SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
CROP GROWERS CORPORATION
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(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):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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/X/ Fee paid previously with preliminary materials.
/X/ Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
$12,772
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(2) Form, Schedule or Registration Statement No.:
Schedule 13E-3
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(3) Filing Party:
Joint - Crop Growers Corporation, Fireman's Fund Insurance Company and
CG Acquisitions Corp.
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(4) Date Filed:
May 8, 1997
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CROP GROWERS CORPORATION
10895 LOWELL AVENUE
SUITE 300
OVERLAND PARK, KANSAS 66210
July , 1997
Dear Stockholder:
You are cordially invited to attend a special meeting of stockholders of
Crop Growers Corporation (the "Company") to be held at the offices of the
Company, 10895 Lowell Avenue, Suite 300, Overland Park, Kansas, on ,
August , 1997 at 9:00 a.m. local time (the "Special Meeting"). A Notice of the
Special Meeting, a Proxy Statement, related information about the Company and a
proxy card are enclosed. All holders of the Company's outstanding shares of
Common Stock (the "Common Stock") and Series A Convertible Preferred Stock (the
"Preferred Stock") as of July 15, 1997 are entitled to notice of and to vote at
the Special Meeting.
At the Special Meeting, you will be asked to consider and to vote upon a
proposal to approve and adopt an Agreement and Plan of Merger, dated May 1, 1997
(the "Merger Agreement"), by and among the Company, Fireman's Fund Insurance
Company, a California corporation ("Fireman's Fund"), and a wholly owned merger
subsidiary of Fireman's Fund, pursuant to which the merger subsidiary will be
merged with and into the Company (the "Merger"). If the Merger Agreement is
approved and the Merger becomes effective, each outstanding share of the Common
Stock will be converted into the right to receive $10.25 in cash, and holders of
options to acquire shares of the Common Stock will each be paid, in cash, net of
withholding taxes, an amount per option share equal to the excess, if any, of
$10.25 over the exercise price of such options. Approval of the Merger requires
the affirmative vote of the holders of a majority of the voting power of all
outstanding shares of the Common Stock and the Preferred Stock, voting together
as one class. Details of the proposed Merger and other important information are
set forth in the accompanying Proxy Statement, which you are urged to read
carefully.
YOUR BOARD OF DIRECTORS HAS APPROVED THE MERGER AND RECOMMENDS THAT YOU VOTE
FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. Whether or not you plan to
attend the Special Meeting, please complete, sign and date the accompanying
proxy card and return it in the enclosed postage prepaid envelope. If you attend
the Special Meeting, you may revoke such proxy and vote in person if you wish,
even if you have previously returned your proxy card.
Thank you for your interest and participation.
Sincerely,
Lawrence T. Martinez
CHIEF EXECUTIVE OFFICER
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR
MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE
INFORMATION CONTAINED IN THIS DOCUMENT. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
CROP GROWERS CORPORATION
10895 LOWELL AVENUE
SUITE 300
OVERLAND PARK, KANSAS 66210
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NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , AUGUST , 1997
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To Stockholders of Crop Growers Corporation:
A special meeting of the stockholders of Crop Growers Corporation, a
Delaware corporation (the "Company"), will be held at the offices of the
Company, 10895 Lowell Avenue, Suite 300, Overland Park, Kansas, on ,
August , 1997 at 9:00 a.m. local time (the "Special Meeting"), to consider and
act upon the following matters:
1. To consider and vote upon a proposal to approve and adopt an Agreement
and Plan of Merger, dated May 1, 1997 (the "Merger Agreement"), among the
Company, Fireman's Fund Insurance Company, a California corporation
("Fireman's Fund"), and CG Acquisitions Corp., a Delaware corporation and
wholly owned subsidiary of Fireman's Fund (the "Merger Subsidiary"),
pursuant to which, among other things, (i) the Merger Subsidiary will be
merged with and into the Company (the "Merger"), (ii) each outstanding
share of Common Stock, par value $.01 per share, of the Company (the
"Common Stock") will be converted into the right to receive $10.25 in
cash, and (iii) holders of options to acquire shares of the Common Stock
will each be paid, in cash, net of withholding taxes, an amount per
option share equal to the excess, if any, of $10.25 over the exercise
price of such options. A copy of the Merger Agreement is attached as
Exhibit A to the accompanying Proxy Statement.
2. To transact such other business as may properly come before the Special
Meeting or any adjournment thereof.
Only holders of record of the Common Stock and the Series A Convertible
Preferred Stock, par value $.01 per share, of the Company (the "Preferred
Stock") at the close of business on July 15, 1997 are entitled to notice of and
to vote at the Special Meeting. Fireman's Fund, which owns approximately 22.9%
of the outstanding shares of Common Stock and all of the outstanding shares of
the Preferred Stock (together representing approximately 29.6% of the combined
voting power of the Common Stock and the Preferred Stock) has notified the
Company that, to the extent it is permitted to do so under its prior agreement
with the Company, it intends to vote its shares of the Common Stock and the
Preferred Stock in favor of the Merger. See the discussion in the accompanying
Proxy Statement with respect to the "Consent Agreement" under the caption
"SPECIAL FACTORS--Relationship Between the Company and Fireman's
Fund--Transactions and Agreements."
Holders of the Common Stock who do not vote their shares in favor of the
Merger Agreement and who strictly comply with Section 262 of the Delaware
General Corporation Law (the "DGCL") have the right to object to the Merger
Agreement and make written demand for payment of the "fair value" of their
shares ("Dissenting Shares"). For a description of the rights of holders of
Dissenting Shares, see Section 262 of the DGCL, a copy of which is attached as
Exhibit C to the accompanying Proxy Statement. In addition, a description of the
procedures to be followed in order to obtain payment for Dissenting Shares is
set forth under the caption "RIGHTS OF DISSENTING STOCKHOLDERS" in the Proxy
Statement.
Your attention is directed to the Proxy Statement, the Exhibits thereto and
the other materials relating to the Company that have been mailed to you
herewith for more complete information regarding the Merger Agreement and the
Company. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL AND ADOPTION OF
THE MERGER AGREEMENT.
By Order of the Board of Directors
David E. Hill
SECRETARY
Overland Park, Kansas
July , 1997
YOUR VOTE IS IMPORTANT. ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE
SPECIAL MEETING. WHETHER OR NOT YOU PLAN TO ATTEND, PLEASE MARK, SIGN AND DATE
THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. YOU MAY
NEVERTHELESS VOTE IN PERSON IF YOU ATTEND THE SPECIAL MEETING.
CROP GROWERS CORPORATION
PROXY STATEMENT
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SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , AUGUST , 1997
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This Proxy Statement is being furnished to the stockholders of Crop Growers
Corporation, a Delaware corporation (the "Company"), in connection with the
solicitation by the Board of Directors of the Company of proxies to be voted at
a special meeting of stockholders of the Company to be held at the offices of
the Company, 10895 Lowell Avenue, Suite 300, Overland Park, Kansas, on ,
August , 1997 at 9:00 a.m. local time, and any adjournments or postponements
thereof (the "Special Meeting"). At the Special Meeting, the stockholders of the
Company will consider and vote upon a proposal to approve and adopt an Agreement
and Plan of Merger, dated May 1, 1997 (the "Merger Agreement"), by and among the
Company, Fireman's Fund Insurance Company, a California corporation ("Fireman's
Fund"), and CG Acquisitions Corp., a Delaware corporation and wholly owned
subsidiary of Fireman's Fund (the "Merger Subsidiary"), pursuant to which, among
other things (i) the Merger Subsidiary will be merged with and into the Company
(the "Merger"), with the result that the Company will become a wholly owned
subsidiary of Fireman's Fund, (ii) each outstanding share of Common Stock, par
value $.01 per share, of the Company (the "Common Stock"), except those shares
as to which dissenters' rights have been perfected ("Dissenting Shares"), will
be converted into the right to receive $10.25 in cash, and (iii) holders of
options to acquire shares of the Common Stock of the Company will each receive a
cash payment, net of withholding taxes, in an amount per share equal to the
excess, if any, of $10.25 over the exercise price of such options. See "THE
MERGER AGREEMENT--Consideration To Be Received by Stockholders."
This Proxy Statement is accompanied by copies of the Company's Annual Report
on Form 10-K, as amended, for the year ended December 31, 1996 and its Quarterly
Report on Form 10-Q for the quarter ended March 31, 1997. These materials are
specifically incorporated by reference in this Proxy Statement and are included
to aid stockholders in their consideration of the Merger.
Only holders of record of the Common Stock and the Series A Convertible
Preferred Stock, par value $.01 per share, of the Company (the "Preferred
Stock") at the close of business on July , 1997 are entitled to notice of and
to vote at the Special Meeting. This Proxy Statement is first being sent to
stockholders on or about July , 1997.
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THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR
MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE
INFORMATION CONTAINED IN THIS DOCUMENT. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
TABLE OF CONTENTS
PAGE
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SUMMARY.................................................................................................... 1
Date, Time and Place of Special Meeting.................................................................. 1
Record Date; Stockholders Entitled to Vote; Quorum....................................................... 1
Purpose of the Meeting................................................................................... 1
The Merger............................................................................................... 2
Termination by Company................................................................................... 2
Termination Fee.......................................................................................... 2
Effective Time of the Merger............................................................................. 2
Voting of Shares Owned by Fireman's Fund................................................................. 2
Special Factors.......................................................................................... 3
Payment for Shares and Options........................................................................... 4
Dissenters' Rights....................................................................................... 4
Regulatory Approvals..................................................................................... 4
The Company.............................................................................................. 4
Fireman's Fund........................................................................................... 4
Market Price and Dividend Data........................................................................... 5
Selected Consolidated Financial Data..................................................................... 6
THE SPECIAL MEETING........................................................................................ 7
General.................................................................................................. 7
Proposal to be Considered at the Special Meeting......................................................... 7
Record Date; Stockholder Approval........................................................................ 7
Proxies.................................................................................................. 8
SPECIAL FACTORS............................................................................................ 8
Background of the Merger................................................................................. 8
Purpose and Structure of the Merger...................................................................... 17
Recommendation of the Company's Board of Directors....................................................... 18
Opinion of Financial Advisor............................................................................. 19
Perspective of Fireman's Fund on the Merger.............................................................. 25
Plans for the Company After the Merger................................................................... 26
Certain Effects of the Merger............................................................................ 26
Relationship Between the Company and Fireman's Fund...................................................... 26
Interests of Certain Persons in the Merger............................................................... 30
Sources and Uses of Funds................................................................................ 31
Certain Federal Income Tax Consequences.................................................................. 32
Public Offerings and Repurchases of Common Stock......................................................... 33
Regulatory Approvals..................................................................................... 33
THE MERGER AGREEMENT....................................................................................... 33
General.................................................................................................. 34
Effective Time........................................................................................... 34
Consideration To Be Received by Stockholders............................................................. 34
Payment for Shares and Options........................................................................... 34
Operations of the Company Prior to the Merger............................................................ 35
Conditions to Consummation of the Merger................................................................. 36
Termination.............................................................................................. 37
Termination Fee.......................................................................................... 37
Accounting Treatment..................................................................................... 37
i
PAGE
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RIGHTS OF DISSENTING STOCKHOLDERS.......................................................................... 37
STOCK OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS................................................ 41
Stock Ownership.......................................................................................... 41
Transactions by Certain Persons in Common Stock.......................................................... 42
MANAGEMENT OF THE COMPANY, FIREMAN'S FUND AND THE MERGER SUBSIDIARY........................................ 43
The Company.............................................................................................. 43
Fireman's Fund and Affiliates............................................................................ 44
The Merger Subsidiary.................................................................................... 45
Certain Proceedings...................................................................................... 45
STOCKHOLDER PROPOSALS...................................................................................... 46
INDEPENDENT PUBLIC ACCOUNTANTS............................................................................. 46
INFORMATION INCORPORATED BY REFERENCE...................................................................... 46
AVAILABLE INFORMATION...................................................................................... 47
ADDITIONAL INFORMATION..................................................................................... 47
EXHIBIT A--Agreement and Plan of Merger.................................................................... A-1
EXHIBIT B--Opinion of Dean Witter Reynolds Inc............................................................. B-1
EXHIBIT C--Provisions of Delaware General Corporation Law Relating to Appraisal Rights..................... C-1
EXHIBIT D--Crop Growers Corporation Annual Report on Form 10-K for the year ended December 31, 1996, as
amended.................................................................................................. D-1
EXHIBIT E--Crop Growers Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 1997..... E-1
ii
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROXY STATEMENT. THE FOLLOWING SUMMARY IS NOT INTENDED TO BE COMPLETE AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION
CONTAINED IN THIS PROXY STATEMENT, IN THE MATERIALS ACCOMPANYING THIS PROXY
STATEMENT, IN THE EXHIBITS HERETO AND IN THE DOCUMENTS INCORPORATED HEREIN BY
REFERENCE. STOCKHOLDERS ARE URGED TO REVIEW THE ENTIRE PROXY STATEMENT AND
ACCOMPANYING MATERIALS CAREFULLY.
DATE, TIME AND PLACE OF SPECIAL MEETING
A Special Meeting of Stockholders of Crop Growers Corporation will be held
on , August , 1997 at 9:00 a.m. local time at the offices of the
Company, 10895 Lowell Avenue, Suite 300, Overland Park, Kansas.
RECORD DATE; STOCKHOLDERS ENTITLED TO VOTE; QUORUM
Only holders of record of shares of the Common Stock and the Preferred Stock
at the close of business on July 15, (the "Record Date") are entitled to notice
of and to vote at the Special Meeting. On that date, there were 7,973,151 shares
of Common Stock outstanding, held of record by approximately 110 stockholders,
and 10,000 shares of Preferred Stock outstanding, all of which are owned by
Fireman's Fund. The holders of Common Stock and the holder of the Preferred
Stock will vote together as one class with respect to the matters to be voted
upon at the Special Meeting, with each share of Common Stock entitled to one
vote and the 10,000 shares of Preferred Stock entitled to a total of 754,717
votes. See "THE SPECIAL MEETING--Record Date; Stockholder Approval." The
presence, in person or by proxy, at the Special Meeting of the holders of a
majority of the combined voting power of the outstanding shares of the Common
Stock and the Preferred Stock is necessary to constitute a quorum at the Special
Meeting.
PURPOSE OF THE MEETING
At the Special Meeting, stockholders will consider and vote upon a proposal
to approve and adopt the Merger Agreement, a copy of which is attached as
Exhibit A to this Proxy Statement. See "THE SPECIAL MEETING--Proposal to be
Considered at the Special Meeting." The Merger Agreement provides for the merger
of the Merger Subsidiary with and into the Company, with the result that the
Company, as the surviving corporation (the "Surviving Corporation"), will become
a wholly owned subsidiary of Fireman's Fund. See "THE MERGER
AGREEMENT--General."
THE MERGER
Pursuant to the Merger Agreement, the Merger Subsidiary will merge with and
into the Company, with the Company being the Surviving Corporation. Each
outstanding share of Common Stock (except Dissenting Shares and shares held by
Fireman's Fund or its designee) will be converted into the right to receive
$10.25 in cash, without interest, from the Paying Agent (as defined herein) for
Fireman's Fund and holders of options to acquire shares of the Common Stock of
the Company will each receive from the Surviving Corporation a cash payment, net
of withholding taxes, in an amount per share equal to the excess, if any, of
$10.25 over the exercise price of such options. See "THE MERGER
AGREEMENT--Consideration To Be Received by Stockholders" and "--Payment for
Shares and Options." After the Merger, Fireman's Fund will own all of the
outstanding shares of capital stock of the Surviving Corporation. The shares of
the Common Stock will no longer be traded on the Nasdaq National Market and the
registration of the Common Stock under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), will be terminated. See "SPECIAL FACTORS--Certain
Effects of the Merger."
Approval of the Merger requires the affirmative vote of the holders of a
majority of the voting power of all outstanding shares of the Common Stock and
the Preferred Stock, voting together as one class. See "THE SPECIAL
MEETING--Record Date; Stockholder Approval."
1
The Merger is subject to various closing conditions, including state
insurance regulatory approvals (which have been granted) and the absence of any
event that would have a material adverse effect on the assets, properties,
liabilities, obligations, financial condition, results of operations or business
of the Company. See "THE MERGER AGREEMENT--Conditions to Consummation of the
Merger."
TERMINATION BY COMPANY
The Board of Directors of the Company may, if it determines in good faith,
after hearing advice of outside counsel, that such action is necessary in order
for the Board of Directors to comply with its fiduciary duties to the Company's
stockholders under applicable law, modify or withdraw its approval or
recommendation of the Merger, approve or recommend a Superior Proposal (as
defined below) or terminate the Merger Agreement, and such action will not
constitute a breach of the Merger Agreement. A "Superior Proposal" is a bona
fide Acquisition Proposal (as defined herein) the terms of which the Board of
Directors of the Company determines, after hearing the advice of a financial
advisor of nationally recognized reputation, to be more favorable to the
Company's stockholders than the terms of the Merger. See "THE MERGER
AGREEMENT--Termination."
TERMINATION FEE
The Merger Agreement may, under specified circumstances, be terminated and
the Merger abandoned at any time prior to the filing of a Certificate of Merger
with the Delaware Secretary of State, notwithstanding approval of the Merger
Agreement by the stockholders of the Company. The Merger Agreement requires the
Company to pay Fireman's Fund a termination fee of $2.4 million plus a sum equal
to the amount of certain transaction costs incurred by Fireman's Fund if the
Merger is not consummated and (a) the Merger Agreement is terminated by the
Company as stated under "--Termination by Company" above, or (b) the Merger
Agreement is terminated by Fireman's Fund following any withdrawal or
modification of the approval or recommendation of the Merger Agreement by the
Company's Board of Directors or any failure by the Board to recommend that the
stockholders of the Company vote in favor of the Merger or any approval or
recommendation by the Board of any Acquisition Proposal other than the Merger,
or (c) Fireman's Fund has complied with all its obligations under the Merger
Agreement, and (d) if the termination is the result of failure of the
stockholders of the Company to approve the Merger, the Company within 18 months
thereafter enters into a binding agreement with a third party regarding a
merger, consolidation, recapitalization, sale of assets, sale of its securities
or a similar transaction. See "THE MERGER AGREEMENT--Termination" and
"--Termination Fee."
EFFECTIVE TIME OF THE MERGER
Unless otherwise agreed by the parties to the Merger Agreement or otherwise
provided by law, the Merger will become effective upon the acceptance for
recording of the Certificate of Merger by the Delaware Secretary of State (the
"Effective Time"). Subject to approval of the Merger at the Special Meeting and
the satisfaction or waiver of the terms and conditions in the Merger Agreement,
the Effective Time is expected to occur on the date of and as soon as
practicable after the Special Meeting. See "THE MERGER AGREEMENT--Effective
Time."
VOTING OF SHARES OWNED BY FIREMAN'S FUND
The Board of Directors of Fireman's Fund, which owns approximately 22.9% of
the issued and outstanding shares of the Common Stock and all of the issued and
outstanding shares of the Preferred Stock (together representing 29.6% of the
combined voting power of the Common Stock and the Preferred Stock), has approved
the Merger and has notified the Company that, to the extent it is permitted to
do so under its prior agreement with the Company, it intends to vote its shares
of the Common Stock and the Preferred Stock in favor of the Merger. The
agreement requires Fireman's Fund to vote its shares which exceed 20% of the
Company's outstanding voting securities in accordance with the pro rata vote of
the
2
Company stockholders who are not "interested parties" as defined in Section 203
of the Delaware General Corporate Law ("DGCL"). For such purposes, Fireman's
Fund is an "interested party" as so defined. See the discussion with respect to
the "Consent Agreement" under the caption "SPECIAL FACTORS-- Relationship
Between the Company and Fireman's Fund--Transactions and Agreements." Because
Fireman's Fund is entitled to vote substantially less than 50.0% of the combined
voting power of the outstanding shares of the Common Stock and the Preferred
Stock, approval of the Merger is not assured as a result of the voting power
held by Fireman's Fund. See "THE SPECIAL MEETING--Record Date; Stockholder
Approval."
SPECIAL FACTORS
In determining whether to vote in favor of the Merger, stockholders of the
Company should consider the following special factors, as well as the other
factors discussed elsewhere in this Proxy Statement under the caption "SPECIAL
FACTORS":
PURPOSE AND STRUCTURE OF THE MERGER. The purpose of the Merger is to effect
the sale of the Company to Fireman's Fund in a transaction that will provide the
Company stockholders cash for their shares at a price that the Board of
Directors of the Company believes to be fair. The primary reason for the Company
entering into the Merger Agreement is the Board of Directors' belief that it
would be difficult for the Company to enhance operating performance and enhance
shareholder value on a stand-alone basis in the immediate future. See "SPECIAL
FACTORS--Purpose and Structure of the Merger."
RECOMMENDATION OF THE COMPANY'S BOARD OF DIRECTORS. The Board of Directors
of the Company has determined that the Merger is fair from a financial point of
view to and in the best interests of the Company's stockholders (other than
affiliates of the Company and Fireman's Fund and its affiliates). The Board of
Directors has approved the Merger Agreement and recommends that stockholders
vote in favor of the proposal to approve and adopt the Merger Agreement. See
"SPECIAL FACTORS--Recommendation of the Company's Board of Directors."
OPINION OF FINANCIAL ADVISOR. On March 5, 1997, Dean Witter Reynolds Inc.
("Dean Witter") delivered a written opinion to the Board of Directors of the
Company to the effect that the cash consideration to be received by the holders
of the Common Stock (other than Fireman's Fund and its affiliates) in connection
with the Merger is fair to such stockholders from a financial point of view. A
copy of the written opinion of Dean Witter dated March 5, 1997 is attached as
Exhibit B to this Proxy Statement. Stockholders of the Company are urged to read
the opinion of Dean Witter in its entirety. For discussion of the factors
considered and assumptions made by Dean Witter in reaching its opinion, see
"SPECIAL FACTORS--Opinion of Financial Advisor."
INTERESTS OF CERTAIN PERSONS IN THE MERGER. In considering the
recommendation of the Board of Directors of the Company with respect to the
Merger Agreement and the transactions contemplated thereby, stockholders should
be aware that certain officers and directors of the Company have interests in
connection with the consummation of the Merger that may conflict with the
interests of the Company's stockholders. For example current officers and
directors of the Company will receive payments in connection with the settlement
of stock options totalling $72,725 (not taking into account any tax witholding).
See "SPECIAL FACTORS--Interests of Certain Persons in the Merger."
FEDERAL INCOME TAX CONSEQUENCES. For federal income tax purposes, the
Merger will be treated as a taxable sale or exchange of shares of the Common
Stock for cash by each holder of the Common Stock (including any holder of
Dissenting Shares). The amount of gain or loss to be recognized by each
stockholder will be measured by the difference between the amount of cash
received by such stockholder in connection with the Merger for his or her shares
of Common Stock (including Dissenting Shares) and such stockholder's tax basis
in such shares of Common Stock at the Effective Time. See "SPECIAL
FACTORS--Certain Federal Income Tax Consequences."
3
PAYMENT FOR SHARES AND OPTIONS
As promptly as possible after the Effective Time, instructions will be
furnished to holders of shares of the Common Stock regarding procedures to be
followed to surrender their certificates and receive payment from the Paying
Agent for their shares. Instructions will also be furnished by the Surviving
Corporation to holders of options to purchase the Common Stock concerning their
rights, if any, to receive payments from the Surviving Corporation in settlement
of the options and procedures to be followed to exercise those rights. See "THE
MERGER AGREEMENT--Payment for Shares and Options."
DISSENTERS' RIGHTS
Under the DGCL, any holder of the Common Stock who does not vote in favor of
the Merger and who strictly complies with the procedural requirements of Section
262 of the DGCL, the full text of which is attached as Exhibit C to this Proxy
Statement, will have the right to object to the Merger Agreement and make
written demand for the payment of the "fair value" of such holder's shares of
the Common Stock. See "RIGHTS OF DISSENTING STOCKHOLDERS."
REGULATORY APPROVALS
All approvals of state insurance regulatory authorities required in
connection with the Merger have been obtained. In addition, under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), the Merger may not be consummated unless notice has been given and
certain information has been furnished to the Antitrust Division of the United
States Department of Justice and the Federal Trade Commission. Such notice and
information has been given and furnished, and the Company and Fireman's Fund
have been notified that neither the Department of Justice nor the Federal Trade
Commission will object to the Merger. See "SPECIAL FACTORS--Regulatory
Approvals."
THE COMPANY
The Company is a leading marketer and servicer of crop insurance. It markets
and services federal multi-peril crop insurance ("MPCI"), private crop hail
insurance and other insurance products underwritten primarily by Fireman's Fund,
as well as its own property and casualty insurance company subsidiaries. The
Company also markets a variety of farm-related software products. The Company's
principal source of revenues is fees for servicing policies and premiums that
are generated for Fireman's Fund through the Company's agency network. In
addition, the Company has underwriting gains and losses generated through its
insurance company subsidiaries.
The principal executive office of the Company is located at 10895 Lowell
Avenue, Suite 300, Overland Park, Kansas 66210, and the Company's telephone
number is (913) 338-7800.
FIREMAN'S FUND
Fireman's Fund is one of the top 20 property and casualty insurance
companies in the United States, with total assets of $16.6 billion and gross
premiums written of $4 billion. The 134-year old Fireman's Fund is assigned an
"A" rating from A.M. Best Company and an "Aa1" rating from Moody's. Fireman's
Fund has 8,157 employees who operate out of 40 major offices, distributing
business and personal lines insurance through approximately 6,000 independent
agents.
The principal executive office of Fireman's Fund is located at 777 San Marin
Drive, Novato, California 94998, and its telephone number is (415) 899-2000.
Fireman's Fund is a wholly owned subsidiary of Allianz of America, Inc.
("AZOA"). Allianz Aktiengesellschaft Holding ("AZ AG") holds 90% of the voting
securities of AZOA. AZ AG's business address is Koniginstrasse 28, 80802 Munich,
Federal Republic of Germany. AZOA's business address is 55 Green Farms Road,
Westport, Connecticut 06881.
4
MARKET PRICE AND DIVIDEND DATA
The Common Stock is traded on the Nasdaq National Market under the symbol
"CGRO." The following table sets forth the high and low trading prices per share
of the Common Stock on the Nasdaq National Market for the periods indicated.
HIGH LOW
--------- ---------
1995
First Quarter............................................................ $ 28.00 $ 14.00
Second Quarter........................................................... 33.00 11.25
Third Quarter............................................................ 16.75 13.19
Fourth Quarter........................................................... 15.00 11.50
1996
First Quarter............................................................ $ 16.25 $ 6.00
Second Quarter........................................................... 11.75 7.00
Third Quarter............................................................ 10.50 6.88
Fourth Quarter........................................................... 7.88 5.88
1997
First Quarter............................................................ $ 10.00 $ 6.13
Second Quarter........................................................... 10.13 9.50
Third Quarter (through July 11).......................................... 10.13 10.06
On February 14, 1997, the last full day of trading prior to the announcement
by the Company that certain stockholders of the Company intended to sell their
shares of Common Stock for $10 per share, which were approximately 23% of the
shares of the Common Stock then outstanding (see "SPECIAL FACTORS--Relationship
Between the Company and Fireman's Fund"), the reported high and low trading
prices per share of the Common Stock were $8.00 and $7.00, respectively. On
March 5, 1997, the last full day of trading prior to the announcement by the
Company that it had entered into an agreement with Fireman's Fund relating to
the Merger, such reported high and low trading prices per share of the Common
Stock were $8.88 and $8.50, respectively. On July , 1997, the last full day of
trading prior to the printing of this Proxy Statement, the reported high and low
trading prices per share of the Common Stock were $10.13 and $10.06,
respectively. STOCKHOLDERS ARE URGED TO OBTAIN A CURRENT MARKET QUOTATION FOR
THEIR SHARES.
The Company has never paid a cash dividend on the Common Stock and does not
anticipate paying any such dividend in the foreseeable future.
5
SELECTED CONSOLIDATED FINANCIAL DATA
Set forth below is a summary of selected consolidated financial data with
respect to the Company excerpted or derived from the information contained in
the Company's Annual Reports on Form 10-K for the years ended December 31, 1996,
1995 and 1994, and its Quarterly Report on Form 10-Q for the quarterly periods
ended March 31, 1997 and March 31, 1996. More comprehensive financial
information is included in such reports and other documents filed by the Company
with the Securities and Exchange Commission (the "Commission"), and the
following summary is qualified in its entirety by reference to such reports and
other documents and all of the financial information (including any related
notes) contained therein. Such reports and other documents may be inspected and
copies may be obtained from the offices of the Commission. See "AVAILABLE
INFORMATION." In addition, copies of the Company's Annual Report on Form 10-K
for the year ended December 31, 1996, as amended, and its Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 1997 are attached as Exhibits
D and E to this Proxy Statement being provided to stockholders and are
incorporated herein by reference. See "INFORMATION INCORPORATED BY REFERENCE."
QUARTER ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- ------------------------------------------
1997 1996 1996 1995 1994 1993
--------- --------- --------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER COMMON SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
Service fees.................................................. $ 49,737 $ 66,272 $ 104,602 $ 85,025 $ 48,100 $ 26,733
Premiums earned and other income.............................. 522 780 4,309 701 2,203 524
Investment income............................................. 206 562 2,255 2,163 1,397 587
--------- --------- --------- --------- --------- ---------
Total Revenues.............................................. 50,465 67,614 111,166 87,889 51,700 27,844
Expenses:
Agent commissions and other direct costs...................... 36,010 46,280 71,082 52,612 30,475 20,203
Losses incurred and other expenses............................ 142 445 2,420 (2,013) 1,428 --
General and administrative expenses........................... 7,481 8,029 33,699 28,886 11,526 5,765
Restructuring and non-core expenses........................... 1,375 -- 6,510 -- -- --
Legal matters................................................. 1,135 551 7,458 -- -- --
Interest expense.............................................. 93 834 1,478 859 394 431
--------- --------- --------- --------- --------- ---------
Total Expenses.............................................. 46,236 56,139 122,647 80,344 43,823 26,399
Income (loss) before income taxes and minority interest......... 4,229 11,475 (11,481) 7,545 7,877 1,445
Income taxes.................................................. (1,683) (4,503) 3,345 (2,943) (2,274) --
Minority interest............................................. -- -- (67) (307) (279) --
--------- --------- --------- --------- --------- ---------
Net income (loss)........................................... 2,546 6,972 (8,203) 4,295 5,324 1,445
Redeemable preferred stock dividend............................. (125) -- (239) -- -- --
--------- --------- --------- --------- --------- ---------
Net income (loss) attributable to common stock.............. $ 2,421 $ 6,972 $ (8,442) $ 4,295 $ 5,324 $ 1,445
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Pro Forma Data (1):
Historic net income (loss).................................... $ -- $ -- $ -- $ -- $ 5,324 $ 1,445
Pro forma provision for income taxes.......................... -- -- -- -- (281) (542)
--------- --------- --------- --------- --------- ---------
Pro forma net income (loss)................................... $ -- $ -- $ -- $ -- $ 5,043 $ 903
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Pro forma net income per common share......................... $ -- $ -- $ -- $ -- $ .91 $ .22
Net income (loss) per common share.............................. $ .30 $ .84 $ (1.04) $ .51 $ -- $ --
Ratio of earnings to fixed charges.............................. 19.8 14.76 -- (2) 9.79 -- --
Weighted average common shares outstanding...................... 7,985 8,348 8,109 8,353 5,562 4,074
1992
---------
STATEMENT OF OPERATIONS DATA:
Revenues:
Service fees.................................................. $ 19,122
Premiums earned and other income.............................. --
Investment income............................................. 323
---------
Total Revenues.............................................. 19,445
Expenses:
Agent commissions and other direct costs...................... 14,065
Losses incurred and other expenses............................ --
General and administrative expenses........................... 4,882
Restructuring and non-core expenses........................... --
Legal matters................................................. --
Interest expense.............................................. 505
---------
Total Expenses.............................................. 19,452
Income (loss) before income taxes and minority interest.........
Income taxes.................................................. --
Minority interest............................................. --
---------
Net income (loss)...........................................
Redeemable preferred stock dividend............................. --
---------
Net income (loss) attributable to common stock.............. $
---------
---------
Pro Forma Data (1):
Historic net income (loss).................................... $
Pro forma provision for income taxes.......................... 3
---------
Pro forma net income (loss)................................... $
---------
---------
Pro forma net income per common share......................... $ --
Net income (loss) per common share.............................. $ --
Ratio of earnings to fixed charges.............................. --
Weighted average common shares outstanding...................... --
MARCH 31, DECEMBER 31,
----------------------- ---------------------------------------------
1997 1996 1996 1995 1994 1993
------------ --------- ------------ --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER COMMON SHARE DATA)
BALANCE SHEET DATA:
Total assets........................................... $ 325,983 $ 319,299 $ 158,929 $ 153,465 $ 88,175 $ 35,230
Long-term debt, excluding current installments......... 2,328 3,838 2,654 3,374 1,978 1,621
Redeemable preferred stock............................. 10,000(3) -- 10,000(3) -- -- 3,250
Stockholders' equity................................... 36,194 50,935 33,752 44,342 38,669 1,960
Book value per common share............................ $ 4.54 $ 6.25 $ 4.23 $ 5.43 $ 4.78 $ .55
1992
---------
BALANCE SHEET DATA:
Total assets........................................... $ 20,337
Long-term debt, excluding current installments......... 618
Redeemable preferred stock............................. --
Stockholders' equity................................... 1,176
Book value per common share............................ $ .33
- ----------------------------------
(1) Reflects federal and state income taxes as if the Company's subsidiaries had
not been treated as S Corporations during periods prior to the Company's
initial public offering in June 1994.
(2) In 1996, earnings were inadequate to cover fixed charges by $11,818,303.
(3) Represents issuance of the Preferred Stock to Fireman's Fund in July 1996.
6
THE SPECIAL MEETING
GENERAL
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of the Company for a Special Meeting of
Stockholders to be held on August , 1997 at 9:00 a.m. local time at the
offices of the Company, 10895 Lowell Avenue, Suite 300, Overland Park, Kansas,
and at any adjournments thereof. Shares represented by properly executed proxies
received by the Company will be voted at the Special Meeting or any adjournment
thereof in accordance with the terms of such proxies, unless such proxies are
revoked. See "--Proxies" below.
PROPOSAL TO BE CONSIDERED AT THE SPECIAL MEETING
At the Special Meeting, the stockholders of the Company will consider and
vote upon a proposal to approve and adopt the Merger Agreement. Pursuant to the
Merger Agreement, the Merger Subsidiary will merge with and into the Company,
the separate corporate existence of the Merger Subsidiary will cease, and the
Company will be the Surviving Corporation. At the Effective Time, each
outstanding share of the Common Stock (except Dissenting Shares and shares owned
by Fireman's Fund or its designee) will be converted into the right to receive
$10.25 in cash, and holders of options to acquire shares of the Common Stock of
the Company will each be paid, in cash, net of withholding taxes, an amount per
share equal to the excess, if any, of $10.25 over the exercise price of such
options. Holders of Dissenting Shares will be entitled to receive from the
Surviving Corporation a cash payment in the amount of the "fair value" of such
shares, determined in the manner provided in Section 262 of the DGCL, but after
the Effective Time such shares will not represent any interest in the Surviving
Corporation other than the right to receive such cash payment. See "RIGHTS OF
DISSENTING STOCKHOLDERS." A copy of the Merger Agreement is attached as Exhibit
A to this Proxy Statement.
In addition to approval and adoption of the Merger Agreement and the
transactions contemplated thereby, stockholders of the Company may be asked to
approve a proposal to adjourn the Special Meeting to permit further solicitation
of proxies in the event there are not sufficient votes at the time of the
Special Meeting to approve and adopt the Merger Agreement. It is not anticipated
that any other matters will be brought before the Special Meeting. However, if
other matters should come before the Special Meeting, it is intended that the
holders of proxies solicited hereby will vote thereon in their discretion,
unless such authority is withheld.
RECORD DATE; STOCKHOLDER' APPROVAL
Only holders of record of the Common Stock and the Preferred Stock at the
close of business on July 15, 1997 are entitled to notice of and to vote at the
Special Meeting. On that date, there were 7,973,151 shares of Common Stock
outstanding, which were held of record by approximately 110 stockholders, and
10,000 shares of Preferred Stock outstanding, all of which are held of record by
Fireman's Fund. Each share of Common Stock entitles its holder to one vote, and
the holder of the Preferred Stock is entitled to a total of 754,717 votes,
concerning all matters properly coming before the Special Meeting. A majority of
the combined voting power of the shares of the Common Stock and the Preferred
Stock entitled to vote, represented in person or by proxy, will constitute a
quorum. Abstentions and broker non-votes (I.E. shares held by brokers in street
name, voting on certain matters due to discretionary authority or instructions
from the beneficial owner but not voting on other matters due to lack of
authority to vote on such matters without instructions from the beneficial
owner) are counted for the purpose of establishing a quorum and will have the
same effect as a vote against the approval of the Merger.
The Merger must be approved by the holders of at least a majority of the
combined voting power of all outstanding shares of the Common Stock and the
Preferred Stock. Approval by holders of a majority of such combined voting power
that are not affiliates of the Company is not required.
7
Fireman's Fund, which owns approximately 22.9% of the issued and outstanding
shares of the Common Stock and all of the issued and outstanding shares of the
Preferred Stock (together representing approximately 29.6% of the combined
voting power of the Common Stock and the Preferred Stock), has notified the
Company that, to the extent it is permitted to do so under its prior agreement
with the Company, it intends to vote its shares of Common Stock and Preferred
Stock in favor of the Merger. See the discussion with respect to the "Consent
Agreement" under the caption "SPECIAL FACTORS-- Relationship Between the Company
and Fireman's Fund--Transactions and Agreements." Because Fireman's Fund is
entitled to vote substantially less than 50.0% of the combined voting power of
all outstanding shares of Common Stock and Preferred Stock, approval of the
Merger is not assured as a result of the voting power held by Fireman's Fund.
Although they have not specifically agreed to do so, the Company believes
that each of the directors and executive officers of the Company will vote the
shares of Common Stock with respect to which he has voting power in favor of the
Merger. Such shares represent less than 1% of the shares entitled to vote at the
Special Meeting. See "STOCK OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL
OWNERS."
PROXIES
Any Company stockholder entitled to vote at the Special Meeting may vote
either in person or by duly authorized proxy. All shares of the Common Stock and
the Preferred Stock represented by properly executed proxies received prior to
or at the Special Meeting and not revoked will be voted in accordance with the
instructions indicated in such proxies. IF NO INSTRUCTIONS ARE INDICATED, SUCH
PROXIES WILL BE VOTED FOR THE PROPOSAL TO APPROVE AND ADOPT THE MERGER AGREEMENT
AND, IN THE DISCRETION OF THE PERSONS NAMED IN THE PROXY, ON SUCH OTHER MATTERS
AS MAY PROPERLY BE PRESENTED AT THE SPECIAL MEETING.
A stockholder may revoke his or her proxy at any time prior to its use by
delivering to the Secretary of the Company a signed notice of revocation or a
later dated and signed proxy or by attending the Special Meeting and voting in
person. Attendance at the Special Meeting will not in itself constitute the
revocation of a proxy.
Expenses in connection with the solicitation of proxies will be paid by the
Company. Upon request, the Company will reimburse brokers, dealers and banks, or
their nominees, for reasonable expenses incurred in forwarding copies of the
proxy material to the beneficial owners of the Common Stock which such persons
hold of record. Solicitation of proxies will be made principally by mail and by
the Company's agent for such purposes, W.F. Doring & Company (the "Proxy
Solicitation Agent"). The Proxy Solicitation Agent will be paid a fee of $5,000
plus expenses for such services, which principally will involve contacting
individual stockholders of the Company and delivery of proxy materials and
solicitation of proxies from brokers, nominees, fiduciaries and other custodians
for stockholders. Proxies may also be solicited in person, or by telephone or
telegraph, by officers and regular employees of the Company.
SPECIAL FACTORS
BACKGROUND OF THE MERGER
HISTORY OF RELATIONSHIP BETWEEN THE COMPANY AND FIREMAN'S FUND. The Company
and Fireman's Fund first entered into a business and contractual relationship in
1995. Effective for the 1995 crop year (beginning July 1, 1994), the Company and
Fireman's Fund entered into agreements pursuant to which Fireman's Fund agreed
to write a portion of the federal multi-peril crop insurance ("MPCI") policies
serviced by the Company, and the Company agreed to provide the services and
administration relating to such policies. For a description of those agreements,
see "--Relationship Between the Company and Fireman's Fund--Intercompany
Business Relationship" below.
8
In April 1996, representatives of the Company and Fireman's Fund began
discussing the possibility of expanding their business relationship in a manner
such that Fireman's Fund would become the primary writer of the Company's crop
insurance business and would also make an investment in the Company. On July 10,
1996, the Company and Fireman's Fund entered into a stock purchase agreement
(the "Preferred Stock Purchase Agreement") pursuant to which Fireman's Fund
purchased, for $10 million in cash, 10,000 shares of the Company's Preferred
Stock. The Preferred Stock is convertible into 754,717 shares of the Company's
Common Stock (at the time of purchase and assuming conversion, approximately
8.6%). Under the terms of the Preferred Stock Purchase Agreement, Fireman's Fund
has the right to select one nominee for election to the Company's Board of
Directors. Fireman's Fund selected John M. Meuschke, Fireman's Fund's Senior
Vice President in charge of its Central States Region, as its representative on
the Board of Directors.
At the same time, the Company and Fireman's Fund entered or agreed to enter
into new agreements relating to MPCI, crop hail insurance and farm and ranch
insurance under which Fireman's Fund obtained the right to underwrite
substantially all of such insurance originated by the Company other than the
portion underwritten by the Company's subsidiaries. Also as a part of this
transaction, and in connection with discussions among the Company, Fireman's
Fund and the Federal Crop Insurance Corporation (the federal agency that
administers the MPCI program, the "FCIC") related to the Company's indictment on
May 30, 1996 in an action brought by the Independent Counsel investigating the
affairs of former Secretary of Agriculture, Mike Espy (see "MANAGEMENT OF THE
COMPANY, FIREMAN'S FUND AND THE MERGER SUBSIDIARY--Certain Proceedings"),
Fireman's Fund assumed the Company's standard reinsurance agreement with the
FCIC that had previously been held by one of the Company's insurance company
subsidiaries, and agreed to service the Company's MPCI business in the event the
Company was unable to participate in the MPCI program. The Company believes
Fireman's Fund's agreement to assume the Company's standard reinsurance
agreement was an important aspect of the FCIC's decision to permit the Company
to continue to participate in the MPCI program following its indictment. Absent
such an assignment, the Company believes it may have been suspended from
participating in the MPCI pending disposition of the charges contained in the
indictment. In light of the fact that, prior to the Company's indictment,
Fireman's Fund and the Company had agreed in principle to expand their business
relationship, the assignment of the standard reinsurance agreement was made a
part of the overall business transaction.
For a description of the agreements discussed above, see "--Relationship
Between the Company and Fireman's Fund--Intercompany Business Relationship" and
"--Transactions and Agreements" below.
FINANCIAL ADVISOR. In late 1995, the Company began considering expanding
its business relationships and potential strategic transactions. Accordingly, in
January 1996, the Company engaged Dean Witter to act as its exclusive financial
advisor in connection with the Company's review of strategic and financial
planning matters, including a possible merger or sale of the Company. Dean
Witter was the Company's financial advisor in connection with the expansion of
its business relationship with Fireman's Fund in July 1996 and the related
investment in the Company by Fireman's Fund. From time to time, representatives
of Dean Witter had discussions with senior management of the Company and the
Company's Board of Directors concerning the Company's potential strategic
alternatives. Such discussions were general in nature and did not result in any
formal actions by the Company's Board of Directors, except as described below.
DISCUSSIONS WITH THIRD PARTY. In October 1996, the Company was approached
by Acceptance Insurance Companies ("Acceptance"), which indicated a desire to
hold discussions with Company management relating to possible strategic
transactions involving the Company and Acceptance. Acceptance was involved in
the crop insurance business through a subsidiary which serviced approximately
$250 million of MPCI premiums in the 1996 crop year. On or about October 21,
1996, Richard Gibson, Chief Executive Officer of Acceptance's crop insurance
subsidiary, telephoned Lawrence T. Martinez, the Chief Executive Officer
9
of the Company, to determine if the Company would be interested in meeting to
discuss what opportunities might exist for a relationship between their
respective companies. Mr. Martinez indicated he would be available to meet and
asked Mr. Gibson to telephone him to arrange a meeting. On October 24, 1996, Mr.
Gibson telephoned Mr. Martinez regarding meeting logistics.
On October 25, 1996, Messrs. Martinez and David E. Hill, the Chief Financial
Officer of the Company, met with Mr. Gibson, Kenneth Coon, Chief Executive
Officer of Acceptance, and Michael McCarthy, a director of and financial advisor
to Acceptance. The parties discussed general crop insurance industry conditions,
the possibility of government action that would significantly reduce the amount
paid to private companies to service MPCI premiums and the likelihood that such
a reduction would result in increased consolidation within the industry. The
parties also briefly discussed the possible merits of a strategic transaction
between the two companies, including the creation of a leading market position
and the economies of scale created by combining the two crop insurance
businesses. They also discussed Fireman's Fund's MPCI agreements with the
Company. There was no discussion of any form or structure that any possible
relationship between the companies might take. At the conclusion of the meeting,
the parties agreed that it would be appropriate to continue the discussions.
On November 7, 1996, at a meeting of the Board of Directors of the Company
(with all directors in attendance), the Board directed Mr. Martinez to continue
discussions with Acceptance.
On November 21, 1996, at the initiative of Mr. Coon, Messrs. Martinez and
Hill, a representative of Dean Witter and Messrs. Coon and McCarthy met to
continue their prior discussion. In addition to again reviewing general crop
insurance industry conditions, Mr. McCarthy outlined a possible transaction
between the companies whereby the Company and Acceptance would each contribute
its crop insurance book of businesses into a to-be-formed company in exchange
for stock in the new company. Mr. McCarthy indicated that because of the
uncertainty surrounding the possible impact of the Independent Counsel matter
and the Company's existing securities class action, Acceptance did not believe
it was desirable to structure a transaction pursuant to which the Company was
the surviving corporation.
On November 26, 1996, Dean Witter, at the Company's request, sent Acceptance
an alternative transaction structure which contemplated a merger of the
Company's and Acceptance's crop insurance companies, with the Company surviving
as a public company. No price or other financial terms were included. On the
same date, a representative of Dean Witter and Messrs. Hill and Martinez were
telephoned by Messrs. Coon and McCarthy to discuss the alternative transaction
structure proposed by the Company. Dean Witter indicated that the structure
previously proposed by Acceptance was unacceptable to the Company because it
left any and all contingent liabilities of the Company with the Company
stockholders, did not adequately address how the new company would be
capitalized, had adverse tax consequences for the Company and its stockholders,
and might have required the new company to go through the time and expense of an
initial public offering. Messrs. Coon and McCarthy indicated that they were
still concerned with doing a transaction pursuant to which the Company was the
surviving corporate entity, but that they would consider the structure proposed
by the Company.
On December 11, 1996, at a meeting initiated by Acceptance, Mr. Martinez, a
representative of Dean Witter and Messrs. Coon and McCarthy met to continue
their prior discussions. Mr. McCarthy indicated that the Company's proposed
transaction structure was not acceptable for the reasons stated above and he
suggested that Acceptance believed the preferred transaction structure would be
an acquisition of the Company by Acceptance in a merger pursuant to which the
Company's stockholders would receive stock of Acceptance. No financial terms
were discussed at the meeting, however the parties did discuss certain issues
facing the Company, such as the Independent Counsel matter and the ongoing
related expenses, the existing securities class action lawsuit against the
Company, competitive issues facing the Company in the marketplace (principally
as a result of the negative impact of the Independent Counsel matter), the
restructuring charges the Company had taken in 1996 and the terms of the
Company's MPCI agreements with Fireman's Fund, which are described below under
the caption "Relationship Between the Company
10
and Fireman's Fund--Intercompany Business Relationship." Mr. Martinez in
response to a question indicated that he believed Fireman's Fund wanted to be a
long-term player in the crop insurance industry. He also indicated that he
believed that Fireman's Fund's ongoing role would be an important element for
the Company to consider. The parties talked generally about these issues,
without quantifying the effects, and agreed that for a transaction to go
forward, Acceptance would have to become comfortable with these issues as the
Company was not willing to enter into an acquisition agreement that included
termination rights for Acceptance relating to these issues.
On December 27, 1996, Acceptance sent a draft summary of proposed terms to
Dean Witter, and Dean Witter provided a copy to the Company. The proposal
provided that the Company would be merged into a subsidiary of Acceptance, and
that each issued and outstanding share of the Company's Common Stock would be
converted into stock of Acceptance having an equivalent value of approximately
$6.80 per share (based on the then-current price of Acceptance's stock), on the
condition that the Company had a tangible book value on the closing date of the
transaction of at least $35 million. The proposal was further conditioned upon
completion of due diligence by Acceptance, settlement of the Company's
outstanding securities class action lawsuit and disposition of the Independent
Counsel matter. Acceptance proposed a break-up fee of $1 million and an option
to purchase a portion of the Company's crop insurance business at a specified
price in the event the break-up fee became payable. On or about January 6, 1997,
a representative of Dean Witter telephoned Mr. McCarthy to convey to Acceptance
the Company's position that the proposed terms were unacceptable to the Company
based on the proposed price and the conditions attached to the payment of that
price and to a closing of the proposed transaction.
On February 10 and 11, 1997, Messrs. Martinez and Hill, Paul T. Horn, the
Company's Chairman, Thomas M. Vertin, the Company's Vice Chairman, Mr. Meuschke,
and representatives of Dean Witter met with Messrs. Coon, Gibson and McCarthy,
John Nelson, President of Acceptance, and William Gerber, Vice President of
Investor Relations of Acceptance. The meeting resulted from Acceptance's offer
to meet with members of the Company's Board of Directors to discuss Acceptance's
business and the benefits of a possible merger transaction with Acceptance. At
the meeting, the representatives of Acceptance provided an overview of
Acceptance's business and management team. They also discussed certain benefits
Acceptance perceived of combining the Company's and Acceptance's crop insurance
businesses. These benefits included a leading market position in the MPCI
industry, an improved spread of risk across the United States and economies of
scale which might be realized through a combination of the businesses. None of
the benefits discussed were quantified. In response to a question, one of the
Acceptance representatives indicated that Fireman's Fund's role in such a
transaction would be as a potential reinsurer once the Company's MPCI
reinsurance agreement with Fireman's Fund terminated after the 1999 crop year.
Mr. Horn indicated that the Company believed that Fireman's Fund's participation
in any possible transaction between the Company and Acceptance was desirable in
view of Fireman's Fund's capital resources and its investor and reinsurance
relationships with the Company. The representatives of Acceptance indicated that
it was unlikely that Fireman's Fund could continue to have its same reinsurance
arrangement (after the 1999 crop year) in the event of a transaction. The
parties discussed Acceptance's desire to be assured that a certain minimum MPCI
premiums level for the 1997 Spring business would be achieved and a minimum
tangible net worth be maintained as conditions to a possible merger agreement
and/or adjustments to the purchase price. The Company indicated that it was not
acceptable for it to enter into a definitive merger agreement where the price
payable to shareholders might fluctuate and/or Acceptance, a competitor, could
engage in significant due diligence and then terminate the agreement for the
Company's failure to satisfy a certain covenant. In view of this discussion,
Acceptance suggested that it might be preferable to wait until the Company's
first quarter financial results were known before entering into any agreement or
discussing the consideration Acceptance might be willing to pay for the
Company's Common Stock. The parties also discussed the timing and possible
disruption to the Company's business (for example, distractions to management
and possible leaks of information which might negatively affect the Company's
agency network) of engaging in any formal due diligence process prior to the
1997 Spring MPCI sales closing date (March 15, 1997) which would mean that
discussions and further negotiations
11
would likely have to wait until after that date. The parties agreed to discuss
further a possible transaction schedule based on the timing of the availability
of the Company's first quarter financial results.
Except as described below under the caption "--Contacts and Negotiations
with Fireman's Fund," the Company and Acceptance did not engage in any
significant discussions following the February 10 and 11, 1997 meetings.
CONTACTS AND NEGOTIATIONS WITH FIREMAN'S FUND. On January 20, 1997, at the
request of Mr. Martinez and with the knowledge of the Board of Directors of the
Company, a representative of Dean Witter contacted Mr. Meuschke, Fireman's
Fund's representative on the Company's Board of Directors, to determine whether
Fireman's Fund had an interest in expanding its relationship with the Company,
particularly in light of the Company's recent discussions with Acceptance. Mr.
Meuschke indicated that Fireman's Fund's principal interest was to protect its
investment in and contracts with the Company. Mr. Martinez and Mr. Meuschke had
a telephone conference the same day, in which Mr. Meuschke gave Mr. Martinez
similar information.
On January 21, 1997, the Company settled the charges brought against it by
the Independent Counsel investigating the affairs of former Secretary of
Agriculture, Mike Espy. See "MANAGEMENT OF THE COMPANY, FIREMAN'S FUND AND THE
MERGER SUBSIDIARY--Certain Proceedings." The existence of the Independent
Counsel matter had been a factor in certain discussions with Acceptance, as
discussed above. It was not, however, a significant factor in the Board's
decision to hold discussions with Acceptance, or subsequently with Fireman's
Fund concerning a possible strategic transaction.
On January 27, 1997, Mr. Horn, the Chairman of the Board of the Company,
spoke to Carl Lindner, the Chairman of the Board of American Financial Group,
who had called Mr. Horn to inquire whether Mr. Horn knew whether John Hemmingson
or Gary Black, former executives of the Company, or Kramer Spellman LP, an
institutional stockholder, might be interested in selling their Company stock.
American Financial Group's subsidiary, Great American Insurance Company ("Great
American"), serviced approximately $75 million of MPCI premiums in the 1996 crop
year. At that time, Mr. Hemmingson, Mr. Black and Kramer Spellman LP owned
approximately 15%, 9% and 10%, respectively, of the outstanding Common Stock of
the Company.
On January 29, 1997, at a meeting of the Company's Board of Directors that
included Messrs. Horn, Meuschke, Vertin and Martinez in attendance and from
which Mr. Sanchez was absent, and was also attended by Mr. Hill and a
representative of Dean Witter, the parties discussed recent events, including
those described above. In response to a question, Mr. Meuschke informed the
Board that Fireman's Fund would be interested in exploring its options regarding
an expanded relationship with the Company if the Board decided to explore more
aggressively the possibility of entering into a strategic transaction. The Board
also discussed the Company's current operations, including the projected decline
in premiums serviced in the first quarter of 1997 versus the first quarter of
1996, general conditions affecting the crop insurance industry (including the
possibility that the government would significantly reduce the amounts paid to
private companies for servicing MPCI business) and the Company's difficulty in
securing adequate working capital financing. The Board also discussed the
possible impact on the Company's Spring MPCI business of any announcement of a
significant transaction prior to March 15, 1997, the date on which the majority
of the MPCI premiums serviced by the Company in 1997 were to become bound.
On January 30, 1997, during a telephonic meeting of the Company's Board
(with Messrs. Horn, Meuschke, Vertin and Martinez present and Mr. Sanchez
absent) held to continue the discussion which occurred during the January 29,
1997 meeting, the Board determined, based upon the factors discussed during the
January 29, 1997 board meeting, to explore more aggressively the possibility of
pursuing a strategic transaction. In that regard, the Board asked Dean Witter to
contact Acceptance and inform its representatives that members of the Board
would be willing to meet with Acceptance's representatives to discuss the
possibility of a strategic transaction.
12
On February 4 and 5, 1997, Mr. Martinez and Mr. Meuschke discussed,
generally, the possibility of a transaction involving the Company, Fireman's
Fund's and Acceptance, including whether Fireman's Fund would have any ongoing
role after expiration of its agreements with the Company. They also discussed,
generally, the possibility of Fireman's Fund deciding to expand its relationship
with the Company through increased ownership in the Company.
On February 15, 1997, Mr. Meuschke telephoned Mr. Martinez to inform him
that Fireman's Fund had received notice from Mr. Hemmingson, pursuant to
Fireman's Fund's right of first refusal agreement with him, offering his
1,145,703 shares of stock to Fireman's Fund and informing Fireman's Fund that he
had an agreement to sell his stock to Great American for $10 per share. The
notice indicated that Mr. Black also had an agreement to sell his 681,774 shares
of stock to Great American for $10 per share. Mr. Meuschke stated that Fireman's
Fund was analyzing the issues presented by the proposed sales. Right of first
refusal agreements between Fireman's Fund and Hemmingson and Black provided that
Fireman's Fund had 20 days to respond if it wished to exercise its rights to
purchase the offered stock. For a description of the right of refusal
agreements, see "--Relationship between the Company and Fireman's
Fund--Transactions and Agreements" below. Mr. Lindner telephoned Mr. Horn the
same day to inform him of Great American's agreements to purchase all of the
stock of the Company owned by Messrs. Hemmingson and Black (the "Hemmingson and
Black Stock").
On February 17, 1997, Mr. Martinez telephoned Mr. Meuschke to inform him
that the Company would be issuing a press release the next day regarding
Hemmingson's and Black's agreements to sell their stock to Great American and
Fireman's Fund's right of first refusal with respect to the Hemmingson and Black
Stock.
On February 19 and 20, 1997, Mr. Martinez and Mr. Hill were telephoned by
Jeff Post, the Chief Financial Officer of Fireman's Fund, Harold Marsh, the
Treasurer of Fireman's Fund, and Bruce Friedberg, the Chief Financial Officer of
Fireman's Fund's Commercial Insurance Division, to discuss Hemmingson's and
Black's agreements with Great American and the impact of the standstill
provision in the Preferred Stock Purchase Agreement on Fireman's Fund's ability
to exercise its rights to purchase such shares. Fireman's Fund indicated that it
was interested in purchasing Hemmingson's and, perhaps, Black's stock. Fireman's
Fund asked if the Company would waive the 20% standstill provision in the
Preferred Stock Purchase Agreement, if necessary, so that Fireman's Fund would
be in a position to purchase the Hemmingson and Black Stock. Mr. Martinez
indicated that the Company was evaluating the standstill issue. For a
description of the standstill provision, see "--Relationship Between the Company
and Fireman's Fund--Transactions and Agreements" below.
On February 22, 1997, the Company's Board of Directors held a meeting (with
Messrs. Horn, Meuschke, Vertin and Martinez in attendance and Mr. Sanchez
absent) to discuss these recent developments. Mr. Meuschke participated in the
first portion of the meeting, in which there were discussions of Fireman's
Fund's rights of first refusal, the proposed standstill waiver and Fireman's
Fund's intentions with respect to exercising its rights of refusal. Mr. Meuschke
said Fireman's Fund was inclined to purchase all of the Hemmingson and Black
Stock. Mr. Meuschke then withdrew from the meeting, and the members of the Board
held lengthy discussions, with representatives of Dean Witter, the Board's
financial advisor, and Dorsey & Whitney LLP ("Dorsey & Whitney"), the Company's
legal counsel, and Henke, Heaton & Bufkin ("Henke, Heaton") the Company's
special crop insurance counsel, present.
At the time of the February 22 meeting, the Board believed that it was
important to know Fireman's Fund's longer term intentions before it made a
decision to waive the standstill provision, and the Board did not want to
preclude Fireman's Fund, its primary business partner, from considering a
transaction with the Company. The Board also considered the impact on the
Company of another party, particularly a competitor, obtaining an approximately
23% interest in the Company, as well as the facts that (a) the Company did not
know Great American's intentions toward the Company, (b) refusal to accommodate
Fireman's Fund's purchase of the Hemmingson and Black Stock could harm its
relationship with Fireman's
13
Fund, and (c) Great American's purchase of the Hemmingson and Black Stock would
likely result in uncertainty in the crop insurance marketplace and could be
harmful to the Company's business. Based on reports from its regional office
personnel, the Company believed Great American's purchase of approximately 23%
of the Common Stock would create uncertainty over who controlled the Company and
the impact of a competitor potentially influencing the management of the Company
in a manner designed to benefit that competitor.
At the February 22 meeting, the Board took action authorizing Mr. Martinez
to inform Fireman's Fund that the Company would waive the standstill agreement
(subject to certain restrictions regarding Fireman's Fund's voting of its
Company stock) to accommodate Fireman's Fund's purchase of the Hemmingson and
Black Stock, if Fireman's Fund would agree: (a) to consider making a proposal
for the acquisition of the Company within one week (i) at a price above the $10
per share price offered by Great American for the Hemmingson and Black Stock,
and (ii) with the understanding that management of the Company would have the
right to seek out other parties who might be interested in a similar transaction
involving the Company and to terminate the acquisition agreement with Fireman's
Fund if a superior offer was obtained and a break-up fee was paid to Fireman's
Fund; and (b) to provide an interim working capital facility to the Company, if
needed. The Board's proposal was immediately communicated by Mr. Martinez and a
representative of Dean Witter to Mr. Meuschke. Members of the Board, with Mr.
Meuschke, representatives of Dean Witter, Dorsey & Whitney and Henke, Heaton
present, had a telephone conference with Messrs. Post, Marsh and Friedberg and
with Paul Saffert, the Chief Financial Officer of Allianz of America Corporation
("Allianz"), a wholly-owned subsidiary of AZOA, the parent company of Fireman's
Fund, to discuss the Board's proposal. Mr. Post indicated that Fireman's Fund's
preference was to continue its strategic relationship with the Company, not to
purchase the Company. Mr. Post acknowledged the Company's concern about having
Great American or Fireman's Fund own a significant percentage of the Company
Common Stock and possibly precluding the Company from entering into strategic
transactions with other parties as a result of such ownership. Mr. Post
indicated that Fireman's Fund would consider the Company's proposal.
On February 23, 1997, Mr. Meuschke initiated a telephone conference with a
representative of Dean Witter Mr. McCarthy to discuss whether it made sense for
Fireman's Fund and Acceptance to meet to discuss whether a possible transaction
among the three companies was feasible.
On February 24, 1997, Mr. Martinez spoke with Mr. Meuschke to determine
whether a meeting among Fireman's Fund, the Company and Acceptance was to take
place to discuss the possibility of a transaction which could result in a
combination of the Company's and Acceptance crop insurance books of
business.
On February 25, 1997, Mr. Martinez met with Mr. Meuschke and Keith F. Curry,
the underwriting executive in charge of Fireman's Fund's Agricultural Unit, and
discussed recent events, including the Great American agreements with Hemmingson
and Black and Fireman's Fund's intention with respect to the exercise of its
rights of first refusal. Messrs. Meuschke and Curry indicated that Fireman's
Fund was still evaluating whether to exercise its rights of first refusal. Mr.
Martinez indicated the Company was still considering whether to waive the
standstill provision. They also discussed, in general terms, what the meeting
with Acceptance the following day might accomplish.
On February 26, 1997, Mr. Martinez attended a meeting involving Messrs.
Post, Marsh, Friedberg, Meuschke, Curry, Greg Wacker, the Vice President and
Actuary of Fireman's Fund, Mr. Saffert, Manfred Hoffman of Allianz, and Messrs.
Coon, Gibson, McCarthy and Nelson of Acceptance. The representatives of
Acceptance provided an overview of Acceptance's business and management team.
Acceptance also discussed certain benefits Party X perceived of combining the
Company's and Acceptance's crop insurance businesses through the merger of the
Company into Acceptance. These benefits included a leading market position in
the MPCI industry, and improved spread of risk across the United States and
economies of
14
scale which might be realized through the combination of the businesses. None of
the benefits discussed were quantified.
Messrs. Post, Marsh, Friedberg and Hoffman and the representatives of
Acceptance also met separately the same day to discuss various scenarios under
which Fireman's Fund and Acceptance would enter into a strategic relationship in
conjunction with Acceptance's proposal to merge the Company into Acceptance. The
primary proposal set forth by Acceptance was to form a joint venture between
Fireman's Fund and Acceptance in which Fireman's Fund would exercise its first
rights of refusal on the Hemmingson and Black Stock and agree to vote in favor
of Acceptance's bid to acquire the Company for Acceptance's stock. Acceptance
would then acquire the Company, and together with its crop insurance business,
contribute both operations to the joint venture. Fireman's Fund would eventually
receive Acceptance's stock in return for its shares of the Company so that after
the transaction was completed, Fireman's Fund would be a significant shareholder
of Acceptance and would then agree to be a long-term reinsurer to the joint
venture, assuming 100% of the underwriting risk for a 20% profit stake.
Throughout the discussions, it was Fireman's Fund's perception that Acceptance
viewed Fireman's Fund's role primarily as a reinsurer, and secondarily as a
potential capital provider to Acceptance. Fireman's Fund, however, viewed its
role as participating in the underwriting activities of the Company's MPCI
business, thus creating a business conflict between Fireman's Fund and
Acceptance.
On February 26, 1997, Mr. Martinez talked to Mr. Post about Fireman's Fund's
request that the Company waive the standstill provision and a possible meeting
on March 3, 1997 between the Company and Fireman's Fund to discuss a proposed
transaction. Mr. Post indicated that Fireman's Fund would be prepared on March 3
to address the Company's concerns that any Fireman's Fund proposal provide all
Company stockholders with an opportunity to sell their shares. Mr. Post
indicated that Fireman's Fund's willingness to consider an acquisition of the
entire Company was influenced, in part, by its concern that the Board of
Directors of the Company would not give its consent under the standstill
provision in the Preferred Stock Purchase Agreement to its purchase of the
Hemmingson and Black Stock in the absence of an opportunity for all stockholders
of the Company to sell their shares. On February 27, 1997, Mr. Martinez had
additional discussions with Mr. Post regarding the same matters and to confirm
the March 3 meeting date.
On February 28, 1997, Mr. Marsh and Mr. McCarthy reviewed by telephone the
proposal set forth in the meeting of February 26. Mr. Marsh and Mr. McCarthy
could not agree upon a proposal satisfactory to Fireman's Fund because both
parties wanted to participate in the same aspect of the Company's MPCI business,
specifically the underwriting activities, and Fireman's Fund did not wish to
become a significant shareholder of Acceptance. No agreement was ever reached
between Fireman's Fund and Acceptance.
On March 1, a representative of Dean Witter telephoned Mr. McCarthy to
determine if Acceptance was willing to make a proposal for consideration by the
Board of Directors. Mr. McCarthy indicated that Acceptance was still considering
the possibility of making a proposal to the Company whereby the Company would be
merged into Acceptance and the Company's stockholders would receive Acceptance's
common stock (which, based on the then current trading price of Acceptance's
stock, represented approximately $8.85 per share of Company Common Stock) in
exchange for their shares of the Company's Common Stock. No formal proposal was
made. Dean Witter discussed the possible structure on the telephone with Messrs.
Martinez and Vertin on March 1 and with the Board as a group at a meeting on
March 3.
On March 1, 1997, Mr. Martinez talked with Mr. Marsh to confirm the Board's
planned March 3 meeting. Mr. Marsh indicated that Fireman's Fund's had had
discussions with Mr. McCarthy on February 28 regarding a possible Fireman's Fund
role in the context of a transaction between the Company and Acceptance, and
that Fireman's Fund did not view reaching an agreement with Acceptance as likely
due to the fact that both parties sought the same aspect of the Company's MPCI
business and because Fireman's Fund was not interested in becoming a significant
shareholder of Acceptance.
15
On March 2, 1997, at Mr. Post's invitation Mr. Martinez met with Mr. Post,
who indicated that Fireman's Fund was preparing to exercise its rights of first
refusal with respect to the Hemmingson and Black Stock, to make an offer to
acquire all remaining shares of the Company for $10 per share, and to agree to
provide a working capital line of credit (as necessary) for the Company. Mr.
Post indicated that Fireman's Fund would request that the Company waive the
standstill provision to permit Fireman's Fund to exercise its rights of first
refusal. Mr. Martinez and Mr. Post also discussed in general terms certain
business and operational issues involving the companies.
On March 3, 1997, the Company's Board of Directors held a meeting (with
Messrs. Horn, Meuschke, Vertin and Martinez in attendance and Mr. Sanchez
absent) in preparation for the scheduled meeting with representatives of
Fireman's Fund. During the day, representatives of Dorsey & Whitney and Henke,
Heaton, Messrs. Horn, Vertin, Martinez, Hill and representatives of Dean Witter
had numerous discussions and negotiations with Messrs. Post, Marsh, Friedberg
and Meuschke and a representative of McCutchen, Doyle, Brown & Enersen, LLP
("McCutchen"), Fireman's Fund's legal counsel, regarding Fireman's Fund's
proposal as presented the previous day to Mr. Martinez. The proposal also
included (a) a no-solicitation provision, (b) a break-up fee of 3% of the
transaction value, plus an overbid option to acquire 19.9% of the Company's
Common Stock, and (c) a waiver of the standstill provision and a related voting
restriction with respect to equity securities of the Company owned by Fireman's
Fund that represented more than 25% of the combined voting power of all equity
securities of the Company. Fireman's Fund provided drafts of acquisition
documents to the Company at that time. The Board, Dean Witter and Dorsey &
Whitney reviewed the documents. The Company negotiated throughout the day for a
price higher than $10. The negotiations concerning price were tied to the
Company's ability to continue to solicit alternative proposals after a
definitive agreement with Fireman's Fund was reached. The Company indicated that
were Fireman's Fund willing to offer $12 per share, the Company would be willing
to limit its ability to solicit alternative offers and agree to a waiver of the
standstill provision. In the alternative, the Company suggested that if
Fireman's Fund would be willing to offer $10.50 per share, the Company would not
be willing to limit its ability to solicit other offers. Fireman's Fund
initially indicated that it was not willing to offer more than $10 per share.
The Company also negotiated to eliminate or change various provisions of the
draft acquisition documents.
By the end of the day on March 3, the Company and Fireman's Fund had reached
agreement in principle on the acquisition of the Company by Fireman's Fund in
the form of a cash merger at $10.25 per share. The Company negotiated for and
obtained the opportunity to affirmatively solicit alternative proposals until
March 28, 1997 from a group of seven companies (some of the larger crop
companies in the United States and several companies with which the Company had
had contacts over the previous few years) whom the Company and Dean Witter
believed were possible purchasers of or partners for the Company, and to have
the right to terminate any agreement in the event the Company obtained a
superior offer. The Board wanted the ability to contact those companies to
ensure that the offer by Fireman's Fund was the best opportunity available to
the Company at that time. In addition, the Company obtained a provision allowing
the Company to terminate any such agreement under certain conditions in the
event the Board received an unsolicited offer that it believed it had to
consider. Upon termination of the agreement, the Company was obligated to pay a
breakup fee of $2.4 million plus Fireman's Fund's out-of-pocket costs (including
outside legal fees) and internal legal costs. The Company also consented to
Fireman's Fund's purchase of the Hemmingson and Black Stock, waiving the 20%
standstill provision with respect to those purchases set forth in its prior
agreement with the Company and consenting to such purchases under Section 203 of
the DGCL. See the discussions with respect to the "Consent Agreement" and the
"Preferred Stock Purchase Agreement" under the caption "SPECIAL
FACTORS--Relationship between the Company and Fireman's Fund--Transactions and
Agreements." Relative to the proposal discussed with Fireman's Fund on March 3,
the members of the Board concluded that Fireman's Fund's proposal offered
significantly more value than the structure being discussed by Acceptance and
consequently did not pursue discussions with Acceptance at that time.
16
On March 4, 1997, Messrs. Martinez, Hill and Marsh, together with
representatives of Dorsey & Whitney and McCutchen, legal counsel for the
parties, negotiated the remainder of the terms of the definitive acquisition
documents. The negotiations primarily involved wording of the provisions
relating to the circumstances under which any agreement could be terminated and
other provisions negotiated in principle on the previous day.
On March 5, 1997, the Board of Directors held a meeting, with all members
participating, to consider and approve the Merger and the definitive acquisition
documents (together, the "Acquisition Agreements"). Dean Witter delivered its
written opinion to the Board that the cash consideration to be paid in
connection with the Merger was fair, from a financial point of view, to the
stockholders of the Company (excluding Fireman's Fund and its affiliates). Dean
Witter also distributed materials it prepared containing the analysis underlying
its fairness opinion. The Board (unanimously with the exception of Mr. Meuschke,
who abstained) approved the Merger and the Acquisition Agreements. The
Acquisition Agreements were executed and delivered by the Company and Fireman's
Fund at the end of the day.
Following the March 5 meeting, at the request of the Board, Dean Witter
began to contact the limited group of potential purchasers or partners that
Fireman's Fund and the Company agreed the Company could affirmatively solicit to
ascertain their interest in a strategic transaction with the Company. None of
the contacts or discussions during the ensuing several weeks between Dean Witter
and the identified group (including Acceptance), or with two other parties who
initiated contact with Dean Witter and the Company, indicated any serious
interest by any such parties in pursuing a transaction with the Company or an
acquisition proposal.
During the course of its negotiations with the Company and following
execution of the Acquisition Agreements, Fireman's Fund has had preliminary
contacts with other parties concerning a potential investment in the business of
the Company following the Merger. Such preliminary contacts did not result in
any agreement to pursue any such investment.
PURPOSE AND STRUCTURE OF THE MERGER
The primary benefit of the Merger to the Company's stockholders is the
opportunity to sell all of their Common Stock at a price which represents a
substantial premium over trading prices in effect immediately prior to the
announcement of Messrs. Hemmingson's and Black's agreements to sell their stock
to Great American for $10 per share and the announcement of the Merger. The
structure of the transaction as a cash merger provides a cash payment at a
premium price to all holders of outstanding Common Stock (except for Messrs.
Hemmingson and Black, who had separate agreements to sell their stock to
Fireman's Fund) and ensures the acquisition by Fireman's Fund of all the
outstanding shares of the Company.
The primary reason for the Company entering into the Merger Agreement is the
Board of Directors' belief that it would be difficult for the Company to
significantly enhance operating performance and maximize stockholder value on a
stand-alone basis in the immediate future. The Company's projections for
revenues, expenses, cash flows and earnings for calendar years 1997 through
2006, which it provided to both Dean Witter and Fireman's Fund, assumed revenues
from MPCI premiums serviced would decrease 20% for 1997, be relatively flat for
1998 and grow 10% per year thereafter. For crop hail, the Company assumed
revenues would decrease 30% for 1997 (due to a one-time non-compete obligation),
grow 25% during 1998 (due to the elimination of the non-compete) and 10%
thereafter. The Company assumed expenses would decrease during 1997 based on the
anticipated sale of its insurance company subsidiaries and realization of
certain efficiencies as a result of the restructuring by the Company undertaken
during 1996. Expenses were projected to remain flat for 1998 and increase by 5%
thereafter. The differential in the rates of increase of expenses versus
revenues was based on anticipated system and other efficiencies in processing
the business. The Company's earnings and cash flow projections flow directly
from the projected revenues and expenses. The projections are included as pages
32 through 46 of Dean Witter's March 5, 1997 presentation to the Company's Board
of Directors filed as Exhibit (b)(2) to the Schedule 13E-3 filed by the Company
and Fireman's Fund. See "ADDITIONAL INFORMATION."
17
The Board of Directors believes, based principally upon factors (i), (ii)
and (vii) discussed below under "--Recommendation of the Company's Board of
Directors" that an internal restructuring of the Company's operations in order
to enhance its growth and profitability would not yield as favorable a result to
the Company's stockholders in the foreseeable future as the Merger with
Fireman's Fund. Consequently, the Board of Directors believes that the Merger is
the best available opportunity to maximize stockholder value at the present
time. The $10.25 per share price to be received by the stockholders represents a
premium of approximately 29% over the reported average closing price of the
Common Stock during the 30-day period prior to the announcement of the Merger,
and 41%, over the reported average closing price of the Common Stock during the
30-day period prior to announcement that Messrs. Hemmingson and Black had
entered into agreements to sell their stock to Great American for $10 per share.
Fireman's Fund's principal purposes for entering into the Merger Agreement
are to preserve a significant underwriting book of business developed by the
Company and Fireman's Fund and to protect its prior $10 million cash investment
in the Company. It gave consideration to simply purchasing the Hemmingson and
Black Stock, but could not do so without the consent of the Company under the
standstill agreement between Fireman's Fund and the Company. It also considered
entering into a transaction involving the Company and Acceptance, but decided
that such a transaction would not be commercially feasible due to the fact that
both parties sought the same aspect of the Company's MPCI business and because
Fireman's Fund was not interested in becoming a significant shareholder of
Acceptance.
RECOMMENDATION OF THE COMPANY'S BOARD OF DIRECTORS
On March 5, 1997, the Company's Board of Directors, by unanimous vote (with
the exception of Mr. Meuschke, Fireman's Fund's designee, who did not
participate in the deliberations or the vote) at a special board meeting held on
that date, determined that the transactions contemplated by the Merger are fair
from a financial point of view to and in the best interests of the stockholders
of the Company other than (i) affiliates of the Company and (ii) Fireman's Fund
and its affiliates (the "Unaffiliated Stockholders"), approved the Acquisition
Agreements and resolved to recommend that the Company's stockholders approve the
Acquisition Agreements and all related implementing agreements, including the
Merger Agreement.
In determining to approve and adopt the Acquisition Agreements and related
implementing agreements, and in determining the fairness of the terms of the
Merger to the Unaffiliated Stockholders, the Board of Directors considered the
following factors, each of which, in the Board of Directors' view, supported the
determination to recommend the Merger:
(i) information with regard to the financial condition, results of
operation, liquidity, business and prospects of the Company, as well as
the risks involved in achieving those prospects, including the expected
decline in the Company's premium base in 1997 without a commensurate
reduction in the Company's general and administrative expenses,
continuing reductions in the amount the Company expected to receive from
the government for servicing MPCI business (particularly in light of
recently proposed changes to the MPCI program which, if enacted as
proposed, would reduce the Company's service fee revenues in the 1998
crop year by approximately 20%, assuming the company were to service the
same amount of premiums in the 1998 crop year as the 1997 crop year),
the Company's ability to effectively manage its operating expenses to
offset the reduced MPCI revenues, particularly in view of the Company's
inability to retain a significant amount of underwriting risk due to the
small amount of capital in its insurance company subsidiaries, the
ability of the Company to secure adequate working capital or other
financing in light of these factors and the lingering impact of the
Independent Counsel matter;
(ii) the going concern value of the Company (as reflected in part by its
historical and projected operating results) and the net book value and
liquidation value of the Company, each as
18
discussed with Dean Witter as summarized below under the caption
"--Opinion of Financial Advisor," and each of which, on a per share
basis, was projected to be less than the $10.25 per share being offered
by Fireman's Fund;
(iii) the historical market prices of and recent trading activity in the
Company's Common Stock, particularly the fact that the Merger will
enable the stockholders of the Company to realize a significant premium
over the prices at which the Common Stock traded prior to the Company's
public announcement that Messrs. Hemmingson and Black had entered into
agreements to sell their stock to Great American for $10 per share and
prior to the announcement of the Merger;
(iv) the written opinion of Dean Witter that the cash consideration to be
paid in the Merger is fair, from a financial point of view, to the
stockholders of the Company (excluding Fireman's Fund and its
affiliates);
(v) the terms and conditions of the Acquisition Agreements, including the
special, limited shop provision and the fiduciary out provision
negotiated by the Company, which allowed the Company to seek additional
offers by contacting certain parties until March 28, 1997, and to
consider unsolicited offers thereafter; the fact that the Company may
terminate the Acquisition Agreements in certain circumstances; the
circumstances under which the breakup fee is payable; the restriction of
Fireman's Fund's voting or tendering of certain Company stock in certain
circumstances; and the relatively few substantive closing conditions;
(vi) the Company's positive working relationship with Fireman's Fund, and
Fireman's Fund's reputation in the insurance industry;
(vii) the likely positive effect of the Merger on stabilizing the Company's
premium base, agent network, key employees important to the premium
base and agent network and the relatively low level of expected
disruption to the Company's business prior to closing the Merger; and
(viii) the likely decrease in the market price of the Company's Common Stock
if the Company was not sold, taking into account the likelihood of
downward pressure on the market price as a result of factors discussed
in subparagraph (i) above and the announcement, the day after the
announcement of the proposed Merger, of a significant reduction of the
Company's earnings estimates by an analyst, and advice from Dean Witter
that, based on financial projections furnished to Dean Witter by the
Company, it was unlikely that the price of the Common Stock would reach
$10.25 per share in the near future.
In considering the fairness of the Merger to Unaffiliated Stockholders, the
Board gave primary consideration to factors (ii) through (v) above. It also gave
consideration to factors (i) and (vi) through (viii) in determining whether to
approve the Merger. The Company's Board of Directors did not find it practicable
to, and did not, quantify or otherwise attempt to assign relative weights to the
specific factors considered in reaching its conclusions.
The executive officers of the Company, other than Mr. Martinez in his
capacity as a director, have made no recommendation with respect to the Merger.
If the Merger is not approved by the Company's stockholders and the Merger
does not occur, the Company will continue its current operations as an
independent company. However, for the reasons discussed above, it is possible
that the Company would seek a business combination with another company.
OPINION OF FINANCIAL ADVISOR
As described under "SPECIAL FACTORS--Background of the Merger--Financial
Advisor" above, the Company engaged Dean Witter to act as its exclusive
financial advisor in connection with the Company's review of strategic and
financial planning matters including the possible merger or sale of the
19
Company. In connection with the transaction discussed herein and pursuant to the
terms of the engagement, the Company requested that Dean Witter evaluate the
fairness to the holders of the Company's Common Stock other than Fireman's Fund
and its affiliates (the "Public Stockholders") from a financial point of view,
of the consideration to be received by the Public Stockholders in connection
with the Merger. It was contemplated that prior to the consummation of the
Merger, a subsidiary of Fireman's Fund would purchase all of the Common Stock
then owned by Messrs. Hemmingson and Black, so that Messrs. Hemmingson and Black
would not be Public Stockholders. On March 5, 1997, Dean Witter delivered to the
Board of Directors its opinion to the effect that, as of such date and based
upon and subject to certain matters described to the Board of Directors, the
consideration to be received by the Public Stockholders is fair from a financial
point of view (the "Dean Witter Opinion"). The Dean Witter Opinion is directed
to the Board of Directors of the Company and does not constitute a
recommendation to any stockholder of the Company as to how such stockholder
should vote with respect to the Merger at the Special Meeting. Dean Witter did
not establish or recommend the amount of the Merger Consideration, but only
passed upon the fairness from a financial point of view of the amount agreed
upon by the Company and Fireman's Fund.
A copy of the Dean Witter Opinion, which sets forth the assumptions made and
matters considered in, and limits on the review undertaken, is attached to this
Proxy Statement as Exhibit B and should be read by stockholders carefully in its
entirety.
In connection with its opinion, Dean Witter, among other things, (i)
reviewed the Acquisition Agreement dated March 5, 1997 between the Company and
Fireman's Fund (the "March 5 Agreement"); (ii) reviewed the Annual Reports on
Form 10-K and related publicly available financial information of the Company
for the two most recent fiscal years ended December 31, 1994 and 1995, the
Quarterly Reports on Form 10-Q of the Company for the periods ended March 31,
1996, June 30, 1996 and September 30, 1996, and the Company's definitive Proxy
Statement dated May 8, 1996; (iii) reviewed the Right of First Refusal
Agreements between Fireman's Fund and Messrs. Hemmingson and Black (the
"Hemmingson and Black Transactions"); (iv) reviewed the Chief Financial
Officer's financial model of the income statement, balance sheet and cash flow
statement of the Company for the quarter ended December 31, 1996 and for
calendar years 1997 through 2006 created for the purpose of evaluating various
financial alternatives (the "Model"); (v) conducted discussions with members of
senior management of the Company concerning the past and current business,
operations, assets, present financial condition and future prospects of the
Company; (vi) reviewed the historical reported market prices and trading
activity for the Company's Common Stock; (vii) compared certain financial
information and operating statistics relating to the Company with published
financial information and operating statistics relating to selected public
companies that Dean Witter deemed to be most comparable to the Company; (viii)
compared the amount per share of the cash consideration proposed to be paid to
the holders of the Company's Common Stock upon approval of the Merger with the
financial terms, to the extent publicly available, of selected other recent
acquisitions that Dean Witter deemed to be relevant; (ix) reviewed certain other
information, including publicly available information relating to the business,
earnings, cash flow, assets and prospects of the Company; and (x) reviewed such
other financial studies and analyses and performed such other investigations and
took into account such other matters as Dean Witter deemed necessary.
Dean Witter relied without independent verification upon the accuracy and
completeness of all of the financial and other information reviewed by it for
purposes of rendering its opinion. Dean Witter also relied upon the management
of the Company as to the reasonableness and achievability of the Model (and the
assumptions and bases therefor) provided to Dean Witter and assumed for purposes
of such opinion that the Model was reasonably prepared on bases reflecting the
performance of the Company. Dean Witter was not requested to make, and did not
make, an independent appraisal or evaluation of the assets, properties,
facilities or liabilities of the Company and Dean Witter was not furnished with
any such appraisal or evaluation. Dean Witter was not directed to, and did not,
solicit any third party indications of interest in acquiring all or any part of
the Company before delivering its opinion, however, Dean Witter
20
noted the provision of the March 5 Agreement which gave the Company the ability
to solicit indications of interest from a limited group of other participants in
the crop insurance and related industries from the date of the signing of the
March 5 Agreement until March 28, 1997 to determine what, if any, interest
certain parties would have in an acquisition of the Company. Dean Witter also
noted the "window shop" provision of the March 5 Agreement also gives the
Company the right to consider certain unsolicited offers before or after March
28, 1997. Dean Witter's opinion to the Company's Board of Directors was based
upon prevailing market conditions (including, then current market prices for the
Company's Common Stock) and other circumstances and conditions existing on the
date of such opinion and does not represent Dean Witter's opinion as to what the
actual value of the Company's Common Stock will be after the date of such
opinion. It is not contemplated that Dean Witter will give any subsequent
opinion with respect to the Merger.
The following is a brief summary of certain financial analyses performed by
Dean Witter in connection with its opinion dated March 5, 1997, which it
presented to the Company's Board of Directors at the Board meeting held on that
date or at previous meetings.
STOCK TRADING HISTORY. Dean Witter examined the history of the trading
prices and volume for the Company's Common Stock and the relationship between
movements in the prices of the Common Stock and certain events surrounding the
Company. For the 52-week period ending March 3, 1997, the Company's highest
trading price was $11.75 and its lowest trading price was $5.875. The Company's
average closing bid and asked prices for the 30 days ending February 14, 1997,
the trading date immediately prior to the public announcement of the Hemmingson
and Black Transactions (the "Hemmingson/Black Announcement"), was $7.24. The
last sale price on March 3, 1997 was $8.25.
ANALYST REPORTS. Dean Witter reviewed publicly available research reports
from ABN Amro Chicago Corporation ("ABN") relating to the Company's Common Stock
and noted that the earnings projections were lowered from $0.70 and $1.10 to
$0.39 and $0.14, respectively, for 1996 and 1997, on February 19, 1997, one day
after the Hemmingson/Black Announcement.
ANALYSIS OF CERTAIN OTHER PUBLICLY TRADED COMPANIES. Using publicly
available information, Dean Witter compared selected historical share prices,
earnings and operating and financial ratios for the Company to the corresponding
data and ratios of selected crop insurance participants, insurance brokers and
excess and surplus lines insurance companies. Such data and ratios included
equity market value on March 3, 1997 to announced and projected operating
earnings (based upon First Call earnings estimates for 1996, 1997 and 1998) and
to book value (adjusted to eliminate the effects of FASB 115 adjustments, which
require insurance companies to mark-to-market the bonds that are held as
available-for-sale in their portfolios, thus impacting stockholders' equity), as
well as dividend yield, price performance over the 30 and 60 days immediately
prior to March 3, 1997, the 52 week high and low trading prices, and the March 3
closing price relative to the 52 week trading range. For the Company, Dean
Witter compared both First Call earnings estimates and the projected operating
earnings data from the Model.
In performing its analyses, Dean Witter concluded that there were no
publicly traded companies which it considered directly comparable to the
Company. Dean Witter did, however, select two other crop insurance participants
(Acceptance Insurance Companies and Symons International, collectively the "Crop
Insurance Companies"), six insurance brokers (Acordia, Inc., E.W. Blanch
Holdings, A.J. Gallagher, Hilb, Rogal & Hamilton, Marsh & McLennan and Poe &
Brown, collectively the "Insurance Brokers") and nine excess and surplus lines
insurance companies (Acceptance Insurance Companies, W.R. Berkley Corp., Capsure
Holdings, Exel Ltd., Gainsco, Inc., HCC Insurance Holdings, Markel Corp.,
NYMAGIC, Inc., and RLI Corp., collectively the "E&S Companies") as to which Dean
Witter analyzed certain data. Although Dean Witter analyzed this data, due to
the differences between these companies and the Company, Dean Witter concluded
that the comparisons were of limited relevance.
21
Dean Witter again noted that ABN adjusted its 1996 and 1997 earnings
forecast for the Company from $0.70 and $1.10 per share of Common Stock to $0.39
and $0.14, respectively, on February 19, 1997, one day after the
Hemmingson/Black Announcement. Dean Witter noted that the earnings multiples at
which the Crop Insurance Companies, the Insurance Brokers and the E&S Companies
traded were much lower than the Company's, and that Dean Witter believed this
difference was due in large part to the Hemmingson/Black Announcement. When Dean
Witter compared the Company to the other Crop Insurance Companies, the Insurance
Brokers and the E&S Companies, an analysis of market value to 1996 projected or
announced operating earnings yielded a range of 8.7x to 11.1x, 11.7x to 18.6x
and 9.9x to 19.4x and an adjusted average (excluding the high and the low of
each range, except for the Crop Insurance Companies) of 9.9x, 15.2x and 13.5x,
respectively, as compared to 21.7x ABN estimates for the Company and 68.8x
estimate of the Model (based on a share price of $8.25); market value to 1997
projected operating earnings yielded a range of 8.0x to 9.4x, 11.3x to 16.6x and
9.4x to 17.0x and an adjusted average (except for the Crop Insurance Companies)
of 8.7x, 13.4x and 12.3x, respectively, as compared to 58.9x ABN estimates for
the Company and 16.8x estimate of the Model (based on a share price of $8.25);
market value to 1998 projected operating earnings yielded a range of 10.1x to
14.7x and 8.6x to 13.3x and an adjusted average of 12.4x and 11.3x for the
Insurance Brokers and the E&S Companies (1998 earnings estimates were not
available for the Crop Insurance Companies), respectively, as compared to 21.2x
estimate of the Model (based on a share price of $8.25, no 1998 analyst earnings
projections were available). An analysis of market value to book value adjusted
to eliminate the effects of FASB 115 adjustments yielded a range of 1.6x to
2.8x, 2.0x to 5.4x and 1.2x to 3.6x and an adjusted average (except for the Crop
Insurance Companies) of 2.2x, 3.8x and 1.7x, respectively, as compared to 1.5x
for the Company (based on a share price of $8.25). An analysis of dividend yield
produced a range of 0.0% to 0.0%, 1.7% to 4.7% and 0.0% to 2.2% and an adjusted
average (except for the Crop Insurance Companies) of 0.0%, 2.9% and 0.8%,
respectively, as compared to 0.0% for the Company (based on a share price of
$8.25). An analysis of price performance over the 30 days immediately prior to
March 3, 1997 yielded a range of -3.7% to 9.7%, -0.9% to 15.0% and -17.2% to
15.0% and an adjusted average (except for the Crop Insurance Companies) of 3.0%,
7.0% and 8.4%, respectively, as compared to 24.5% for the Company (based on a
share price of $8.25). An analysis of price performance over the past 60 days
immediately prior to March 3, 1997 yielded a range of 0.0% to 3.7%, -0.9% to
21.1% and -10.5% to 27.8% and an adjusted average (except for the Crop Insurance
Companies) of 1.8%, 4.6% and 6.7%, respectively, as compared to 32.0% for the
Company (based on a share price of $8.25). An analysis of the March 3 closing
price relative to the 52 week trading range yielded a range of 59.5% to 85.1%,
17.3% to 94.7% and 16.7% to 100.0% and an adjusted average (except for the Crop
Insurance Companies) of 72.3%, 73.0% and 73.4%, respectively, as compared to
40.4% for the Company (based on a share price of $8.25).
TRANSACTION ANALYSIS. Dean Witter reviewed publicly available information
on certain acquisitions of crop insurers, as well as certain pending or
withdrawn acquisition transactions and completed acquisition transactions
involving companies in the property and casualty and brokerage markets. In
performing its analysis, Dean Witter concluded that there were no transactions
for which financial information was available which are directly comparable to
the Merger and that, given the differences between the Company and the companies
pending to be acquired and acquired in other transactions, these comparisons
were of limited relevance.
The completed acquisitions of crop insurers which Dean Witter reviewed were
the acquisitions of Dawson Hail Insurance Co. by the Company and Redland Group
Inc. by Acceptance Insurance Companies (collectively the "Crop Insurance
Transactions"). Dean Witter calculated multiples for each of the Crop Insurance
Transactions based on the ratio of the offer price to such acquired company's
respective statutory net income in the year prior to and the year of the
transaction, direct premiums written, and policyholders' surplus for the year
ending before the transaction. With respect to the multiple of the offer price
to statutory net income in the year prior to the transaction, the multiple was
8.9x compared to 27.0x for the Company (based upon a $10.25 value per share).
The multiple of the offer price to statutory net income in the year of the
transaction was 4.1x compared to 73.2x for the Company (based upon a $10.25
value per share). The
22
average multiple of the offer price to direct written premiums in the year prior
to the transaction was 0.3x and ranged from 0.2x to 0.3x compared to 0.3x for
the Company (based upon a $10.25 value per share). The average multiple of the
offer price to policyholders' surplus at year-end prior to the transaction was
1.4x and ranged from 1.4x to 1.4x compared to 2.4x for the Company (based upon a
$10.25 value per share and the Model's estimated book value per share). The
multiple of the consideration offered for Redland Group Inc.'s common stock to
Redland Group Inc.'s statutory net income in both the year prior to and the year
of its acquisition is not meaningful as Redland Group Inc. incurred losses in
both years.
The pending and withdrawn transactions which Dean Witter reviewed were the
acquisitions of Avemco Corp. by HCC Insurance Holdings Inc.; Alexander &
Alexander Services by Aon Corp.; Pac Rim Holding Corp. by Superior National
Insurance Group; Financial Institutions Insurance Group by John Dore (company
president) and Castle Harlan; and Midland Financial Group, Inc. by Danielson
Holding Corp. (collectively the "Pending or Withdrawn Transactions"). Dean
Witter calculated multiples for each of the Pending or Withdrawn Transactions
based on the ratio of the offer price to such acquired company's respective
consensus earnings estimates for the current year and the following year, as
well as to the market value of such acquired company one day, one week, four
weeks, six months and one year prior to the transaction's announcement date.
With respect to the multiple of the offer price to consensus earnings estimates
for the current year, the adjusted mean was 17.1x and ranged from 9.0x to 23.3x
compared to 27.0x for the Company (based upon a $10.25 value per share). The
average multiple of the offer price to consensus earnings estimates for the
following year was 18.1x and ranged from 18.0x to 18.2x compared to an estimated
73.2x for the Company (based upon a $10.25 value per share). The adjusted
average premium to the market value of the companies one day prior to the
transaction's announcement was 18.8% and ranged from 0.0% to 46.7% compared to
19.7% for the Company (based upon a $10.25 value per share). The adjusted
average premium the market value of the companies one week prior to the
transaction's announcement was 20.9% and ranged from 6.7% to 49.7% compared to
17.1% for the Company (based upon a $10.25 value per share). The adjusted
average premium to the market value of the companies four weeks prior to the
transaction's announcement was 19.3% and ranged from 14.3% to 81.8% compared to
39.0% for the Company (based upon a $10.25 value per share). The adjusted
average premium to the market value of the companies six months prior to the
transaction's announcement was 9.4% and ranged from -22.7% to 83.3.% compared to
43.9% for the Company (based upon a $10.25 value per share). The adjusted
average premium to the market value of the companies one year prior to the
transaction's announcement was 21.6% and ranged from -19.4% to 80.3% compared to
2.5% for the Company (based upon a $10.25 value per share).
The other completed transactions which Dean Witter reviewed were the
acquisitions of American Re Corp. by Munich Re; National Re Corp. by General Re
Corp.; Capital Guaranty Corp. by Financial Security Assurance; Milwaukee
Insurance Group by Unitrin Inc.; CII Financial Inc. by Sierra Heath Services
Inc.; Employee Benefits Plans Inc. by First Financial Management; Kemper Corp.
by an investor group; Re Capital Corp. by Zurich Reinsurance Centre; Victoria
Financial Corp. by USF&G Corp.; and UniCare Financial Corp. by Wellpoint Health
Networks Inc. (collectively the "Completed P&C Transactions"). Dean Witter
calculated multiples for each of the Completed P&C Transactions based on the
ratio of the offer price to such acquired company's respective consensus
earnings estimates for the current year and the following year, as well as to
the market value of such acquired company one day, one week, four weeks, six
months and one year prior to the transaction's announcement date. With respect
to the multiple of the offer price to consensus earnings estimates for the
current year, the adjusted mean was 16.1x and ranged from 12.7x to 21.9x
compared to 27.0x for the Company (based upon a $10.25 value per share). The
adjusted average multiple of the offer price to consensus earnings estimates for
the following year was 13.0x and ranged from 10.8x to 15.1x compared to 73.2x
for the Company (based upon a $10.25 value per share). The adjusted average
premium to the market value of the companies one day prior to the transaction's
announcement was 43.0% and ranged from 13.0% to 63.0% compared to 19.7% for the
Company (based upon a $10.25 value per share). The adjusted average premium to
the market value of the companies one week prior to the transaction's
announcement was 49.2% and ranged from 18.0% to 63.8%
23
compared to 17.1% for the Company (based upon a $10.25 value per share). The
adjusted average premium to the market value of the companies four weeks prior
to the transaction's announcement was 55.1% and ranged from 20.7% to 91.3%
compared to 39.0% for the Company (based upon a $10.25 value per share). The
adjusted average premium to the market value of the companies six months prior
to the transaction's announcement was 54.7% and ranged from -14.1% to 131.6%
compared to 43.9% for the Company (based upon a $10.25 value per share). The
adjusted average premium to the market value of the companies one year prior to
the transaction's announcement was 33.8% and ranged from -14.7% to 72.8%
compared to 2.5% for the Company (based upon a $10.25 value per share).
No company or transaction used in the above analyses is believed by Dean
Witter to be directly comparable to the Company or the Merger. Accordingly, an
analysis of the results of the foregoing is not mathematical; rather, it
involves complex considerations and judgments concerning differences in the
financial and operating characteristics of the companies and other factors that
could affect the public trading values of the companies to which they are being
compared.
DISCOUNTED CASH FLOW ANALYSIS. Using discounted cash flow analysis, Dean
Witter estimated the present value of the future streams of after-tax cash flows
that the Company would produce through 2006, assuming the Company performed in
accordance with the Model provided by the Company's Chief Financial Officer.
After-tax cash flows were calculated as the total cash generated by the Model
for each of the ten years 1997 through 2006. Dean Witter estimated the terminal
value of the Company by applying a range of multiples (from 8.0 to 10.0) to net
income and (from 1.0x to 2.0x) to book value projected for the Company in 2006.
The cash flow streams and terminal values were then discounted to present values
using different discount rates (ranging from 13% to 17%) chosen to reflect
different assumptions regarding the required rates of return of holders or
prospective buyers of the Company's Common Stock. This discounted cash flow
analysis indicated a reference range for the Company's Common Stock of between
$5.81 and $8.86 per share and $3.84 and $6.55 per share, respectively.
LIQUIDATION VALUE. After consulting with management of the Company, Dean
Witter determined that the liquidation value of the Company would be an amount
substantially less than the consideration that would be paid to the Public
Stockholders (assuming $10.25 per share total consideration). The Model projects
the Company's book value to be approximately $4.30 per share and tangible book
value (book value less intangibles) to be approximately $3.27 per share at year
end 1996.
GENERAL. The summary set forth above does not purport to be a complete
description of the analyses performed by Dean Witter. The preparation of a
fairness opinion involves various determinations as to the most appropriate and
relevant methods of financial analysis and the application of these methods to
the particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description. Accordingly, notwithstanding the separate
factors summarized above, Dean Witter believes that its analyses must be
considered as a whole and that selected portions of its analyses and the factors
considered by it, without considering all analyses and factors, could create an
incomplete view of the evaluation process underlying its opinion. In performing
its analyses, Dean Witter made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters, many of
which are beyond the control of the Company. The analyses performed by Dean
Witter are not necessarily indicative of actual values or future results, which
may be significantly more or less favorable than suggested by such analyses.
Additionally, analyses relating to the values of businesses do not purport to be
appraisals or to reflect the prices at which businesses actually may be sold.
Dean Witter is an investment banking firm engaged, among other things, in
the valuation of businesses and securities in connection with mergers,
acquisitions, underwritings, sales and distributions of listed and unlisted
securities, private placements and valuations for estate, corporate and other
purposes. Dean Witter is a nationally recognized investment banking firm which
has substantial experience in merger and acquisition transactions and was
familiar with the Company. In the ordinary course of business, Dean
24
Witter may actively trade in the securities of the Company for its own account
and the accounts of its customers, and accordingly, may at any time hold a long
or short position in such securities.
Pursuant to the terms of an engagement letter dated January 5, 1996 (the
"Engagement Letter") and its amendment dated May 28, 1996, Dean Witter acted as
financial advisor to the Company in July 1996 in the formation of a strategic
alliance with Fireman's Fund which included a $10,000,000 investment by
Fireman's Fund in the Preferred Stock. Dean Witter received a fee of $500,000
plus reimbursement of out-of-pocket expenses, as the exclusive financial advisor
in this transaction.
The Company has paid Dean Witter $400,000 for acting as financial advisor in
connection with rendering the Dean Witter Opinion, and will pay Dean Witter an
additional $515,000 upon consummation of the Merger. The Company also has agreed
to reimburse Dean Witter for its out-of-pocket expenses, including the
reasonable fees and expenses of its legal counsel, and to indemnify Dean Witter
and certain related parties against certain liabilities, including liabilities
under the federal securities laws, arising out of or in connection with the
services rendered by Dean Witter under the engagement letter. The Company's
Board of Directors was aware of the fact that a significant portion of the
aggregate fee payable to Dean Witter is contingent upon consummation of the
Merger or another Transaction (as defined hereafter). Such additional fee (the
amount of which would depend upon the value of the underlying transaction) also
would be payable upon consummation of a transaction or series of transactions
(including, without limitation, a sale or exchange of capital stock or assets, a
lease of assets with or without a purchase option, a merger (other than the
Merger) or consolidation, a leveraged buy-out or recapitalization, the formation
of a joint venture, a minority investment or partnership, or any similar
transaction) whereby, directly or indirectly, control of or a material interest
in the securities, assets or business of the Company or any of its affiliates is
transferred (collectively, a "Transaction") if such Transaction were to occur
within six months from the termination of the engagement letter (which
termination date is upon 15 days' prior written notice).
PERSPECTIVE OF FIREMAN'S FUND ON THE MERGER
The determination of the Merger Consideration resulted from extensive
arm's-length negotiation between the Company and Fireman's Fund and their
respective representatives. See "--Background of the Merger." At the conclusion
of the negotiation process, Fireman's Fund offered to acquire the Company for a
price of $10.25 per share. In determining such price, Fireman's Fund analyzed
its projections of the underwriting results for the policies marketed by the
Company and of the Company's results of operations, including the effects of
projected growth in the Company's revenue and possible reductions in the
Company's expenses following the Merger.
Fireman's Fund did not undertake any formal or informal evaluation of its
own as to the fairness of the Merger Consideration to the Company stockholders.
Based upon the determination by the Company's Board of Directors that the Merger
is fair to, and in the best interests of, the Unaffiliated Stockholders of the
Company, and based upon the fact that Dean Witter rendered the Dean Witter
Opinion to the Company's Board of Directors, Fireman's Fund believes that the
Merger Consideration is fair to such Unaffiliated Stockholders from a financial
point of view and hereby adopts the Company's Board of Directors' analysis as to
fairness. Fireman's Fund did not attach specific weights to any factors in
reaching its belief as to fairness and did not perform any independent analysis
with respect thereto. In considering the determination made by the Company's
Board of Directors, Firemen's Fund did not necessarily adopt any intermediate
conclusions reached by the Board.
Fireman's Fund's principal purposes for entering into the Merger Agreement
are to preserve a significant underwriting book of business developed by the
Company and Fireman's Fund and to protect its prior $10 million cash investment
in the Company. It gave consideration to simply purchasing the Hemmingson and
Black Stock, but could not do so without the consent of the Company under the
standstill agreement between Fireman's Fund and the Company. It also considered
entering into a
25
transaction involving the Company and Party X, but decided that such a
transaction would not be commercially feasible.
PLANS FOR THE COMPANY AFTER THE MERGER
After the Merger, Fireman's Fund anticipates that it will continue its
review of the Company and its assets, businesses, operations, properties,
policies, corporate structure, dividend policy, capitalization and management
and consider whether any changes would be desirable in light of the
circumstances then existing. At this time Fireman's Fund does not intend to
close the Company's corporate headquarters located in Overland Park, Kansas.
Effective upon consummation of the Merger, current management of the Company
will be the initial management of the Surviving Corporation and the directors of
the Merger Subsidiary will be the initial directors of the Surviving
Corporation.
Except for the foregoing, and as otherwise indicated in this Proxy
Statement, Fireman's Fund does not have any other present plans or proposals
which relate to or would result in an extraordinary corporate transaction, such
as a merger, reorganization or liquidation, involving the Company or any of its
subsidiaries, a sale or transfer of a material amount of assets of the Company
or any of its subsidiaries or any material change in the Company's
capitalization or any other material changes in the Company's corporate
structure or business or the composition of the Company's Board of Directors or
management.
CERTAIN EFFECTS OF THE MERGER
As a result of the Merger, the entire equity interest of the Company will be
owned by Fireman's Fund, and the current stockholders will have no continuing
interest in the Company. Therefore, following the Merger, the stockholders of
the Company other than Fireman's Fund will no longer benefit from any increases
in the value of the Company and will no longer bear the risk of any decreases in
the value of the Company. Following the Merger, Fireman's Fund and its
affiliates will own 100% of the Company and will have complete control over the
management and conduct of the Company's business, all income generated by the
Company and any future increase in the Company's value. Similarly, Fireman's
Fund will also bear the risk of any losses incurred in the operation of the
Company and any decrease in the value of the Company.
Following the Merger, the Common Stock will no longer meet the requirements
of the Nasdaq National Market for continued listing and will, therefore, be
delisted from the Nasdaq National Market.
The Common Stock is currently registered as a class of securities under the
Exchange Act. Registration of the Common Stock under the Exchange Act may be
terminated upon application of the Company to the Commission if the Common Stock
is not listed on a national securities exchange or quoted on the Nasdaq National
Market and there are fewer than 300 record holders of the Common Stock.
Termination of registration of the Common Stock under the Exchange Act would
substantially reduce the information required to be furnished by the Company to
its stockholders and to the Commission and would make certain provisions of the
Exchange Act, such as the short-swing trading provisions of Section 16(b), the
requirement of furnishing a proxy statement in connection with stockholders'
meetings pursuant to Section 14(a), and the requirements of Rule 13e-3 under the
Exchange Act with respect to "going private" transactions, no longer applicable
to the Company. It is the present intention of Fireman's Fund to cause the
Company to make an application for the termination of the registration of the
Common Stock under the Exchange Act as soon as practicable after the Effective
Time of the Merger.
RELATIONSHIP BETWEEN THE COMPANY AND FIREMAN'S FUND
INTERCOMPANY BUSINESS RELATIONSHIP. In 1996 and 1995, 21% and 9.8%,
respectively, of the Company's service fees were derived from premiums
underwritten by Fireman's Fund, pursuant to a MPCI general agency agreement. The
Company's business relationship with Fireman's Fund with respect to
26
MPCI, crop hail/named peril insurance and farm and ranch insurance is governed
by the terms of certain agency agreements and reinsurance arrangements, the
principal terms of which are summarized below.
MPCI AGREEMENTS. Effective with the 1995 crop year, the Company and
Fireman's Fund entered into a general agency agreement to market and service
MPCI policies underwritten by Fireman's Fund. The Company's responsibilities
under the agreement included production, processing, claims administration,
accounting and statistical reporting and risk management strategy. Under the
agreement, the Company was responsible for all expenses allocable to the
business generated under the agreement, including marketing and claims
administration and adjusting services. The Company received as its compensation,
(i) the expense reimbursement allowance and excess loss adjustment expenses
(both of which amounts are established by the federal government under the MPCI
program) payable by the federal government for premiums serviced under the MPCI
program, and (ii) a portion of certain of the underwriting gains on MPCI
premiums for policies written under Fireman's Fund's standard reinsurance
agreement. In addition, Fireman's Fund received fronting fees under the parties'
MPCI agreement. In the Company's fiscal years ended December 31, 1995 and 1996,
the amounts of such compensation were $9.9 million and $22.0 million,
respectively. In addition, for the 1995, 1996 and 1997 crop years, Fireman's
Fund insured or reinsured 17%, 45% and 100%, respectively, of the MPCI premium
serviced by the Company.
Concurrent with Fireman's Fund's purchase of the Preferred Stock in July
1996, the Company and Fireman's Fund entered into a new general agency agreement
effective for the 1997 crop year (the "New Agreement"). The Company's
responsibilities for servicing the business remained the same as in the prior
agreement. The fronting fees payable to Fireman's Fund were eliminated and the
profit sharing formula was changed to provide the Company with a greater
percentage of underwriting gain once the underwriting gain exceeds a certain
minimum level. The New Agreement also provides for an additional profit and
growth bonus based on certain profit levels for combined MPCI and Crop Hail
business. See "--Crop Hail/Named Peril Agency Agreement" below.
On November 27, 1996, the Company and Fireman's Fund entered into an
amendment to the original MPCI agency agreement, pursuant to which Fireman's
Fund agreed, for the 1996 crop year only, to finance up to $50 million of MPCI
premium payments on behalf of insureds who did not pay their premiums by the
applicable due date. In 1996 and 1997, Fireman's Fund paid the Company $76,000
and $175,000, respectively, as an administrative fee under the agreement.
The Company has granted Fireman's Fund a security interest in the Company's
expiration rights and records as security for the Company's obligations under
the MPCI Agreements. The Company has the right to effect a bulk transfer to
another insurance company(ies) of the MPCI business upon termination of the
Agreements. The New Agreement can terminate as of June 30, 1999, if 12 months
advance notice is given by either party. Thereafter, the Company may terminate
the agreement upon 12 months advance notice and Fireman's Fund may terminate the
agreement upon 24 months advance notice. Fireman's Fund also has the right to
terminate the agreement immediately in the event of certain specified breaches
of the agreement.
CROP HAIL/NAMED PERIL AGENCY AGREEMENT. In July 1996, the parties also
agreed that Fireman's Fund would underwrite crop hail and other named peril
(collectively referred to as "Crop Hail") policies serviced by the Company
beginning in 1997. The Company's responsibilities under this agreement are
similar to its responsibilities under the MPCI agency agreements described
above. Under the agreement, Fireman's Fund will insure or reinsure 100% of the
premiums serviced by the Company, and the Company will receive commissions as
its compensation for marketing and servicing Crop Hail premiums. As of April 30,
1997, approximately $900,000 of payments had been made under this agreement.
Fireman's Fund has been granted a security interest in the Crop Hail
expiration rights and records. The term of the agreement coincides with the term
of the MPCI agency agreement. The agreement may be terminated by Fireman's Fund
for cause upon the occurrence of certain enumerated events.
27
FARM AND RANCH AGENCY AGREEMENT. The Company and Fireman's Fund also
entered into a farm and ranch general agency agreement effective November 1,
1996. The Company is responsible for marketing and servicing farm and ranch
insurance in certain agreed upon states and will receive income under a
specified commission structure. As of March 31, 1997, the Company had not
written any premiums under this agreement. The Company does not expect this
agreement to have a material impact on its revenues in the near future. The
agreement may be terminated by either party without cause, as of October 31,
1999 or any October 31 thereafter, upon three months prior notice.
TRANSACTIONS AND AGREEMENTS. The Company and certain of its principal
stockholders have entered into certain transactions and agreements on and after
July 10, 1996 that are related directly and indirectly to the Merger. Such
transactions and agreements are described below:
PREFERRED STOCK PURCHASE AGREEMENT. On July 10, 1996, Fireman's Fund and
the Company entered into a stock purchase agreement (the "Preferred Stock
Purchase Agreement") pursuant to which Fireman's Fund purchased 10,000 shares of
the Company's Series A Convertible Preferred Stock, par value $.01 per share,
for an aggregate purchase price of $10 million. The Preferred Stock is
convertible into 754,717 shares of the Company's Common Stock, or approximately
9% of the outstanding Company Common Stock, assuming conversion of the Preferred
Stock and assuming that any other outstanding rights to purchase, convert into
or exchange for the Company's Common Stock are not exercised. Such conversion is
at an initial price per share of Common Stock of $13.25, which represents a
premium of $2.25 per share over the last traded price of the Common Stock on May
29, 1996, the day prior to the public announcement that the Company and
Fireman's Fund had entered into discussions concerning the Preferred Stock
transaction. The Preferred Stock has a liquidation value of $1,000 per share and
holders of the Preferred Stock are entitled to dividends thereon at the rate of
$50.00 per share per annum, payable quarterly. The Company has paid Fireman's
Fund $239,000 in 1996 and $250,000 in 1997 in dividends on the Preferred Stock.
The Preferred Stock Purchase Agreement contains a "standstill" provision which,
in general terms, requires the Company to consent to any Fireman's Fund
acquisition of Common Stock which results in Fireman's Fund beneficially owning
greater than 20% of the outstanding Common Stock of the Company. The provision
expires on the earlier of the tenth anniversary of the agreement or the date
upon which Fireman's Fund beneficially owns less than 150,000 shares of the
Company's Common Stock or equivalents, but in no event prior to the second
anniversary of the agreement. The agreement also gives Fireman's Fund the right
to select one nominee for election to the Company's Board of Directors.
RIGHT OF FIRST REFUSAL AGREEMENTS. On September 23, 1996, Fireman's Fund
and each of John J. Hemmingson and Gary A. Black entered into separate Right of
First Offer and First Refusal Agreements (together, the "Right of First Refusal
Agreements"). The Company was a party to the agreements for the limited purpose
of agreeing to facilitate transfers of the subject shares.
Under the Right of First Refusal Agreements, Fireman's Fund was granted
certain first offer and first refusal rights with respect to the shares of the
Company's Common Stock owned by each of Messrs. Hemmingson and Black. Such first
offer and first refusal rights became operative at such time as either Mr.
Hemmingson or Mr. Black notified Fireman's Fund of their intent to sell shares
of the Company's Common Stock.
On February 14, 1997, Mr. Hemmingson, and on February 17, 1997, Mr. Black
notified Fireman's Fund that they each had received an offer for the Hemmingson
and Black Stock and were offering to sell such shares to Fireman's Fund on the
same terms as those contained in the offer they had received. On March 5, 1997,
Fireman's Fund notified each of Messrs. Hemmingson and Black that Fireman's Fund
would exercise its rights under the Right of First Refusal Agreements and
purchase the Hemmingson and Black Stock. According to their written notices to
Fireman's Fund, Messrs. Hemmingson and Black then owned 1,145,703 and 681,774
shares, respectively, of the Company's Common Stock.
28
Fireman's Fund purchased the Hemmingson and Black Stock on May 30, 1997, for
$10 per share, plus interest thereon from the date of exercise of the rights of
first refusal. The aggregate amounts paid to Messrs. Hemmingson and Black,
including interest, were $11,645,993 and $6,930,186, respectively.
As result of the purchase of the shares of the Hemmingson and Black Stock,
Fireman's Fund beneficially owns 2,582,194 shares of the Company's Common Stock,
or approximately 29.6% of the Company's Common Stock, assuming conversion of the
Preferred Stock and assuming that any other outstanding rights to purchase,
convert into or exchange for the Company's Common Stock are not exercised. Upon
consummation of the Merger, Fireman's Fund will own, directly or through an
affiliate, 100% of the outstanding shares of the Company's Common Stock.
ACQUISITION AGREEMENT. On March 5, 1997, the Company and Fireman's Fund
entered into an Acquisition Agreement pursuant to which they agreed to the
principal terms of the Merger. Subsequently, the Company, Fireman's Fund and the
Merger Subsidiary entered into the Merger Agreement dated May 1, 1997, which
includes the essential terms of and supercedes the Acquisition Agreement. See
"THE MERGER AGREEMENT."
LOAN AGREEMENT. On March 5, 1997, the Company and Fireman's Fund also
entered into a Letter of Intent re Revolving Credit Working Capital Facility,
pursuant to which, as an express condition of the Acquisition Agreement,
Fireman's Fund agreed to extend a $15,000,000 revolving credit working capital
facility to the Company in the event that the Company, after using its
reasonable best efforts, was unable by March 31, 1997 to obtain a working
capital facility from a commercial bank on reasonable terms not involving any
guarantee or similar support from Fireman's Fund. Effective March 31, 1997, the
Company entered into a Business Loan Agreement with Fireman's Fund to borrow up
to $15,000,000 on a revolving basis and thereby provide the Company with working
capital. The loan bears interest at Bank of America's Base Rate (currently 8.5%)
and will mature in one year. The loan is secured with the inventory, accounts
receivable, equipment and general intangibles of the Company and certain of its
subsidiaries and affiliates.
CONSENT AGREEMENT. On March 5, 1997, the Company and Fireman's Fund also
entered into a Consent Agreement (the "Consent Agreement"). As discussed above,
the Preferred Stock Purchase Agreement contains a "standstill" provision which,
in general, requires the Company to consent to any Fireman's Fund acquisition of
Common Stock which results in Fireman's Fund beneficially holding more than 20%
of the voting power of the Company's outstanding securities, assuming the
exercise of in-the-money stock options and stock rights. Under the terms of the
Consent Agreement, the Company gave its consent under the standstill provision
and for purposes of Section 203 of the DGCL to the extent required to permit
Fireman's Fund's acquisition of the Hemmingson and Black Stock, which would
result in Fireman's Fund owning more than 20% of such outstanding shares. Under
the Consent Agreement, and in return for the Company's consent thereunder and
waiver of the applicable provisions of Section 203 with respect to Fireman's
Fund's purchase of the Hemmingson and Black Stock, Fireman's Fund agreed, with
respect to any stockholder vote on an acquisition or other specified
transactions, to vote its shares which exceed 20% of the voting power of the
Company's outstanding securities in accordance with the pro rata voting of other
Company stockholders who are not "interested stockholders" of the Company under
Section 203 of the DGCL (generally, persons owning more than 15% of the
Company's voting stock, or affiliates or associates of the Company who owned 15%
of such stock within the three-year period prior to the determination, and the
affiliates and associates of such persons). Under the applicable provisions of
Section 203 of the DGCL, Fireman's Fund, would become an "interested party" with
respect to the Company by virtue of its acquisition of the Hemmingson and Black
Stock and, unless the Board had consented in advance to that purchase, would
have been prohibited from completing the Merger or any similar transaction with
the Company for a period of three years following the acquisition of such stock.
In addition, the Consent Agreement contains a provision which amends the
standstill provision of the Preferred Stock Purchase Agreement. Under this
provision, the restrictions of the standstill provision will immediately
terminate at the time when any person or group (as defined in Commission
regulations)
29
publicly announces an intention to make or makes or commences a tender or
exchange offer, other than a tender or exchange offer which has been approved by
the Board of Directors of the Company before the earliest to occur of such
announcement, making or commencement, for more than 15% of the outstanding
Common Stock.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Board of Directors of the Company
with respect to the Merger Agreement and the transactions contemplated thereby,
stockholders should be aware that certain members of the management and the
Board of Directors of the Company have certain interests in the Merger in
addition to the interests of stockholders of the Company generally. In
connection with the Board of Directors' determination that the Merger is fair to
the Company's stockholders (excluding Fireman's Fund and its affiliates), the
Board carefully considered conflict of interest issues relating to the matters
described below.
EMPLOYMENT AGREEMENT. Mr. Martinez, Chief Executive Officer of the Company,
has a three-year employment agreement ending in May 1999, under which he is
currently paid an annual base salary of $275,000. Under the terms of the
agreement, upon consummation of the Merger, Mr. Martinez may resign and continue
to receive his then current base salary and continuation of health and life
insurance benefits for the remainder of the contract term.
STOCK OPTIONS. Under the terms of the Company's stock option plans and the
agreements relating to certain outstanding stock options, the Merger will cause
the acceleration of vesting of all outstanding stock options of the Company. The
following table sets forth, with respect to each of the individuals who are, or
since January 1, 1996 have been (as indicated with an asterisk), executive
officers and directors of the Company, information concerning cash settlements
of "in-the-money" stock options that will be paid in connection with the
consummation of the Merger, including options that are currently exercisable and
those that will become exercisable as a result of the Merger. See "THE MERGER
AGREEMENT-- Payment for Shares and Options" and "MANAGEMENT OF THE COMPANY,
FIREMAN'S FUND AND THE MERGER SUBSIDIARY--The Company." The cash settlement
amounts are based upon the spread between $10.25 and the exercise price of such
options and do not take into account any income taxes that may be required to be
withheld.
AMOUNT PAYABLE WITH
RESPECT TO OPTIONS
------------------------ TOTAL
CURRENTLY BECOMING CASH SETTLEMENT
EXERCISABLE EXERCISABLE AMOUNT
----------- ----------- ---------------
Tony Cid........................................... $ 4,309 $ 8,621 $ 12,930
Rafe Hargrove...................................... 16,580 19,411 35,991
Paul Horn.......................................... 4,125 -- 4,125
John Meuschke...................................... 2,625 -- 2,625
Manuel Sanchez..................................... 4,125 -- 4,125
David Hill......................................... 4,309 8,621 12,930
Richard Bartlett*.................................. 15,311 -- 15,311
Gary Black*........................................ 59,979 63,710 123,689
Tony Coelho*....................................... 3,750 1,875 5,625
John Hemmingson*................................... 85,939 96,881 182,820
----------- ----------- ---------------
Total.......................................... $ 201,052 $ 199,119 $ 400,171
----------- ----------- ---------------
----------- ----------- ---------------
30
INDEMNIFICATION OF OFFICERS AND DIRECTORS. The Merger Agreement provides
that, for a period of not less than four years following the Effective Time, the
Surviving Corporation will maintain in effect all rights of indemnification of
the officers, directors, employees or agents of the Company and its subsidiaries
of the Company provided in its certificate of incorporation, bylaws or in
indemnification agreements with the Company or any of its subsidiaries, and will
indemnify and hold harmless such persons to the full extent permitted by law
against losses, claims, damages, liabilities, costs, expenses, judgments, fines
and amounts paid in settlement in connection with any threatened or actual
claim, action, suit, proceeding or investigation, asserted or arising before or
after the Effective Time. Fireman's Fund has also agreed to cause the Surviving
Corporation to maintain, or for Fireman's Fund itself to provide, for the
benefit of such persons, for a period of not less than four years after the
Effective Time, any current officer's and director's liability insurance
policies maintained by the Surviving Corporation, or policies with at least the
same coverage, provided that if the cost of such continuing coverage exceeds
200% of the last annual premium paid by the Surviving Corporation prior to March
5, 1997, Fireman's Fund will purchase as much comparable insurance as possible
for an annual premium equal to such maximum amount.
SOURCES AND USES OF FUNDS
MERGER CONSIDERATION, FEES AND EXPENSES. Fireman's Fund estimates that the
total consideration payable to stockholders other than Fireman's Fund upon
consummation of the Merger, including amounts needed to settle outstanding
Company stock options, will be approximately $64,250,000. It paid an aggregate
purchase price of $18,576,179, including interest, to Messrs. Hemmingson and
Black for their shares. The estimated fees and expenses incurred or to be
incurred by Fireman's Fund in connection with the Merger are legal fees and
expenses of $200,000 and miscellaneous fees of $50,000. Fireman's Fund currently
has working capital funds available to make such payments and pay such fees and
expenses.
The estimated fees and expenses incurred or to be incurred by the Company in
connection with the Merger, which will be paid using working capital funds, are
approximately as follows. Certain of those funds may be borrowed by the Company
from Fireman's Fund under the Business Loan Agreement referred to above under
"SPECIAL FACTORS--Relationships Between the Company and Fireman's
Fund--Transactions and Agreements--Loan Agreement."
Investment banking fees and expenses............................ $ 935,000
Legal fees and expenses......................................... 200,000
Printing and mailing fees....................................... 70,000
Accounting fees and expenses.................................... 10,000
Commission filing fee........................................... 12,772
Paying Agent fees............................................... 10,000
Proxy Solicitation Agent fees................................... 5,000
Miscellaneous expenses.......................................... 15,000
---------
Total Fees and Expenses......................................... 1,187,772
For information regarding Dean Witter's engagement by the Board of
Directors, see "--Opinion of Financial Advisor." Certain of the Company's
officers will receive certain payments if the Merger is consummated. See
"--Interests of Certain Persons in the Merger."
SOLICITATION FEES AND EXPENSES. Neither Fireman's Fund nor the Company will
pay any fees or commissions to any broker or dealer or any other person (other
than the Proxy Solicitation Agent) for soliciting Company stockholders with
respect to the Merger. Brokers, dealers, commercial banks and trust companies
will, upon request, be reimbursed by the Company for reasonable and necessary
costs and expenses incurred by them in forwarding materials to their customers.
31
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Under currently existing provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), the Treasury Regulations promulgated thereunder,
applicable judicial decisions and administrative rulings, all of which are
subject to change, the federal income tax consequences described below will
arise in connection with the Merger. Due to the complexity of the Code, the
following discussion is limited to the material federal income tax aspects of
the Merger for a Company stockholder who is a citizen or resident of the United
States. The general tax principles discussed below are subject to retroactive
changes that may result from subsequent amendments to the Code. The following
discussion does not address potential foreign, state, local and other tax
consequences, nor does it address taxpayers subject to special treatment under
the federal income tax laws, such as insurance companies, Fireman's Fund as the
holder of all of the outstanding shares of Preferred Stock, tax-exempt
organizations, S corporations and taxpayers subject to the alternative minimum
tax. In addition, the following discussion may not apply to Company stockholders
who acquired their shares upon the exercise of employee stock options or
otherwise as compensation. Neither the Company nor Fireman's Fund has requested
either the Internal Revenue Service or counsel to rule or issue an opinion on
the federal income tax consequences of the Merger. ALL STOCKHOLDERS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS REGARDING THE FEDERAL, FOREIGN, STATE AND LOCAL
TAX CONSEQUENCES OF THE DISPOSITION OF THEIR SHARES IN THE MERGER.
For federal income tax purposes, the Merger will be treated as a taxable
sale or exchange of shares of Common Stock for cash by each holder of such
shares (including any holder of Dissenting Shares). Accordingly, the federal
income tax consequences to the holders of Common Stock will generally be as
follows:
(a) Assuming that the shares of Common Stock exchanged by a Company
stockholder for cash in connection with the Merger are capital assets in
the hands of the stockholder at the Effective Time, such stockholder will
recognize capital gain or loss by reason of the consummation of the
Merger.
(b) The capital gain or loss, if any, will be long-term with respect to
shares of Common Stock held for more than 12 months as of the Effective
Time and short-term with respect to such shares held for 12 months or
less as of the Effective Time.
(c) The amount of capital gain or loss to be recognized by each holder of
Common Stock will be measured by the difference between the amount of
cash payable for the account of such stockholder in connection with the
Merger (including cash received for Dissenting Shares) and such
stockholder's tax basis in the Common Stock at the Effective Time.
Cash payments made pursuant to the Merger (including any cash paid to
holders of Dissenting Shares) will be reported to the extent required by the
Code to stockholders of the Company and the Internal Revenue Service. Such
amounts will ordinarily not be subject to withholding of federal income tax.
However, backup withholding of such tax at a rate of 31% may apply to certain
stockholders by reason of the events specified in Section 3406 of the Code and
the Treasury Regulations promulgated thereunder, which include failure of a
stockholder to supply the Company or its agent with such stockholder's taxpayer
identification number. Accordingly, each Company stockholder will be asked to
provide the stockholder's correct taxpayer identification number on a Substitute
Form W-9 which is to be included in the letter of transmittal to be sent to
stockholders relating to their shares of Common Stock. Withholding may also
apply to Company stockholders who are otherwise exempt from such withholding,
such as a foreign person, if such person fails to properly document its status
as an exempt recipient.
The cash settlement amounts distributed in connection with the Merger to
holders of in-the-money options to acquire shares of the Common Stock will
constitute "wages," and will be subject to income tax withholding. The gross
amount due, the withheld amount and the net payment will be included in each
optionholder's W-2 form for 1997.
32
PUBLIC OFFERINGS AND REPURCHASES OF COMMON STOCK
PUBLIC OFFERINGS. On June 30, 1994, the Company completed an underwritten
initial public offering of 2,780,748 newly issued shares of its Common Stock, at
an initial public offering price to the public of $7.50, which was registered on
a Registration Statement on Form S-1 under the Securities Act of 1933, as
amended. The Company retained net proceeds of the offering in the amount of
$18,096,107, after deducting underwriting commissions and discounts of
$1,459,893 and other costs of $1,299,610.
On December 6, 1994, the Company completed an underwritten public offering
of 1,400,000 newly issued shares of its Common Stock, at a public offering price
to the public of $14.00, which was registered on a Registration Statement on
Form S-1 under the Securities Act of 1933, as amended. The Company retained net
proceeds of the offering of $17,774,886, after deducting underwriting
commissions and discounts of $1,274,000 and other costs of $551,114.
REPURCHASES. Pursuant to an agreement relating to the acquisition of their
agency business, in 1996 the Company purchased 14,250 and 10,000 shares of its
Common Stock from John Chapman, Sr. and Jack Chapman, respectively, for $16.25
per share. Also, pursuant to separation agreements with Messrs. Hemmingson and
Black, in 1996 and 1997 the Company purchased 108,000 and 84,000 shares of its
Common Stock from Hemmingson and Black, respectively, at prices ranging from
$10.00 to $6.65 per share. The average repurchase price paid for each applicable
quarterly period was as follows:
AVERAGE
REPURCHASE
PRICE PAID
-----------
1996
First Quarter.................................................................. $ 16.25
Third Quarter.................................................................. $ 9.78
Fourth Quarter................................................................. $ 7.14
1997
First Quarter.................................................................. $ 6.50
REGULATORY APPROVALS
STATE REGULATORY AUTHORITIES. Certain filings have been made with, and all
necessary approvals obtained from, insurance regulatory authorities in certain
states in connection with the Merger.
HSR ACT FILINGS. Under the Hart-Scott-Rodino Antitrust Improvements Act of
1976 and the rules promulgated thereunder by the Federal Trade Commission (the
"FTC"), certain acquisition transactions may not be consummated unless notice
has been given and certain information has been furnished to the Antitrust
Division of the United States Department of Justice (the "Antitrust Division")
and the FTC and certain waiting period requirements have been satisfied. The
Merger is subject to these requirements.
The Company and Fireman's Fund each filed with the Antitrust Division and
the FTC a Notification and Report Form with respect to the Merger on May 2 and
May 1, 1997, respectively. On May 16, 1997, the Company and Fireman's Fund were
notified by the FTC that the waiting period had been terminated.
State Attorneys General and private parties may also bring legal actions
under the federal or state antitrust laws under certain circumstances. There can
be no assurance that a challenge to the proposed Merger on antitrust grounds
will not be made or of the result if such a challenge is made.
THE MERGER AGREEMENT
The information under this caption is qualified in its entirety by reference
to the full text of the Merger Agreement, a copy of which is attached as Exhibit
A to this Proxy Statement.
33
GENERAL
The Company and Fireman's Fund entered into the Merger Agreement effective
May 1, 1997. If the stockholders of the Company approve the Merger Agreement,
the Merger Subsidiary will be merged with and into the Company, with the result
that the separate corporate existence of the Merger Subsidiary will then cease.
The Company will be the Surviving Corporation and will be an wholly owned
subsidiary of Fireman's Fund. At the Effective Time, the Common Stock will be
converted automatically into the right to receive cash, as described below. See
"--Consideration to be Received by Stockholders." The shares of the Common Stock
will no longer be listed or traded on the Nasdaq National Market, and the
registration of the Common Stock under the Exchange Act will be terminated.
EFFECTIVE TIME
If the Merger Agreement is adopted by the requisite vote of the Company's
stockholders, the Merger will be consummated and become effective upon the
acceptance for record of the Certificate of Merger by the Delaware Secretary of
State on a date as soon as practicable after conditions to the Merger are
satisfied (or waived to the extent permitted), or such other date agreed on by
the parties. It is currently contemplated that the Effective Time will occur on
the date of, and as soon as practicable after, the Special Meeting. There can be
no assurance that all conditions to the Merger will be satisfied. See
"--Conditions to Consummation of the Merger."
CONSIDERATION TO BE RECEIVED BY STOCKHOLDERS
In connection with the Merger, each share of Common Stock outstanding
immediately prior to the Effective Time (other than Dissenting Shares and shares
held by Fireman's Fund or its designee) will be converted into the right to
receive $10.25 in cash, without interest (the cash consideration per share to be
paid to the Company's stockholders in the Merger being sometimes referred to
herein as the "Merger Consideration"), and each holder of an option to acquire
shares of the Common Stock of the Company will receive a cash settlement, net of
withholding taxes, equal to the excess, if any, of $10.25 over the exercise
price of such options. Dissenting Shares will be converted to cash in the manner
described under the caption "RIGHTS OF DISSENTING STOCKHOLDERS."
PAYMENT FOR SHARES AND OPTIONS
PAYMENT FOR SHARES. On the Effective Date Fireman's Fund will deliver the
Merger Consideration to ChaseMellon Shareholder Services, L.L.C. (the "Paying
Agent"), who will act as the paying agent for payment of the Merger
Consideration to the holders of the Common Stock. Instructions with regard to
the surrender of certificates formerly representing shares of Common Stock,
together with the letter of transmittal to be used for that purpose, will be
mailed to stockholders of record on the Effective Date as soon as practicable
after the Effective Time. As soon as practicable following receipt from the
stockholder of a duly executed letter of transmittal, together with certificates
formerly representing Common Stock and any other items specified by the letter
of transmittal, the Paying Agent will pay the Merger Consideration to such
stockholder, by check or draft.
After the Effective Time, the holder of a certificate formerly representing
Common Stock will cease to have any rights as a stockholder of the Company, and
such holder's sole right will be to receive the Merger Consideration with
respect to such shares (or, in the case of Dissenting Shares, the statutorily
determined "fair value"). If payment is to be made to a person other than the
person in whose name the surrendered certificate is registered, it will be a
condition of payment that the certificates so surrendered be properly endorsed
or otherwise in proper form for transfer and that the person requesting such
payment shall pay any transfer or other taxes required by reason of such payment
or establish to the satisfaction of the Surviving Corporation that such taxes
have been paid or are not applicable. No transfer of shares outstanding
immediately prior to the Effective Time will be made on the stock transfer books
of the Surviving Corporation after the Effective Time.
34
To the extent permitted by law, the appointment of the Paying Agent may be
terminated at any time by Fireman's Fund upon notice to the Paying Agent, or by
the Paying Agent upon 30 days notice to Fireman's Fund. Any portion of the
Merger Consideration remaining undistributed upon termination of the Paying
Agent's appointment will be returned to the Surviving Corporation, and any
holders of theretofore unsurrendered Common Stock certificates may thereafter
surrender to the Surviving Corporation such stock certificates and (subject to
abandoned property, escheat or similar laws) receive in exchange therefor the
Merger Consideration to which they are entitled.
STOCKHOLDERS OF THE COMPANY SHOULD NOT FORWARD THEIR STOCK CERTIFICATES TO
THE PAYING AGENT WITHOUT A LETTER OF TRANSMITTAL, AND SHOULD NOT RETURN THEIR
STOCK CERTIFICATES WITH THE ENCLOSED PROXY.
OPTION SETTLEMENT PAYMENTS. As of the Effective Time, the outstanding
options to purchase shares of the Company's Common Stock will become, by their
terms, fully exercisable and vested. At such time, all such options will be
canceled, and in consideration of such cancellation, the Surviving Corporation
will pay to the holder of each such option an amount (the "Option Settlement
Amount"), net of withholding taxes, equal to the excess, if any, of $10.25 over
the exercise price of such options. Such payments will be made by check, mailed
to optionholders with a letter explaining in detail the calculation of the
amount paid. No action on the part of optionholders will be required to initiate
such payments. After the Effective Time, no holder of an option will have any
rights other than to receive payment for such holder's options equal to the
Option Settlement Amount.
NO INTEREST ON PAYMENT AMOUNTS. In no event will holders of shares of
Common Stock or options to purchase Common Stock be entitled to receive payment
of any interest on the Merger Consideration or the Option Settlement Amounts.
OPERATIONS OF THE COMPANY PRIOR TO THE MERGER
The Company has agreed that, prior to the Effective Time, the business of
the Company will be conducted in accordance with certain restrictions set forth
in the Merger Agreement. Among other things, the Company has agreed that, except
as the Company and Fireman's Fund may otherwise agree, the Company will, and
will cause its subsidiaries to, operate only in the ordinary course of business,
and neither the Company nor any of its subsidiaries will do any of the
following: (a) take any action which would or could reasonably be expected to
jeopardize any of its material contracts or its good standing with any
applicable state department of insurance or similar regulatory agency with
jurisdiction over the Company, (b) take any extraordinary action or fail to take
any action, the failure of which to be taken would be an extraordinary action,
or (c) declare, set aside or pay any dividend (other than stated dividends on
the Preferred Stock) or other distribution in respect of its capital stock,
whether in stock, cash, indebtedness or other property, redeem, repurchase or
otherwise acquire any of its outstanding capital stock, whether for cash,
indebtedness or property, or issue any capital stock or any right to acquire,
convert into or exchange for capital stock except pursuant to stock options
outstanding on March 5, 1997. The Company has also agreed that, in the event it
adopts a "rights plan," "poison pill," or similar plan or arrangement, it will
include a provision expressly exempting Fireman's Fund from the operation
thereof.
In addition, the Company has agreed that until the earlier of the
termination of the Merger Agreement or the Effective Time, neither the Company
nor any of its subsidiaries or representatives will, directly or indirectly,
take any action to encourage, solicit or initiate the submission of any
Acquisition Proposal (as defined below), enter into any agreement for or
relating to any Acquisition Proposal, or participate in any way in any
discussions or negotiations with, or furnish any nonpublic information to, any
party in connection with any Acquisition Proposal. Notwithstanding the
foregoing, the Company may, in response to an unsolicited bona fide offer or
proposal made by a third party to the Company and upon written notice to
Fireman's Fund, provide information to or have discussions or negotiations with
such third party if the Board of Directors of the Company, after having
considered the advice of outside
35
counsel, has determined in good faith that it is the fiduciary duty under
applicable law of such directors to do so.
An Acquisition Proposal is defined in the Merger Agreement as a proposal for
any (i) merger, consolidation or similar transaction involving the Company, (ii)
sale, lease or other disposition directly or indirectly by merger,
consolidation, share exchange or otherwise of any assets of the Company and its
subsidiaries representing 15% or more of the consolidated assets of the Company
and its subsidiaries, (iii) issuance, sale or other disposition of (including by
way of merger, consolidation, share exchange or any similar transaction)
securities (or options, rights or warrants to purchase, or securities
convertible into, such securities) representing 15% or more of the votes
attached to the outstanding securities of the Company, (iv) transaction in which
any person or group of persons will acquire beneficial ownership or the right to
acquire beneficial ownership of 15% or more of the outstanding shares of
Company's Common Stock, (v) recapitalization, restructuring, liquidation,
dissolution or similar type of transaction with respect to the Company or any of
its subsidiaries, or (vi) transaction which is similar in form, substance or
purpose to any of the foregoing transactions.
CONDITIONS TO CONSUMMATION OF THE MERGER
The Merger will occur only if the Merger Agreement is approved and adopted
by the requisite votes of the holders of the Common Stock and Preferred Stock
voting as a single class. Consummation of the Merger also is subject to the
satisfaction of certain other conditions specified in the Merger Agreement,
unless such conditions are waived (to the extent such waiver is permitted by
law). The failure of any such condition to be satisfied, if not waived, would
prevent consummation of the Merger.
The obligations of Fireman's Fund to consummate the Merger are subject to
satisfaction of the following conditions: (i) all waivers, consents,
authorizations, orders, approvals and expirations of waiting periods required
under any applicable law, rule, regulation, judgment or decree ("Law"), or any
note, bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which any party to the Merger
Agreement or any of its subsidiaries is bound or by which the property or assets
of any such party or subsidiary is bound or affected ("Contract"), required to
be obtained by any such party in order to consummate the Merger shall have been
obtained, except where the failure to do so would not have a material adverse
effect on the assets, properties, liabilities, obligations, business, financial
condition or results of operations ("Material Adverse Effect") of the Company
and its subsidiaries taken as a whole; (ii) each of the representations and
warranties of the Company contained in the Merger Agreement shall have been true
and correct as of the date of execution of the Merger Agreement and as of the
Effective Time (except for any inaccuracies which in the aggregate would not be
expected to have a Material Adverse Effect on the Company and its subsidiaries
taken as a whole); (iii) the Company shall have complied in all material
respects with all covenants and agreements required under the terms of the
Merger Agreement to be performed by it; (iv) no injunction, restraining order or
other order of any federal or state court which prevents the Merger shall be in
effect; (v) no statute, rule or regulation shall have been enacted by any state
or governmental agency that would prevent consummation of the Merger; (vi)
between March 5, 1997 and the Effective Time no Material Adverse Effect shall
have occurred with respect to the Company other than any developments that
generally affect the industry in which the Company operates; and (vii) the
Merger shall have been approved by the stockholders of the Company.
The obligations of the Company to consummate the Merger are subject to
satisfaction of the following conditions: (i) all waivers, consents,
authorizations, orders, approvals and expirations of waiting periods required
under any applicable Law or Contract to be obtained by any party to the Merger
Agreement in order to consummate the Merger shall have been obtained, except
where the failure to do so would not have a Material Adverse Effect on the
Company and its subsidiaries taken as a whole ; (ii) each of the representations
and warranties of Fireman's Fund contained in the Merger Agreement shall have
been true and correct as of the date of execution of the Merger Agreement and as
of the Effective Time (except for any inaccuracies which in the aggregate would
not be expected to have a Material Adverse Effect on
36
Fireman's Fund and its subsidiaries taken as a whole); (iii) Fireman's Fund
shall have complied in all material respects with all covenants and agreements
required under the terms of the Merger Agreement to be performed by it; (iv) no
injunction, restraining order or other order of any federal or state court which
prevents the Merger shall be in effect; (v) no statute, rule or regulation shall
have been enacted by any state or governmental agency that would prevent
consummation of the Merger; and (vi) the Merger shall have been approved by the
stockholders of the Company.
TERMINATION
The Merger Agreement may be terminated and the Merger abandoned at any time
prior to the filing of Certificate of Merger with the Delaware Secretary of
State whether before or after action by the Company's stockholders and without
further approval by the Company's stockholders under any of the following
circumstances: (i) by mutual written consent of the Company and Fireman's Fund;
(ii) by either the Company or Fireman's Fund on or after December 31, 1997 if
the conditions of such party's obligation to consummate the Merger have not been
satisfied or waived; and (iii) by the Company and Fireman's Fund if the Company
stockholders do not approve the Merger. In addition, (a) the Board of Directors
of the Company may, if it determines in good faith, after hearing advice of
outside counsel, that such action is necessary in order for the Board of
Directors to comply with its fiduciary duties to the Company's stockholders
under applicable law, modify or withdraw its approval or recommendation of the
Merger, approve or recommend a Superior Proposal (as defined below) or terminate
the Merger Agreement without such action constituting a breach of the Merger
Agreement, and (b) Fireman's Fund may terminate the Merger Agreement if the
Board of Directors of the Company or any committee of the Board withdraws or
modifies its approval or recommendation of the Merger Agreement or the Merger,
fails to recommend that the stockholders of the Company vote in favor of the
Merger, approves or recommends any Acquisition Proposal other than the Merger,
or resolves to do any of the foregoing. A "Superior Proposal" is a bona fide
Acquisition Proposal the terms of which the Board of Directors of the Company
determines, after hearing the advice of a financial advisor of nationally
recognized reputation, to be more favorable to the Company's stockholders than
the terms of the Merger.
TERMINATION FEE
The Merger Agreement requires the Company to pay Fireman's Fund a
termination fee of $2.4 million plus costs and expenses incurred by Fireman's
Fund in connection with the Merger (the "Termination Fee Amount") if the Board
of Directors of the Company takes any of the actions described in clause (a)
above under the caption "--Termination," or the Merger Agreement is terminated
by Fireman's Fund for any of the reasons set forth in clause (b) above under
such caption. In the event that the Merger Agreement is terminated because the
stockholders of the Company do not approve the Merger, and if within the 18
months following such termination the Company enters into a binding agreement
for an Acquisition Transaction with a party not affiliated with Fireman's Fund,
the Company must pay Fireman's Fund the Termination Fee Amount upon entering
into such binding agreement.
ACCOUNTING TREATMENT
The Merger will be accounted for under the purchase method of accounting
under which the total consideration paid in the Merger will be allocated among
the Surviving Corporation's consolidated assets and liabilities based on the
fair values of the assets acquired and liabilities assumed.
RIGHTS OF DISSENTING STOCKHOLDERS
When the Merger is effected, stockholders of the Company who comply with the
procedures prescribed in Section 262 of the DGCL ("Section 262") will be
entitled to a judicial determination of the "fair value" of their shares
(exclusive of any element of value arising from the accomplishment or
expectation of the Merger) and to receive from the Company payment of such fair
value in cash. Shares of Common Stock which are outstanding immediately prior to
the Effective Time and with respect to which
37
appraisal shall have been properly demanded in accordance with Section 262 shall
not be converted into the right to receive the Merger Consideration at or after
the Effective Time unless and until the holder of such shares withdraws his or
her demand for such appraisal or becomes ineligible for such appraisal.
The following is a brief summary of the statutory procedures to be followed
by a stockholder of the Company in order to dissent from the Merger and perfect
appraisal rights under the DGCL. This summary is not intended to be complete and
is qualified in its entirety by reference to Section 262, the text of which is
included as Appendix C of this Proxy Statement. Any stockholder considering
demanding appraisal is advised to consult legal counsel.
A written demand for appraisal of shares of Common Stock must be delivered
to the Company by a stockholder seeking appraisal before the taking of the vote
on the Merger. This written demand must be separate from any proxy or vote
abstaining from or voting against approval of the Merger. Voting against
approval of the Merger, abstaining from voting or failing to vote with respect
to approval of the Merger will not constitute a demand for appraisal within the
meaning of Section 262.
Stockholders electing to exercise their appraisal rights under Section 262
must not vote for approval of the Merger. A vote by a stockholder against
approval of the Merger is not required in order for that stockholder to exercise
appraisal rights. However, if a stockholder returns a signed proxy but does not
specify a vote against approval of the Merger or a direction to abstain, the
proxy, if not revoked, will be voted for approval of the Merger, which will have
the effect of waiving that stockholder's appraisal rights.
A written demand for appraisal must reasonably inform the Company of the
identity of the stockholder of record and that such stockholder intends thereby
to demand appraisal. Accordingly, a demand for appraisal should be executed by
or for the stockholder of record, fully and correctly, as such stockholder's
name appears on the stock certificates. If Common Stock is owned of record in a
fiduciary capacity, such as by a trustee, guardian or custodian, such demand
must be executed by the fiduciary. If, for example, a stockholder holds shares
of Common Stock through a broker, who in turn holds shares through a central
securities depository nominee, such as Cede & Co., a demand for appraisal of
such shares must be made by or on behalf of such depository nominee. If Common
Stock is owned of record by more than one person, as in a joint tenancy or
tenancy in common, such demand must be executed by or for all joint owners. An
authorized agent, including an agent for two or more joint owners, may execute
the demand for appraisal for a stockholder of record; however, the agent must
identify the record owner and expressly disclose the fact that, in exercising
the demand, he is acting as agent for the record owner.
A record owner, such as a broker, who holds Common Stock as a nominee for
others, may exercise appraisal rights with respect to the Common Stock held for
all or less than all beneficial owners of Common Stock as to which the holder is
the record owner. In such case, the written demand must set forth the number of
shares of Common Stock covered by such demand. Where the number of shares of
Common Stock is not expressly stated, the demand will be presumed to cover all
shares of Common Stock outstanding in the name of such record owner. Beneficial
owners who are not record owners and who intend to exercise appraisal rights
should instruct the record owner to comply strictly with the statutory
requirements with respect to the delivery of written demand prior to the taking
of the vote on the Merger.
A Company stockholder who elects to exercise appraisal rights must mail or
deliver the written demands for appraisal to: Secretary, Crop Growers
Corporation, 10895 Lowell, Suite 300, Overland Park, Kansas, 66210, or deliver
such demand to the Company in person at the Special Meeting. The written demand
for appraisal should specify the stockholder's name and mailing address and the
number of shares of Common Stock covered by the demand, and should state that
the stockholder is thereby demanding appraisal in accordance with Section 262.
Within ten days after the Effective Time, the Company must provide notice as
to the date of effectiveness of the Merger to all stockholders who have duly and
timely delivered demands for appraisal and who have not voted for approval of
the Merger Agreement.
38
Within 120 days after the Effective Time, any dissenting stockholder is
entitled, upon written request, to receive from the Company a statement setting
forth the aggregate number of shares not voted in favor of approval of the
Merger Agreement and with respect to which demands for appraisal have been
received by the Company and the number of holders of such shares. Such statement
must be mailed within 10 days after the written request therefor has been
received by the Company.
Within 120 days after the Effective Time, either the Company or any
dissenting stockholder may file a petition in the Delaware Court of Chancery
demanding a determination of the fair value of shares of Common Stock of all
dissenting stockholders. If a petition for an appraisal is timely filed, after a
hearing on such petition, the Delaware Court of Chancery will determine which of
the Company stockholders are entitled to appraisal rights and thereafter will
appraise the shares of Common Stock owned by such stockholders, determining the
fair value of such shares, exclusive of any element of value arising from the
accomplishment or expectation of the Merger, together with the fair rate of
interest to be paid, if any, upon the amount determined to be fair value. In
determining fair value, the Delaware Court of Chancery is to take into account
all relevant factors. In WEINBERGER V. UOP, INC, ET AL., the Delaware Supreme
Court discussed the factors that could be considered in determining fair value
in an appraisal proceeding, stating that "proof of value by any techniques or
methods which are generally considered acceptable in the financial community and
otherwise admissible in court" should be considered and the "fair price
obviously requires consideration of all relevant factors involving the value of
a company." The Delaware Supreme Court stated that in making this determination
of fair value the court and the appraiser may consider "all factors and elements
which reasonably might enter into the fixing of value," including "market value,
asset value, dividends, earnings prospects, the nature of the enterprise and any
other facts which were known or which could be ascertained as of the date of the
merger and which throw any light on future prospects of the merged
corporation...." The Delaware Supreme Court has construed Section 262 to mean
that "elements of future value, including the nature of the enterprise, which
are known or susceptible of proof as of the date of the merger and not the
product of speculation, may be considered." However, such court noted that
Section 262 provides that fair value is to be determined "exclusive of any
element of value arising from the accomplishment or expectation of the merger."
Stockholders considering whether to seek appraisal should bear in mind that
the fair value of their Common Stock determined under Section 262 could be more
than, the same as, or less than the value of the Merger Consideration to be
exchanged in the Merger, and that opinions of investment banking firms as to
fairness from a financial point of view are not necessarily opinions as to fair
value under Section 262. Moreover, the Company reserves the right to assert in
any appraisal proceeding that, for purposes thereof, the "fair value" of the
Common Stock is less than the value of the Merger Consideration.
The cost of the appraisal proceeding may be determined by the Delaware Court
of Chancery and taxed upon the parties as the court deems equitable in the
circumstances. Upon application of a dissenting stockholder, the court may order
that all or a portion of the expenses incurred by any dissenting stockholder in
connection with the appraisal proceeding, including, without limitation,
reasonable attorneys' fees, and the fees and expenses of experts, be charged pro
rata against the value of all shares entitled to appraisal. In the absence of
such a determination or assessment, each party bears its own expenses.
A dissenting stockholder who has duly demanded appraisal in compliance with
Section 262 will not, after the Effective Time, be entitled to vote for any
purpose the Common Stock subject to such demand or to receive payment of
dividends or other distributions on such Common Stock, except for dividends or
other distributions payable to stockholders of record at a date prior to the
Effective Time.
At any time within 60 days after the Effective Time, any dissenting
stockholder will have the right to withdraw his or her demand for appraisal and
to accept the Merger Consideration. After this period, a dissenting stockholder
may withdraw his or her demand for appraisal only with the consent of the
Company. If no petition for appraisal is filed with the Delaware Court of
Chancery within 120 days after the Effective Time, dissenting stockholders'
rights to appraisal shall cease and they shall be entitled only to receive the
Merger Consideration. Inasmuch as the Company has no obligation to file such a
petition, any
39
stockholder who desires such a petition to be filed is advised to file it on a
timely basis. However, no petition timely filed in the Delaware Court of
Chancery demanding appraisal shall be dismissed as to any stockholder without
the approval of the Delaware Court of Chancery, and such approval may be
conditioned upon such terms as the Delaware Court of Chancery deems just.
A vote for the Merger will constitute a waiver of appraisal rights. A
failure to vote against the Merger will not, under Delaware law, constitute a
waiver of appraisal rights. If a stockholder returns a proxy which does not
contain instructions as to how it should be voted, such proxy will be voted in
favor of the Merger and, accordingly, appraisal rights will be waived. As
described above, a vote against the Merger is not sufficient to perfect
appraisal rights. A stockholder's failure to make the written demand prior to
the Special Meeting (under Delaware law) as described above will constitute a
waiver of appraisal rights.
Cash received pursuant to the exercise of dissenters' rights may be subject
to federal or state income tax. See "SPECIAL FACTORS--Certain Federal Income Tax
Consequences."
ANY HOLDER WHO FAILS TO COMPLY FULLY WITH THE STATUTORY PROCEDURE SUMMARIZED
ABOVE WILL FORFEIT HIS OR HER RIGHTS OF DISSENT AND WILL RECEIVE THE MERGER
CONSIDERATION FOR HIS OR HER SHARES. SEE EXHIBIT C.
40
STOCK OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
STOCK OWNERSHIP
The following table sets forth, as of May 31, 1997, certain information with
respect to beneficial ownership of the Common Stock by (i) each person or entity
known by the Company to own beneficially more than 5% of the Company's Common
Stock; (ii) each director of the Company; (iii) each executive officer of the
Company; and (iv) all executive officers and directors as a group. For purposes
of this table, beneficial ownership of securities is defined in accordance with
the rules of the Commission and means generally the power to vote or dispose of
securities, regardless of any economic interest therein. Except as otherwise
indicated, the stockholders listed in the table have sole voting and investment
power with respect to the shares indicated. For the purpose of determining
"Percent of Outstanding Shares," (i) the number of shares of Common Stock
outstanding at May 31, 1997 was 8,728,868, including 754,717 shares of Common
Stock issuable upon conversion of 10,000 shares of the Preferred Stock (which
will vote with the Common Stock with respect to the Merger on an as converted
basis), and (ii) stock options exercisable within 60 days from May 31, 1997 are
assumed to be exercised by the individual or entity with respect to whom the
percentage is calculated.
NUMBER OF SHARES
NAME OF BENEFICIALLY PERCENT OF
BENEFICIAL OWNER OWNED OUTSTANDING SHARES
- -------------------------------------------------------------------------- ----------------- ---------------------
Fireman's Fund Insurance Company (1) ..................................... 2,582,164 29.6%
777 San Marin Drive
Novato, California 94998
Thomas Vetter (2) ........................................................ 457,735 5.2%
955 West Chandler Blvd., Suite 15
Chandler, Arizona 84244
Michael A. Roth and Brian J. Stark ....................................... 788,200 9.0%
1500 West Market Street
Mequon, Wisconsin 53092 (3)
Tony Cid (2)(4)........................................................... 16,963 *
David E. Hill (2)......................................................... 9,029 *
Raford S. Hargrove, Jr. (2)............................................... 15,483 *
Paul T. Horn (2)(5)....................................................... 83,500 *
Lawrence T. Martinez (2).................................................. 47,635 *
John M. Meuschke (2)...................................................... 2,500 *
Manuel Sanchez (2)........................................................ 4,500 *
Thomas M. Vertin (2)(6)................................................... 129,779 1.5%
All executive officers and directors as a group (8 individuals)
(2)(4)(5)(6)............................................................ 309,389 3.4%
- ------------------------
* Less than 1%.
(1) Includes 754,717 shares of Common Stock issuable upon conversion of 10,000
shares of the Preferred Stock, which currently votes with the Common Stock
on an as converted basis.
(2) Includes the following number of shares of Common Stock which could be
acquired within 60 days of April 30, 1997 through the exercise of stock
options: Mr. Vetter, 837 shares; Mr. Cid, 3,629 shares; Mr. Hill, 8,629
shares; Mr. Hargrove, 11,883 shares; Mr. Martinez, 47,000 shares; Mr. Horn,
79,500 shares; Mr. Meuschke, 1,500 shares; Mr. Sanchez, 4,500 shares; Mr.
Vertin, 69,500 shares; and all directors and executive officers as a group,
226,141 shares.
(3) On the basis of information contained in a Schedule 13D filed by Messrs.
Roth and Stark with the Commission on April 3, 1997, includes 394,100 shares
owned by Reliant Trading and 394,100 shares
41
owned by Shepard Trading Limited, investment entities. Messrs. Roth and
Stark have shared voting and investment power with respect to such shares by
virtue of their positions as members of Stark Asset Management L.L.C., the
managing partner of Reliant Trading, and as investment managers of Shepard
Trading Limited.
(4) Includes 6,667 shares of restricted stock, which will vest on June 23, 1997.
(5) Includes 2,000 shares of Common Stock beneficially owned by Mr. Horn's
spouse.
(6) Includes 5,000 shares of Common Stock held jointly with another individual
(2,500 shares of which Mr. Vertin disclaims beneficial ownership of), 3,750
shares of which are held by a corporation owned by Mr. Vertin, and 1,125
shares are held by Mr. Vertin's wife and daughters, all of which Mr. Vertin
is deemed to beneficially own. With respect to 6,225 shares of Common Stock,
Mr. Vertin shares investment power with another individual or individuals.
TRANSACTIONS BY CERTAIN PERSONS IN COMMON STOCK
No transactions in the Company's Common Stock were effected by any person
named in the table above during the 60 day period preceding the date of this
Proxy Statement, other than Fireman's Fund's purchase of the Hemmingson and
Black Stock as described under the caption "SPECIAL FACTORS-- Relationship
Between the Company and Fireman's Fund--Transactions and Agreements--Right of
First Refusal Agreements."
42
MANAGEMENT OF THE COMPANY, FIREMAN'S FUND
AND THE MERGER SUBSIDIARY
Certain information concerning the directors and executive officers of the
Company, Fireman's Fund and the Merger Subsidiary is set forth below. Unless
otherwise indicated, each such person is a citizen of the United States and the
address of each such person is that of the Company, Fireman's Fund or the Merger
Subsidiary, as the case may be. Such addresses are set forth under the caption
"SUMMARY--The Company" and "--Fireman's Fund."
THE COMPANY
The names, ages, principal occupations and employment history for the past
five years of the members of the directors and executive officers of the Company
are set forth below.
PAUL T. HORN, 54, has been Chairman of the Board of Directors since March
1996, and a Director since June 1994. He has been the Chief Operating Officer of
R.D. Offutt Company, which provides a variety of agribusiness services and
products to rural communities, since 1985. He has been President, Chief
Operating Officer and a Director of RDO Equipment Corp., which owns and operates
John Deere industrial and agricultural stores in the United States, since August
1996. He also serves as a Director of Northern Grain Company, a regional grain
elevator.
LAWRENCE T. MARTINEZ, 35, has been the Chief Executive Officer and a
Director of the Company since August 1996. He was Acting Chief Executive Officer
from June 1996 to August 1996, and was with the law firm of Dorsey & Whitney LLP
from November 1990 to June 1996.
JOHN M. MEUSCHKE, 51, has held various positions at Fireman's Fund since
1968, and is currently Senior Vice President of Fireman's Fund Insurance
Company. He has been a Director of the Company since July 1996.
MANUEL SANCHEZ, 53, has been a Director of the Company since June 1994. He
has been the Chief Executive Officer of Tower Health, a health maintenance
organization, since February 1997. He had a private law practice from May 1996
to February 1997, and served as President and Chief Executive Officer of Gulf
Atlantic Life Insurance Company from 1991 to May 1996.
THOMAS M. VERTIN, 50, has been Vice Chairman of the Board of Directors since
March 1996, and has been a Director since October 1994. He has been the owner
and operator of Vertin Company, a business management firm with a variety of
commercial business and real estate interests, primarily involving multi-state
funeral homes, since its inception in 1981. He is also a partner in The Coveda
Company, a management firm that operates Hardee's restaurants in Minnesota,
North Dakota and South Dakota.
TONY CID, 35, has been the Senior Vice President of the Company since April
1994. He held various positions with Continental Insurance Companies from March
1989 to February 1994.
RAFORD S. HARGROVE, JR., 28, has been President of Crop Growers Software,
Inc. since October 1994. He was General Manager of Crop Growers Software, Inc.
from January 1991 to October 1994, and was a Director of the Company from
October 1994 to July 1996.
DAVID E. HILL, 34, has been Chief Financial Officer of the Company since
December 1995, and Secretary and Treasurer since May 1996. He served as Chief
Accounting Officer from March 1995 to December 1995, and Vice President and
Controller of Insurance Company Operations from September 1994 to March 1995. He
was with the accounting firm of KPMG Peat Marwick LLP from January 1985 to
September 1994.
43
FIREMAN'S FUND AND AFFILIATES
Fireman's Fund is a wholly owned subsidiary of AZOA, and AZ AG holds 90% of
the voting securities of AZOA. See "SUMMARY--Fireman's Fund.
FIREMAN'S FUND. The names, principal occupations and employment history for
the past five years of the directors and executive officers of Fireman's Fund
are set forth below. Mr. Hansmeyer and Dr. Schulte-Noelle are German citizens.
Dr. Schulte-Noelle's address is Koniginstrasse 28, 80802 Munich, Federal
Republic of Germany, and Mr. Marks' address is 55 Green Farms Road, Westport,
Connecticut 06881.
GARY E. BLACK, Director; President, Claims Division, since 1997; Executive
Vice President of Fireman's Fund since 1987.
HERBERT HANSMEYER, Director and Chairman of the Board since 1991; Member of
the Board of Management of AZ AG since 1994.
DAVID R. POLLARD, Director; Executive Vice President of Fireman's Fund.
JEFFREY H. POST, Director; Executive Vice President, Chief Financial Officer
and Actuary of Fireman's Fund since 1994; Senior Actuary with St. Paul Companies
Inc. from 1985 to 1994.
THOMAS E. ROWE, Director; Executive Vice President of Fireman's Fund since
1993; Senior Vice President from 1987 to 1993.
DR. HENNING SCHULTE-NOELLE, Director; Chairman of the Board of Management of
AZ AG and Director, President and Chief Executive Officer of AZOA since 1991.
JOE L. STINNETTE, JR., Director; President and Chief Executive Officer of
Fireman's Fund since 1994; Chief Administrative Officer from 1991 to 1994;
Director of AZOA since 1994.
DAVID P. MARKS, Executive Vice President of Fireman's Fund; Director,
Secretary and Assistant Treasurer of AZOA since 1991.
HAROLD N. MARSH, III, Senior Vice President and Treasurer of Fireman's Fund
since 1991.
THOMAS A. SWANSON, Senior Vice President and General Counsel of Fireman's
Fund since 1988; Corporate Secretary since 1993.
AZOA. The names and, unless already set forth under "--Fireman's Fund"
above, the principal occupations and employment history for the past five years
of the directors and executive officers of AZOA are set forth below. Mr.
Hansmeyer and Drs. Schulte-Noelle, Breipohl and Schinzler are German citizens.
The address of Mr. Hansmeyer and Drs. Schulte-Noelle and Breipohl is
Koniginstrasse 28, 80802 Munich, Federal Republic of Germany; the address of
Messrs. Clark and Marks is 55 Green Farms Road, Westport, Connecticut 06881; the
address of Mr. Stinnette is 777 San Marin Drive, Novato, California 94998; the
address of Mr Anderson is 1750 Hennepin Avenue, Minneapolis, Minnesota 55403;
and the address of Dr. Schinzler is 500 Lexington Avenue, New York, New York
10022.
DR. HENNING SCHULTE-NOELLE, Director, President and Chief Executive Officer.
LOWELL C. ANDERSON, Director.
DR. DIETHART BREIPOHL, Director; Member of the Board of Management of AZ AG.
HERBERT HANSMEYER, Director.
DAVID P. MARKS, Director, Secretary and Assistant Treasurer.
44
DR. HANS JURGEN SCHINZLER, Director.
JOE L. STINNETTE, JR., Director.
RONALD M. CLARK, Treasurer and Assistant Secretary.
AZ AG. The names and, unless already set forth under "--Fireman's Fund" or
"--AZOA" above, the principal occupations and employment history for the past
five years of the members of the Board of Management of AZ AG are set forth
below. All of the named individuals are German citizens. The address of each of
the named individuals is Koniginstrasse 28, 80802 Munich Federal Republic of
Germany.
DR. HENNING SCHULTE-NOELLE, Chairman of the Board of Management.
DETLEV BREMKAMP, Member.
DR. REINER HAGEMANN, Member.
DR. GERHARD RUPPRECHT, Member.
DR. DIETHART BREIPOHL, Member.
DR. HELMUT PERLET, Member.
HERBERT HANSMEYER, Member.
THE MERGER SUBSIDIARY
The names and, unless already set forth under "--Fireman's Fund" above,
principal occupations and employment history for the past five years of the
directors and executive officers of the Merger Subsidiary are set forth below.
HAROLD N. MARSH, III, Director and Senior Vice President and Treasurer.
JEFFREY H. POST, Director and Executive Vice President, Chief Financial
Officer and Actuary.
JOE L. STINNETTE, JR., Director and Chairman of the Board, President and
Chief Executive Officer.
THOMAS A. SWANSON, Senior Vice President, General Counsel and Corporate
Secretary.
RICHARD G. WARREN, Senior Vice President and Controller.
CERTAIN PROCEEDINGS
On January 21, 1997, the Company entered a NOLO CONTENDERE plea to two
charges in the matter of UNITED STATES OF AMERICA V. CROP GROWERS CORPORATION,
JOHN J. HEMMINGSON AND GARY A. BLACK (Crim. No. 96-0181 (GK)), filed in the
United States Federal District Court in Washington, D.C., and paid a fine in the
amount of $2 million. The case was brought against the Company by the
Independent Counsel appointed to investigate former United States Secretary of
Agriculture Mike Espy, and the indictment as initially filed against the Company
alleged conspiracy to violate federal election laws, false statements to a
government agency, falsification of books and records, false statements to
auditors, various securities law violations and other matters. The allegations
were made in connection with alleged corporate reimbursement of individual
campaign contributions to the 1993 Congressional primary campaign of Henry Espy,
brother of Mike Espy, and an amount paid as a retainer to an attorney who used
the funds, allegedly with the knowledge of an officer of the Company, to retire
certain Congressional primary campaign debts of Henry Espy. The counts with
respect to which the Company entered its plea alleged conspiracy to make and
conceal illegal campaign contributions and the making and keeping of false
records and accounts
45
under provisions of the Securities and Exchange Act of 1934. A nolo contendere
plea is neither an admission nor a denial of guilt.
On February 28, 1997, the Company agreed to settlement of the matter
entitled IN RE CROP GROWERS SECURITIES LITIGATION (Civ. No. 95-58-GF-PGH) with
members of a class of plaintiffs consisting of purchasers of the Company's
common stock during the period from February 15, 1995 to May 16, 1995. The
complaint alleged, among other things, that the Company made false and
misleading statements in publicly filed or disseminated documents to inflate
artificially the price of its stock. Specifically, plaintiffs' primary
allegation was that the Company's statements regarding the potential impact on
the Company's premiums and earnings for 1995 due to the passage of legislation
in the Fall of 1994 amending the MPCI program were false and misleading. Under
the settlement, the Company has paid $2.5 million, $1.22 million of was paid by
the Company, with the remainder paid out under the terms of a directors' and
officers' insurance policy.
Except as described in the preceding paragraph, during the past five years,
neither the Company, Fireman's Fund, AZOA, AZ AG, the Merger Subsidiary, nor any
of the individuals named above with respect to those entities has been convicted
in a criminal proceeding (excluding traffic violations and similar
misdemeanors), or been a party to a civil proceeding of a judicial or
administrative body of competent jurisdiction and as a result of such proceeding
been or become subject to a judgment, decree or final order enjoining future
violations of, or prohibiting or mandating activities subject to, federal or
state securities laws of finding any violation with respect to such laws.
STOCKHOLDER PROPOSALS
In the event the Merger is not consummated for any reason, proposals of
stockholders intended to be presented at the 1997 annual meeting of stockholders
must be received by the Company at its principal executive offices not later
than June 20, 1997 for inclusion in the Company's proxy statement and form of
proxy relating to that meeting. Stockholders should mail any proposals by
certified mail return receipt requested.
INDEPENDENT PUBLIC ACCOUNTANTS
The consolidated financial statements of the Company as of December 31,
1996, December 31, 1995, and December 31, 1994, and for each of the years in the
three-year period ended December 31, 1996, incorporated by reference in this
Proxy Statement, have been audited by KPMG Peat Marwick LLP, independent public
accountants.
A representative of KPMG Peat Marwick LLP will be at the Special Meeting to
answer questions by stockholders and will have the opportunity to make a
statement if so desired.
INFORMATION INCORPORATED BY REFERENCE
The Company's Annual Report on Form 10-K for the year ended December 31,
1996, as amended, its Quarterly Report on Form 10-Q for the quarter ended March
31, 1997, and its Current Reports on Form 8-K dated January 3, 1997, January 21,
1997, February 28, 1997 and May 30, 1997 as filed by the Company with the
Commission (Commission File No. 0-23830), are incorporated by reference into
this Proxy Statement.
All documents filed by the Company pursuant to sections 13(a), 13(c), 14 or
15(d) or the Exchange Act after the date of this Proxy Statement and prior to
the date of the Special Meeting shall be deemed to be incorporated by reference
herein and to be a part hereof from the date of filing of such documents. Copies
of the documents (without exhibits) incorporated by reference in this Proxy
Statement are available without charge upon written or oral request from David
E. Hill, Chief Financial Officer, Crop Growers Corporation, 10895 Lowell Avenue,
Suite 300, Overland Park, Kansas 66210 (telephone (913) 338-7800).
46
AVAILABLE INFORMATION
The Company is subject to the informational reporting requirements of the
Exchange Act and, in accordance therewith, files reports, proxy statements and
other information with the Commission. Such reports, proxy statements and other
information can be inspected and copies made at the public reference facilities
of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549
and the Commission's regional offices at Seven World Trade Center, Suite 1300,
New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such material can also be obtained from
the Public Reference Section of Commission at its Washington, D.C. address at
prescribed rates. The Commission also maintains a Web site address,
http://www.sec.gov., which contains reports, proxy statements and other
information regarding registrants that file electronically with the Commission.
The Company's Common Stock is listed and traded on the Nasdaq National Market,
and such reports, proxy statements and other information may be inspected at the
offices of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006.
ADDITIONAL INFORMATION
This Proxy Statement contains information disclosed pursuant to Rule 13e-3
under the Exchange Act, which governs so-called "going private" transactions by
certain issuers and their affiliates. At the time the Company and Fireman's Fund
entered into the March 5 Agreement, Fireman's Fund owned 10,000 shares of the
Company's Preferred Stock, which, on an as converted basis, represented 8.6% of
the combined voting power of the Company's Common Stock and Preferred Stock. At
such time, Fireman's Fund had the right to acquire from Messrs. Hemmingson and
Black 1,827,477 shares of Common Stock, which, together with the Preferred
Stock, represented 29.6% of such combined voting power, but the exercise of such
right was subject to the Company's consent. Although neither the Company nor
Fireman's Fund believes that Fireman's Fund or the Merger Subsidiary was then an
"affiliate" of the Company within the meaning of Rule 13e-3(a)(1) of the
Exchange Act, and both Fireman's Fund and the Merger Subsidiary deny being
affiliates of the Company at the time of the March 5 Agreement was entered into,
Fireman's Fund, the Merger Subsidiary and the Company are filing a Rule 13e-3
Transaction Statement ("Schedule 13E-3") with the Commission to furnish
information with respect to the transactions described herein. This Proxy
Statement does not contain all of the information set forth in the Schedule
13E-3, parts of which are omitted in accordance with the regulations of the
Commission. The Schedule 13E-3, and any amendments thereto, including exhibits
filed as part thereof, will be available for inspection and copying at the
offices of the Commission as set forth above.
By Order of the Board of Directors
David E. Hill
SECRETARY
Overland Park, Kansas
July , 1997
47
EXHIBIT A
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "AGREEMENT") dated May 1, 1997 is
entered into among CROP GROWERS CORPORATION, a Delaware corporation (the
"COMPANY"), FIREMAN'S FUND INSURANCE COMPANY, a California corporation (the
"BUYER"), and CG ACQUISITIONS CORP., a Delaware corporation and direct
subsidiary of the Buyer (the "BUYER SUBSIDIARY").
The Company and the Buyer entered into a binding acquisition agreement dated
March 5, 1997 (the "ACQUISITION AGREEMENT") pursuant to which the parties agreed
that an affiliate of the Buyer would merge into the Company, with the Company
being the surviving corporation, in which (i) the common stockholders of the
Company will be entitled to receive cash in the amount of $10.25 per share upon
surrender of the relevant stock certificate following the closing, (ii) the
holders of options to acquire common stock of the Company will receive a cash
settlement equal to the spread (if any) represented by each option, based on
such price per share, and (iii) the Buyer or an affiliate of the Buyer will
become the holder of all the outstanding common stock and rights to acquire
common stock of the Company.
The Acquisition Agreement contemplates that Implementation Agreements (as
defined therein) will be entered into to carry out the acquisition contemplated
thereby. This Agreement is such an Implementation Agreement.
The Company's outstanding capital stock consists of two classes: (i) common
stock, par value $0.01 per share (the "COMMON STOCK"), and (ii) Series A
Convertible Preferred Stock, par value $0.01 per share (the "PREFERRED STOCK").
The Buyer Subsidiary's outstanding capital stock consists of common stock,
$1.00 per share (the "BUYER SUBSIDIARY COMMON STOCK").
NOW, THEREFORE, the parties hereby agree as follows:
SECTION 1. THE MERGER
1.1 THE MERGER. Subject to the terms and conditions of this Agreement, at
the Effective Time (as defined in Section 1.3 hereof), the Buyer Subsidiary
shall be merged with and into the Company in accordance with this Agreement and
the separate corporate existence of the Buyer Subsidiary shall thereupon cease
(the "MERGER"). The Company shall be the surviving corporation in the Merger
(sometimes hereinafter referred to as the "SURVIVING CORPORATION"). The Merger
shall have the effects specified in Section 259 of the Delaware General
Corporation Law (the "DGCL").
1.2 THE CLOSING. Subject to the terms and conditions of this Agreement,
the consummation of the Merger (the "CLOSING") shall take place within 5
business days after the satisfaction or waiver (the party or parities entitled
to waive) all conditions to Closing set forth in this Agreement. The date on
which the Closing occurs is herein called the "CLOSING DATE."
1.3 EFFECTIVE TIME. If all the conditions to the Merger set forth in
Sections 12 and 13 shall have been fulfilled or waived in accordance herewith
and this Agreement shall not have been terminated as provided in Section 14, the
parties hereto shall cause a Certificate of Merger satisfying the requirements
of the DGCL to be properly executed, verified and delivered for filing in
accordance with the DGCL on the Closing Date. The Merger shall become effective
upon the acceptance for record of the Certificates of Merger by the Secretary of
State of Delaware in accordance with the DGCL (the "EFFECTIVE TIME").
SECTION 2. THE SURVIVING CORPORATION
2.1 ARTICLES OF INCORPORATION. The Certificate of Incorporation of the
Company shall be the Certificate of Incorporation of the Surviving Corporation.
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2.2 BYLAWS. The Bylaws of the Company shall be the Bylaws of the Surviving
Corporation.
2.3 BOARD OF DIRECTORS. The Board of Directors of the Surviving Company
will consist of individuals designated by the Buyer on or before the Effective
Time.
2.4 OFFICERS. The officers of the Surviving Company will consist of
individuals designated by the Buyer on or before the Effective Time.
SECTION 3. CONVERSION OF SECURITIES
3.1 CAPITAL STOCK. As of the Effective Time, by virtue of the Merger and
without any action on the part of the holders of any shares of capital stock of
the Company:
(a) BUYER SUBSIDIARY CAPITAL STOCK. Each issued and outstanding share
of Buyer Subsidiary Common Stock shall be converted into and become one fully
paid and nonassessable share of common stock, $0.01 par value per share of the
Surviving Corporation.
(b) COMPANY CAPITAL STOCK.
(i) COMMON STOCK. Each issued and outstanding Share (a "SHARE") of
the Common Stock (other than any Shares which are held by stockholders
exercising appraisal rights pursuant to Section 262 of the DGCL (the "DISSENTING
STOCKHOLDERS") and other than any Shares held by the Buyer or the Buyer's
designee) shall be converted into the right to receive $10.25 in cash, payable
to the holder thereof, without interest (the "MERGER CONSIDERATION"), upon
surrender of the certificate formerly representing such Share in the manner
provided in Section 3.2. All such Shares, when so converted, shall no longer be
outstanding and shall automatically be canceled and retired and shall cease to
exist, and each holder of a certificate representing any such Shares shall cease
to have any rights with respect thereto, except the right to receive the Merger
Consideration therefor upon surrender of such certificate in accordance with
Section 3.2, without interest, or, in the case of Dissenting Stockholders, the
right, if any, to receive payment from the Surviving Corporation of the "fair
value" of such Shares as determined in accordance with Section 262 of the DGCL.
(ii) COMMON STOCK HELD BY THE BUYER. All Shares of Common Stock
held by the Buyer or the Buyer's designee shall be canceled.
(iii) PREFERRED STOCK. Each issued and outstanding share of the
Preferred Stock shall continue as an identical share of preferred stock of the
Surviving Corporation.
(c) CANCELLATION OF TREASURY STOCK. All Shares that are owned by the
Company shall be canceled and retired and shall cease to exist and no
consideration shall be delivered in exchange therefor.
3.2 SURRENDER OF CERTIFICATES.
(a) PAYING AGENT. Prior to the Effective Time, the Buyer shall
designate a bank or trust company to act as agent for the holders of the Shares
in connection with the Merger (the "PAYING AGENT") to receive the funds to which
the holders of the Shares shall become entitled pursuant to Section 3.1(b)(i).
The Buyer shall pay the Merger Consideration under Section 3.1(b)(i) to the
Paying Agent on or before the date on which the Effective Time occurs. All
interest earned on such funds shall be paid the Surviving Corporation.
(b) SURRENDER PROCEDURES. As soon as reasonably practicable after the
Effective Time, the Paying Agent shall mail each holder of record of a
certificate or certificates, which immediately prior to the Effective Time
represented outstanding Shares (the "CERTIFICATES"), whose shares were converted
pursuant to Section 3.1(b)(i) into the right to receive the Merger Consideration
(i) a letter of transmittal (which shall specify that delivery shall be
effected, and risk of loss and title to the Certificates shall pass, only upon
delivery of the Certificates to the Paying Agent and shall be in such form and
have such other provisions as
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the Buyer and the Company may reasonably specify) and (ii) instructions for use
in effecting the surrender of the Certificates in exchange for payment of the
Merger Consideration. Upon surrender of a Certificate for cancellation to the
Paying Agent or to such other agent or agents as may by appointed by the Buyer,
together with such letter of transmittal, duly executed, the holder of such
Certificate shall be entitled to receive in exchange therefor the Merger
Consideration for each Share formerly represented by such Certificate and the
Certificate so surrendered shall forthwith be canceled. If payment of the Merger
Consideration is to be made to a person other than the person in whose name the
surrendered Certificate is registered, it shall be a condition of payment that
the Certificate so surrendered shall be properly endorsed or shall be otherwise
in proper form for transfer and that the person requested in such payment shall
have paid any transfer and other taxes required by reason of the payment of the
Merger Consideration to a person other than the registered holder of the
Certificate surrendered or shall have established to the satisfaction of the
Surviving Corporation that such tax either has been paid or is not applicable.
Until surrendered as contemplated by this Section 3.2, each Certificate shall be
deemed at any time after the Effective Time to represent only the right to
receive the Merger Consideration as contemplated by this Section 3.2. The right
of any holder of Shares to receive the Merger Consideration shall be subject to
and reduced by any applicable withholding obligation.
(c) TRANSFER BOOKS; NO FURTHER OWNERSHIP RIGHTS IN THE SHARES. At the
Effective Time, the stock transfer books of the Company shall be closed and
thereafter there shall be no further registration of transfers of the Shares on
the records of the Company. From and after the Effective Time, the holders of
Certificates evidencing ownership of the Shares outstanding immediately prior to
the Effective Time shall cease to have any rights with respect to such Shares,
except as otherwise provided for herein or by applicable law.
(d) TERMINATION OF FUND; NO LIABILITY. At any time following six
months after the Effective Time, the Surviving Corporation shall be entitled to
require the Paying Agent to deliver to it any funds (including any interest
received with respect thereto) which had been made available to the Paying Agent
and which have not been disbursed to holders of Certificates, and thereafter
such holders shall be entitled to look to the Surviving Corporation (subject to
abandoned property, escheat or other similar laws) only as general creditors
thereof with respect to the Merger Consideration payable upon due surrender of
their Certificates, without any interest thereon. In no event shall the Buyer,
the Surviving Corporation or the Paying Agent shall be liable to any holder of a
Certificate for Merger Consideration delivered to a public official pursuant to
any applicable abandoned property, escheat or similar law.
(e) LOST, STOLEN OR DESTROYED CERTIFICATES. In the event any
Certificate shall have been lost, stolen or destroyed, upon the making of an
affidavit of that fact by the registered holder thereof or such holder's duly
authorized attorney-in-fact, the Surviving Company may pay, or authorize the
Paying Agent to pay, the Merger Consideration with respect thereto, subject to
Section 3.2(d) if applicable, PROVIDED, HOWEVER, that the Board of Directors of
the Surviving Company may, it its discretion and as a condition precedent to the
payment thereof, require the registered holder(s) and/or beneficial owner(s) of
such Certificate to give the Surviving Corporation a bond in such sum as it may
direct as indemnity against any claim that may be made against the Surviving
Corporation, the Company, the Buyer or the Buyer Subsidiary with respect to the
Certificate alleged to have been lost, stolen or destroyed.
3.3 DISSENTER'S RIGHTS. If any Dissenting Stockholder shall be entitled to
be paid the "fair value" of such holder's Shares, as provided in Section 262 of
the DGCL, the Company shall give the Buyer and Buyer Subsidiary notice thereof
and the Buyer and Buyer Subsidiary shall have the right to participate in all
negotiations and proceedings with respect to any such demands. The Surviving
Corporation shall not, except with the prior written consent of the Buyer or the
Buyer Subsidiary, voluntarily make any payment with respect to, or settle or
offer to settle, any such demand for payment. If any Dissenting Stockholder
shall fail to perfect or shall have effectively withdrawn or lost the right to
dissent, the Shares held by such Dissenting Stockholder shall thereupon be
treated as though such Shares had been converted into the right to receive the
Merger Consideration pursuant to Section 3.1(b)(i).
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3.4 COMPANY STOCK PLANS. On the Effective Time, (i) cause each outstanding
stock option (the "OPTIONS") to purchase Shares granted under the Company's
option arrangements set forth in Section 8(b) of the Company's disclosure
schedule delivered concurrently with the Acquisition Agreement (the "DISCLOSURE
SCHEDULE"), whether or not then exercisable or vested, will become fully
exercisable and vested. The Company will cause each Option that is then
outstanding to be canceled as of the Effective Time. In consideration of such
cancellation, and except that the Buyer or the Buyer Subsidiary and the holder
of any such Option otherwise agree, the Buyer will cause the Company (or, at the
Buyer's option, the Buyer Subsidiary) to pay such holders of Options an amount
in respect thereof equal to the product of (A) the excess, if any, of the Merger
Consideration over the exercise price of each such Option and (B) the number of
Shares previously subject to the Option immediately prior to its cancellation
(such payment to be net of withholding taxes).
SECTION 4. NO SOLICITATION, ETC.
(a) Until the earlier of the termination of this Agreement pursuant to its
terms or the Effective Time, neither the Company nor any of its subsidiaries nor
any representative of the Company or any of its subsidiaries shall, directly or
indirectly, take any action to (i) encourage, solicit or initiate the submission
of any Acquisition Proposal, (ii) enter into any agreement for or relating to a
Third Party Transaction, or (iii) participate in any way in discussions or
negotiations with, or furnish any non-public information to, any Person in
connection with any Acquisition Proposal. Notwithstanding any other provision of
this Section 4(a), the Company may, in response to an unsolicited BONA FIDE
offer or proposal made by a third party to it, provide information to or have
discussions or negotiations with such third party; PROVIDED, HOWEVER, that if
such offer or proposal is received after March 28, 1997, the Board of Directors
must first make a determination in good faith, after hearing advice of its
outside counsel, that such action is necessary in order for the Board of
Directors to comply with its fiduciary duties under applicable law. The Company
will immediately communicate to the Buyer the receipt of any third party
solicitation, proposal or BONA FIDE inquiry that the Company, any of its
subsidiaries or any representative of the Company or any of its subsidiaries may
receive in respect of any such transaction, or of any request for such
information, including in each case a copy thereof and all other particulars
thereof.
(b) "ACQUISITION PROPOSAL" means any proposed Acquisition Transaction.
"ACQUISITION TRANSACTION" means any (i) merger, consolidation or similar
transaction involving the Company, (ii) sale, lease or other disposition
directly or indirectly by merger, consolidation, share exchange or otherwise of
any assets of the Company or its subsidiaries representing 15% or more of the
consolidated assets of the Company and its subsidiaries, (iii) issue, sale or
other disposition of (including by way of merger, consolidation, share exchange
or any similar transaction) securities (or options, rights or warrants to
purchase, or securities convertible into, such securities) representing 15% or
more of the votes attached to the outstanding securities of the Company, (iv)
transaction in which any person shall acquire Beneficial Ownership or the right
to acquire Beneficial Ownership, or any Group shall have been formed which has
Beneficial Ownership or has the right to acquire Beneficial Ownership, of 15% or
more of the outstanding shares of common stock of the Company, (v)
recapitalization, restructuring, liquidation, dissolution or other similar type
of transaction with respect to the Company or any of its subsidiaries, or (vi)
transaction which is similar in form, substance or purpose to any of the
foregoing transactions. "THIRD PARTY TRANSACTION" shall mean an Acquisition
Transaction with a party unrelated to the Buyer. "BENEFICIAL OWNERSHIP" and
"GROUP" shall have the meanings stated in Regulation 13D-G under the Securities
Exchange Act of 1934, as amended (the "EXCHANGE ACT").
(c) The Company will use its best efforts to take all action necessary in
accordance with applicable law and its certificate of incorporation and bylaws
to convene a meeting of its stockholders as promptly as practicable to consider
and vote upon the approval of the Merger. The Board of Directors of the Company
shall recommend and declare advisable to its stockholders such approval and the
Company shall take all lawful action to solicit, and use all best efforts to
obtain, approval of its stockholders, and neither the
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Board of Directors of the Company nor any committee of such Board of Directors
shall (i) withdraw or modify the approval or recommendation by such Board of
Directors or such committee of the Merger, (ii) approve or recommend any
Acquisition Proposal other than the Merger, or (iii) cause the Company to enter
into any letter of intent, agreement in principle, acquisition agreement or
other similar agreement with respect to any Acquisition Proposal other than the
Merger. Notwithstanding the foregoing, the Board of Directors of the Company may
withdraw or modify its approval or recommendation of the Merger, approve or
recommend a Superior Proposal or terminate this Agreement, but in each case only
concurrently with the payment of the amount required by Section 14(d) or 14(e),
as applicable, and after a determination in good faith, after hearing advice of
its outside counsel, that such action is necessary in order for the Board of
Directors to comply with its fiduciary duties to stockholders under applicable
law. A "SUPERIOR PROPOSAL" means any bona fide Acquisition Proposal, the terms
of which the Board of Directors of the Company determines in its good faith
judgment (after hearing the advice of a financial advisor of nationally
recognized reputation) to be more favorable to the Company's stockholders than
the Merger.
SECTION 5. ACCESS
The Company shall (and shall cause each of its subsidiaries to) afford to
the Buyer and its agents and representatives full access during normal business
hours throughout the period prior to the Effective Time to all of its
properties, books, contracts, commitments and records and during such period
shall (and shall cause each of its subsidiaries to) furnish promptly to such
parties (i) a copy of each report, schedule and other document filed or received
by it pursuant to the requirements of federal or state securities or insurance
laws and (ii) all other information concerning its business, properties and
personnel as such party may reasonably request, including any financial and
operating data. Any such access shall commence forthwith, and shall be conducted
in such a manner so as not to interfere unreasonably with the business or
operations of the Company. The Buyer shall maintain the confidentiality of any
nonpublic information received by it or its representatives pursuant to this
Section 5.
SECTION 6. CONSENTS
The parties hereto will use their respective reasonable best efforts to (i)
obtain all material consents, authorizations, orders and approvals of or from
private parties or Government Entities, required, proper or advisable in
connection with this Agreement and the Merger and (ii) resolve any action, suit,
proceeding or investigation which shall have been instituted or which a
Government Entity shall have indicated its intention to institute which
jeopardizes the Merger; PROVIDED, HOWEVER, that no party hereto shall be
obligated to take any such action which, in the reasonable opinion of such party
(following consultation with its counsel), would (x) have a material adverse
effect on the assets, properties, liabilities, obligations, financial
conditions, results of operations or business (a "MATERIAL ADVERSE EFFECT") of
such party and its subsidiaries taken as a whole or (y) have a Material Adverse
Effect or materially restrict or impair the effective ownership, operation or
control of the Company by the Buyer following the consummation of the Merger.
"GOVERNMENTAL ENTITY" means any federal, state or local governmental or
regulatory agency, authority or instrumentality, whether domestic or foreign.
SECTION 7. ANNOUNCEMENTS
The parties hereto will consult and cooperate with each other and agree upon
the terms and substance of all press releases, announcements and public
statements with respect to this Agreement and the Merger, PROVIDED, HOWEVER,
that such consultation and cooperation shall not interfere with any obligation
of either party hereto to disclose any information as required by applicable
law. Any press release or other announcement by any party with respect to the
Merger will be subject to the consent and approval of the other party, which
consent or approval will not be unreasonably withheld.
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SECTION 8. INTERIM OPERATIONS
Except as set forth on the Disclosure Schedule, or expressly required or
permitted by this Agreement, from and after the date hereof until the earlier of
(i) the Effective Time or (ii) the termination of this Agreement pursuant to its
terms, the Company will and will cause its subsidiaries to (w), except as
otherwise agreed to by the Buyer orally or in writing, operate its businesses in
the ordinary course of business, (x) not take any action or fail to take any
action which would or could reasonably be expected to jeopardize any of its
material contracts or its good standing with all applicable Departments of
Insurance and similar regulatory agencies with jurisdiction over the Company,
(y) not take any extraordinary action or fail to take any action, the failure of
which to be taken would be an extraordinary action, and (z) not declare, set
aside or pay any dividend (other than stated dividends on the Preferred Stock)
or other distribution in respect of its capital stock, whether in stock, cash,
indebtedness or other Property, redeem, repurchase or otherwise acquire any of
its outstanding capital stock, whether for stock, cash, indebtedness or
Property, or issue any capital stock or any right to acquire, convert into or
exchange for capital stock except pursuant to stock options outstanding on March
5, 1997. The Company agrees that, in the event it adopts a "rights plan,"
"poison pill" or similar plan or arrangement, it will include a provision
expressly exempting the Buyer from the operation thereof.
SECTION 9. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Buyer and the Buyer
Subsidiary that, as of the date of this Agreement:
(a) ORGANIZATION AND QUALIFICATIONS. The Company and each subsidiary
of the Company is a corporation duly incorporated, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and has the
requisite corporate power and authority, and all governmental permits, approvals
and other authorizations, necessary to own, lease and operate its Properties and
to carry on its business as it is now being conducted, except for such
exceptions as would not, individually or in the aggregate, have a Material
Adverse Effect on the Company and its subsidiaries taken as a whole (a "COMPANY
MATERIAL ADVERSE EFFECT").
(b) CAPITALIZATION. The authorized capital stock of the Company is as
set forth on the Disclosure Schedule. Except as set forth thereon, no shares of
capital stock or other voting securities of the Company are issued, reserved for
issuance or outstanding. Except as set forth above and except as contemplated
herein, there are no options or agreements relating to the issued or unissued
capital stock of the Company or any subsidiary of the Company, or obligating the
Company or any subsidiary to issue, transfer, grant or sell any shares of
capital stock of, or other equity interests in, or securities convertible into
or exchangeable for any capital stock or other equity interests in, the Company
or any subsidiary. There are no outstanding contractual obligations of the
Company or any subsidiary to repurchase, redeem or otherwise acquire any shares
of capital stock of the Company or any subsidiary. Attached hereto as Exhibit 1
is a complete and accurate list of each holder of an option to acquire Shares,
showing the number of shares and exercise price under each option.
(c) AUTHORITY RELATIVE TO THIS AGREEMENT. The Company has all
necessary corporate power and authority to execute and deliver this Agreement,
to perform its obligations hereunder and, subject to adoption of this Agreement
by the stockholders of the Company as contemplated hereby (the "STOCKHOLDER
APPROVAL"), to consummate the Merger. The execution and delivery of this
Agreement by the Company and the consummation by it of the Merger have been duly
and validly authorized by all necessary corporate action and no other corporate
proceedings on the part of the Company is necessary to authorize this Agreement
or to consummate the Merger (other than the Stockholder Approval). This
Agreement has been duly and validly executed and delivered by the Company and,
assuming the due authorization, execution and delivery hereof by each other
party hereto, constitutes the legal, valid and binding obligation of the
Company, enforceable against it in accordance with its terms, except as
enforcement may be limited
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by bankruptcy, insolvency, moratorium or other similar laws relating to
creditors' rights generally and by equitable principles.
(d) NO CONFLICT; REQUIRED FILINGS AND CONSENTS.
(i) The execution and delivery of this Agreement by the Company does
not, and the performance of its obligations hereunder and the
consummation of the Merger by it will not, (A) conflict with or violate
the certificate of incorporation or bylaws of the Company or any of its
subsidiaries, (B) subject to the making of the filings and obtaining the
approvals identified in Section 9(d)(ii), conflict with or violate any
law, rule, regulation, order, judgment or decree (collectively, "LAWS")
applicable to the Company or any of its subsidiaries or by which any
Property or asset of the Company or any of its subsidiaries is bound or
affected, or (C) except as disclosed in the Disclosure Schedule, conflict
with, result in any breach of, constitute a default (or an event which
with notice or lapse of time or both would become a default) under,
result in a loss or modification adverse to the Company or its
subsidiaries of any right or benefit under, give to others any right of
termination, amendment, acceleration, repurchase, repayment, increased
payments or cancellation of, or result in the creation of a lien or other
encumbrance on any Property or asset of the Company or any subsidiary
pursuant to, any note, bond, mortgage, indenture, contract, agreement,
lease, license, permit, franchise or other instrument or obligation,
whether written or oral (collectively, a "CONTRACT"), to which the
Company or any subsidiary is a party or by which the Company or any
subsidiary or any Property or asset of the Company or any subsidiary is
bound or affected, except, in the case of clauses (B) and (C), for any
such conflicts, violations or other consequences which would not,
individually or in the aggregate, prevent or delay in any material
respect the consummation of the Merger or prevent the Company from
performing its obligations under this Agreement in any material respect
and which, in any case, would not, individually or in the aggregate, have
a Company Material Adverse Effect.
(ii) The execution and delivery of this Agreement by the Company does
not, and the performance of its obligations hereunder and the
consummation of the Merger by it will not, require any consent, approval,
authorization or permit of, or filing with or notification to, any
Government Entity for or by any party, except (A) for applicable
requirements of (l) the Exchange Act (in the case of the Company only)
and the filing, of a certificate of merger under the DGCL, (2), to the
knowledge of the Company on the date hereof, the state insurance holding
company laws of the states previously agreed by the parties (in the case
of the Buyer only) and (3) the Hart-Scott-Rodino Antitrust Improvement
Act (the "HSR ACT") and (B) where the failure to obtain such consents,
approvals, authorizations or permits, or to make such filings or
notifications, would not, individually or in the aggregate, prevent or
delay in any material respect consummation of the Merger, or otherwise
prevent the Company from performing its obligations hereunder in any
material respect, and would not, individually or in the aggregate, have a
Company Material Adverse Effect.
(e) SECURITIES REPORTS AND FINANCIAL STATEMENTS. Except as set forth
on the Disclosure Schedule, each form, report, schedule, registration statement
and definitive proxy statement filed by the Company with the Securities and
Exchange Commission ("SEC") since December 31, 1995 and prior to the date hereof
(as such documents have been amended prior to the date hereof, collectively the
"COMPANY SEC REPORTS"), as of their respective dates, complied in all material
respects with the applicable requirements of the Securities Act and the Exchange
Act and the rules and regulations thereunder. Except as set forth in the
Disclosure Schedule, none of the Company SEC Reports, as of their respective
dates, contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, except for such statements, if any, as have been modified or
superseded by subsequent Company SEC Reports filed prior to the date hereof. The
consolidated financial statements of the Company and its subsidiaries included
in such reports comply in all material respects with applicable
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accounting requirements and with the published rules and regulations of the SEC
with respect thereto, have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved (except as may be indicated in the notes thereto or, in the case of the
unaided interim financial statements, as permitted by Form 10-Q of the SEC) and
fairly present (subject, in the case of the unaudited interim financial
statements, to normal year-end audit adjustments) the consolidated financial
position of the Company and its subsidiaries as of the dates thereof and the
consolidated results of their operations and cash flows for the periods then
ended. Except as set forth in the Disclosure Schedule, since December 31, 1996,
neither the Company nor any of its subsidiaries has incurred any liabilities or
obligations (whether absolute, accrued, fixed, contingent, liquidated,
unliquidated or otherwise and whether due or to become due) of any nature,
except liabilities, obligations or contingencies which (i) were incurred in the
ordinary course of business after such interim date and are consistent with past
practices, (ii) are disclosed in the Company SEC Reports filed after such date,
or (iii) would not, individually or in the aggregate, have a Company Material
Adverse Effect. Since December 31, 1996, there has been no change in any of the
significant accounting (including tax accounting) policies, practices or
procedures of the Company or any material subsidiary.
(f) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as contemplated by
this Agreement, as disclosed in any Company SEC Report or as set forth in the
Disclosure Schedule, since December 31, 1996, (i) the Company and its
subsidiaries have conducted their respective businesses only in the ordinary
course, consistent with past practice, and have not taken any action that would
be inconsistent with the covenants set forth in Section 8 if they had applied
during such period, and (ii) there has not occurred or arisen any event that,
individually or in the aggregate, has had or, insofar as reasonably can be
foreseen, is likely in the future to have, a Company Material Adverse Effect
other than any developments that generally affect the industry in which the
Company operates.
SECTION 10. REPRESENTATIONS AND WARRANTIES OF THE BUYER
The Buyer hereby represents and warrants to the Company that, as of the date
of this Agreement:
(a) ORGANIZATION AND QUALIFICATIONS. The Buyer is a corporation duly
incorporated or organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation and has the requisite power and
authority and all governmental permits, approvals and other authorizations
necessary to own, lease and operate its Properties and to carry on its business
as it is now being conducted, except for such exceptions as would not,
individually or in the aggregate, have a Material Adverse Effect on the Buyer
and its subsidiaries, taken as a whole (a "BUYER MATERIAL ADVERSE EFFECT").
(b) AUTHORITY RELATIVE TO THIS AGREEMENT. The Buyer has all necessary
corporate power and authority to execute and deliver this Agreement, to perform
its obligations hereunder and to consummate the Merger. The execution and
delivery of this Agreement by the Buyer and the consummation by it of the Merger
have been duly and validly authorized by all necessary corporate action and no
other corporate proceedings on the part of the Buyer is necessary to authorize
this Agreement or to consummate the Merger. This Agreement has been duly and
validly executed and delivered by the Buyer and, assuming the due authorization,
execution and delivery thereof by the Company, constitutes the legal, valid and
binding obligation of the Buyer, except as enforcement may be limited by
bankruptcy, insolvency, moratorium or other similar laws relating to creditors'
rights generally and by equitable principles.
(c) NO CONFLICT; REQUIRED FILINGS AND CONSENTS.
(i) The execution and delivery of this Agreement by the Buyer does
not, and the performance of its obligations hereunder and the
consummation of the Merger by it will not (A) conflict with or violate
the certificate of incorporation or bylaws of the Buyer, (B) subject to
the making of the filings and obtaining the approvals identified in
Section 10(c)(ii), conflict with or violate any Laws applicable to the
Buyer or by which any Property or asset of the Buyer is bound or
affected, or (C) conflict with or result in any breach of or constitute a
default (or an event which
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with notice or lapse of time or both would become a default) under,
result in the loss or modification in a manner materially adverse to the
Buyer of any material right or benefit under, or give to others any right
of termination, amendment, acceleration, repurchase or repayment,
increased payments or cancellation of, or result in the creation of a
lien or other encumbrance on any Property or asset of the Buyer pursuant
to, any Contract to which the Buyer is a party or by which the Buyer or
any Property or asset of the Buyer is bound or affected, except, in the
case of clauses (B) and (C), for any such conflicts or violations which
would not prevent or delay in any material respect the consummation of
the Merger, or otherwise, individually or in the aggregate, prevent the
Buyer from performing its obligations under this Agreement in any
material respect.
(ii) The execution and delivery of this Agreement by the Buyer does
not, and the performance of its obligations hereunder and the
consummation of the Merger by it will not, require any consent, approval,
authorization or permit of, or filing with or notification to, any
Governmental Entity for or by the Buyer, except (A) for applicable
requirements of (1) the insurance company holding laws of certain states
and (2) the HSR Act, and (B) where the failure to obtain such consents,
approvals, authorizations or permits, or to make such filings or
notifications, would not, individually or in the aggregate, prevent or
delay in any material respect consummation of the Merger, or otherwise
prevent the Buyer from performing its obligations hereunder in any
material respect.
SECTION 11. REPRESENTATIONS AND WARRANTIES OF THE BUYER SUBSIDIARY
The Buyer Subsidiary hereby represents and warrants to the Company that, as
of the date of this Agreement:
(a) ORGANIZATION AND QUALIFICATIONS. The Buyer Subsidiary is a
corporation duly incorporated or organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and has the
requisite power and authority and all governmental permits, approvals and other
authorizations necessary to own, lease and operate its Properties and to carry
on its business as it is now being conducted, except for such exceptions as
would not, individually or in the aggregate, have a Buyer Material Adverse
Effect.
(b) AUTHORITY RELATIVE TO THIS AGREEMENT. The Buyer Subsidiary has all
necessary corporate power and authority to execute and deliver this Agreement,
to perform its obligations hereunder and to consummate the Merger. The execution
and delivery of this Agreement by the Buyer Subsidiary and the consummation by
it of the Merger have been duly and validly authorized by all necessary
corporate action and no other corporate proceedings on the part of the Buyer
Subsidiary is necessary to authorize this Agreement or to consummate the Merger.
This Agreement has been duly and validly executed and delivered by the Buyer
Subsidiary and, assuming the due authorization, execution and delivery thereof
by the Company, constitutes the legal, valid and binding obligation of the Buyer
Subsidiary, except as enforcement may be limited by bankruptcy, insolvency,
moratorium or other similar laws relating to creditors' rights generally and by
equitable principles.
(c) NO CONFLICT; REQUIRED FILINGS AND CONSENTS.
(i) The execution and delivery of this Agreement by the Buyer
Subsidiary does not, and the performance of its obligations hereunder and
the consummation of the Merger by it will not (A) conflict with or
violate the certificate of incorporation or bylaws of the Buyer
Subsidiary, (B) subject to the making of the filings and obtaining the
approvals identified in Section 11(c)(ii), conflict with or violate any
Laws applicable to the Buyer Subsidiary or by which any Property or asset
of the Buyer Subsidiary is bound or affected, or (C) conflict with or
result in any breach of or constitute a default (or an event which with
notice or lapse of time or both would become a default) under, result in
the loss or modification in a manner materially adverse to the Buyer
Subsidiary of any material right or benefit under, or give to others any
right of termination,
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amendment, acceleration, repurchase or repayment, increased payments or
cancellation of, or result in the creation of a lien or other encumbrance
on any Property or asset of the Buyer Subsidiary pursuant to, any
Contract to which the Buyer Subsidiary is a party or by which the Buyer
Subsidiary or any Property or asset of the Buyer Subsidiary is bound or
affected, except, in the case of clauses (B) and (C), for any such
conflicts or violations which would not prevent or delay in any material
respect the consummation of the Merger, or otherwise, individually or in
the aggregate, prevent the Buyer Subsidiary from performing its
obligations under this Agreement in any material respect.
(ii) The execution and delivery of this Agreement by the Buyer
Subsidiary does not, and the performance of its obligations hereunder and
the consummation of the Merger by it will not, require any consent,
approval, authorization or permit of, or filing with or notification to,
any Governmental Entity for or by the Buyer Subsidiary, except (A) for
applicable requirements of (1) the insurance company holding laws of
certain states and (2) the HSR Act, and (B) where the failure to obtain
such consents, approvals, authorizations or permits, or to make such
filings or notifications, would not, individually or in the aggregate,
prevent or delay in any material respect consummation of the Merger, or
otherwise prevent the Buyer Subsidiary from performing its obligations
hereunder in any material respect.
SECTION 12. CONDITIONS TO THE COMPANY'S OBLIGATIONS
The obligation of the Company to consummate the Merger is subject to the
satisfaction of each of the following conditions:
(a) All waivers, consents, authorizations, orders, approvals or
expiration of waiting periods required under any Law or Contract to be
obtained by the Company in order to consummate the Merger shall have been
obtained, except where the failure to have obtained any such waiver,
consent, authorization, order or approval would not have a Company Material
Adverse Effect.
(b) The representations and warranties of the Buyer and the Buyer
Subsidiary set forth herein shall be true and correct in all respects as of
the date hereof, and as of the time the Merger is consummated, other than,
in all such cases, such failures to be true and/or correct as would not in
the aggregate reasonably be expected to have a Buyer Material Adverse
Effect; PROVIDED, HOWEVER, that if any of the representations and warranties
are already qualified in any respect by materiality or as to a Buyer
Material Adverse Effect, for purposes of this Section 12(b) such materiality
or Buyer Material Adverse Effect qualification will be in all respects
ignored (but subject to the overall standard as to Buyer Material Adverse
Effect set forth immediately prior to this proviso); and the Buyer and the
Buyer Subsidiary shall have complied in all material respects with all
covenants and agreements set forth herein to be performed by it.
(c) No injunction, restraining order or other order of any federal or
state court which prevents the consummation of the Merger shall be in
effect.
(d) No statute, rule or regulation shall have been enacted by any state
or governmental agency that would prevent the consummation of the Merger.
(e) The Stockholder Approval shall have been obtained.
SECTION 13. CONDITIONS TO THE BUYER'S AND THE BUYER SUBSIDIARY'S OBLIGATIONS
The respective obligations of the Buyer and the Buyer Subsidiary to
consummate the Merger are subject to the satisfaction of each of the following
conditions:
(a) All waivers, consents, authorizations, orders, approvals or
expiration of waiting periods required under any Law or Contract to be
obtained by any of the parties hereto in order to
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consummate the Merger shall have been obtained, except where the failure to
have obtained any waiver, consent, authorization, order or approval would
not have a Company Material Adverse Effect or a Buyer Material Adverse
Effect.
(b) The representations and warranties of the Company set forth herein
shall be true and correct in all respects as of the date hereof, and as of
the time the Merger is consummated, other than, in all such cases, such
failures to be true and/or correct as would not in the aggregate reasonably
be expected to have a Company Material Adverse Effect; PROVIDED, HOWEVER,
that if any of the representations and warranties is already qualified in
any respect by materiality or as to a Company Material Adverse Effect, for
purposes of this Section 13(b) such materiality or Company Material Adverse
Effect qualification will be in all respects ignored (but subject to the
overall standard as to Material Adverse Effect set forth immediately prior
to this proviso); and the Company shall have complied in all material
respects with all covenants and agreements set forth herein to be performed
by it.
(c) No injunction, restraining order or other order of any federal or
state court which prevents the consummation of the Merger shall be in
effect.
(d) No statute, rule or regulation shall have been enacted by any state
or governmental agency that would prevent the consummation of the Merger.
(e) Except as set forth in the Disclosure Schedule, no Company Material
Adverse Effect shall have occurred between March 5, 1997 and the Effective
Time other than any developments that generally affect the industry in which
the Company operates.
(f) The Stockholder Approval shall have been obtained.
SECTION 14. TERMINATION
This Agreement shall terminate at the earlier of:
(a) Such time as the parties shall mutually agree.
(b) At the option of the Company, on or after December 31, 1997, if by
that date all of the conditions set forth in Section 12 shall not have been
satisfied or waived.
(c) At the option of the Buyer or the Buyer Subsidiary, on or after
December 31, 1997, if by that date all of the conditions set forth in
Section 13 shall not have been satisfied or waived.
(d) At the option of the Company in accordance with Section 4(c),
provided the Company has complied with all provisions thereof, and provided
further that the Company simultaneously pays to the Buyer the sum of $2.4
million plus the Buyer's out-of-pocket costs (including, without limitation,
outside legal fees and expenses) and internal legal costs as the Buyer shall
reasonably determine (collectively, the "TERMINATION FEE AMOUNT") in
immediately available funds.
(e) At the option of the Buyer, if (i) the Board of Directors of the
Company or any committee of such Board of Directors shall have (A) withdrawn
or modified its approval or recommendation of this Agreement (or the
Acquisition Agreement) or the Merger, or (B) failed to recommend that the
stockholders of the Company vote in favor of the Merger, or (C) approved or
recommended any Acquisition Proposal other than the Merger, or (ii) the
Board of Directors of the Company or any committee of such Board of
Directors shall have resolved to do any of the foregoing. The Company shall
promptly following termination for any of the reasons set forth in this
clause (e) pay to the Buyer the Termination Fee Amount in immediately
available funds.
(f) At the option of any of the parties hereto if the stockholders of
the Company do not approve the Merger.
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In the event this Agreement is terminated pursuant to Section 14(f) because the
Company stockholders did not approve the Merger and prior to 18 months following
such termination the Company enters into a binding agreement for a Third Party
Transaction, the Company shall pay to the Buyer the Termination Fee Amount in
immediately available funds simultaneously with its entry into such binding
agreement.
SECTION 15. RECORD DATE
The Company agrees that the record date for determining stockholders
entitled to vote on (or give consents or exercise appraisal rights with respect
to) the Merger or any Third Party Transaction will be no earlier than 10
business days after the Buyer's receipt of all required approvals under the
insurance holding company laws of states with applicable jurisdiction, and the
expiration of the applicable waiting period under the HSR Act, with respect to
the Buyer's purchase of 1,145,703 shares of Company common stock from John J.
Hemmingson and 681,774 shares of Company common stock from Gary A. Black,
provided that, in the case of a Third Party Transaction, this Section 15 shall
not require the Company to set a record date later than December 31, 1997. This
Section 15 shall continue in effect (with respect to any Third Party
Transaction) notwithstanding any termination of this Agreement in accordance
with its terms or otherwise
SECTION 16. MISCELLANEOUS
(a) AMENDMENTS AND WAIVERS. This Agreement may not be modified or
amended except by an instrument or instruments in writing signed by the party
against whom enforcement of any such modification or amendment is sought. Any
party hereto may, in its sole election, solely as to itself and not as to any
other party hereto, only by an instrument in writing, waive compliance by
another party hereto with any term or provision hereof on the part of such other
party hereto to be performed or complied with. The waiver by any party hereto of
a breach of any term or provision hereof shall not be construed as a waiver of
any subsequent breach.
(b) ENTIRE AGREEMENT. This Agreement, the Consent Agreement dated
March 5, 1997 and the Business Loan Agreement dated as of March 31, 1997 each
between the Company and the Buyer, contain the entire agreement between the
parties hereto with respect to the transactions contemplated hereby and thereby.
This Agreement supersedes the Acquisition Agreement, except for the Disclosure
Schedule, which is incorporated into this Agreement. This Agreement is not
intended to confer upon any other person any rights or remedies hereunder.
(c) APPLICABLE LAW. This Agreement shall be exclusively governed by
and construed in accordance with the internal laws of the State of Delaware
without regard to its rules of conflicts of laws.
(d) EXPENSES. Except as otherwise included herein, in the event the
Merger contemplated hereby is not consummated for any reason, then all expenses
incurred by each party will be borne by the party incurring such expenses.
(e) DESCRIPTIVE HEADINGS, SECTION REFERENCES, DATE. The descriptive
headings contained herein are for convenient reference only and shall not affect
in any way the meaning or interpretation of this Agreement. Reference herein to
Sections refer, unless otherwise specified, to the designated Section of this
Agreement. The date of this Agreement is for identification only and is not
necessarily the date on which it was entered into.
(f) COUNTERPARTS. This Agreement and any amendments hereto may be
executed in any number of counterparts, each of which shall be deemed to be an
original but all of which together shall constitute but one agreement.
(g) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors. This
Agreement may not be assigned by any party without prior consent of all parties
hereto, provided that any party hereto may assign its rights and
A-12
obligations hereunder to any affiliate to implement the Merger, provided that
such affiliate agrees to be bound hereby, provided that such party remains
liable hereunder, and that such assignment does not adversely effect the Merger
from the perspective of the other parties.
(h) BINDING EFFECT. This Agreement shall, subject to the terms and
conditions hereof, be in all respects binding upon each of the Company and the
Buyer from and after the date hereof.
(i) SURVIVAL. None of the representations or warranties set forth in
Sections 9, 10 or 11 shall survive the consummation of the Merger.
(j) INDEMNIFICATION; INSURANCE. Following the Effective Time, the
Surviving Corporation will maintain in effect all rights to indemnification
existing in favor of any director, officer, employee or agent of the Company and
its subsidiaries (the "INDEMNIFIED PARTIES") as provided in its certificate of
incorporation, by-laws or in indemnification agreements with the Company or any
of its subsidiaries, all of which shall survive the consummation of the Merger
and shall continue in full force and effect for a period of not less than four
years from the Effective Time; PROVIDED, HOWEVER, that in the event any claim or
claims are asserted or made within such four-year period, all rights to
indemnification in respect of any such claim or claims shall continue until
final disposition of any and all such claims. It is understood and agreed that
the Surviving Corporation shall advance, indemnify, and hold harmless, as and to
the full extent permitted by applicable law, each Indemnified Party against any
losses, claims, damages liabilities, costs, expenses (including attorneys' fees
and expenses), judgments, fines and amounts paid in settlement in connection
with any threatened or actual claim, action, suit, proceeding or investigation
(whether asserted or arising before or after the Effective Time). In addition,
the Surviving Corporation shall cause to be maintained in effect for not less
than four years from the Effective Time any current policies of the directors'
and officers' liability insurance maintained by the Surviving Corporation;
PROVIDED, HOWEVER, that the Surviving Corporation will be permitted to
substitute therefor policies, issued by the Buyer or other insurers, of at least
the same coverage containing terms and conditions which are no less advantageous
and provided that such substitution shall not result in any gaps or lapses in
coverage with respect to matters occurring prior to the Effective Time;
PROVIDED, FURTHER, that the Surviving Corporation shall not be required to pay
an annual premium in excess of 200% of the last annual premium paid by the
Surviving Corporation prior to March 5, 1997 and if it is unable to obtain the
insurance required, it shall obtain as much comparable insurance as possible for
an annual premium equal to such maximum amount
SECTION 17. GLOSSARY
As used in this Agreement, the following terms have the meaning indicated:
ACQUISITION AGREEMENT--introductory paragraphs.
ACQUISITION PROPOSAL--Section 4(b).
ACQUISITION TRANSACTION--Section 4(b).
AGREEMENT--introductory paragraphs.
BENEFICIAL OWNERSHIP--Section 4(b).
BUYER--introductory paragraphs.
BUYER MATERIAL ADVERSE EFFECT--Section 10(a).
BUYER SUBSIDIARY--introductory paragraphs.
BUYER SUBSIDIARY COMMON STOCK--introductory paragraphs.
CERTIFICATES--Section 3.2(b).
CLOSING--Section 1.2.
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CLOSING DATE--Section 1.2.
COMMON STOCK--introductory paragraphs.
COMPANY--introductory paragraphs.
COMPANY SEC REPORTS--Section 9(e).
COMPANY MATERIAL ADVERSE EFFECT--Section 9(a).
CONTRACT-- ection 9(d)(i)(C).
DGCL--Section 1.1.
DISCLOSURE SCHEDULE--Section 3.4.
DISSENTING STOCKHOLDERS--Section 3.1(b)(i).
EFFECTIVE TIME--Section 1.3.
EXCHANGE ACT--Section 4(b).
GOVERNMENTAL ENTITY--Section 6.
GROUP--Section 4(b).
HSR ACT--Section 9(d)(ii)(A)(3).
INDEMNIFIED PARTIES--Section 16(j).
LAWS--Section 9(d)(i)(B).
MATERIAL ADVERSE EFFECT--Section 6.
MERGER--Section 1.1.
MERGER CONSIDERATION--Section 3.1(b)(i).
PAYING AGENT--Section 3.2(a).
PERSON--a natural individual, corporation, partnership, limited liability
company, trust, business trust, association or entity of any kind, including
without limitation a Governmental Entity.
PREFERRED STOCK--introductory paragraphs.
PROPERTY--any interest in real, personal or mixed property, whether tangible
or intangible, including without limitation cash.
OPTIONS--Section 3.4.
SEC--Section 9(e).
SHARE--Section 3.1(b)(i).
STOCKHOLDER APPROVAL--Section 9(c).
SUPERIOR PROPOSAL--Section 4(c).
SURVIVING CORPORATION--Section 1.1.
TERMINATION FEE AMOUNT--Section 14(d).
THIRD PARTY TRANSACTION--Section 4(b).
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement and Plan
of Merger.
CROP GROWERS CORPORATION
By: /s/ Lawrence T. Martinez
----------------------------------
Name: Lawrence T. Martinez
Title: Chief Executive Officer
FIREMAN'S FUND INSURANCE COMPANY
By: /s/ Harold N. Marsh, III
----------------------------------
Name: Harold N. Marsh, III
Title: Senior Vice President and
Treasurer
CG ACQUISITIONS CORP.
By: /s/ Harold N. Marsh, III
----------------------------------
Name: Harold N. Marsh, III
Title: Senior Vice President and
Treasurer
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EXHIBIT B
March 5, 1997
Board of Directors
Crop Growers Corporation
10895 Lowell, Suite 300
Overland Park, Kansas 66210
Gentlemen:
Crop Growers Corporation, a Delaware Corporation ("Crop Growers"), and
Fireman's Fund Insurance Company, a California corporation ("Fireman's Fund"),
contemplate entering into an acquisition agreement (the "Acquisition
Agreement"), dated as of the date hereof, providing for the acquisition by
Fireman's Fund through merger of all of the issued and outstanding shares of
common stock (the "Common Shares") of Crop Growers from all holders of Common
Shares other than Fireman's Fund and its affiliates (the "Public Shareholders").
It is contemplated that prior to the consummation of the merger, a subsidiary of
Fireman's Fund ("Acquisition Sub") will purchase all of the Common Shares now
owned by John Hemmingson and Gary Black, former Chief Executive Officer and
Executive Vice President of Crop Growers, respectively, for a purchase price of
$10.00 per share in cash, so that Messrs. Hemmingson and Black will not be
Public Shareholders. The Acquisition Agreement provides, among other things,
that at the Effective Time (as defined in the Acquisition Agreement).
Acquisition Sub will be merged into Crop Growers with the Common Shares held by
Public Shareholders being converted into the right to receive $10.25 per share
in cash (the "Cash Consideration"). The Acquisition Agreement provides that Crop
Growers will waive the standstill agreement to which Fireman's Fund is subject
in order for Fireman's Fund to exercise its right of first refusal under
existing agreements to purchase from Messrs. Hemmingson and Black 1,145,703 and
681,744 Common Shares, respectively, which shares represent approximately 23% of
Crop Grower's outstanding Common Shares.
You have requested Dean Witter Reynolds Inc.'s opinion ("Dean Witter"), as
investment bankers, as to the fairness, from a financial point of view, of the
Cash Consideration, taken as a whole, to the Public Shareholders.
In arriving at the opinion set forth below, we have, among other things:
(1) reviewed the Acquisition Agreement;
(2) reviewed the Annual Report on Form 10-K and related publicly
available financial information of Crop Growers for the two most recent
fiscal years ended December 31, 1994 and 1995, the Quarterly Reports on Form
10-Q of Crop Growers for the periods ended March 31, 1996, June 30, 1996 and
September 30, 1996, and the definitive Proxy Statement on Form 14A, dated
May 8, 1996;
(3) received the Right of First Refusal agreements between Fireman's
Fund and Messrs. Hemmingson and Black;
(4) reviewed the Chief Financial Officer's financial model of the income
statement, balance sheet and cash flow statement of Crop Growers for the
quarter ended December 31, 1996 and for the calendar years 1997 through 2006
created for the purpose of evaluation various financial alternatives (the
"Model");
(5) conducted discussions with members of senior management of Crop
Growers concerning the past and current business, operations, assets,
present financial condition and future prospects of Crop Growers;
(6) reviewed the historical reported market prices and trading activity
for Crop Growers' Common Shares;
B-1
(7) compared certain financial information and operating statistics
relating to Crop Growers with published financial information and operating
statistics relating to selected public companies that we deemed to be most
comparable to Crop Growers;
(8) compared the proposed Cash Consideration with the financial terms,
to the extent publicly available, of selected other recent acquisitions that
we deemed to be relevant;
(9) reviewed certain other information, including publicly available
information relating to the business, earnings, cash flow, assets and
prospects of Crop Growers; and
(10) reviewed such other financial studies and analyses and performed
such other investigations and took into account such other matters as we
deemed necessary.
In preparing our opinion, we have assumed and relied upon the accuracy and
completeness of all financial and other information supplied to us by Crop
Growers, or that is publicly available, and we have not independently verified
such information. We also have relied upon the management of Crop Growers, as to
the reasonableness and achievability of the financial results of Crop Growers as
set forth in the Model (and the assumptions and bases thereof) provided to us or
prepared on the basis of information and assumptions furnished to us, and with
your consent we have assumed that the Model has been reasonably prepared on the
basis reflecting the best currently available estimates and judgments of
management as to the future operating performance of Crop Growers. We have not
been requested to make, and we have not made, an independent appraisal or
evaluation of the assets, properties, facilities or liabilities of Crop Growers,
and we have not been furnished with any such appraisal or evaluation.
It should be noted that this opinion necessarily is based upon prevailing
market conditions and other circumstances and conditions as they exist and can
be evaluated at this time, and does not represent our opinion as to what the
actual value of the Common Shares will be after the date hereof.
In the past, we have acted as financial advisor to Crop Growers concerning a
strategic alliance with Fireman's Fund, which included an investment by
Fireman's Fund in Crop Growers, and we received a fee for our services.
We have acted as financial advisor to the Board of Directors of Crop Growers
in connection with this transaction and will receive a fee for our services, a
portion of which is contingent upon the consummation of the transaction.
On the basis of, and subject to the foregoing and other matters that we
consider pertinent, we are of the opinion that as of the date hereof the
proposed Cash Consideration to be paid for the Common Shares of the Public
Shareholders, taken as a whole, is fair, from a financial point of view, to such
Public Shareholders.
Very truly yours,
DEAN WITTER REYNOLDS INC.
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EXHIBIT C
SECTION 262 OF THE GENERAL
CORPORATION LAW OF THE STATE OF DELAWARE
Section 262 APPRAISAL RIGHTS. (a) Any stockholder of a corporation of this
State who holds shares of stock on the date of the making of a demand pursuant
to subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to Section 228 of this title shall be entitled to an appraisal by the
Court of Chancery of the fair value of his shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section Section 251, 252, 254, 257, 258, 263 or 264 of this
title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no appraisal
rights shall be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require for its
approval the vote of the holders of the surviving corporation as provided in
subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required by
the terms of an agreement of merger or consolidation pursuant to Section
Section 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this paragraph.
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(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are available
pursuant to subsections (b) or (c) hereof that appraisal rights are
available for any or all of the shares of the constituent corporations, and
shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of his shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation, a
written demand for appraisal of his shares. Such demand will be sufficient
if it reasonably informs the corporation of the identity of the stockholder
and that the stockholder intends thereby to demand the appraisal of his
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must do
so by a separate written demand as herein provided. Within 10 days after the
effective date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent corporation
who has complied with this subsection and has not voted in favor of or
consented to the merger or consolidation of the date that the merger or
consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to Section228
or Section253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days thereafter,
shall notify each of the holders of any class or series of stock of such
constituent corporation who are entitled to appraisal rights of the approval
of the merger or consolidation and that appraisal rights are available for
any or all shares of such class or series of stock of such constituent
corporation, and shall include in such notice a copy of this section;
provided that, if the notice is given on or after the effective date of the
merger or consolidation, such notice shall be given by the surviving or
resulting corporation to all such holders of any class or series of stock of
a constituent corporation that are entitled to appraisal rights. Such notice
may, and, if given on or after the effective date of the merger or
consolidation, shall, also notify such stockholders of the effective date of
the merger or consolidation. Any stockholder entitled to appraisal rights
may, within twenty days after the date of mailing of such notice, demand in
writing from the surviving or resulting corporation the appraisal of such
holder's shares. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such holder's shares. If such
notice did not notify stockholders of the effective date of the merger or
consolidation, either (i) each such constituent corporation shall send a
second notice before the effective date of the merger or consolidation
notifying each of the holders of any class or series of stock of such
constituent corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the surviving or
resulting corporation shall send such a second notice to all such holders on
or within 10 days after such effective date; provided, however, that if such
second notice is sent more than 20 days following the sending of the first
notice, such second notice need only be sent to each stockholder who is
entitled to appraisal rights and who has demanded appraisal of such holder's
shares in accordance with this subsection. An affidavit of the
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secretary or assistant secretary or of the transfer agent of the corporation
that is required to give either notice that such notice has been given
shall, in the absence of fraud, be prima facie evidence of the facts stated
therein. For purposes of determining the stockholders entitled to receive
either notice, each constituent corporation may fix, in advance, a record
date that shall be not more than 10 days prior to the date the notice is
given; provided, however, that if the notice is given on or after the
effective date of the merger or consolidation, the record date shall be such
effective date. If no record date is fixed and the notice is given prior to
the effective date, the record date shall be the close of business on the
day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw his demand for
appraisal and to accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and (d)
hereof, upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been received
and the aggregate number of holders of such shares. Such written statement shall
be mailed to the stockholder within 10 days after his written request for such a
statement is received by the surviving or resulting corporation or within 10
days after expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by one or more publications at least one week before the day
of the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion,
C-3
permit discovery or other pretrial proceedings and may proceed to trial upon the
appraisal prior to the final determination of the stockholder entitled to an
appraisal. Any stockholder whose name appears on the list filed by the surviving
or resulting corporation pursuant to subsection (f) of this section and who has
submitted his certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that he is not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged PRO RATA against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
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FORM OF PROXY CROP GROWERS CORPORATION
10895 LOWELL AVENUE, SUITE 300
OVERLAND PARK, KANSAS 66210
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS AUGUST , 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned appoints Lawrence T. Martinez and David E. Hill, and each of
them, with power to act without the other and with all the right of substitution
in each, the proxies of the undersigned to vote all shares of Crop Growers
Corporation (the "Company") held by the undersigned on July 15, 1997, at the
Special Meeting of Shareholders of the Company, to be held on August , 1997 at
9:00 a.m. local time at the offices of the Company, 10895 Lowell Avenue, Suite
300, Overland Park, Kansas 66210, and all adjournments thereof, with all powers
the undersigned would possess if present in person. All previous proxies given
with respect to the meeting are revoked.
Receipt of Notice of Special Meeting of Shareholders and Proxy Statement is
acknowledged by your execution of this proxy. Complete, sign, date, and return
this proxy in the addressed envelope--no postage required. Please mail promptly
to save further solicitation expenses.
1. Approval of Merger Agreement, / / FOR the Merger / / AGAINST the Merger / / ABSTAIN
dated May 1, 1997, by and among
Crop Growers Corporation, Fire-
man's Fund Insurance Company and
CG Acquisitions Corp.
(continued, and to be dated and signed, on other side)
2. To vote with discretionary authority upon such other matters as may come before the meeting. (Discretionary
authority will be only exercised with respect to votes in favor or abstentions.)
/ / APPROVED / / WITHHELD
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS PROVIDED BY THE UNDERSIGNED
SHAREHOLDER, THIS PROXY WILL BE VOTED "FOR" ITEM 1 LISTED HEREIN, UPON ALL OTHER
MATTERS, THE PROXIES SHALL VOTE AS THEY DEEM IN THE BEST INTERESTS OF THE
COMPANY.
SIGNATURE(S)
_______________________________________
_______________________________________
DATED: __________________________, 1997
INSTRUCTION: When shares are held by
joint tenants, all joint tenants should
sign. When signing as attorney,
executor, administrator, trustee,
custodian, or guardian, please give
full title as such. If shares are held
by a corporation, this proxy should be
signed in full corporate name by its
president or other authorized officer.
If a partnership holds the shares
subject to this proxy, an authorized
person should sign in the name of such
partnership.