SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
SCHEDULE 14D-9
Solicitation/Recommendation Statement
Pursuant to Section 14(d)(4) of the
Securities Exchange Act of 1934
__________
ALLIED Group, Inc.
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(Name of Subject Company)
ALLIED Group, Inc.
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(Name of Person(s) Filing Statement)
Common Stock, No Par Value
--------------------------
(Title of Class of Securities)
019220102
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(CUSIP Number of Class of Securities)
__________
GEORGE OLESON, ESQ.
Vice President and Corporate Counsel
ALLIED Group, Inc.
710 Fifth Avenue
Des Moines, Iowa 50391-2000
(515) 280-4211
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(Name, address and telephone number of person
authorized to receive notice and communications
on behalf of the person(s) filing)
With a copy to:
STEVEN OSTNER, ESQ.
Debevoise & Plimpton
875 Third Avenue
New York, New York 10022
(212) 909-6000
ITEM 1. SECURITY AND SUBJECT COMPANY.
The name of the subject company is ALLIED Group, Inc., an Iowa
corporation (the "Company"). The address of the principal executive offices of
the Company is 701 Fifth Avenue, Des Moines, Iowa 50391-2000. The title of the
class of equity securities to which this Statement relates is the common stock,
no par value (the "Shares"), of the Company.
ITEM 2. TENDER OFFER OF THE BIDDER.
This Statement relates to the tender offer by Nationwide Mutual
Insurance Company, an Ohio corporation ("Nationwide"), and Nationwide Group
Acquisition Corporation, an Ohio corporation and a wholly-owned subsidiary of
Nationwide ("Nationwide Sub" and, collectively with Nationwide, the "Bidder"),
disclosed in a Tender Offer Statement on Schedule 14D-1, filed with the
Securities and Exchange Commission (the "Commission") on May 19, 1998 (as the
same may be amended from time to time, the "Schedule 14D-1"), to purchase up to
30,634,052 Shares, at a price of $47 per Share, net to the seller in cash,
without interest, upon the terms and subject to the conditions set forth in the
Offer to Purchase, dated May 19, 1998 (the "Offer to Purchase"), and the related
Letter of Transmittal (which collectively constitute the "Offer").
According to the Schedule 14D-1, the address of the principal
executive offices of each of Nationwide and Nationwide Sub is One Nationwide
Plaza, Columbus, Ohio, 43215.
ITEM 3. IDENTITY AND BACKGROUND.
(a) The name and business address of the Company, which is the person
filing this Statement, are set forth in Item 1 above, which information is
incorporated herein by reference.
(b) Nationwide, in addition to commencing the Offer has also proposed
to the Board of Directors of ALLIED Mutual a merger of ALLIED Mutual into
Nationwide, and has indicated its willingness to acquire all of the outstanding
shares of common stock held by the public shareholders of ALLIED Life for $30 a
share. Nationwide has also offered to distribute $110 million of cash to ALLIED
Mutual's policyholders in connection with the merger. Certain of the directors
and officers of the Company are also directors and/or officers of ALLIED Mutual
and/or of ALLIED Life. A majority of the Company's directors Messrs, Carpenter,
Colby, Jacobson, Taylor, Timmons and Willis (the "Unaffiliated Directors"), are
not officers or directors of, or otherwise affiliated with, either ALLIED Mutual
or ALLIED Life. Except as described herein or in Annex A hereto, which is
incorporated herein by reference, there are no material contracts, agreements,
arrangements or understandings or any actual or potential conflicts of interest
between the Company or its affiliates and (i) any of the Company's executive
officers, directors or affiliates or (ii) Bidder and its executive officers,
directors or affiliates. Reference is made to the information contained under
the captions "Compensation of the Members of the Board of Directors and the
Outside Director Stock Purchase Plan," "Security Ownership of Directors and
Executive Officers," "Board Compensation Committee Report on Executive
Compensation" and "Compensation of Executive Officers" in the Company's proxy
statement dated March 27, 1998 relating to the Company's 1998 Annual Meeting
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of Stockholders (the "1998 Proxy Statement"), the relevant portions of which are
filed as Exhibit 1 hereto and are incorporated herein by reference.
ITEM 4. THE SOLICITATION OR RECOMMENDATION.
(a)-(b) The Board of Directors of the Company acting on the unanimous
recommendation of a committee (the "Committee") consisting of all of the
Unaffiliated Directors has unanimously determined to recommend that shareholders
do not tender their shares in response to the Offer at this time. The reasons
for this determination are as follows:
(i) Representatives of the Company have met with representatives of
Nationwide during the last several days to determine the terms, if any, on
which a negotiated transaction would be available. On June 1, Nationwide
stated it was prepared to increase the per Share price of its Offer to $48.25
as part of a negotiated merger agreement, and also to reduce the amount of
the termination fee that would be payable by the Company under certain
circumstances pursuant to Nationwide's merger agreement. On June 1, as
directed by the Board of Directors on the recommendation of the Committee,
Morgan Stanley informed Nationwide that the Board was prepared in principle
to recommend a transaction at that price and with the revised termination fee
provision, subject to negotiation of an acceptable transaction agreement.
(ii) Because negotiations with Nationwide concerning the proposed
transaction agreement are ongoing, the Board of Directors, acting on the
recommendation of the Committee, believes that it would be premature for
shareholders to tender their Shares in response to the Offer at this time
and recommends that Shareholders defer making a decision whether to tender
while the Board and its advisors continue discussions with Nationwide and
its advisors.
A copy of a press release communicating the Board's position is filed
as 3 hereto and is incorporated herein by reference.
June 1, 1998
Background. On January 26, 1998, John E. Evans, Chairman of the
Company, received a telephone call from Dimon R. McFerson, Chairman and Chief
Executive Officer of Nationwide Insurance Enterprise. In the call, Mr. McFerson
expressed Nationwide's interest in a possible transaction with the Company,
ALLIED Mutual Insurance Company ("ALLIED Mutual") and ALLIED Life Financial
Corporation ("ALLIED Life"; collectively with the Company and ALLIED Mutual,
"ALLIED").
On January 28, 1998, at the request of Mr. McFerson, Mr. Evans,
Douglas L. Andersen, President and Chief Executive Officer of the Company, and
other
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representatives of the Company met with representatives of Nationwide to
discuss Nationwide's interest in acquiring each of the Company, ALLIED Mutual
and ALLIED Life. After the January 28, 1998 meeting, Nationwide provided a
draft confidentiality agreement to Mr. Andersen which did not include customary
standstill provisions.
On February 6, 1998, Mr. McFerson and Mr. Andersen engaged in further
discussions by telephone regarding Nationwide's interest in acquiring the
Company, ALLIED Mutual and ALLIED Life. Mr. McFerson requested that the
Company, ALLIED Mutual and ALLIED Life agree to deal exclusively with
Nationwide. Mr. Andersen informed Mr. McFerson that the ALLIED companies would
not agree to deal exclusively with Nationwide, expressed concerns about the
absence of an acceptable confidentiality agreement and other elements of
Nationwide's proposal and stated that Nationwide's proposal could not be
considered formally until it was received in writing by the Company, ALLIED
Mutual and ALLIED Life. On February 10, 1998, the Company provided to
Nationwide its own form of confidentiality agreement, executed by the Company,
which included a customary standstill provision.
Also, on February 10, 1998, Nationwide sent draft merger agreements to
the Company, which provided for a transaction whereby Nationwide's wholly-owned
subsidiaries would acquire the Company and ALLIED Life and Nationwide would
merge with ALLIED Mutual. The draft merger agreements provided for the purchase
of the Shares for $47 per Share and the purchase of all outstanding shares of
ALLIED Life for $30 per share, subject to various conditions, including that the
acquisition of all three ALLIED companies close simultaneously. The draft
merger agreement with ALLIED Mutual provided for no distribution to ALLIED
Mutual's policyholders. Each of the merger agreements included provisions
requiring payment to Nationwide of termination fees, totaling $75 million in the
aggregate, plus expenses of Nationwide in the event of the termination of the
merger agreement under certain circumstances.
On February 17, 1998, at a joint meeting of the Boards of Directors of
the Company, ALLIED Mutual and ALLIED Life, Nationwide's proposal and proposed
merger agreements were discussed. Following the joint Board meeting, a special
meeting of the Board of Directors of the Company was convened. At that meeting
it was noted that Nationwide's proposal was contingent on the consummation of
transactions with all three ALLIED companies. The Board discussed the potential
difficulty in obtaining approval from ALLIED Mutual policyholders and ALLIED
Life shareholders, that the Company's employees and independent agents could
perceive the proposal and change in control unfavorably and that the Company
could suffer loss of business and disruption of its employee force. The Board
noted that Nationwide's proposal included an exclusivity provision which
restricted the Company from soliciting proposals from third parties and which
limited the Board's ability to accept a superior offer from a third party for a
period of 180 days. The Board also noted that Nationwide had refused to sign a
confidentiality agreement with a standstill provision that would prevent it from
making a hostile bid for a specified period of time after it had reviewed
confidential documents of the Company. The Board discussed the
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various regulatory approvals required before the acquisition could be approved
and the uncertainty of obtaining those approvals. Finally, the Board noted that
the substantial termination fees proposed by Nationwide presented additional
risk to the Company. The Board determined that the proposal was not in the best
interests of the Company and its shareholders and unanimously (with one member
absent) determined that the proposal should be rejected.
On February 19, 1998, at a special joint meeting of the Executive
Committees of the Company, ALLIED Mutual and ALLIED Life, Mr. Andersen was
authorized to advise Mr. McFerson that Nationwide's proposal had been rejected.
On February 19, 1998, Nationwide sent to the Company a form of
confidentiality agreement, signed on behalf of Nationwide and Nationwide Sub,
which again did not contain the standstill provision and certain other items
that the Company had proposed.
On February 20, 1998, Mr. Andersen informed Mr. McFerson via telephone
that the respective Boards of ALLIED had rejected Nationwide's proposal as
presented.
Later on February 20, 1998, Nationwide sent to the Company a letter
indicating that Nationwide was withdrawing the executed confidentiality
agreement that it had sent to the Company on February 19, 1998.
On May 1, 1998, Mr. McFerson telephoned Mr. Evans to express that
Nationwide wished to re-initiate contact with ALLIED. Mr. Evans indicated that
Nationwide should speak with Mr. Andersen, but requested that Nationwide delay
contacting Mr. Andersen for 30 days.
On May 18, 1998, Mr. McFerson made an unannounced visit to the
Company's Des Moines, Iowa offices and asked to see Mr. Andersen. However, Mr.
Andersen and other executive officers of the Company were out of the country.
Members of the Company's legal department met with Mr. McFerson, who stated that
the purpose of his visit was to announce a tender offer for all the Shares.
Mr. McFerson delivered three letters, addressed to each of the ALLIED companies,
which letters were also publicly released by Nationwide, communicating the
substance of the Offer.
Also, on May 18, 1998, Nationwide and Nationwide Sub filed a complaint
against the Company and its directors in the United States District Court for
the Southern District of Iowa seeking, among other things, an order compelling
the Company Board to approve the Offer and the Proposed Merger for purposes of
Section 490.1110 (the "Business Combination Statute," which is further discussed
under Item 8 below) of the Iowa Business Corporation Act (the "Iowa Corporation
Act"). A copy of this complaint is filed as Exhibit 4 hereto and is
incorporated by reference herein.
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Later on May 18, 1998, the Company issued a press release stating that
the Board would review the Offer and requesting shareholders not to tender their
Shares until they have been advised of the Board's position with respect to the
Offer. A copy of the press release is filed as Exhibit 5 hereto and is
incorporated by reference herein.
On May 19, 1998, the Directors of the Company convened by conference
call to discuss the Offer. At the recommendation of the Unaffiliated Directors,
the Directors authorized the retention of Morgan Stanley as the Company's
financial advisor concerning the Offer or any other acquisition transaction.
Also on May 19, Nationwide delivered two letters to the Company
requesting that the Company provide Nationwide with a list of the Company's
shareholders. The Company delivered letters to Nationwide, dated May 21, 1998
and May 22, 1998, advising Nationwide that, as permitted by law, the Company was
electing to deliver the Bidder's tender offer materials to the Company's
shareholders rather than provide Nationwide with a shareholder list.
On May 22, 1998, the Company's Board received a letter from Nationwide
stating that Nationwide intended to file a proxy statement that proposes to call
a special meeting of shareholders of the Company for the purpose of removing the
members of the Board and electing new directors who support the Offer.
On May 27, 1998, the Board of the Company met with management and the
Company's financial and legal advisors. The Board authorized the Committee to
conduct or supervise negotiations, if any, with Nationwide or with any other
party, on behalf of the Company; to make recommendations to the Board as to any
proposed transaction; to consult with ALLIED Mutual and ALLIED Life and their
financial advisors; and to give instructions to Morgan Stanley. Following the
meeting of the Board, the Committee met with the Company's financial and legal
advisors to discuss the Offer and the Company's response. The Committee
authorized Morgan Stanley to contact Nationwide's financial advisor, who had
expressed an interest in meeting, to discuss the possibility of a mutually
acceptable negotiated transaction.
On May 28, 1998, the Company, Nationwide and Nationwide Sub entered
into an agreement as to the confidentiality of settlement discussions on or
before June 2, 1998 regarding the litigation filed by Nationwide. A copy of the
confidentiality agreement is filed as Exhibit 6 hereto and is incorporated by
reference herein. Beginning on May 28, 1998, representatives of Morgan Stanley
(consulting with and under the supervision of the Committee) and representatives
of Nationwide's financial advisor met on several occasions to discuss the terms
of the Offer and whether a negotiated transaction could be achieved.
On June 1, Nationwide stated that it was prepared to increase the per
Share price of its Offer to $48.25 as part of a negotiated merger agreement, and
also to reduce the amount of the termination fee that would be payable under
certain circumstances pursuant
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to Nationwide's proposed merger agreement. On June 1, as directed by the Board
of Directors on the unanimous recommendation of the Committee, Morgan Stanley
informed Nationwide that the Board determined that it was prepared in principle
to recommend a transaction at that price and with the revised termination fee
provisions, subject to negotiation of an acceptable transaction agreement.
Discussions between representatives of the Company and representatives
of Nationwide are ongoing at this time regarding the terms of a mutually
acceptable transaction agreement.
ITEM 5. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED.
Pursuant to an engagement letter, dated May 22, 1998, the Company has
retained Morgan Stanley to render financial advisory services to the Company in
connection with Nationwide's proposal and such other matters as may be agreed
upon by the Company and Morgan Stanley. The Company has agreed to pay Morgan
Stanley: (i) an initial advisory fee of $250,000, payable immediately, and an
additional advisory fee of $75,000 per month for any month after an initial two-
month advisory period (collectively, the "Advisory Fees"); (ii) a fee of
$1,000,000 (the "Opinion Fee"), which becomes payable upon delivery by Morgan
Stanley of an opinion (whether oral or written, as requested by the Company) to
the Board of Directors of the Company or its shareholders in connection with the
Offer or any alternate transaction; and (iii) a final fee (the "Conclusion Fee")
of $6,000,000 (less the Advisory Fees and Opinion Fee) upon the first occurrence
of any of the following events: (a) Nationwide withdraws its Offer, (b) twelve
months from the date of the engagement letter, if no change of control (as
defined in the engagement letter) of the Company has occurred, or (c) the
Company is involved in an acquisition transaction or otherwise experiences a
change of control prior to that time.
The Company has also agreed to reimburse Morgan Stanley for its
reasonable out-of-pocket expenses, including reasonable fees and expenses of
counsel, and to indemnify Morgan Stanley and certain related persons against
certain liabilities in connection with their engagement including liabilities
under the federal securities laws.
The Company has retained Abernathy MacGregor Frank ("Abernathy") as
public relations adviser and Innisfree M&A Incorporated ("Innisfree") to assist
the Company with its communications to stockholders with respect to, and to
provide other services to the Company in connection with, the Offer. The
Company will pay Abernathy and Innisfree reasonable and customary compensation
for their respective services, and will reimburse Abernathy and Innisfree for
their reasonable out-of-pocket expenses incurred in connection therewith.
Except as described above, neither the Company nor any person acting
on its behalf has employed, retained or compensated any other person to make
solicitations or recommendations to security holders on its behalf with respect
to the Offer.
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ITEM 6. RECENT TRANSACTIONS AND INTENT WITH RESPECT TO SECURITIES.
(a) Except as described in Annex B hereto, which is incorporated by
reference herein, there have been no transactions in the Shares during the past
60 days by the Company or, to the best knowledge of the Company, by any
executive officer, director, affiliate or subsidiary of the Company.
(b) To the best knowledge of the Company, no executive officer,
director, affiliate or subsidiary of the Company has any present intention to
tender any Shares pursuant to the Offer. The foregoing statement does not
include any Shares over which, or with respect to which, any such executive
officer, director or affiliate acts in a fiduciary or representative capacity or
is subject to the instructions of a third party with respect to such decision to
tender.
ITEM 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY THE SUBJECT COMPANY.
(a) - (b) See the response to Item 4, concerning discussions between
the Company and Nationwide to discuss the possibility of a mutually acceptable
negotiated transaction involving the acquisition by Nationwide of the Company.
As of the date hereof, there have been contacts with third parties as to their
possible interest in acquiring or merging with the Company, but negotiations
regarding potential transactions with third parties have not yet commenced.
Except as stated in the preceding two sentences, no negotiation is being
undertaken or is underway by the Company in response to the Offer which relates
to or would result in: (i) an extraordinary transaction such as a merger or
reorganization, involving the Company or any subsidiary of the Company; (ii) a
purchase, sale or transfer of a material amount of assets by the Company or any
subsidiary of the Company; (iii) a tender offer for or other acquisition of
securities by or of the Company; or (iv) any material change in the present
capitalization or dividend policy of the Company.
The Board has determined, by resolution adopted at the Board meeting
on June 1, 1998, that disclosure of the substance of negotiations concerning, or
the possible terms of, or potential parties to, any such transactions or
proposals prior to an agreement in principle with respect thereto would
jeopardize continuation of such negotiations and has directed that no such
disclosure be made unless and until such agreement in principle or a definitive
agreement has been reached.
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ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED.
Insurance Law Matters.
The Company, which is incorporated in Iowa, directly or through its
subsidiaries, owns three property-casualty insurance companies domiciled in Iowa
and one excess and surplus lines insurance company domiciled in Arizona.
Accordingly, the acquisition of Shares pursuant to the Offer may require filings
with, and approvals of, state insurance regulatory authorities (the "Insurance
Commissions" or "Insurance Commissioners") under the respective insurance codes
(the "Insurance Codes") of Iowa and Arizona as well as Ohio, the domiciliary
state of Nationwide.
The Insurance Codes of Iowa and Arizona and the rules that have been
promulgated thereunder each contain provisions applicable to the acquisition of
"control" of a domestic insurer, including a presumption of control that arises
from the ownership of ten percent (10%) or more of the voting securities of a
domestic insurer or of a person that controls a domestic insurer. Generally,
any person seeking to acquire voting securities, such as the Shares, in an
amount that would result in such person controlling, directly or indirectly, a
domestic insurer must, together with any person ultimately controlling such
person, file with the relevant Insurance Commissioner certain information
concerning the acquisition of control (generally known as a "Form A") and send a
copy of each Form A to the domestic insurer. On the date of the Offer,
Nationwide and Nationwide Sub made Form A filings with the Insurance Commissions
of Arizona and Iowa and sent copies thereof to the relevant domestic insurer.
In both Iowa and Arizona, the Form A filings trigger public hearing
requirements and commence statutory periods within which decisions must be
rendered approving or disapproving the acquisition of control of the Company by
Nationwide and Nationwide Sub The periods within which hearings must be
commenced or decisions rendered generally do not begin until the relevant
Insurance Commissioner has deemed the Form A filing complete. The Insurance
Commissioner has discretion to request that additional information be furnished
before it deems the Form A filing complete. The Insurance Codes provide certain
statutory standards for the approval or the disapproval of the acquisition of
control of the Company. However, the Insurance Codes also permit the Insurance
Commissioners discretion in determining whether such standards have been met.
The Insurance Commissioner has discretion to request that Nationwide
and Nationwide Sub furnish additional information before such Insurance
Commissioner deems the Form A filing complete. The Iowa and Arizona Insurance
Codes both provide that a public hearing must be commenced within thirty (30)
days after the Form A is filed and that the relevant Insurance Commissioner must
make the determination within thirty (30) days after the conclusion of such
hearing.
9
The Iowa and Arizona Insurance Codes both generally require the
relevant Insurance Commissioner to approve the application for the acquisition
of control unless the Insurance Commissioner determines, after a public hearing,
that such application should be disapproved on one or more prescribed regulatory
grounds. The Iowa and Arizona Insurance Codes also contain provisions providing
generally for judicial review of an Insurance Commissioner's order.
On May 21, 1998, the Iowa Department of Insurance provided to the
Company notice of a hearing to be held on June 9, 1998 with respect to the Form
A approval. No notice of a hearing has been provided by the Arizona Department
of Insurance.
The Company is reviewing the Form A's filed by Nationwide in both Iowa
and Arizona and, depending on the outcome of ongoing discussions with
Nationwide, may seek to reschedule the hearing scheduled for June 9, 1998 and
may seek discovery in connection with the Form A's in both Arizona and Iowa.
State Corporation Law Requirements
In the Offer to Purchase, Nationwide has stated its intention, as soon
as practicable following consummation of the Offer, to seek to have the Company
consummate a merger with Nationwide Sub with the Company continuing as the
surviving corporation (the "Proposed Merger"), pursuant to which each then
remaining Share outstanding (other than Shares owned by Nationwide or any of its
wholly owned subsidiaries, Shares held in the treasury of the Company, and
Shares held by shareholders who perfect any appraisal rights under the Iowa
Corporation Act) would be converted into the right to receive $47.00 net per
Share in cash. The Proposed Merger, including its timing and details, is subject
to, among other things, the provisions of the Iowa Corporation Act, including
the Business Combination Statute. In general, under the Iowa Corporation Act and
the Company Articles (as defined below), the approval of the Company's Board and
the affirmative vote of the holders of a majority of the outstanding Shares and
the shares of 6 3/4% Series Preferred Stock of the Company (including any shares
owned by Nationwide or Nationwide Sub), voting together as a single class, would
be required to approve the Proposed Merger.
The Business Combination Statute generally provides that an Iowa
corporation may not engage in a "Business Combination," defined to encompass a
variety of transactions including mergers, with an "Interested Shareholder,"
defined generally as a person that is the owner of ten percent (10%) or more of
the outstanding voting stock of the corporation, for three years after the
shareholder became an Interested Shareholder, unless (a) the Business
Combination is approved by the corporation's board before the shareholder
becomes an Interested Shareholder, (b) the Interested Shareholder, upon
consummation of the transaction which resulted in the shareholder becoming an
Interested Shareholder, owned at least eighty-five percent (85%) of the voting
shares of the corporation, excluding those shares owned by officers and
directors, or (c) after the shareholder becomes an Interested Shareholder, the
Business Combination is approved
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by the corporation's board and authorized by the affirmative vote of at least
two-thirds of the voting stock, excluding that of the Interested Shareholder.
Pending Litigation
In addition to the litigation filed by Nationwide and described in the
response to Item 4, the following litigation is pending that relates to the
Offer or that is otherwise significant.
On May 21, 1998, a class action on behalf of all shareholders of the
Company was filed in Iowa District Court in and for Polk County, Iowa.
Plaintiffs seek to compel the Company to consider the Offer or, in the
alternative, to recover damages caused by an alleged breach of the fiduciary
duty owed by the Board of Directors to its shareholders. A copy of this
complaint is filed as Exhibit 7 hereto and is incorporated by reference herein.
On December 31, 1997, a complaint was filed by Mary M. Rieff, a
policyholder of ALLIED Mutual, in the Iowa District Court in and for Polk County
Iowa, against the Company and certain other individuals who are or were officers
and/or directors of ALLIED Mutual and the Company. The complaint, an alleged
policyholder derivative action brought on behalf of ALLIED Mutual, asserts,
among other things, (a) that the defendants were responsible for the
-
inappropriate transfer of ALLIED Mutual's corporate assets, the seizure of
certain corporate opportunities, and the implementation of an improper de facto
demutualization without informing or compensating policyholders or receiving the
appropriate approval from regulatory authorities; (b) that this allegedly
-
wrongful demutualization began on or about January 1, 1985 and was accomplished
through transfers of ALLIED Mutual's assets to the Company and to the individual
defendants for inadequate consideration; (c) that the individual defendants
-
breached fiduciary duties owed to ALLIED Mutual, wasted its corporate assets,
and intentionally interfered with its contracts, prospective business advantage,
and business relationships; and (d) that the defendants improperly transferred
-
substantial ownership of and control over the Company and ALLIED Mutual's
insurance business. The complaint further asserts that as a result of the
foregoing, ALLIED Mutual and its policyholders have suffered damages in excess
of
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$500 million. The complaint requests an accounting of the assets allegedly
wrongfully transferred to the Company and compensation to ALLIED Mutual for the
value of such assets, for the seizure of corporate opportunities, and for the de
factor demutualization of ALLIED Mutual. The complaint also asks for certain
other relief, including attorneys' fees and costs, equitable relief and
interest, and restitution for any assets wrongfully transferred or conveyed. A
copy of this complaint is filed as Exhibit 8 hereto and is incorporated by
reference herein. On June 1, 1998, the plaintiff filed a motion seeking to
enjoin the defendant directors of ALLIED Mutual from considering, negotiating or
approving any transaction on behalf of ALLIED Mutual with Nationwide or any
third party because of alleged conflicts of interest of the members of the Board
of Directors of ALLIED Mutual. A copy of the motion is filed as Exhibit 2 hereto
and incorporated herein by reference.
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
Exhibit 1 Pages 7-8, 10-12 and 14-16 of the Company's Proxy
Statement, dated March 27, 1998, in connection with
the May 5, 1998 Annual Meeting of Stockholders.
Exhibit 2 Motion filed in Rieff v. ALLIED Group in the
Iowa District Court in and for Polk County on June 1,
1998./*/
Exhibit 3 Text of Press Release issued by the Company on June
2, 1998./*/
Exhibit 4 Complaint filed by Nationwide and Nationwide Sub in
the United States District Court for the Southern
District of Iowa on May 18, 1998.
Exhibit 5 Text of Press Release issued by the Company on May
18, 1998.
Exhibit 6 Confidentiality Agreement, dated May 28, 1998,
among the Company, Nationwide and Nationwide Sub
Exhibit 7 Complaint filed in Brickell v. Andersen in the Iowa
District Court in and for Polk County on May 21,
1998.
Exhibit 8 Complaint filed in Rieff v. Allied Group in the
Iowa
District Court in and for Polk County on December
31, 1997.
Exhibit 9 Amended and Restated ALLIED Group Intercompany
Operating Agreement, dated August 25, 1993, by and
among ALLIED Mutual Insurance Company, ALLIED
Group, Inc., ALLIED Life Financial Corporation and
certain of their subsidiaries.
- ------------------
* to be filed by amendment.
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Exhibit 10 First Amendment, dated November 1, 1993, to
Amended and Restated ALLIED Group Intercompany
Operating Agreement by and among ALLIED Mutual
Insurance Company, ALLIED Group, Inc., ALLIED
Life Financial Corporation and certain of their
subsidiaries.
Exhibit 11 Second Amendment, dated May 16, 1994, to
Amended and Restated ALLIED Group Intercompany
Operating Agreement by and among ALLIED Mutual
Insurance Company, ALLIED Group, Inc., ALLIED
Life Financial Corporation and certain of their
subsidiaries.
Exhibit 12 Third Amendment, dated December 15, 1994, to
Amended and Restated ALLIED Group Intercompany
Operating Agreement by and among ALLIED Mutual
Insurance Company, ALLIED Group, Inc., ALLIED
Life Financial Corporation and certain of their
subsidiaries.
Exhibit 13 Second Amended and Restated Reinsurance Pooling
Agreement, dated December 14, 1992, by and
between ALLIED Mutual Insurance Company, AMCO
Insurance Company, ALLIED Property and Casualty
Insurance Company and Depositors Insurance
Company.
Exhibit 14 First Amendment to Second Amended and Restated
Reinsurance Pooling Agreement, dated February 18,
1993, by and between ALLIED Mutual Insurance
Company, AMCO Insurance Company, ALLIED
Property and Casualty Insurance Company and
Depositors Insurance Company.
Exhibit 15 Second Amendment to Second Amended and Restated
Reinsurance Pooling Agreement, dated December 13,
1994, by and between ALLIED Mutual Insurance
Company, AMCO Insurance Company, ALLIED
Property and Casualty Insurance Company and
Depositors Insurance Company.
Exhibit 16 Third Amendment to Second Amended and Restated
Reinsurance Pooling Agreement, dated May 5, 1998,
by and between ALLIED Mutual Insurance Company,
AMCO Insurance Company, ALLIED Property and
Casualty Insurance Company and Depositors Insurance
Company.
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Exhibit 17 Amended and Restated Management Information
Services Agreement, dated January 24, 1997 (to be
effective March 1, 1996), by and among AMCO
Insurance Company, ALLIED Group Information
Systems, Inc., ALLIED Mutual Insurance Company,
ALLIED Group, Inc., ALLIED General Agency
Company, ALLIED Group Mortgage Company,
ALLIED Group Leasing Corporation, ALLIED Life
Financial Corporation, ALLIED Life Insurance
Company, ALLIED Life Brokerage Agency, ALLIED
Group Merchant Banking Corporation, ALLIED
Group Insurance Marketing Company, The Freedom
Group, Inc., and Midwest Printing Services, Ltd.
Exhibit 18 First Amendment, dated February 24, 1997, to
Amended and Restated Management Information
Services Agreement.
Exhibit 19 The ALLIED Group Joint Marketing Agreement,
dated August 30, 1993, by and between ALLIED Life
Insurance Company, ALLIED Mutual Insurance
Company, AMCO Insurance Company, ALLIED
Property and Casualty Insurance Company, and
Depositors Insurance Company.
Exhibit 20 First Amendment to the ALLIED Group Joint
Marketing Agreement, dated November 1, 1993, by
and between ALLIED Life Insurance Company,
ALLIED Mutual Insurance Company, AMCO
Insurance Company, ALLIED Property and Casualty
Insurance Company, and Depositors Insurance
Company.
Exhibit 21 Stock Rights Agreement, dated July 5, 1990, by and
between ALLIED Mutual Insurance Company and
ALLIED Group, Inc.
Exhibit 22 First Amendment, dated November 11, 1992, to the
Stock Rights Agreement by and between ALLIED
Mutual Insurance Company and ALLIED Group, Inc.
Exhibit 23 Agency Agreement, dated September 1, 1991, by and
between Allied Group Insurance Marketing Company,
Depositors Insurance Company, and AMCO Insurance
Company.
14
Exhibit 24 Amendment, dated February 1, 1992, to the Agency
Agreement relating to the addition of ALLIED
Property and Casualty Insurance Company as a party
thereto.
Exhibit 25 Addendum A to the Agency Agreement, attached to
the Agency Agreement effective January 1, 1994.
Exhibit 26 Intercompany Cash Concentration Fund Agreement,
effective as of April 24, 1995, by and among AID
Finance Services, Inc. ALLIED Mutual Insurance
Company, ALLIED Group, Inc., AMCO Insurance
Company, ALLIED Property and Casualty Insurance
Company, Depositors Insurance Company Western
Heritage Insurance Company, ALLIED Group Leasing
Corporation, ALLIED Group Information Systems,
Inc., Midwest Printing Services, Ltd., The Freedom
Group, Inc., ALLIED General Agency Company,
ALLIED Life Financial Corporation, ALLIED Life
Insurance Company, ALLIED Group Merchant
Banking Corporation, ALLIED Life Brokerage
Agency, Inc., ALLIED Group Insurance Marketing
Company and ALLIED Group Medical Plan Trust.
Exhibit 27 Aggregate Catastrophe Excess of Loss Reinsurance
Agreement, dated May 15, 1997, by and among
AMCO Insurance Company, ALLIED Property and
Casualty Insurance Company, Depositors Insurance
Company, Motor Club of Iowa Insurance Company,
and General Reinsurance Corporation and ALLIED
Mutual Insurance Company (the Subscribing
Reinsurers).
Exhibit 28 Severance Pay Plan, dated May 30, 1998 of the
Company.
Exhibit 29 Form of Severance Agreement.
Exhibit 30 Amendment, dated June 1, 1998 to the Company's
Employee Stock Ownership Plan.
Exhibit 31 Consulting Agreement, dated December 14, 1994 by and between
John E. Evans and ALLIED Group, Inc., ALLIED Mutual Insurance
Company, and ALLIED Life Financial Corporation.
Exhibit 32 First Amendment to Consulting Agreement, dated December 18, 1996
by and between John E. Evans and ALLIED Group, Inc., ALLIED Mutual
Insurance Company, and ALLIED Life Financial Corporation.
Exhibit 33 Second Amendment to Consulting Agreement, dated May 13, 1997, by
and between John E. Evans and ALLIED Group, Inc., ALLIED Mutual
Insurance Company, and ALLIED Life Financial Corporation.
Exhibit 34 Third Amendment to Consulting Agreement, date March 24, 1998, by
and between John E. Evans and ALLIED Group, Inc., ALLIED Mutual
Insurance Company, and ALLIED Life Financial Corporation.
15
SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this Statement is true, complete and
correct.
Dated: June 2, 1998
ALLIED GROUP, INC.
By: /s/ Sally J. Malloy
---------------------------
Name: Sally J. Malloy
Title: Corporate Secretary
16
ANNEX A
Certain Transactions and Relationships
Intercompany Operating Agreement
The Company and its subsidiaries are parties to an Intercompany Operating
Agreement ("IOA") with ALLIED Life, ALLIED Mutual, and each of their respective
subsidiaries. The following summary of the IOA is qualified in its entirety by
reference to the full text of the IOA and the amendments thereto, copies of
which are filed as Exhibits 9 through 12 hereto and are incorporated herein by
reference. The IOA provides for the sharing of employees, office space, agency
forces, data processing, and other services and facilities. The IOA extends
through December 31, 2004 and continues thereafter subject to any party
providing two years notice that such party intends to cease participation.
The Company leases to ALLIED Mutual and its subsidiaries (except for ALLIED
Life) the employees utilized in their operations for a fee and reimbursement of
personnel costs based on certain allocation methods. The Company is obligated
to provide the entire requirements for employees to ALLIED Mutual and its
subsidiaries (other than ALLIED Life), but ALLIED Mutual reserves the right to
hire employees independently rather than leasing them from the Company. The
Company has the right to determine the compensation and benefits of all leased
employees. However, if the Company wishes to adopt or amend any employee
benefit plan or program and pass on the increased costs thereof with respect to
employees leased by ALLIED Mutual, it must obtain the approval of ALLIED Mutual
(or a joint Compensation Committee consisting of directors of the Company and
ALLIED Mutual). The IOA contains a covenant not to compete that binds each of
the Company, ALLIED Life, and ALLIED Mutual not to engage in a business that
competes with the products or markets of any
other party or such party's subsidiaries for the term of the IOA and five years
thereafter.
Any disputes regarding the use of occupancy of facilities or the terms on
which property is leased or used are to be referred to the Coordinating
Committee, consisting of two directors of each of the Company, ALLIED Mutual and
ALLIED Life, for resolution. Decisions of the Coordinating Committee must be
unanimous and are binding on the parties. If an issue is not resolved by the
Coordinating Committee, it will be submitted to arbitration. In such
arbitration, each party to the dispute selects one arbitrator, and if such
dispute involves only two parties, such arbitrators select third arbitrator.
During 1997, the Company received revenues of $2.6 million for employees
leased to ALLIED Mutual and certain of ALLIED Mutual's subsidiaries,
substantially all of which represented cost reimbursement. The IOA also
provides for the leasing by ALLIED Mutual to the Company of substantially all of
the office space utilized by the Company and the provision of data processing
services by the Company to ALLIED Mutual and its subsidiaries. The Company paid
to ALLIED Mutual rent expense for office space of $3.6 million for the year
ended December 31, 1997. ALLIED Mutual, the Company, and ALLIED Life share
agency forces as well as other services and facilities.
Pooling Agreement
ALLIED Mutual and the Company's three property-casualty subsidiaries, AMCO
Insurance Company ("AMCO"), ALLIED Property and Casualty Insurance Company
("ALLIED Property and Casualty") and Depositors Insurance Company
("Depositors"), are parties to a reinsurance pooling agreement in which the
Company's subsidiaries in the aggregate were 64% participants in 1997. The
following summary of the Pooling Agreement is qualified in its entirety by
reference to the full text of the Pooling Agreement and the amendments thereto,
copies of which are filed as Exhibits 13 through 16 hereto and are incorporated
herein by reference. The Pooling Agreement provides that ALLIED Mutual, ALLIED
Property and Casualty, and Depositors cede to AMCO (the pool administrator)
premiums, losses, allocated loss settlement expenses, commissions, premium
taxes, service charge income, and dividends to policyholders and assume from
AMCO an amount of the pooled property-casualty business equal to their
participation in the pooling agreement. The agreement provides that AMCO will
pay certain underwriting expenses, unallocated loss settlement expenses, and
premium collection expenses for all of the pool participants and receive a fee
equal to a specified percentage of premiums. AMCO currently charges each of the
other pool participants 12.85% of written premiums for underwriting services,
7.25% of earned premiums for unallocated loss settlement expenses, and 0.75% of
earned premiums for premium collection services. During 1997, ALLIED Mutual
paid AMCO $71 million in fees under the pooling agreement.
A-2
In the event of a change of control of the Company, ALLIED Mutual may, in
its sole discretion at any time after such change of control, (i) terminate the
Pooling Agreement as well as the MIS Agreement and IOA upon six months' notice
to the Company, AMCO, APC and Depositors, (ii) extend the term of all three
agreements for up to 10 additional years beyond December 31, 2004 upon six
months' notice to the Company, AMCO, APC and Depositors, or (iii) allow the
agreements to continue in effect. A change of control is any event whereby a
person, group or entity unaffiliated with the Company or ALLIED Mutual acquires
the ownership of 50% or more of the voting stock of the Company. The Pooling
Agreement is not assignable.
In the event of a change of control (whenever ownership of 50% or more of
the voting stock of ALLIED Life is acquired by a nonaffiliated party) of ALLIED
Life, either the Company or ALLIED Mutual may (i) terminate the IOA and the MIS
Agreement (as defined below) on 6 months notice to ALLIED Life, (ii) extend the
term of both agreements for up to 10 years beyond December 31, 2004 upon six
months' notice, or (iii) allow the agreements to remain in effect without
change.
In the event of a change of control (whenever ownership of 50% or more of
the voting stock of the Company is acquired by a nonaffiliated party) of the
Company, ALLIED Mutual may (i) terminate all three of the IOA, the Pooling
Agreement (as defined below), and the MIS Agreement on six months' notice to the
party with respect to which a change of control takes place, (ii) extend the
term of all three agreements for up to 10 years beyond December 31, 2004 upon
six months' notice, or (iii) allow the agreements to remain in effect without
change. ALLIED Life enjoys the same rights of termination on a change of
control of the Company with respect to the IOA and the MIS Agreement.
Management Information Services Agreement
The Company, ALLIED Mutual, ALLIED Life, and other affiliated companies are
parties to a Management Information Services Agreement ("MIS Agreement") with
AMCO, whereby AMCO provides certain computer services, printing, equipment
leasing, and mail and communication services to affiliates on a fee basis. The
following summary of the MIS Agreement is qualified in its entirety by reference
to the full text of the MIS Agreement and the amendments thereto, copies of
which are filed as Exhibits 17 and 18 hereto and are incorporated herein by
reference. The agreement terminates on December 31, 2004 and has an extension
provision similar to that in the IOA described above. Any disputes under this
agreement are to be referred to the Coordinating Committee for resolution.
Decisions of the Coordinating Committee must be unanimous and are binding on the
parties. If an issue is not resolved by the Coordinating Committee, it will be
submitted to arbitrators for resolution. For the year 1997, amounts paid to
AMCO and certain subsidiaries of the Company by ALLIED Mutual, ALLIED Life and
their subsidiaries under the MIS Agreement were $2.5 million.
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In the event of a change of control of ALLIED Life, either the Company or
Mutual may, in its sole discretion at any time after such change of control,
(i) terminate the MIS Agreement and IOA upon six months' notice to ALLIED Life,
(ii) extend the term of the MIS Agreement and IOA for up to 10 additional years
beyond December 31, 2004 upon six months' notice to ALLIED Life, or (iii) allow
the agreements to continue in effect. A change of control is any event whereby
a person, group or entity unaffiliated with ALLIED Life or ALLIED Mutual
acquires the ownership of 50% or more of the voting stock of ALLIED Life. In
the event of a change of control of the Company, ALLIED Mutual may, in its sole
discretion at any time after such change of control, (i) terminate the Pooling
Agreement, the MIS Agreement and IOA upon six months' notice, (ii) extend the
term of all three agreements for up to 10 additional years beyond December 31,
2004 upon six months' notice to the Company, AMCO, ALLIED Property and Casualty
and Depositors, or (iii) allow the agreements to continue in effect. ALLIED
Life enjoys the same rights with respect to the MIS Agreement and the IOA in the
event of a change of control of the Company. A change of control is any event
whereby a person, group or entity unaffiliated with the Company or ALLIED Mutual
acquires the ownership of 50% or more of the voting stock of the Company.
Joint Marketing Agreement
AMCO, ALLIED Property and Casualty, and Depositors are parties to the
ALLIED Group Joint Marketing Agreement ("JMA") with ALLIED Mutual and ALLIED
Life Insurance Company ("ALIC"). The following summary of the JMA is qualified
in its entirety by reference to the full text of the JMA and the amendments
thereto, copies of which are filed as Exhibits 19 and 20 hereto and are
incorporated herein by reference. The JMA requires ALLIED Mutual and the
Company's property-casualty subsidiaries to promote to their customers and
agents the sale of the products of ALIC. The JMA provides for payment by ALIC
to AMCO (as pool administrator for the property-casualty companies) of an annual
access fee of $100,000 plus an annual new production incentive fee ("NPIF"),
calculated based on the percentage increase from the preceding year's production
credit premiums for ALIC produced by the independent property-casualty agencies
representing ALLIED Mutual, AMCO, ALLIED Property and Casualty, and Depositors
("ALLIED agencies"). The annual NPIF is not payable unless production credit
premiums increase by at least 10% over the prior year and is capped at an
increase of 25% over the prior year. For the year ended December 31, 1997, the
fee incurred by ALIC under the JMA totaled $100,000. The JMA also provides for
joint systems development, including joint data bases of customers and agents,
multiple account billing systems, marketing plans and promotions, and other
systems to be developed. Development costs are to be allocated on a mutually
agreeable basis reflecting projected and actual utilization of the systems.
The JMA continues to the year 2008 and continues thereafter subject to
termination on two years notice given by any party. The JMA contains a non-
compete provision structured along product lines which are applicable during the
term of the JMA and for a period of ten years thereafter. The non-compete
provision prevents
A-4
ALLIED Mutual and the property-casualty subsidiaries of the Company, directly or
indirectly through any subsidiary, affiliate, joint venture or partnership from
selling life insurance or annuities in the states where ALIC now sells these
life products (or on termination of the JMA, any states where the life insurance
and annuity products are sold by ALIC). ALLIED Mutual and the property-casualty
subsidiaries, which are not licensed to sell life insurance or annuity products,
do not operate in all the states in which ALIC operates. The JMA non-compete
provision also prevents ALIC from offering property-casualty products in states
in which ALLIED Mutual and the property-casualty subsidiaries of the Company now
operate. In the event of a change of control of ALIC or ALLIED Life (whenever
ownership of 50% or more of the voting stock is acquired by a nonaffiliated
party), the Company, ALLIED Mutual, or any of the Company's property-casualty
subsidiaries may (i) terminate it upon six months' notice; (ii) extend the term
for up to ten additional years beyond 2008; or (iii) allow the JMA to continue
in effect without change. Those three rights are also given to ALIC in the event
of a change of control of the Company, any of its property-casualty subsidiaries
or ALLIED Mutual. Disputes are to be resolved by the Coordinating Committee.
Decisions of the Coordinating Committee must be unanimous and are binding on the
parties. If the Coordinating Committee fails to resolve an issue, it would be
submitted to arbitration. In such arbitration, one arbitrator will be appointed
jointly by ALLIED Mutual and the Company's property-casualty subsidiaries and a
second arbitrator will be appointed by ALLIED Life. Both arbitrators so selected
will jointly select a third arbitrator.
Other Arrangements and Transactions
The Company and ALLIED Mutual are parties to a Stock Rights Agreement which
expires in 2005. Under the Stock Rights Agreement, ALLIED Mutual is entitled to
nominate and the Company is required to use its best efforts to cause the
election or retention of a number of members of the Company's Board of Directors
in proportion to ALLIED Mutual's percentage ownership of the total number of
shares of the Company's voting stock outstanding at the time of nomination. In
addition, the Company is required to elect to its Executive Committee at least
one Company director who has been nominated by ALLIED Mutual but who is not an
officer or employee of ALLIED Mutual, and the Company must limit the number of
directors serving on the Executive Committee to five at any time. The Stock
Rights Agreement restricts the ability of ALLIED Mutual to grant proxies to
other than affiliated individuals and to solicit other stockholders of the
Company. ALLIED Mutual has incidental registration rights and three demand
registration rights with respect to the 6-3/4% Preferred. The preceding summary
of the Stock Rights Agreement is qualified in its entirety by reference to the
full text of the Stock Rights Agreement and the amendment thereto, copies of
which are filed as Exhibits 21 and 22 hereto and are incorporated herein by
reference.
A-5
The Company and its affiliates pool their excess cash into a short-term
investment fund pursuant to the Intercompany Cash Concentration Fund Agreement.
The fund, administered by AID Finance Services, Inc. (an affiliate of the
Company), also issues short-term loans (30 days or less) to affiliated companies
in accordance with the current intercompany borrowing policy. At December 31,
1997, the Company had several unsecured notes payable totalling $5.9 million,
bearing interest rate at 8.8%. The Company and its affiliates pay to AID Finance
Services, Inc. a management fee (5 basis points of invested assets) which is
offset against investment income. At December 31, 1997, $8.3 million was
invested in the fund by the Company and its subsidiaries, which is carried as a
short-term investment. Interest earned by the Company and its subsidiaries from
the fund during 1997 was $477,000. Interest expense paid to AID Finance
Services, Inc. during 1997 amounted to $424,000. The preceding summary of the
Intercompany Cash Concentration Fund Agreement is qualified in its entirety by
reference to the full text of the Intercompany Cash Concentration Fund
Agreement, a copy of which is filed as Exhibit 26 hereto and is incorporated
herein by reference.
ALLIED Group Insurance Marketing Company ("AGIMC"), a wholly-owned
subsidiary of AID Finance Services, Inc., markets insurance products for the
Company's property-casualty subsidiaries on a commission basis pursuant to an
Agency Agreement. The Company's share of commissions paid to AGIMC was $3.7
million for the year ending December 31, 1997. The Agency Agreement and
amendments thereto are filed as Exhibits 23 through 25 hereto and are
incorporated herein by reference.
The Company paid premiums to ALLIED Life for term life insurance on the
Company's employee group in the amount of $468,000 in 1997.
The property-casualty subsidiaries of the Company paid premiums to ALLIED
Mutual in the amount of $2.9 million in 1997 for ALLIED Mutual's participation
in a reinsurance agreement with General Re-Insurance Company. There were
recoveries from ALLIED Mutual in the amount of $2 million. The reinsurance
agreement for 1997 is filed as Exhibit 27 hereto and is incorporated by
reference herein.
On December 31, 1997, State Street Bank and Trust Company, as the ESOP
Trustee, purchased for the ESOP Trust 18,865 shares of Common Stock from the
Company for $540,000.
AMCO administers many of the bank accounts for the affiliated ALLIED
companies. During the fiscal year 1997, AMCO issued checks in payment of
certain transactions between affiliated ALLIED companies and the companies of
certain directors of the Company. During 1997, ALLIED Mutual, as owner of the
ALLIED office buildings, paid $214,000 for construction services to Taylor Ball,
of which John P. Taylor, a director of the Company, is CEO and Chairman. It is
anticipated that in 1998 ALLIED Mutual will continue to use the construction
services of Taylor Ball and
A-6
that AMCO will issue the checks on behalf of ALLIED Mutual in payment for the
construction services.
During the year ended December 31, 1997, ALLIED Mutual, the Company, and
its subsidiaries paid $1 million in fees and media costs to J.D. Evans &
Associates, of which Julie Evans (daughter of John E. Evans) is a stockholder.
Donald S. Willis, a Director of the Company, is a majority stockholder of
Willis and Moore, Inc., a general insurance agency. During 1997, ALLIED Mutual,
AMCO, ALLIED Property and Casualty, and Depositors paid $233,000 in property-
casualty commissions and profit share to Willis and Moore, Inc. These
commissions and profit share were paid on the same basis and terms as those paid
to unrelated agencies.
During 1997, directors and executive officers of the Company purchased
insurance or obtained residential mortgages from the Company or its subsidiaries
on terms comparable to those offered in the normal course of business to
nonaffiliated customers. In addition, corporations of which Company directors
are executive officers purchased insurance from the Company's subsidiaries and
ALLIED Mutual in the ordinary course of business during 1997.
Amendment to Employee Stock Ownership Plan
On June 1, 1998, the Board of Directors of the Company, acting upon the
recommendation of the Compensation Committee of the Board, amended the ALLIED
Group Employee Stock Ownership Plan ("ESOP") to provide that participants in the
ESOP (including executive officers) will be fully vested in their accounts upon
the occurrence of a "Change in Control" (as defined below) and to clarify that
surplus assets following such a Change in Control will generally be allocated
based on the same formula applicable to employer contributions. The amendment
to the ESOP is filed as Exhibit 30 hereto and is incorporated by reference
herein.
For purposes of the foregoing, a "Change in Control" shall be deemed to
have occurred upon the first to occur of the following:
(i) Any person other than (a) a trustee or other fiduciary holding
securities under an employee benefit plan of the Company, (b) a
corporation owned directly or indirectly by the shareholders of the
Company in substantially the same proportions as their ownership of
stock of the Company, or (c) ALLIED Mutual, is or becomes the
beneficial owner, directly or indirectly, of securities of the Company
representing twenty percent (20%) or more of the total voting power
represented by the Company's then outstanding voting securities; or
A-7
(ii) During any period of two (2) consecutive years, individuals who at the
beginning of such period constitute the Board plus any new Director
(a) whose election by the Board or nomination for election by the
Company's shareholders was approved by a vote of at least two-thirds
(2/3) of the Directors at the beginning of the period or whose
election or nomination for election was previously so approved or (b)
whose nomination for election by the Company's shareholders was made
pursuant to the Stock Rights Agreement between the Company and ALLIED
Mutual, cease for any reason to constitute a majority thereof; or
(iii) The shareholders of the Company approve a merger or consolidation of the
Company with any other corporation (and such merger or consolidation is
in fact consummated), other than a merger or consolidation which would
result in the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or
by being converted into voting securities of the surviving entity) at
least eighty percent (80%) of the total voting power represented by the
voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or the shareholders of
the Company approve a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the Company of all or
substantially all the Company's assets , provided that such merger,
consolidation, liquidation, sale or disposition, as the case may be, is
actually consummated.
Amendment to John Evans Consulting Agreement
The consulting agreement between the Company, ALLIED Mutual, ALLIED Life
and John Evans, which is described in the 1998 Proxy Statement, was amended on
March 24,1998 to provide for a decrease in the annual compensation payable to
Mr. Evans from $180,000 to $120,000. Such annual compensation is consideration
for consulting services rendered by Mr. Evans and is prorated among the Company,
ALLIED Mutual and ALLIED Life. The consulting agreement and the amendments
thereto are filed as Exhibits 31 to 34 hereto and are incorporated herein by
reference.
Change of Control Provisions in Long-Term Management Incentive Plan
As discussed in the 1998 Proxy Statement, the Company maintains a Long-Term
Management Incentive Plan (the "Long-Term Plan") which provides for the award of
stock options, stock appreciation rights ("SAR's") and shares of restricted
stock. On March 10, 1998, the following option grants were made to executive
officers of the Company: Douglas L. Andersen - 25,000 options, W. Kim Austen -
7,500 options, Steven A. Biggi - 15,000 options, Marla J. Franklin - 8,000
options, James J. Hachenbucher - 10,000 options, Michael D. Holmes - 15,000
options, Steven P. Larsen - 15,000 options, Charles H. McDonald - 5,000 options,
Michael L. Pollard - 12,000 options, Stephen S. Rasmussen - 18,000 options,
Scott E. Reddig - 10,000 options,
A-8
Jamie H. Shaffer - 15,000 options, Edward E. Sullivan - 10,000 options and Kirt
A. Walker - 7,500 options. Additionally, on May 30, 1998, Paul J. Curran was
granted 5,000 shares of restricted stock pursuant to the Long-Term Plan. The
Long-Term Plan provides that upon a change of control (as defined in the Long-
Term Plan), all options and SAR's shall become immediately exercisable, and any
restriction periods and restrictions imposed on restricted stock will lapse.
Amendment to Stock Option Plans
On May 30, 1998, the Compensation Committee of the Company's Board of
Directors, seeking to provide parallel treatment of employee stock options upon
a change in control, determined that it would interpret the Company's Restated
and Amended Stock Option Plan and Nonqualified Stock Option Plan (together, the
"Option Plans") in the same manner as the Long Term Plan with respect to a
change in control. On June 1, 1998, the Board of Directors approved and
ratified the action of the Compensation Committee.
Severance Plan and other Agreements
On May 30, 1998, the Compensation Committee of the Company's Board of
Directors, following publication of the Offer and after consideration of the
potentially destabilizing effects of the pendency of such proposal on the morale
and retention of Company employees, approved the adoption by the Company of a
severance policy applicable to the Company's salaried and hourly employees and
approved the entry by the Company into separate severance agreements (the
"Severance Agreements") with executives and certain other employees of the
Company. On June 1, 1998, the Board of Directors approved and ratified these
actions of the Compensation Committee. The following is a summary of the ALLIED
Group, Inc. Severance Pay Plan (the "Severance Pay Plan"). This summary is
qualified in its entirety by reference to the full text of the Severance Plan, a
copy of which is filed as Exhibit 28 hereto and is incorporated herein by
reference.
The Severance Plan provides for certain benefits to eligible employees
following an involuntary termination of employment or Company-approved
resignation. The benefits consist of a lump sum payment equal to one week's
base salary for each full calendar year of employment and continuation of health
benefits for approximately the same period as is used to calculate the lump sum
payment. Benefit continuation terminates when the employee becomes eligible to
receive benefits from another employer. An employee is not eligible to receive
severance benefits if his termination of employment is due to death, transfer of
employment to an affiliate or successor of the Company or for "Cause."
"Cause" is generally defined as with respect to the termination of an
eligible employee's employment with the Company, termination (or deemed
termination) because the employee has consistently failed to function as
required by Company
A-9
standards. In the event an employee's employment terminates for any reason and
the plan administrator subsequently determines that Cause for termination
existed at the time the employee's employment terminated, such employee shall be
deemed to have been terminated for Cause.
Enhanced benefits are provided to employees who are terminated, whose
employment has been adversely affected, or who resign with the Company's
approval following a change in control (as defined above). The enhanced
benefits consist of an additional lump sum payment equal to employee's base
salary for a period equal to the greater of three months or from the date of
termination of employment through the first anniversary of the change in
control, benefit continuation for the additional period, and outplacement
services to be provided at the expense of the Company.
The Severance Agreement, the form of which is filed as Exhibit 29 hereto
and is incorporated herein by reference, generally provides that in the event of
any involuntary termination or constructive termination of employment (including
a material reduction in responsibilities, a reduction in base pay or incentive
compensation opportunities or a involuntary relocation) within the two year
period following a change in control an employee who is a party to such an
agreement would receive, in lieu of any other severance, a lump sum payment
equal to one year's base pay plus the employee's highest bonus over the
preceding two years and benefit continuation for eighteen months following the
termination of employment (or until the employee becomes eligible for benefits
under new employer). For a small number of employees, the benefit would be a
lump sum severance payment equal to two times annual base salary plus the
employee's highest bonus over preceding two years and benefit continuation for
eighteen months following the termination of employment (or until the employee
becomes eligible for benefits under new employer). In the event that such
severance payments would subject the employee to an excise tax imposed under
section 4999 of the Internal Revenue Code of 1986, as amended, the amount of the
severance otherwise payable will generally be reduced to avoid the imposition of
such excise tax.
The Company has offered Severance Agreements that provide for a severance
equal to two times the employee's base salary and higher bonus over the
preceding two years to the following executive officers of the Company: Douglas
L. Andersen, Michael D. Holmes, and Stephen S. Rasmussen. The Company has also
offered such agreements to six other employees, who are not executive officers.
The Company has offered Severance Agreements that provide for a severance
equal to the employee's base salary and higher bonus over the preceding two
years to the following officers and other senior executives of the Company:
Cheryl M. Critelli, Paul J. Curran, Marla J. Franklin, Sally Malloy, Charles H.
McDonald, George T. Oleson, and Jamie H. Shaffer. The Company has also offered
such agreements to 34 other employees, who are not executive officers.
A-10
The Company has calculated that the maximum aggregate lump sum that could
be payable pursuant to all of the Severance Agreements described above
(including non-executive officers), assuming termination of each of these
individuals, is approximately $9.2 million.
A-11
ANNEX B
ITEM 6(a)
(i) The Company. In response to a sharp decline in the market price of the
Company's Shares following the announcement on May 5, 1998 of changes to its
Pooling Agreement, the Company announced an increase in its previously
authorized stock repurchase program. Between May 7, 1998 and May 14, 1998, the
Company repurchased in the open market an aggregate of 557,600 Shares pursuant
to its previously announced stock repurchase program on the date, in the amounts
and at the prices listed below:
Date of Purchase Number of Shares Price per Share Total
May 7, 1998 125,000 $26.0000 $3,256,250.00
May 8, 1998 25,000 $26.1875 $ 655,937.50
May 8, 1998 100,000 $26.0000 $2,605,000.00
May 11, 1998 25,000 $27.0000 $ 676,250.00
May 11, 1998 51,000 $27.0000 $1,379,550.00
May 12, 1998 164,100 $27.1250 $4,459,417.50
May 13, 1998 29,000 $27.6250 $ 802,575.00
May 13, 1998 16,600 $27.6634 $ 460,042.44
May 14, 1998 21,900 $27.4977 $ 603,294.63
The Company has not purchased any Shares since May 14, 1998.
(ii) ALLIED Group, Inc.'s Executive Officers and Directors.
On April 23, 1998, Charles H. McDonald, Vice President of the Company, sold
9,000 Shares at a price of $31.6806 per Share.
On April 24, 1998, Mr. McDonald sold 2,000 Shares at a price of $31.5625
per Share.
On April 27, 1998, Mr. McDonald sold 1,000 Shares at a price of $31.5000
per Share.
On April 28, 1998, Steve A. Biggi, Regional Vice President of certain
subsidiaries, exercised outstanding stock options to acquire 3,936 Shares at a
price per Share that ranged between $10.778 and $17.889 and sold 1,968 Shares
the same day at a price per Share of $31.4375. He exercised 843 cash-only SARs
with exercise prices of from $10.778 to $17.889 and a fair market value of
$31.563.
On April 29, 1998, W. Kim Austen, Regional Vice President of certain
subsidiaries, exercised outstanding stock options to acquire 15,184 Shares at a
price per Share that ranged between $10.7778 and $17.8889 and sold 12,684 Shares
the same day at a price per Share of $30.7147. He exercised 844 cash-only SARs
at exercise prices of from $10.778 to $17.8889 and a fair market value of
$30.7813.
On May 7, 1998, Douglas L. Andersen, Chief Executive Officer and President
of the Company acquired 474 Shares at a price of $26.6875 per Share.
On May 11, 1998, Jamie H. Shaffer, Senior Vice President and Chief
Financial Officer of the Company, acquired 500 Shares at a price of $27.00 per
Share.
On May 12, 1998, Harold S. Carpenter, a Director of the Company, acquired
10,000 Shares at a price of $27.1875 per Share.
On May 13, 1998, Michael D. Holmes, Vice President of the Company,
exercised outstanding stock options to acquire 5,625 Shares at a price per Share
of $17.1667.
On May 14, 1998, Harold S. Carpenter, a Director of the Company, acquired
5,000 Shares at a price of $27.5000 per Share.
(iii) Employee Stock Purchase Plan
Other transactions include regular on-going acquisitions through the
Company's Employees Stock Purchase Plan.
B-2