection (6) of N.J.S.14A:10-3; or
(b) Any sale, lease, exchange or other disposition of all or
substantially all of the assets of a corporation not in the usual or regular
course of business as conducted by such corporation, other than a transfer
pursuant to subsection (4) of N.J.S.14A:10-11, provided that, unless the
certificate of incorporation otherwise provides, the shareholder shall not have
the right to dissent
(i) with respect to shares of a class or series which, at the record
date fixed to determine the shareholders entitled to vote upon such transaction,
is listed on a national securities exchange or is held of record by not less
than 1,000 holders; or
(ii) from a transaction pursuant to a plan of dissolution of the
corporation which provides for distribution of substantially all of its net
assets to shareholders in accordance with their respective interests within one
year after the date of such transaction, where such transaction is wholly for
(A) cash; or
(B) shares, obligations or other securities which, upon consummation of
the plan of dissolution will either be listed on a national securities exchange
or held of record by not less than 1,000 holders; or
(C) cash and such securities; or
(iii) from a sale pursuant to an order of a court having jurisdiction.
(2) Any shareholder of a domestic corporation shall have the right to
dissent with respect to any shares owned by him which are to be acquired
pursuant to section 14A:10-9.
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(3) A shareholder may not dissent as to less than all of the shares
owned beneficially by him and with respect to which a right of dissent exists. A
nominee or fiduciary may not dissent on behalf of any beneficial owner as to
less than all of the shares of such owner with respect to which the right of
dissent exists.
(4) A corporation may provide in its certificate of incorporation that
holders of all its shares, or of a particular class or series thereof, shall
have the right to dissent from specified corporate actions in addition to those
enumerated in subsection 14A:11-1(1), in which case the exercise of such right
of dissent shall be governed by the provisions of this Chapter.
14A:11-2 Notice of Dissent; demand for Payment; Endorsement of Certificates.
(1) Whenever a vote is to be taken, either at a meeting of shareholders
or upon written consents in lieu of a meeting pursuant to section 14A:5-6, upon
a proposed corporate action from which a shareholder may dissent under section
14A:11-1, any shareholder electing to dissent from such action shall file with
the corporation before the taking of the vote of the shareholders on such
corporate action, or within the time specified in paragraphs 14A:5-6(2)(b) or
14A:5-6(2)(c), as the case may be, if no meeting of shareholders is to be held,
a written notice of such dissent stating that he intends to demand payment for
his shares if the action is taken.
(2) Within 10 days after the date on which such corporate action takes
effect, the corporation, or, in the case of a merger or consolidation, the
surviving or new corporation, shall give written notice of the effective date of
such corporate action, by certified mail to each shareholder who filed written
notice of dissent pursuant to subsection 14A:11-2(1), except any who voted for
or consented in writing to the proposed action.
(3) Within 20 days after the mailing of such notice, any shareholder to
whom the corporation was required to give such notice and who has filed a
written notice of dissent pursuant to this section may make written demand on
the corporation, or, in the case of a merger or consolidation, on the surviving
or new corporation, for the payment of the fair value of his shares.
(4) Whenever a corporation is to be merged pursuant to section
14A:10-5.1 or subsection 14A:10-7(4) and shareholder approval is not required
under subsections 14A:10-5.1(5) and 14A:10-5.1(6), a shareholder who has the
right to dissent pursuant to section 14A:11-1 may, not later than 20 days after
a copy or summary of the plan of such merger and the statement required by
subsection 14A:10-5.1(2) is mailed to such shareholder, make written demand on
the corporation or on the surviving corporation, for the payment of the fair
value of his shares.
(5) Whenever all the shares, or all the shares of a class or series,
are to be acquired by another corporation pursuant to section 14A:10-9, a
shareholder of the corporation whose shares are to be acquired may, not later
than 20 days after the mailing of notice by the acquiring corporation pursuant
to paragraph 14A:10-9(3)(b), make written demand on the acquiring corporation
for the payment of the fair value of his shares.
(6) Not later than 20 days after demanding payment for his shares
pursuant to this section, the shareholder shall submit the certificate or
certificates representing his shares to the corporation upon which such demand
has been made for notation thereon that such demand has been made, whereupon
such certificate or certificates shall be returned to him. If shares represented
by a certificate on which notation has been made shall be transferred , each new
certificate issued therefor shall bear similar notation, together with the name
of the original dissenting holder of such shares, and a transferee of such
shares shall acquire by such transfer no rights in the corporation other than
those which the original dissenting shareholder had after making a demand for
payment of the fair value thereof.
(7) Every notice or other communication required to be given or made by
a corporation to any shareholder pursuant to this Chapter shall inform such
shareholder of all dates prior to which action must be taken by such shareholder
in order to perfect his rights as a dissenting shareholder under this Chapter.
(Last amended by Ch. 94, O. '88, eff. 12-1-88)).
14A:11-3 "Dissenting shareholder" defined; date for determination of fair value
(1) A shareholder who has made demand for the payment of his shares in
the manner prescribed by subsection 14A:11-2(3), 14A:11-2(4) or 14A:11-2(5) is
hereafter in this Chapter referred to as a "dissenting shareholder."
(2) Upon making such demand, the dissenting shareholder shall cease to
have any of the rights of a shareholder except the right to be paid the fair
value of his shares and any other rights of a dissenting shareholder under this
Chapter.
(3) "Fair value" as used in this Chapter shall be determined
(a) As of the day prior to the day of the meeting of shareholders at
which the proposed action was approved or as of the day prior to the day
specified by the corporation for the tabulation of consents to such action if no
meeting of shareholders was held; or
(b) In the case of a merger pursuant to section 14A:10-5.1 or
subsection 14A:10-7(4) in which shareholder approval is not required, as of the
day prior to the day on which the board of directors approved the plan of
merger; or
(c) In the case of an acquisition of all the shares or all the shares
of a class or series by another corporation pursuant to section 14A:10-9, as of
the day prior to the day on which the board of directors of the acquiring
corporation authorized the acquisition, or, if a shareholder vote was taken
pursuant to section 14A:10-12, as of the day provided in paragraph
14A:11-3(3)(a).
In all cases, "fair value" shall exclude any appreciation or
depreciation resulting from the proposed action.
14A:11-4. Termination of right of shareholder to be paid the fair value of
his shares
(1) The right of a dissenting shareholder to be paid the fair value of
his shares under this Chapter shall cease if
(a) he has failed to present his certificates for notation as provided
by subsection 14A:11-2(6), unless a court having jurisdiction, for good and
sufficient cause shown, shall otherwise direct;
(b) his demand for payment is withdrawn with the written consent of the
corporation;
(c) the fair value of the shares is not agreed upon as provided in this
Chapter and no action for the determination of fair value by the Superior Court
is commenced within the time provided in this Chapter;
(d) the Superior Court determines that the shareholder is not entitled
to payment for his shares;
(e) the proposed corporate action is abandoned or rescinded; or
(f) a court having jurisdiction permanently enjoins or sets aside the
corporate action.
(2) In any case provided for in subsection 14A:11-4(1), the rights of
the dissenting shareholder as a shareholder shall be reinstated as of the date
of the making of a demand for payment pursuant to subsections 14A:11-2(3),
14A:11-2(4) or 14A:11-2(5) without prejudice to any corporate action which has
taken place during the interim period. In such event, he shall be entitled to
any intervening preemptive rights and the right to payment of any intervening
dividend or other distribution, or, if any such rights have expired or any such
dividend or distribution other than in cash has been completed, in lieu thereof,
at the election of the board, the fair value thereof in cash as of the time of
such expiration or completion.
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14A:11-5. Rights of dissenting shareholder
(1) A dissenting shareholder may not withdraw his demand for payment of
the fair value of his shares without the written consent of the corporation.
(2) The enforcement by a dissenting shareholder of his right to receive
payment for his shares shall exclude the enforcement by such dissenting
shareholder of any other right to which he might otherwise be entitled by virtue
of share ownership, except as provided in subsection 14A:11-4(2) and except that
this subsection shall not exclude the right of such dissenting shareholder to
bring or maintain an appropriate action to obtain relief on the ground that such
corporate action will be or is ultra vires, unlawful or fraudulent as to such
dissenting shareholder.
14A:11-6. Determination of fair value by agreement
(1) Not later than 10 days after the expiration of the period within
which shareholders may make written demand to be paid the fair value of their
shares, the corporation upon which such demand has been made pursuant to
subsections 14A:11-2(3), 14A:11-2(4) or 14A:11-2(5) shall mail to each
dissenting shareholder the balance sheet and the surplus statement of the
corporation whose shares he holds, as of the latest available date which shall
not be earlier than 12 months prior to the making of such offer and a profit and
loss statement or statements for not less than a 12-month period ended on the
date of such balance sheet or, if the corporation was not in existence for such
12-month period, for the portion thereof during which it was in existence. The
corporation may accompany such mailing with a written offer to pay each
dissenting shareholder for his shares at a specified price deemed by such
corporation to be the fair value thereof. Such offer shall be made at the same
price per share to all dissenting shareholders of the same class, or, if divided
into series, of the same series.
(2) If, not later than 30 days after the expiration of the 10-day
period limited by subsection 14A:11-6(1), the fair value of the shares is agreed
upon between any dissenting shareholder and the corporation, payment therefor
shall be made upon surrender of the certificate or certificates representing
such shares.
14A:11-7. Procedure on failure to agree upon fair value;
commencement of action to determine fair value
(1) If the fair value of the shares is not agreed upon within the
30-day period limited by subsection 14A:11-6(2), the dissenting shareholder may
serve upon the corporation upon which such demand has been made pursuant to
subsections 14A:11-2(3), 14A:11-2(4) or 14A:11-2(5) a written demand that it
commence an action in the Superior Court for the determination of the fair value
of the shares. Such demand shall be served not later than 30 days after the
expiration of the 30-day period so limited and such action shall be commenced by
the corporation not later than 30 days after receipt by the corporation of such
demand, but nothing herein shall prevent the corporation from commencing such
action at any earlier time.
(2) If a corporation fails to commence the action as provided in
subsection 14A:11-7(1), a dissenting shareholder may do so in the name of the
corporation, not later than 60 days after the expiration of the time limited by
subsection 14A:11-7(1) in which the corporation may commence such an action.
14A:11-8. Action to determine fair value; jurisdiction of court;
appointment of appraiser
In any action to determine the fair value of shares pursuant to this Chapter:
(a) The Superior Court shall have jurisdiction and may proceed in the
action in a summary manner or otherwise;
(b) All dissenting shareholders, wherever residing, except those who
have agreed with the corporation upon the price to be paid for their shares,
shall be made parties thereto as an action against their shares quasi in rem;
(c) The court in its discretion may appoint an appraiser to receive
evidence and report to the court on the question of fair value, who shall have
such power and authority as shall be specified in the order of his appointment;
and
(d) The court shall render judgment against the corporation and in
favor of each shareholder who is a party to the action for the amount of the
fair value of his shares.
14A:11-9. Judgment in action to determine fair value
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(1) A judgment for the payment of the fair value of shares shall be
payable upon surrender to the corporation of the certificate or certificates
representing such shares.
(2) The judgment shall include an allowance for interest at such rate
as the court finds to be equitable, from the date of the dissenting
shareholder's demand for payment under subsections 14A:11-2(3), 14A:11-2(4) or
14A:11-2(5) to the day of payment. If the court finds that the refusal of any
dissenting shareholder to accept any offer of payment, made by the corporation
under section 14A:11-6, was arbitrary, vexatious or otherwise not in good faith,
no interest shall be allowed to him.
14A:11-10. Costs and expenses of action
The costs and expenses of bringing an action pursuant to section
14A:11-8 shall be determined by the court and shall be apportioned and assessed
as the court may find equitable upon the parties or any of them. Such expenses
shall include reasonable compensation for and reasonable expenses of the
appraiser, if any, but shall exclude the fees and expenses of counsel for and
experts employed by any party; but if the court finds that the offer of payment
made by the corporation under section 14A:11-6 was not made in good faith, or if
no such offer was made, the court in its discretion may award to any dissenting
shareholder who is a party to the action reasonable fees and expenses of his
counsel and of any experts employed by the dissenting shareholder.
14A:11-11. Disposition of shares acquired by corporation.
(1) The shares of a dissenting shareholder in a transaction described
in subsection 14A:11-1(1) shall become reacquired by the corporation which
issued them or by the surviving corporation, as the case may be, upon the
payment of the fair value of shares.
(2) (Deleted by amendment, P.L.1995, c.279.)
(3) In an acquisition of shares pursuant to section 14A:10-9 or section
14A:10-13, the shares of a dissenting shareholder shall become the property of
the acquiring corporation upon the payment by the acquiring corporation of the
fair value of such shares. Such payment may be made, with the consent of the
acquiring corporation, by the corporation which issued the shares, in which case
the shares so paid for shall become reacquired by the corporation which issued
them and shall be cancelled.
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ANNEX 5.1
OPINION OF COCHRAN, CARONIA & CO.
December 18, 2001
Independent Committee of the Board of Directors of Preserver Group, Inc.
95 Route 17 South
Paramus, NJ 07653
Gentlemen:
You have requested our opinion as to the fairness, from a financial
point of view, to the holders of the outstanding shares of common stock
(collectively the "Stockholders") of Preserver Group, Inc. (the "Company"),
other than the members of the 13D Group (the "13D Group"), of the $7.75 per
share in cash (the "Consideration") proposed to be paid to the Stockholders
pursuant to the self-tender offer by the Company (the "Self-Tender").
Prior to the Company's commencing the Self-Tender, Archer McWhorter and
Alvin Swanner, two members of the 13D Group, commit to advance to the Company on
an interest-free basis the proceeds (the "Financing Commitment") for the
Self-Tender. The Company will draw upon the Financing Commitment to tender for
all of the outstanding common stock of the Company, $0.50 par value per share,
that is not held by the 13D Group. You have not asked us to express, and we are
not expressing, any opinion with respect to any of the other terms, conditions,
determinations or actions with respect to the Self-Tender.
We are familiar with the Company, having provided certain investment
banking services to the Company from time to time, including serving as
financial advisor to the Company in its acquisitions of North East Insurance
Company and Mountain Valley Indemnity Company.
In connection with our review of the proposed Self-Tender and the
preparation of our opinion herein, we have examined: (a) the draft Schedule TO;
(b) certain audited historical financial statements of the Company for the five
years ended December 31, 2000; (c) the unaudited financial statements of the
Company for the nine months ended September 30, 2001; (d) certain internal
business, operating and financial information and forecasts of the Company (the
"Forecasts"), prepared by the senior management of the Company; (e) information
regarding publicly available financial terms of certain recently completed
transactions in the property and casualty insurance industry; (f) information
regarding comparable publicly traded property and casualty insurance companies;
(g) current and historical market prices and trading volumes of the common stock
of the Company; (h) certain key product price forecasts developed by senior
management of the Company; and (i) certain other publicly available information
on the Company. We have also held discussions with members of the senior
management of the Company to discuss the foregoing, have considered other
matters which we have deemed relevant to our inquiry and have taken into account
such accepted financial and investment banking procedures and considerations as
we have deemed relevant.
In rendering our opinion, we have assumed and relied, without
independent verification, upon the accuracy and completeness of all the
information examined by or otherwise reviewed or discussed with us for purposes
of this opinion. We have not made or obtained an independent valuation or
appraisal of the assets, liabilities or solvency of the Company. In addition, we
did not make an independent evaluation of the adequacy of the reserves for, or
collectability of, reinsurance related to the unpaid loss and loss adjustment
expenses of the Company nor have we reviewed any individual insurance claims
files or contracts relating to the Company. We have, with your permission,
assumed that the respective reserves
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for unpaid losses and loss adjustment expenses are adequate to cover such losses
and will be adequate on a pro forma basis for the combined entity.
We have been advised by the management of the Company that the
Forecasts examined by us have been reasonably prepared on bases reflecting the
best currently available estimates and judgments of the management of the
Company. In that regard, we have assumed, with your consent, that the Forecasts
will be realized in the amounts and at the times contemplated thereby. We
express no opinion with respect to the Forecasts or the estimates and judgments
on which they are based.
Our opinion herein is based upon economic, market, financial and other
conditions existing on, and other information disclosed to us as of, the date of
this letter. It should be understood that, although subsequent developments may
affect this opinion, we do not have any obligation to update, revise or reaffirm
this opinion, except as provided in Schedule TO. We have relied as to all legal
matters on advice of counsel to the Company, and have assumed that the
Self-Tender will be consummated on the terms described in the Schedule TO,
without any waiver of any material terms or conditions by the Company. We were
not requested to, nor did we, solicit third party indications of interest in
respect of the proposed Self-Tender.
Cochran, Caronia & Co., LLC is regularly engaged in the valuation of
insurance company securities in connection with business combinations,
investments and other transactions. As specialists in the securities of
companies in the insurance industry, Cochran, Caronia & Co., LLC has experience
in, and knowledge of, the valuation of such enterprises. We have acted as the
investment banker to the Independent Committee of the Board of Directors in
connection with the Self-Tender and will receive a fee for our services. In
addition, the Company has agreed to indemnify us against certain liabilities
arising out of our engagement.
In the ordinary course of our business as a broker-dealer, we may
actively trade the equity securities of the Company for our own account and for
the accounts of customers and, accordingly, may at any time hold a long or short
position in such securities.
We are expressing no opinion herein as to the price at which the common
stock of the Company will trade at any future time or as to the effect of the
Self-Tender on the trading price of the common stock of the Company. Such
trading price may be affected by a number of factors, including but not limited
to (i) changes in prevailing interest rates and other factors which generally
influence the price of securities, (ii) adverse changes in the current capital
markets, (iii) the occurrence of adverse changes in the financial condition,
business, assets, results of operations or prospects of the Company or in the
insurance industry, (iv) any necessary actions by or restrictions of federal,
state or other governmental agencies or regulatory authorities, and (v) timely
completion of the Self-Tender on terms and conditions that are acceptable to all
parties at interest.
Our investment banking services and our opinion were provided for the
use and benefit of the Independent Committee of the Board of Directors of the
Company in connection with its consideration of the transaction contemplated by
Schedule TO. Our opinion is limited to the fairness, from a financial point of
view, to the Stockholders of the Company of the Consideration in connection with
the Self-Tender, and we do not address the merits of the underlying decision by
the Company to engage in the Self-Tender and this opinion does not constitute a
recommendation to any Stockholder as to how such Stockholder should vote on the
proposed Self-Tender. It is understood that this letter may not be disclosed or
otherwise referred to without prior written consent, except that the opinion may
be included in its entirety in submissions to state insurance regulatory
authorities or in a proxy statement mailed to the Stockholders by the Company
with respect to the Self-Tender.
Based upon and subject to the foregoing, we are of the opinion that, as
of the date hereof, the Consideration is fair, from a financial point of view,
to the Stockholders.
Very truly yours,
/s/ COCHRAN, CARONIA & CO., LLC
-------------------------------
COCHRAN, CARONIA & CO., LLC
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ANNEX 5.2
[Cochran Caronia & Co. letterhead]
February 28, 2002
Independent Committee of the Board of Directors
Preserver Group, Inc.
95 Route 17 South
Paramus, New Jersey 07653
Gentlemen:
You have requested that Cochran, Caronia & Co. consider whether any material
changes relevant to the Company's circumstances have occurred since we issued
our fairness opinion, dated December 18, 2001, in which we opined as to the
fairness, from a financial point of view, of the consideration to paid to the
shareholders of Preserver Group, Inc. (the "Company") in connection with the
Company's proposed tender offer and second-step merger.
Accordingly, we considered as possibly material for your purposes those certain
issues which we presented to you today in the course of your meeting, as well as
such other matters which we deemed relevant to our inquiry. Based upon the
matters considered, we have discovered no material changes or developments that
would negatively impact our determination of the fairness of the transaction as
reflected in our opinion, dated December 18, 2001 and, at this date, no
conditions exist that would necessitate a change to that fairness opinion that
the consideration to be paid to the shareholders of the Company is fair, from a
financial point of view.
Sincerely,
/s/ Cochran, Caronia & Co
Cochran, Caronia & Co.
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ANNEX 6
AMENDED AND RESTATED
AGREEMENT FOR SELF-TENDER OFFER, FINANCING
AND SECOND-STEP MERGER
AGREEMENT (the "AGREEMENT"), dated as of January 14, 2002, among
Preserver Group, Inc., a New Jersey corporation (the "COMPANY") and those
persons designated on the signature page hereof as members of the 13D Group
(collectively, the "13D GROUP").
BACKGROUND
A. The Company believes the public trading market for its common stock,
$.50 par value per share (the "COMMON STOCK") has not recognized and will not
recognize the proper value of the Company's shares for the following reasons: 1)
the Company's capitalization is significantly smaller than its peers in the
property casualty insurance industry; 2) the Company's exposure to New Jersey
private passenger automobile insurance; 3) the Company's diversification efforts
in the past three years have subsequently not been recognized and valued; and 4)
the current concentration of ownership by the Executive Committee of the Company
in combination with the small number of shares available has created an
excessive discount to tangible book value. As a result, the shares of Common
Stock rarely trade and when they do trade, have traded at a significant discount
to the shares' book value for an extended period of time, with no change in this
circumstance appearing likely in the future.
B. The Board of Directors has established an independent committee
consisting of George Farley, Robert S. Fried and Malcolm Galatin (the
"INDEPENDENT COMMITTEE") in order to consider alternative means of creating
value in the Common Stock for the benefit of the Company's shareholders and, as
a result of its evaluation, the Independent Committee has recommended providing
the Company's shareholders with an opportunity to achieve liquidity in cash by
allowing them to sell their stock at a premium above recent historical Nasdaq
trading prices at little or no cost to the shareholders.
C. Each of the Independent Committee and the Board of Directors of the
Company, upon the recommendation of the Independent Committee, has unanimously
approved terms of the acquisition ("SELF-TENDER") by the Company of the
Company's issued and outstanding Common Stock and the subsequent merger (the
"SECOND-STEP MERGER" or "MERGER") of a New Jersey corporation formed by the 13D
Group that, if the Self-Tender is successful, will hold in excess of 80% of the
Company's issued and outstanding capital stock (the "MERGER COMPANY") that will
merge with and into the Company pursuant to which any remaining public
shareholders of the Company will be "cashed-out" at the same price as the Offer
Price (as defined below in Section 1.1).
D. Two members of the 13D Group, Messrs. Archer McWhorter and Alvin E.
Swanner (together with one or more affiliates under their control, all of which
are to be acceptable to applicable insurance regulatory authorities, the
"FINANCING RELATED PARTIES"), have agreed to provide to the Company the
financing for the Company's Self-Tender and the Second-Step Merger.
TERMS
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein, the Company and the 13D Group hereby agrees as follows:
1. THE OFFER
1.1 THE OFFER. As soon as practicable after the date hereof, the
Company shall commence (within the meaning of the Securities
Exchange Act of 1934, as amended, and the rules and
regulations thereunder (the "EXCHANGE Act")) an offer to
purchase (as it may be amended in accordance with the terms of
this Agreement, the "OFFER") all of the outstanding shares of
Common Stock of the Company at the price of $7.75 per share as
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recommended by the Independent Committee of the Board of
Directors, after considering, among other things, the proposal
by the Financing Related Parties and the opinion of the
Company's financial advisor (the "OFFER PRICE"). As set forth
in Section 1.4, the 13D Group shall not tender their shares
into the Offer.
1.2 COMPANY ACTION. The Company represents that, subject to the
Board's fiduciary obligations to the Company's shareholders
under applicable law, as advised by counsel, (i) its Board of
Directors has voted for the adoption of this Agreement, has
approved the Offer the purchase of shares of Common Stock
pursuant to the Offer and the Second-Step Merger, in
accordance with the New Jersey Business Corporation Act (the
"NEW JERSEY CORPORATION LAW"); and (ii) the Independent
Committee of the Board has unanimously determined that the
Offer Price and other terms of the Offer are both adequate and
otherwise in the best interests of the Company and its
shareholders. Notwithstanding anything contained in this
Agreement, if either of the Company's Board of Directors or
Independent Committee determines, in the exercise of its
fiduciary duty, to withdraw, modify or amend its approvals or
recommendations, to terminate the Offer, once commenced but
prior to closing, such withdrawal, modification or amendment
or termination shall not constitute a breach of this
Agreement.
1.3 OFFER DOCUMENTS. The Company shall file with the Securities
and Exchange Commission (the "COMMISSION"), and mail to the
holders of record of the Common Stock, a tender offer
statement on a combined Schedule TO and Schedule 13E-3 under
cover of Schedule TO (together with all amendments or
supplements thereto, the "SCHEDULE TO"). The Schedule TO
(collectively, the Schedule TO, Offer to Purchase and related
Letter of Transmittal, together with all amendments or
supplements thereto, the "OFFER DOCUMENTS") shall, when filed
with the Commission: (i) contain all information which is
required to be included therein in accordance with the
Exchange Act and any other applicable law, (ii) comply in all
material respects with the requirements of the Exchange Act
and any other applicable law, and (iii) shall not contain any
untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in
order to make the statements therein, in light of the
circumstances under which they were made, not misleading,
except that the Company shall not be responsible for the
accuracy or completeness of information supplied by the 13D
Group for inclusion in the Offer Documents. The Company and
the 13D Group each agree to cooperate in the preparation of
the Offer Documents in a timely manner and promptly to correct
or supplement any information provided by it for use in the
Offer Documents if and to the extent required by applicable
federal securities laws and the Company and the 13D Group each
further agrees to take all steps necessary to cause the Offer
Documents, as so amended, to be filed with the Commission and
to be disseminated to holders of the Company's Common Stock,
in each case as and to the extent required by applicable
federal securities laws.
1.4 13D GROUP NOT TO PARTICIPATE IN OFFER. Each member of the 13D
Group owns beneficially or of record that number of shares of
Common Stock (including options, warrants or other rights to
purchase Common Stock) set forth next to such person's name on
SCHEDULE A hereto. Each member of the 13D Group hereby agrees
not to tender in the Offer any shares owned beneficially or of
record by it.
1.5 STATUS OF PURCHASED SHARES. All shares of Common Stock
purchased by the Company in the Offer will be held by the
Company as treasury shares.
2. FINANCING FOR OFFER AND SECOND-STEP MERGER
2.1 The Financing Related Parties shall immediately prior to the
consummation of the Offer and from time to time thereafter as
may be required in connection with the Second Step
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Merger and payment for the Dissenting Shares (as hereinafter
defined), advance to the Company one or more loans (the
"LOANS") in the aggregate amount of the product of (i) 1,101,
510 shares (representing 1,101,510 shares of Common Stock held
by the public and management other than the 13D Group) and
(ii) the Offer Price, pursuant to the terms of an agreement
(the "LOAN AGREEMENT") between the Company and the Financing
Related Parties, the form of which is attached hereto as
EXHIBIT 1. The Loan shall be interest-free and evidenced by a
promissory note (the "Note") that will be automatically
convertible 60 days after the consummation of the Offer into
shares of non-voting preferred stock otherwise equivalent to
the Common Stock (the "FINANCING PREFERRED STOCK") of the
Company (or, the Surviving Corporation, as the Company is
known after the Second-Step Merger) at the Offer Price,
subject to the Company's right, at its option, to convert the
Loan into Financing Preferred Stock prior to the expiration of
such 60-day period. Under the Loan Agreement, the proceeds of
the Loan shall be used only to finance the purchase of the
Common Stock pursuant to the Offer and to cash-out minority
shareholders in the Second-Step Merger, including holders of
Dissenting Shares (as defined below).
3. THE SECOND-STEP MERGER
3.1 THE MERGER. Concurrently herewith or as soon as practicable
after the date hereof, the 13D Group shall form a New Jersey
corporation (or a corporation in such other jurisdiction as
the parties may agree) to serve as the Merger Company. Upon or
prior to the consummation of the Offer, each member of the 13D
Group shall contribute to the Merger Company all of the shares
of capital stock owned beneficially and of record by such
member (including the Common Stock set forth on SCHEDULE A and
the Financing Preferred Stock, as defined below when issued)
and shall cause to be issued the same number of common stock
and Financing Preferred Stock of Merger Company. Pursuant to
an agreement in a form to be mutually agreed upon by the
parties (the "MERGER AGREEMENT") to be entered into between
the Company and the Merger Company concurrently with or as
soon as practicable after consummation of the Offer and in
accordance with the provisions of this Agreement, such Merger
Agreement, the New Jersey Corporation Law and applicable
federal and state securities laws, the Company and the Merger
Company shall file a certificate of merger (the "CERTIFICATE
OF MERGER") by which the Merger Company shall be merged with
and into the Company, the Company shall continue its corporate
existence under the New Jersey Corporation Law as the
surviving corporation in the Merger (the "SURVIVING
CORPORATION") and the separate corporate existence of the
Merger Company shall cease. The name of the Surviving
Corporation shall continue to be "Preserver Group, Inc." The
Merger Agreement shall contain usual and customary
representations, warranties and conditions, comply, to the
extent applicable, with the terms hereof, and otherwise be in
form and substance reasonably satisfactory to counsel for the
Company and the 13D Group. The Merger shall have the effects
set forth in the New Jersey Corporation Law. Without limiting
the generality of the foregoing, and subject thereto, at the
Effective Time (as defined below in Section 3.2), all the
rights, privileges, powers and franchises (of a public as well
as of a private nature), of the Company and the Merger Company
shall vest in the Surviving Corporation, and all debts,
liabilities and duties of the Company and the Merger Company
shall become the debts, liabilities and duties of the
Surviving Corporation. The 13D Group agrees, if required by
the New Jersey Corporation Law, to use its best efforts to
obtain approval of the Merger Company's shareholders for, and
to cause the board of directors of the Merger Company to
approve, the Second-Step Merger. In the event that the Merger
Company owns 90% or more of the Common Stock of the Company
after the Offer, the Merger shall be effected as a short form
merger pursuant to Section 14A:10-5.1 of the New Jersey
Corporation Law. The Company and the 13D Group shall, and the
13D Group shall cause the Merger Company to, take all actions
as may be required by the New Jersey Corporation Law and
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any applicable federal and state securities laws to perform
the Merger in compliance therewith, including, but not limited
to, voting in favor of the Merger and making all requisite
mailings and notifications to the minority shareholders of the
Company.
3.2 EFFECTIVE TIME. The Merger shall become effective at the time
of the filing of the Certificate of Merger with the office of
the Secretary of State of the State of New Jersey in
accordance with the applicable provisions of the New Jersey
Corporation Law, which Certificate of Merger shall be so filed
as soon as practicable after the consummation of the Offer.
The date and time when the Merger shall become effective are
herein referred to as the "EFFECTIVE TIME."
3.3 ARTICLES OF INCORPORATION; BY-LAWS. The Articles of
Incorporation of the Company as in effect at the Effective
Time shall be the Articles of Incorporation of the Surviving
Corporation until duly amended in accordance with applicable
law. The By-laws of the Company as in effect at the Effective
Time shall be the By-laws of the Surviving Corporation until
duly amended in accordance with applicable law.
3.4 GOING PRIVATE. If a sufficient number of shareholders tender
their Common Stock in the Offer such that, following the
Offer, the Company has fewer than 300 holders of record of its
Common Stock, the Company shall, immediately upon completion
of the Offer, take all required action to deregister its
Common Stock under the Exchange Act and delist its shares from
the Nasdaq Stock Market.
4. STATUS AND CONVERSION OF SECURITIES UPON SECOND-STEP MERGER
4.1 CONVERSION OF SECURITIES. At the Effective Time, by virtue of
the Merger and without any action on the part of the holders
thereof:
(a) Each outstanding share of Common Stock of the Company
held by the Company as a treasury share and the
shares of Common Stock and Financing Preferred Stock
of the Company held by Merger Company shall be
cancelled and retired and no payment shall be made
with respect thereto.
(b) Each outstanding share of Common Stock of the
Company, other than (i) those shares of Common Stock
referred to in Section 4.1(a) and (ii) Dissenting
Shares (as defined in Section 4.4), shall be
converted into the right to receive an amount of cash
(without interest) equal to the amount paid per share
pursuant to the Offer (the "MERGER CONSIDERATION").
(c) Each share of common stock and Financing Preferred
Stock of Merger Company issued and outstanding
immediately prior to the Effective Time shall be
converted into one fully paid and nonassessable share
of Common Stock of the Surviving Corporation.
4.2 COMPANY STOCK OPTIONS AND RELATED MATTERS.
(a) EMPLOYEE OPTIONS. The Company has issued to its
employees the following options under the Company's
Employee Stock Option Plans: options to purchase
60,000 shares of Common Stock at an exercise price of
$12.75 per share; options to purchase 28,500 shares
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of Common Stock at an exercise price of $11.75 per
share; options to purchase 31,000 shares at $12.875
per share; options to purchase 36,000 shares at
$8.125 per share; and options to purchase 38,500
shares at $7.21 per share (which 38,500 options do
not vest until June 2002). As to each such option
(collectively, the "OPTIONS") granted under the
Company's Employee Stock Option Plans, whether or not
then exercisable, which is outstanding as of the date
hereof and which has not been exercised prior to the
acquisition of shares pursuant to the Offer, the
holder thereof shall be entitled to continue to hold
such Options from the Surviving Corporation on all of
the same terms and conditions as the Options. The
Second-Step Merger will have no effect on the
Options.
(b) CONVERTIBLE DEBENTURES. The Company has outstanding
$10,000,000 of debentures convertible into 645,578
shares of Common Stock at $15.49 per share (the
"CONVERTIBLE DEBENTURES"). The Second-Step Merger
will have no effect on the Convertible Debentures.
4.3 EXCHANGE OF CERTIFICATES.
(a) Prior to the Effective Time of the Second-Step
Merger, Merger Company shall designate First Union
National Bank (or another U.S. bank or trust company
having at least $50,000,000 in capital, surplus and
undivided profits, as mutually agreed to by Merger
Company and the Company) to act as tendering agent in
the Merger (the "TENDERING AGENT") for purposes of
effecting the exchange for the Merger Consideration
of certificates which, prior to the Effective Time,
represented shares of Company Common Stock entitled
to receive the Merger Consideration pursuant to
Section 4.1. Upon the surrender and exchange of such
a certificate, the holder thereof shall be paid,
without interest thereon, the amount of cash to which
he is entitled hereunder, and such certificate shall
forthwith be cancelled. Until so surrendered and
exchanged, each such certificate shall, after the
Effective Time, represent solely the right to receive
the Merger Consideration into which the shares of
Company Common Stock it theretofore represented shall
have been converted pursuant to Section 4.1, and the
holder thereof shall not be entitled to be paid any
cash to which such holder otherwise would be
entitled. In case any payment pursuant to this
Section 4.3 is to be made to a holder other than the
registered owner of a surrendered certificate, it
shall be a condition of such payment that the
certificate so surrendered shall be properly endorsed
or otherwise in proper form for transfer and that the
person requesting such exchange shall pay to the
Tendering Agent any transfer or other taxes required
by reason of the payment of such cash to a person
other than the registered holder of the certificate
surrendered, or shall establish to the satisfaction
of the Tendering Agent that such tax has been paid or
is not applicable. Notwithstanding the foregoing,
neither the Tendering Agent nor any party hereto
shall be liable to a holder of shares of Company
Common Stock for any cash delivered pursuant hereto
to a public official pursuant to applicable abandoned
property, escheat or similar laws.
(b) Immediately prior to the Effective Time of the
Second-Step Merger, Company shall draw down upon the
Loan and shall cause to deposit in trust with the
Tendering Agent cash in an aggregate amount equal to
the product of (i) the number of shares of Company
Common Stock issued and outstanding immediately prior
to the Effective Time (other than: treasury shares);
shares owned by, or issuable upon conversion of other
securities owned by, Merger Company (including any
shares or other securities otherwise held by the 13D
Group); shares issuable upon exercise of the
Convertible Debentures; shares issuable upon
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the exercise of Options; and shares known at
the Effective Time to be Dissenting Shares
(as hereinafter defined)); and (ii) the Merger
Consideration (such amount being hereinafter referred
to as the "PAYMENT FUND"). The Payment Fund shall be
invested by the Tendering Agent as directed by the
Surviving Corporation (so long as such directions do
not impair the rights of the holders of Company
Common Stock) in direct obligations of the United
States of America, obligations for which the full
faith and credit of the United States of America is
pledged to provide for the payment of principal and
interest, commercial paper rated of the highest
quality by Moody's Investors Services, Inc. or
Standard & Poor's Corporation or certificates of
deposit issued by a commercial bank having at least
$1,000,000,000 in assets, and any net earnings with
respect thereto shall be paid to the Surviving
Corporation as and when requested by the Surviving
Corporation. The Tendering Agent shall, pursuant to
irrevocable instructions, make the payments referred
to in Section 4.3(a) out of the Payment Fund. The
Payment Fund shall not be used for any other purpose
except as provided herein. Promptly following the
date which is one year after the Effective Time, the
Tendering Agent shall return to the Surviving
Corporation all cash, certificates and other
instruments in its possession that constitute any
portion of the Payment Fund, and the Tendering Agents
duties shall terminate. Thereafter, each holder of a
certificate representing a share of the Company
Common Stock entitled to receive at the Effective
Time cash therefor may surrender such certificate to
the Surviving Corporation and (subject to applicable
abandoned property, escheat and similar laws) receive
in exchange therefor the Merger Consideration,
without interest.
(c) Promptly after the Effective Time, the Tendering
Agent shall mail to each record holder of
certificates which immediately prior to the Effective
Time represented shares of Company Common Stock a
form letter of transmittal and instructions for use
in surrendering certificates and receiving payment
therefor.
(d) If, after the Effective Time, certificates
representing shares of Company Common Stock are
presented to the Surviving Corporation or the
Tendering Agent, they shall be cancelled and
exchanged for the Merger Consideration as provided in
Section 4.1, subject to applicable law in the case of
Dissenting Shares.
4.4 DISSENTING SHARES.
(a) Any shares of Common Stock outstanding immediately
prior to the Effective Time of the Second-Step Merger
as to which the holder thereof shall have validly
exercised such holder's appraisal rights, if any,
under applicable sections of the New Jersey
Corporation Law ("DISSENTING SHARES") shall not,
after the Effective Time, be entitled to vote for any
purpose or be entitled to the payment of dividends or
other distributions (except dividends or other
distributions payable to shareholders of record prior
to the Effective Time). No such Dissenting Share
shall be converted into the Merger Consideration
hereunder unless and until the holder thereof shall
have failed to perfect, or shall have effectively
withdrawn or lost, such holder's right to payment for
such holder's shares under the New Jersey Corporation
Law. The Company shall give Merger Company prompt
notice upon receipt by the Company of any written
demand for appraisal (any shareholder duly making
such demand being hereinafter called a "DISSENTING
SHAREHOLDER").
(b) Each Dissenting Shareholder who becomes entitled
under the New Jersey Corporation Law to payment
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for the Dissenting Shares shall receive payment
therefor after the Effective Time from the Surviving
Corporation (but only after the amount thereof shall
have been agreed upon or finally determined pursuant
to the New Jersey Corporation Law) and such shares of
Company Common Stock shall be cancelled. To the
extent the remaining proceeds from the Loan (as
defined above in Section 2) are not sufficient to pay
for the Dissenting Shares, the Financing Related
Parties shall advance to Surviving Corporation,
immediately upon written request, funds necessary to
consummate the purchase of the Dissenting Shares.
4.5 TAKING OF NECESSARY ACTION; FURTHER ACTION. The Company and
the 13D Group shall each use its best efforts to take all such
action as may be necessary or appropriate in order to
effectuate the Merger under the New Jersey Corporation Law as
promptly as possible, subject to fiduciary obligations under
applicable law as advised by counsel. If at any time after the
Effective Time, any further action is necessary or desirable
to carry out the purposes of this Agreement and to vest the
Surviving Corporation with full right, title and possession to
all assets property, rights, privileges, powers, franchises of
both of the Company and Merger Company, the officers of such
corporation are fully authorized in the name of their
corporation or otherwise to take, and shall take, all such
lawful and necessary action.
5. REPRESENTATION AND WARRANTIES REGARDING
13D GROUP
Each member of the 13D Group severally hereby represents and warrants
to the Company (except as to Section 5.5 which is solely a representation and
warranty of the Financing Related Parties), except as set forth on the attached
Disclosure Schedules for Article 5, as follows:
5.1 ORGANIZATION AND QUALIFICATION. Such 13D Group member, to the
extent an entity, is a corporation or other entity duly
incorporated or formed, validly existing and in good standing
under the laws of its jurisdiction of incorporation or
formation and has the requisite power and authority to carry
on its business as it is now being conducted. Each such 13D
Group member, to the extent an entity, is duly qualified to do
business and is in good standing in each jurisdiction in which
the character of its properties, owned or leased, or the
nature of its activities make such qualification necessary.
Merger Company shall not have conducted any business prior to
the date the Second-Step Merger and will have no assets and
liabilities other than those incident to its formation and to
the consummation of the transactions contemplated hereby and
the Merger Agreement.
5.2 AUTHORITY RELATIVE TO THIS AGREEMENT. Each member of the 13D
Group has the requisite power and authority to enter into this
Agreement and to carry out its obligations hereunder. The
execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby have been duly
authorized and no other proceedings on the part of 13D Group
member are necessary to authorize this Agreement and the
transactions contemplated hereby. This Agreement has been duly
executed and delivered by 13D Group member and constitutes the
legal, valid and binding obligation of 13D Group member
enforceable against 13D Group member in accordance with its
terms.
5.3 NO VIOLATIONS.
(a) Neither the execution and delivery of this Agreement
by 13D Group member nor the consummation of the
transactions contemplated hereby nor compliance by
13D Group member with any of the provisions hereof
will: (i) violate, conflict with, or result in a
breach of any provision of, require any consent,
approval or notice under, or constitute a default (or
an event which, with notice or lapse of time or both,
would constitute a default) or result in a right of
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termination or acceleration under, or result in the
creation of any lien, security interest, charge or
encumbrance upon any of the properties or assets of
13D Group member or any of its subsidiaries under any
of the terms, conditions or provisions of (x) their
respective charters or by-laws or (y) any note, bond,
mortgage, indenture, deed of trust, agreement, lien,
contract or other instrument or obligation to which
13D Group member or any of its subsidiaries is a
party or to which any of them, or any of their
respective properties or assets, may be subject or by
which 13D Group member or any of its subsidiaries is
bound and which is material to 13D Group member and
its subsidiaries as a whole; or (ii) subject to
compliance with the statutes and regulations referred
to in Section 5.3(b), violate any judgment, ruling,
order, writ, injunction, determination, award,
decree, statute, ordinance, rule or regulation
applicable to 13D Group member or any of its
subsidiaries or any of their respective properties or
assets; or (iii) cause the suspension or revocation
of any authorization, consent, approval or license
currently in effect which would have a material
adverse effect on the business, operations or
financial condition of 13D Group member.
(b) Other than in connection with or in compliance with
the provisions of the New Jersey Corporation Law and
the Exchange Act, (i) there is no legal impediment to
13D Group member's consummation of the transactions
contemplated by this Agreement and (ii) no filing or
registration with, or authorization, consent or
approval of, any domestic public body or authority is
necessary for the consummation by 13D Group member of
the transactions contemplated by this Agreement,
except for such filings or registrations which, if
not made, or for such authorizations, consents or
approvals, which, if not received, would not have any
material adverse effect on the business, operations
or financial condition, of 13D Group member taken as
a whole or on the ability of 13D Group member to
consummate the transactions contemplated hereby.
5.4 BROKERAGE FEES. The 13D Group member has not retained any
financial adviser, broker, agent or finder or paid or agreed
to pay any financial advisers, broker, agent or finder on
account of this Agreement or any transaction contemplated
hereby.
5.5 FINANCING. The Financing Related Parties have, and shall have
immediately prior to the time of the acceptance for purchase
by the Company of shares of Common Stock pursuant to the
Offer, and at the Effective Time, and shall have made
available to the Company at such time, such funds as are
necessary for the consummation of the Offer at the Offer Price
and the Merger in accordance with the terms hereof and the
Loan Agreement. The performance of the Loan Agreement by the
Financing Related Parties is not subject to the Financing
Related Parties obtaining third party financing but is their
joint and several personal direct obligation.
6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the 13D Group, except as
set forth on the attached Disclosure Schedules for Article 6, as follows:
6.1 ORGANIZATION AND QUALIFICATION. The Company is a corporation
duly incorporated, validly existing and in good standing under
the laws of the State of New Jersey and has the requisite
corporate power and authority to carry on its business as it
is now being conducted. The Company is duly qualified to do
business and is in good standing in each jurisdiction in which
the character of its properties, owned or leased, or the
nature of its activities make such qualification necessary,
except where the failure to be so qualified or in good
standing would not have a material adverse effect on the
Company and its subsidiaries taken as a whole.
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6.2 AUTHORITY RELATIVE TO THIS AGREEMENT. The Company has the
requisite corporate power and authority to enter into this
Agreement and to carry out its obligations hereunder. The
execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby have been duly
authorized by the Company's Board of Directors. Except for any
approvals by the Company's Shareholders which is referred to
in Section 6.6, no other corporate proceedings on the part of
the Company are necessary to authorize this Agreement and the
transactions contemplated hereby. This Agreement has been duly
executed and delivered by the Company and constitutes the
legal, valid and binding obligation of the Company enforceable
against the Company in accordance with its terms.
6.3 No Violations.
(a) Except as set forth in SCHEDULE 6.3 to this
Agreement, or as disclosed in any report or statement
filed with the Commission (the "SEC REPORTS"),
neither the execution and delivery of this Agreement
by the Company nor the consummation of the
transactions contemplated hereby nor compliance by
the Company with any of the provisions hereof will:
(i) violate, conflict with, or result in breach of
any provision of, require any consent, approval or
notice under, or constitute a default (or an event
which, with notice or lapse of time or both, would
constitute a default) or result in a right of
termination or acceleration under, or result in the
creation of any lien, security interest, charge or
encumbrance upon any of the properties or assets of
the Company or its subsidiaries under any of the
terms, conditions or provisions of (x) their
respective charters or by-laws or (y) any note, bond,
mortgage, indenture, deed of trust, agreement, lien,
contract, or other instrument or obligation to which
the Company or its subsidiaries is a party or to
which any of them, or any of their respective
properties or assets, may be subject or by which the
Company or any of its subsidiaries is bound and which
is material to the Company and its subsidiaries as a
whole; or (ii) subject to compliance with the
statutes and regulations referred to in Section
6.3(b), violate any judgment, ruling, order, writ,
injunction, determination, award, decree, statute,
ordinance, rule or regulation applicable to the
Company or any of its subsidiaries or any of their
respective properties or assets (except, in the case
of each of clauses (i) and (ii) above, for such
violations, conflicts, breaches, defaults,
terminations, accelerations or creations of liens,
security, interests, charges or encumbrances which,
or any consents, approvals or notices which if not
given or received, would not have any material
adverse effect on the business, operations or
financial condition of the Company and its
subsidiaries taken as a whole or on the ability of
the Company to consummate the transactions
contemplated hereby or which are cured, waived or
terminated prior to the Effective Time; or (iii)
cause the suspension or revocation of any
authorization, consent, approval or license currently
in effect which would have a material adverse effect
on the business, operations or financial condition,
of the Company and its subsidiaries taken as a whole.
(b) Other than in connection with or in compliance with
the provisions of the New Jersey Corporation Law, the
Exchange Act, (and any applicable state securities
laws, (i) there is no legal impediment to the
Company's consummation of the transactions
contemplated by this Agreement and (ii) no filing or
registration with, or authorization, consent or
approval of, any domestic public body or authority is
necessary for the execution, delivery or consummation
by the Company of the transactions contemplated by
this Agreement, except for such filings or
registration which, if not made, or for such
authorizations, consents or approvals, which, if not
received, would not have any material adverse effect
on the business, operations or financial condition,
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of the Company and its subsidiaries taken as a whole
or on the ability of the Company to consummate the
transactions contemplated hereby.
6.4 CAPITALIZATION. As of the date hereof, the authorized capital
stock of the Company consists of 10,000,000 shares of Common
Stock; and 10,000,000 shares of blank-check Preferred Stock,
without par value ("PREFERRED STOCK"). As of the date hereof,
2,124,380 shares of Common Stock were issued and outstanding
and no shares of Preferred Stock were issued and outstanding.
As of the date hereof, the Company has issued to its employees
the following options under the Company's Employee Stock
Option Plans: options to purchase 60,000 shares of common
stock at an exercise price of $12.75 per share; options to
purchase 28,500 shares of common stock at an exercise price of
$11.75 per share; options to purchase 31,000 shares at $12.875
per share; options to purchase 36,000 shares of common stock
at $8.125 per share; and options to purchase 38,500 shares of
common stock at $7.21 per share (which 38,500 options do not
vest until June 2002). Except as set forth in Section 2.1
hereof, this Section 6.4 and the Convertible Debentures, there
are no options, warrants or other rights, agreements or
commitments of any character whatsoever requiring the
issuance, sale or transfer by the Company of any shares of
capital stock of the Company or any securities convertible
into or exchangeable or exercisable for, or otherwise
evidencing the right to acquire, any shares of capital stock
of the Company. All of the outstanding shares of Common Stock
have been duly authorized and validly issued and are fully
paid and non-assessable and are not subject to, nor were they
issued in violation of, any preemptive rights.
6.5 BROKERAGE FEES. The Company has not retained any financial
adviser, broker, agent or finder or paid or agreed to pay any
financial adviser, broker, agent or finder on account of this
Agreement or any transaction contemplated hereby, except that
Cochran Caronia & Co. has been retained as the Company's
financial advisor in connection with certain matters including
the transactions contemplated hereby.
6.6 MEETING. If Company Common Stock is purchased pursuant to the
Offer and if required by applicable law, the Company shall
take all action necessary in accordance with the New Jersey
Business Corporation Act, the Company's Articles of
Incorporation and By-laws to duly call, give notice of, and
hold a meeting of its shareholders as promptly as practicable
to consider and vote upon the adoption of this Agreement and
authorization of the Merger. At any such meeting, all the
shares of Company Common Stock owned by the 13D Group and/or
Merger Company shall be voted in favor of the Merger. The
shareholder vote required for the adoption of this Agreement
and the Merger shall be the vote required by the New Jersey
Corporation Law. The Proxy Statement shall contain the
determinations and recommendations of the Board of Directors
of the Company as to the Merger, subject to the Board's
fiduciary obligations to the Company's shareholders under
applicable law as advised by counsel. No 13D Group member
shall, prior to the Effective Time, sell, transfer, assign or
otherwise dispose of any shares of Company Common Stock owned
by it except to another 13D Group member or beneficiaries of
such 13D Group Member who becomes a direct party to this
Agreement prior to such sale, transfer, assignment or
disposition.
7. FEES AND EXPENSES
Other than as set forth in Article II, all fees, costs and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby, including expenses of counsel and financial advisers, shall be paid by
the party incurring such cost or expense. Notwithstanding the preceding
sentence, if the Offer is commenced and no shares of Common Stock are purchased
by the Company, the Financing Related Parties shall reimburse the Company for
the Company's expenses attributable to the tender offer process, including
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but not limited to, printing, agent fees, Commission filing fees,
solicitation and distribution costs, but excluding fees and expenses of
counsel and financial advisers to the Company.
8. PUBLIC ANNOUNCEMENTS.
The 13D Group, on the one hand, and the Company, on the other hand,
will consult with each other before issuing any press release or otherwise
making any public statements with respect to the transactions contemplated by
this Agreement, including, without limitation, the Offer and Merger, and shall
not issue any such press release or make any such public statement prior to such
consultation, except as may be required by applicable law or by obligations
pursuant to any listing agreement with any national securities exchange or
quotation bureau.
9. TERMINATION, AMENDMENT AND WAIVER
9.1 TERMINATION. This Agreement may be terminated and the Offer
and Second-Step Merger contemplated herein may be abandoned,
by written notice promptly given to the other parties hereto,
at any time prior to the Effective Time or such earlier time
as provided herein below:
(a) prior to the commencement of the Offer, by mutual
written agreement of the Independent Committee on the
one hand, and the 13D Group, on the other hand; or
(b) by either party if, having commenced, the
consummation of the Offer shall have failed to be
consummated on or before March 31, 2002, unless the
absence of such occurrence shall be due to the
failure of the party seeking to terminate this
Agreement to perform in all material respects each of
its obligations under this Agreement required to be
performed by it at or prior to the consummation of
the Offer; or
(c) by the Company prior to consummation of the Offer, if
the Company receives a proposal for acquisition or
other proposal which the Independent Committee
determines, in the exercise of its fiduciary
obligations as advised by counsel, is more favorable
than the Offer and Merger, or there occurs a material
favorable change in the insurance regulatory
administrative scheme regarding the Company's
principal subsidiary, Motor Club of America Insurance
Company, as a result of which the Independent
Committee determines, in the exercise of its
fiduciary duties as advised by counsel, that the
terms of the Offer are no longer in the best interest
of the Company's public Shareholders; or
(d) by the Company if (i) fewer than 676,140 shares of
Common Stock are properly tendered and not properly
withdrawn in the Offer; or (ii) the Independent
Committee fails to obtain a "draw down" of the
fairness opinion of its financial adviser to the date
of the expiration of the Offer, or by the 13D Group
or the Financing Related Parties if the Company
waives the 676,140 minimum tender requirements but
fewer than 590,076 shares of Common Stock are
properly tendered and not
(e) by either party if the Offer shall have been
terminated in accordance with its terms without any
shares of Company Common Stock having been purchased
thereunder; or
(f) by the Company, if, prior to acceptance of the shares
of Company Common Stock pursuant to the Offer, the
13D Group is in material breach of any of its
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representations, warranties, or obligations
hereunder, including but not limited to, Article II
hereof (financing); or
(g) by the Company or the 13D Group or the Financing
Related Parties, if prior to acceptance of the shares
of Company Common Stock pursuant to the Offer, there
shall have been threatened, instituted or pending any
action or proceeding by any government or
governmental, regulatory or administrative agency or
authority or tribunal or any other person, domestic
or foreign, before any court or governmental,
regulatory or administrative authority, agency or
tribunal, domestic or foreign, that (i) challenges
the making of the Offer or the acquisition of Shares
pursuant to the Offer, or otherwise, directly or
indirectly, relates in any manner to the Offer; or
(ii) in the reasonable good faith judgment of the
Company, could materially adversely affect the
business, condition (financial or otherwise), income,
assets, operations or prospects of the Company and
its subsidiaries, or otherwise materially impair in
any way the contemplated future conduct of the
business of the Company or any of its subsidiaries or
materially impair the Offer's contemplated benefits
to the Company; or
(h) by the Company or the 13D Group or the Financing
Related Parties, if prior to acceptance of the shares
of Company Common Stock pursuant to the Offer, there
shall have been any action threatened, pending or
taken, or approval withheld, or any statute, rule,
regulation, judgment, order or injunction threatened,
proposed, sought, promulgated, enacted, entered,
amended, enforced or deemed to be applicable to the
Offer or the Company or any of its subsidiaries, by
any court or any government or governmental,
regulatory or administrative authority, agency or
tribunal, domestic or foreign, that, in the Company's
reasonable good faith judgment, would or might
directly or indirectly (i) make the acceptance for
payment of, or payment for, some or all the Shares
illegal or otherwise restrict or prohibit
consummation of the Offer; (ii) delay or restrict the
ability of the Company, or render the Company unable,
to accept for payment, or pay for, some or all the
Shares; (iii) materially impair the contemplated
benefits of the Offer to the Company; or (iv)
materially affect the business, condition (financial
or otherwise), income, assets, operations or
prospects of the Company and its subsidiaries or
otherwise materially impair in any way the
contemplated future conduct of the business of the
Company or any of its subsidiaries; or
(i) by either party or the Financing Related Parties, if
prior to acceptance of the shares of Company Common
Stock pursuant to the Offer, there shall have
occurred (i) any general suspension of trading in, or
limitation on prices for, securities on any United
States national securities exchange or in the
over-the-counter market (excluding any coordinated
trading halt triggered solely as a result of a
specified decrease in a market index), including but
not limited to any changes in trading conditions
resulting from actual or threatened terrorist
attacks, responses by the United States or its
allies, or the effects thereof; (ii) the declaration
of a banking moratorium or any suspension of payments
in respect of banks in the United States or New
Jersey to such acts; (iii) the commencement of a war,
armed hostilities or other international or national
crisis directly or indirectly involving the United
States or any of its territories, including without
limiting any acts of terrorism, domestic or foreign
or responses of the United States or its allies; (iv)
any limitation (whether or not mandatory) by any
governmental, regulatory or administrative agency or
authority on, or any event that, in the reasonable
good faith judgment of the Company, might affect, the
extension of credit by banks or other lending
institutions in the United States or New Jersey; (v)
any decrease in the market price of the Shares below
12
<Page>
$5.00 for five consecutive trading days (whether
or not the Shares trade on that trading day); (vi)
any change in the general political, market,
economic or financial conditions in the United
States or abroad that could, in the reasonable
good faith judgment of the Company, have a
material adverse effect on the business, condition
(financial or otherwise), income, assets,
operations or prospects of the Company and its
subsidiaries, taken as a whole, or the trading in
the Shares; (vii) in the case of any of the
foregoing existing at the time of the commencement
of the Offer, in the reasonable good faith
judgment of the Company, a material escalation,
acceleration or worsening thereof; or (viii) any
decline in either the Dow Jones Industrial Average
or the Standard and Poor's Index of 500 Industrial
Companies by an amount in excess of 20% measured
from the close of business on December 18, 2001; or
(j) by the Company, if after December 18, 2001, but
before acceptance of the shares of Company Common
Stock pursuant to the Offer, any tender or exchange
offer with respect to the Shares (other than the
Offer), or any merger, acquisition, business
combination or other similar transaction with or
involving the Company or any subsidiary, shall have
been proposed, announced or made by any person or
entity; or
(k) by the Company or the 13D Group or the Financing
Related Parties, if after December 18, 2001, but
before acceptance of the shares of Company Common
Stock pursuant to the Offer, any actual material
adverse change or development shall occur or be
threatened with respect to the business, condition
(financial or otherwise), income, assets, operations
or prospects of the Company and its subsidiaries that
materially adversely affects the anticipated benefits
to the Company of acquiring Shares pursuant to the
Offer; or
(l) by the Company, if prior to acceptance of the shares
of Company Common Stock pursuant to the Offer, other
than any filings that may be required by members of
the Executive Committee or its affiliates as a result
of the transactions contemplated by the Agreement,
any person, entity or "group" (as that term is used
in Section 13(d)(3) of the Exchange Act) shall have
(i) acquired, or proposed to acquire, beneficial
ownership of more than 5% of the outstanding Shares
(other than a person, entity or group which has filed
a Schedule 13D or 13G with the Commission on or prior
to the date of this Offer to Purchase) or made a
public announcement reflecting an intent to acquire
the Company or any of its subsidiaries or any of
their respective assets or securities; or (ii) made a
public announcement reflecting an intent to acquire
the Company or any of its subsidiaries or any of
their respective assets or securities; or
(m) [omitted]
9.2 EFFECT OF TERMINATION. In the event of the termination of this
Agreement as provided in Section 9.1, (i) this Agreement shall
forthwith become void and there shall be no liability on the
part of the 13D Group or the Company hereunder except as set
forth in Sections 7 and 8 and (ii) if such termination occurs
prior to the purchase of shares of Company Common Stock
pursuant to the Offer, the Offer shall be terminated without
any shares of Company Common Stock being purchased. Nothing
contained in this Section 9.2 shall relieve any party from
liability for any breach of any provision of this Agreement.
9.3 CERTAIN MEANINGS. As used in this Section 9: (a) the term
Company, or any reference to such party, shall mean the
Company acting in accordance with the recommendation of, or at
the direction of, the majority of the Independent Committee;
(b) the term 13D Group, or any reference to such party, shall
mean the 13D Group acting by a majority of the Shares held by
13
<Page>
its members; and (c) the term Financing Related Parties, or
any reference thereto, shall mean the Financing Related
Parties acting unanimously.
9.4 AMENDMENT. This Agreement may not be amended, modified or
waived except by an instrument in writing signed by the
Company (as previously recommended by the Independent
Committee and approved by the Board of Directors) and the 13D
Group.
10. GENERAL PROVISIONS
10.1 NOTICES. All notices and other communications given or made
pursuant hereto shall be in writing and shall be deemed to
have been duly given or made as of the date delivered or sent
if delivered personally or sent by telecopier or sent by
prepaid overnight carrier to the parties at the following
addresses (or at such other addresses as shall be specified by
the parties by like notice):
(a) if to the 13D Group or to the Financing Related
Parties, to:
<Table>
Archer McWhorter and Alvin E. Swanner
1600 Smith Street, Suite 4275 28 Chateau Haut Brion Street
Houston, Texas 77002 Kenner, LA 700065
Fax: (713) 650-8361 Fax: (504) 466-2729
</Table>
(b) if to the Company:
95 Route 17 South
Paramus, NJ 07653
Attention: Stephen A. Gilbert and Patrick J. Haveron
Fax: (201) 291-2125
in each case with a copy to:
Sills Cummis Radin Tischman Epstein & Gross, P.A.
One Riverfront Plaza
Newark, NJ 07102
Attention: Stanley U. North, III, Esq.
Fax: 973-643-6500
and
Wolff & Samson P.C.
280 Corporate Center
5 Becker Farm Road
Roseland, New Jersey 07068
Attn: Morris Bienenfeld, Esq.
Fax: 973-436-4432
(c) if to any one member of the 13D Group, to the address
set forth on the signature page hereto.
10.2 NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS.
None of the representations, warranties and agreements
contained in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive the Effective Time,
and thereafter there shall be no liability on the part of the
Company or the 13D Group (including the Financing Related
Parties) any of their respective officers, directors or
shareholders in respect thereof except for the
representations, warranties and agreements
14
<Page>
contained in Sections 7 and 8. Except as expressly set forth
in this Agreement, there are no representations or warranties
of any party hereto, express or implied.
10.3 MISCELLANEOUS. This Agreement (i) constitutes the entire
agreement and supersedes all of the prior agreements and
understandings, both written and oral, among the parties, or
any of them, with respect to the subject matter hereof, (ii)
shall be binding upon and inure to the benefits of the parties
hereto and their respective successors and assigns and is not
intended to confer upon any other person (except as set forth
below) any rights or remedies hereunder, (iii) shall be
governed, including as to validity, interpretation and effect,
by the laws of the State of New Jersey and (iv) may be
executed in two or more counterparts which together shall
constitute a single agreement. The parties hereto agree that
irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance
with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this
Agreement and to enforce specifically the terms and provisions
hereof in any court of the United States or any state having
jurisdiction, this being in addition to any other remedy to
which they are entitled at law or in equity. The parties
hereby consent and agree to exclusive venue in New Jersey, and
agree that the state and federal courts in New Jersey shall
have exclusive jurisdiction over any disputes arising under or
in connection with this Agreement.
10.4 ASSIGNMENT. Except as expressly permitted by the terms hereof,
neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by the Company without
the prior written consent of the 13D Group, or by the 13D
Group, or any member thereof, without the prior written
consent of the Company (as previously recommended by the
Independent Committee and approved by the Board of Directors).
10.5 NO THIRD-PARTY BENEFICIARIES. Nothing herein express or
implied is intended or shall be construed to confer upon or
give to any person other than the parties hereto and their
permitted successors or assigns, any rights and remedies under
or by reason of this Agreement or the transactions
contemplated hereby.
10.6 SEVERABILITY. If any provision of this Agreement, or the
application thereof to any person or circumstance is held
invalid or unenforceable, the remainder of this Agreement, and
the application of such provision to other persons or
circumstances, shall not be affected thereby, and to such end,
the provisions of this Agreement are agreed to be severable.
10.7 WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO IRREVOCABLY
WAIVES ANY AND ALL RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY
ACTION, PROCEEDING OR CLAIM OF ANY NATURE RELATING TO THIS
AGREEMENT OR THE SUBJECT MATTER HEREOF. THE PARTIES HERETO
ACKNOWLEDGE THAT THE FOREGOING WAIVER IS KNOWING AND
VOLUNTARY.
IN WITNESS WHEREOF, each of the Company and the members of the 13D
Group have caused this Agreement to be duly executed as of the date first
written above.
PRESERVER GROUP, INC. 13D GROUP:
By: /s/ Stephen A. Gilbert /s/ Archer McWhorter
---------------------------- ----------------------------
Name: Stephen A. Gilbert Archer McWhorter
Title: President Address: 1600 Smith Street
Houston, Texas 77002
15
<Page>
/s/ Gail McWhorter
-----------------------------------------
Gail McWhorter
Address: 1600 Smith Street
Houston, Texas 77002
SLEEPY LAGOON LTD. BRION PROPERTIES, a Louisiana partnership
in commendam
By: /s/ Archer Mcwhorter
----------------------------- By: /s/ Alvin E. Swanner
Archer McWhorter -------------------------------------
General Partner Alvin E. Swanner
Address: 1600 Smith Street General Partner
Houston, Texas 77002 Address: 28 Chateau Haut Brion Street
Kenner, Louisiana 70065
/s/ Alvin E. Swanner /s/ William E. Lobeck, Jr.
- -------------------------------- -----------------------------------------
Alvin E. Swanner William E. Lobeck, Jr.
Address: 28 Chateau Haut Brion Street Address: 1132 South Lewis Avenue
Kenner, Louisiana 70065 Tulsa, Oklahoma 74104
William E. Lobeck Revocable Trust
By: /s/ William E. Lobeck, Jr.
-------------------------------------
William E. Lobeck, Jr.
Trustee
Address: 1132 South Lewis Avenue
Tulsa, Oklahoma 74104
Kathryn L. Taylor Revocable Trust
By: /s/ Kathryn L. Taylor
-------------------------------------
Kathryn L. Taylor
Trustee
Address: 1132 South Lewis Avenue
Tulsa, Oklahoma 74104
16
<Page>
SCHEDULE A - 13D GROUP OWNERSHIP
<Table>
<Caption>
Number of
Name of Number Options, Warrants
13D Group Member of Shares or Other Rights
- ----------------------------------- ------------------------------ ----------------------------
Archer McWhorter 301,635 -0-
Gail McWhorter 2,000 -0-
Sleepy Lagoon, Ltd. 43,336 201,819
Alvin E. Swanner 301,635 -0-
Brion Properties,
a Louisiana Partnership
In Commendam 43,331 201,818
William E. Lobeck, Jr. 289,185 193,767
William E. Lobeck Revocable Trust 20,083 -0-
------------------------------ ----------------------------
Kathryn L. Taylor Revocable Trust 21,665 -0-
------------------------------ ----------------------------
Total 1,022,870 597,404
============================== ============================
</Table>
<Page>
EXHIBIT 1
LOAN FACILITY
AGREEMENT dated January 14, 2002, by and between Preserver Group, Inc., a
New Jersey corporation (the "COMPANY"), and Archer McWhorter ("McWhorter") and
Alvin E. Swanner ("SWANNER" and together with McWhorter and one or more
Affiliates under their control, the "FINANCING RELATED PARTIES").
BACKGROUND
A. The Company is seeking financing to consummate the proposed tender
offer ("SELF-TENDER OFFER") by the Company to purchase all of its outstanding
capital stock, other than capital stock held by the Financing Related Parties
and certain other affiliates of the Company (collectively, with the Financing
Related Parties, the "13D GROUP"), and the proposed second-step merger
("SECOND-STEP MERGER"), pursuant to the terms of that certain Agreement for
Self-Tender Offer, Financing and Second-Step Merger dated as of the date hereof
by and between the Company and the 13D Group (the "AGREEMENT");
B. The 13D Group owns in the aggregate 1,022,870 shares of common stock,
par value $.50 per share, of the Company, representing 48% of the shares
outstanding on the date hereof, of which the Financing Related Parties own
689,937 shares; and
C. The Financing Related Parties desire to provide, and the Company
desires to receive, the aggregate amount of $8,536,703 (the "COMMITMENT"), on an
interest-free basis, in one or more loans during the period commencing
immediately prior to the consummation of the Offer and ending at the later of
the Self-Tender Offer, the Second-Step Merger and the subsequent payment, if
any, for all Dissenting Shares, as such term is defined in the Agreement (the
"COMMITMENT TERM"), to be used to consummate the Self-Tender Offer and
Second-Step Merger, as set forth in the Agreement.
TERMS
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
1. LOANS. Subject to the terms and conditions set forth herein, the
Financing Related Parties shall make one or more loans ("LOANS") to the Company,
on an interest free basis, during the Commitment Term for up to an aggregate
principal amount of $8,536,703, subject to increase as provided below. The
Financing Related Parties shall advance Loans on demand by the Company and the
Loans shall be evidenced by a grid promissory note of the Company payable to the
Financing Related Parties, in substantially the form attached hereto as EXHIBIT
A (the "NOTE"). Any shortfall in the Purchase Price (as defined hereafter)
required to consummate the Second-Step Merger, including, but not limited to,
payment for Dissenting Shares (as defined in the Agreement) shall be promptly
financed by the Financing Related Parties with an additional loan to the Company
by the Financing Related Parties on substantially the same terms contained
herein and the Note shall be amended to reflect the increase in the amount of
the Loans.
2. RETURN OF LOANS. In the event that one or more Loans are advanced to
the Company prior to consummation of the Offering and the Offering is terminated
pursuant to Section 9 of the Agreement, then, upon such termination, the Company
shall return any funds so received (without interest).
3. CONVERSION. At the Company's option, at any time, the then outstanding
principal under the Note may be converted into shares (the "FINANCING SHARES")
of non-voting Series A Preferred Stock at the conversion price (the "CONVERSION
PRICE") equal to $7.75 per share. Notwithstanding the previous sentence, on the
date sixty (60) days after the consummation of the Self-Tender Offer, the then
outstanding principal under the Note shall
<Page>
automatically convert into Financing Shares at the Conversion Price. Any Loans
made for Dissenting Shares or to purchase shares of Common Stock in the
Second-Step Merger after such 60 day period shall convert automatically and
immediately into Financing Shares at the Conversion Price. In the event that the
issuance of the Financing Shares would cause a violation of any rule, law or
regulation applicable to the Company or its stock, the Company shall on the date
of conversion issue the maximum amount of Financing Shares as would not cause
such violation and use its reasonable best efforts to remedy any such violation
and to issue the balance of the Financing Shares promptly thereafter. The
Financing Shares shall have the terms and conditions set forth in the
Certificate of Amendment to the Certificate of Incorporation, the form of which
is attached hereto as EXHIBIT B.
4. SEGREGATED ACCOUNT. The Company shall establish or have established a
segregated interest bearing account at a banking institution reasonably
acceptable to the Financing Related Parties pursuant to which all proceeds of
the Loans shall be deposited.
5. USE OF PROCEEDS. The Company shall apply the proceeds of the Loans
only (i) to finance the purchase of the Company's shares of Common Stock in the
Self-Tender Offer at the purchase price set forth in the Agreement (the
"PURCHASE PRICE"); and (ii) to purchase shares in the Second-Step Merger at the
Purchase Price and to purchase Dissenting Shares.
6. EXPENSES. Except as otherwise expressly set forth herein, all costs
and expenses incurred in connection with this Agreement and the transactions
contemplated hereby (including, without limitation, reasonable attorney's fees)
shall be paid by the party incurring such expense.
7. EQUITABLE RELIEF. The parties hereto agree and declare that legal
remedies may be inadequate to enforce the provisions of this Agreement and that
equitable relief, including specific performance and injunctive relief, may be
used to enforce such provisions.
8. NOTICES. Any and all notices or any other communication provided for
herein shall be given in writing by hand, facsimile transmission or by
registered or certified mail (postage prepaid) or overnight courier service,
addressed to the address specified for such party on the signature pages hereof,
or to such other address as may be designated in writing by any such party.
Except as otherwise provided in this Agreement, each such notice shall be deemed
given when delivered in person, by facsimile transmission or by overnight
courier or on a date which is five (5) days after it is deposited into the mail
at any U.S. post office.
9. AMENDMENT. No change in or modification of this Agreement shall be
valid unless the same shall be in writing and signed by all the parties hereto.
10. WAIVER. No failure or delay on the part of the parties or any of them
in exercising any right, power or privilege hereunder, nor any course of dealing
between the parties or any of them shall operate as a waiver of any such right,
power or privilege nor shall any single or partial exercise of any such right,
power or privilege preclude the simultaneous or later exercise of any other
right, power or privilege. The rights and remedies herein expressly provided are
cumulative and are not exclusive of any rights or remedies which the parties or
any of them would otherwise have.
11. BENEFIT AND BINDING EFFECT. This Agreement shall be binding upon and
inure to the benefit of the parties and their executors, administrators,
personal representatives, heirs, successors and permitted assigns.
12. SEVERABILITY. In the event that any portion of this Agreement shall
be held to be invalid or unenforceable to any extent, such portion shall be
enforced to the fullest lawful extent and the remaining parts hereof shall
nevertheless continue to be valid and enforceable as though the invalid portions
were not a part hereof. If any time period set forth herein is held by a court
of competent jurisdiction to be unenforceable, a different time period that is
determined by the court to be more reasonable shall replace the unenforceable
time period.
13. HEADINGS. The headings contained in this Agreement are for reference
purposes only and shall not in any way affect the meaning or interpretation of
this Agreement.
<Page>
14. GOVERNING LAW. This Agreement shall be governed by, and construed and
enforced in accordance with, the laws of the State of New Jersey without regard
to principles of conflicts of laws.
15. JURISDICTION. The parties hereto irrevocably consent to the exclusive
venue of New Jersey and agree that the state and federal courts in New Jersey
shall have exclusive jurisdiction over any disputes arising under or in
connection with this Agreement or the Note or the subject matter hereof or
thereof. The Company and the Financing Related Parties agree that venues in New
Jersey are the most convenient forum for both the Company and the Financing
Related Parties. The Financing Related Parties waive any objection to venue and
any objection based on a more convenient forum in any action instituted relating
to this Agreement or the Note.
16. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES
ANY AND ALL RIGHTS IT MAY HAVE TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
CLAIM OF ANY NATURE RELATING TO THIS AGREEMENT OR THE NOTE OR THE SUBJECT MATTER
HEREOF OR THEREOF. THE PARTIES HERETO ACKNOWLEDGE THAT THE FOREGOING WAIVER IS
KNOWING AND VOLUNTARY.
17. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be duly
executed as of the date first written above.
PRESERVER GROUP, INC.
By: /s/ Stephen A. Gilbert
-------------------------------------
Name: Stephen A. Gilbert
Title: President
Address: 95 Route 17 South
Paramus, New Jersey 07653
/s/ Archer McWhorter
-----------------------------------------
Archer McWhorter
Address: 1600 Smith Street
Houston, Texas 77002
/s/ Alvin E. Swanner
-----------------------------------------
Alvin E. Swanner
Address: 28 Chateau Haut Brion Street
Kenner, Louisiana 70065
<Page>
EXHIBIT A
CONVERTIBLE GRID PROMISSORY NOTE
$__________
FOR VALUE RECEIVED, the undersigned corporation, duly organized, validly
existing, and in good standing under the laws of the state of New Jersey (the
"BORROWER" or the "COMPANY"), having its principal office at 95 Route 17 South,
Paramus, New Jersey 07653-0931 promises to pay to the order of Archer McWhorter
and Alvin E. Swanner (the "LENDERS") at the offices of Mr. McWhorter at 1600
Smith Street, Suite 4275, Houston, Texas 77002, or at such other place as the
Lenders may designate in writing, the lesser of: (a) the principal sum of
$8,536,703 (which amount is subject to increase pursuant to Section 1 of the
Financing Agreement is referred to as the "COMMITMENT"), or (b) the aggregate
unpaid principal sum of all loans (the "Loans") made by the Lenders from time to
time under this Note (the "NOTE") and that certain Financing Agreement between
the Borrower and the Lenders, to which the form of this Note is attached as an
exhibit (the "FINANCING AGREEMENT"), in accordance with the provisions hereof.
Borrower may not reborrow any monies already loaned under this Note, even if
such amounts have been paid to Lenders. All capitalized terms not otherwise
defined herein shall have the definitions set forth in the Financing Agreement.
1. INTEREST. No interest shall accrue or be payable in connection with
this Note.
2. OBLIGATION TO EXTEND LOANS. Lenders shall make Loans to the Borrower
under this Note on demand during the Commitment Term in accordance with the
terms of the Financing Agreement.
3. USE OF GRID. The Lenders are hereby authorized by the Borrower to
enter and record on the grid schedule ("GRID") attached hereto as SCHEDULE A the
amount of each Loan made under this Note and each payment of principal thereon
(if any) or conversion into Financing Shares (as defined below) without any
further authorization on the part of the Borrower. The entry of a Loan on said
schedule shall be prima facie and presumptive evidence of the entered Loan. The
Lenders' failure to make any entry, however, shall not limit or otherwise affect
the obligations of the Borrower. The Lenders shall promptly deliver to the
Borrower copies of the Grid each time an entry or change is made thereto.
4. CONVERSION. At the Company's option, at any time, the then outstanding
principal under this Note may be converted into shares (the "FINANCING SHARES")
of non-voting Series A Preferred Stock at the conversion price (the "CONVERSION
PRICE") equal to $7.75 per share. Notwithstanding the previous sentence, on the
date sixty (60) days after the consummation of the Self-Tender Offer, the then
outstanding principal under this Note shall automatically convert into Financing
Shares at the Conversion Price. Any Loans made for Dissenting Shares or to
purchase Shares of Common Stock in the Second-Step Merger after such 60 day
period shall convert automatically and immediately into Financing Shares at the
Conversion Price. In the event that the issuance of the Financing Shares would
cause a violation of any rule, law or regulation applicable to the Company or
its stock, the Company shall on the date of conversion issue the maximum amount
of Financing Shares as would not cause such violation and use its reasonable
best efforts to remedy any such violation and to issue the balance of the
Financing Shares promptly thereafter. The Financing Shares shall have the terms
and conditions set forth in the Certificate of Amendment to Certificate of
Incorporation of Borrower, the form of which is attached as EXHIBIT B to the
Financing Agreement.
5. PREPAYMENT. In the event that any portion of this Note is funded to
the Company prior to consummation of the Offering and the Offering is
subsequently terminated pursuant to Section 9 of the Agreement (as defined in
the Financing Agreement), then, the outstanding principal balance under this
Note shall become due and payable upon such termination.
<Page>
6. DEFAULT. Each of the following shall constitute an event of default
(an "EVENT OF DEFAULT") hereunder: (i) The failure of the Borrower to either
prepay the principal amount of this Note or convert the Loan into Financing
Shares; or (ii) The occurrence of a default or breach by Borrower of any
material provision under this Note or the Financing Agreement.
7. RIGHTS AND REMEDIES. Upon the occurrence of any Event of Default, such
default not having previously been remedied or waived, the Lenders shall have
the following rights and remedies: (i) the right, at their option, by written
notice to the Borrower, to declare the entire unpaid balance of this Note to be
immediately due and payable and thereupon such amount together with all costs,
fees and expenses incurred in connection herewith, shall be immediately due and
payable; (ii) all rights and remedies provided by law, including, without
limitation, those provided by the Uniform Commercial Code as in effect in the
State of New Jersey from time to time (the "UCC").
8. NO RIGHT OF SET-OFF BY MAKER. Borrower's obligations under this Note
shall not be subject to any right of setoff, counterclaim, defense, abatement,
suspension, deferment or reduction.
9. WAIVER OF NOTICE. Borrower hereby waives any requirement of
presentment, notice of protest and all other notices in connection with the
delivery, acceptance, performance, default of enforcement of this Note.
10. REPLACEMENT IF LOST. Upon receipt of evidence, reasonably
satisfactory to the Borrower, of the loss, theft, destruction or mutilation of
this Note, and upon receipt of indemnity reasonably satisfactory to the
Borrower, the Borrower will, at the expense of the Lenders or any one of them,
execute and deliver, in lieu thereof, a new instrument of like tenor and amount.
11. NO WAIVER OF RIGHT OR REMEDY. No delay, failure or omission by the
Lenders in respect of the exercise of any right or remedy granted to the Lenders
or allowed to the Lenders by law, under this Note or otherwise, shall constitute
a waiver of the right to exercise the right or remedy at that or any future time
or in the same or other circumstance.
12. NOTICE. All notices required to be given hereunder shall be given in
accordance with the terms of the Financing Agreement.
13. MODIFICATION. This Note may not be changed, modified or terminated
orally, but only by an agreement in writing, signed by both the Borrower and the
Lender.
14. GOVERNING LAW; JURISDICTION. This Note shall be governed by and
construed in accordance with the laws of the State of New Jersey. Each of the
Borrower and Lenders hereby irrevocably consents to the exclusive jurisdiction
of the state and federal courts located in the State of New Jersey in connection
with any dispute arising out of or relating to this Note.
15. INVALIDITY; ASSIGNMENT. If any term or provision of this Note shall
be held invalid, illegal or unenforceable, the validity of all other terms and
provisions hereof shall in no way be affected thereby. This Note shall be
binding upon the successors and assigns of the Borrower and enure to the benefit
of each Lender, its successors, endorses and assigns.
IN WITNESS WHEREOF, the Borrower has executed this Convertible Grid
Promissory Note as of the date first set forth above.
PRESERVER GROUP, INC.
By:
-------------------------------------
Name: Stephen A. Gilbert
Title: President
-2-