Registration
No. 333-150327
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
AMENDMENT
NO. 1
TO
FORM
S-4
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
FMG
ACQUISITION CORP.
(Exact
name of registrant as specified in its charter)
Delaware
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|
6770
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|
75-3241964
|
(State
or other jurisdiction
of
incorporation or
organization)
|
|
(Primary Standard Industrial Classification Code
Number)
|
|
(I.R.S. Employer
Identification No.)
|
Four
Forest Park, Second Floor
Farmington,
Connecticut 06032
(860)
677-2701
(Address,
including zip code, and telephone number, including area code, of registrant’s
principal executive offices)
Chairman,
President and
Chief
Executive Officer
Four
Forest Park, Second Floor
Farmington,
Connecticut 06032
(860)
677-2701
(Name,
address including zip code, and telephone number, including area code, of agent
for service)
Copies
to:
Douglas
S. Ellenoff, Esq.
Adam
S. Mimeles, Esq.
Ellenoff
Grossman & Schole LLP
150
East 42nd
Street
New
York, New York 10017
(212)
370-1300
(212)
370-7889—Fax
|
Carolyn
T. Long, Esq.
Steven
W. Vazquez, Esq.
Foley
& Lardner LLP
100
North Tampa Street, Suite 2700
Tampa,
Florida 33602
(813)
229-2300
(813)
221-4210—Fax
|
Approximate
date of commencement of proposed sale to the public:
As soon
as practicable after this Registration Statement becomes effective and all
other
conditions to the merger contemplated by the merger agreement described in
the
enclosed proxy statement/prospectus have been satisfied or waived.
If
any of
the securities being registered on this form are to be offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box.
o
If
this
Form is filed to register additional securities for an offering pursuant to
Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.
o
:
If
this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.
o
.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.
Large
accelerated filer
o
Accelerated filer
o
Non-accelerated
filer
o
Smaller
reporting company
x
CALCULATION
OF REGISTRATION FEE
Title of Each Class of
Security to Be Registered
|
|
Amount Being
Registered
|
|
Proposed Maximum
Offering Price Per Security(1)
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|
Proposed Maximum
Aggregate Offering Price
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Amount of
Registration Fee
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Shares
of Common Stock(2)
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8,750,000
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$
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8.00
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$
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70,000,000
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$
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2,751
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Total
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8,750,000
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|
|
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$
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70,000,000
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$
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2,751
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(3)
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(1)
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Based
on the market price of the common stock for the purpose of calculating
the
registration fee pursuant to Rule
457(f)(1).
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(2)
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Represents
8,750,000 shares of common stock to be issued to members of United
Insurance Holdings, L.C. in exchange for their membership
units.
|
The
Registrant hereby amends this registration statement on such date or dates
as
may be necessary to delay its effective date until the Registrant shall file
a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the registration statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
The
information in this proxy statement/prospectus is not complete and may be
changed. We may not sell these securities until the Securities and Exchange
Commission declares our registration statement effective. This proxy
statement/prospectus is not an offer to sell these securities and is not
soliciting an offer to buy these securities in any state where the offer or
sale
is not permitted.
SUBJECT
TO COMPLETION DATED JUNE 13, 2008
PROXY
STATEMENT FOR SPECIAL MEETING OF STOCKHOLDERS
AND
PROSPECTUS FOR UP TO 8,750,000 SHARES OF COMMON STOCK OF
FMG
ACQUISITION CORP.
Proxy
Statement/Prospectus dated [
], 2008
and
first
mailed to stockholders on or about [
], 2008
We
are pleased to announce the boards of directors of FMG Acquisition Corp. (“FMG”
or the “Company”), United Insurance Holdings, L.C., (“United”) and United
Subsidiary Corp., a newly-incorporated Florida corporation and a wholly-owned
subsidiary of FMG (“United Subsidiary”), have agreed to the purchase of all of
the membership units of United by FMG, and to effect a merger whereby United
Subsidiary will merge with and into United, with United surviving as a
wholly-owned subsidiary of FMG. We are sending you this document to ask for
your
vote for the approval and adoption of this transaction, as well as for the
approval and adoption of several related proposals.
On
April 2, 2008, the Company entered into an Agreement and Plan of Merger (the
“Merger Agreement”) pursuant to which United Subsidiary agreed to merge with and
into United, and United has agreed, subject to receipt of the merger
consideration from FMG, to become a wholly-owned subsidiary of FMG (the
“Merger”). If the stockholders of the Company approve the transactions
contemplated by the Merger Agreement, FMG, through United Subsidiary, which
was
newly incorporated in order to facilitate the Merger contemplated thereby,
will
merge pursuant to a merger transaction summarized as follows:
(i)
FMG has
formed a transitory merger subsidiary, United Subsidiary Corp., and will merge
such subsidiary with and into United, with United surviving; and
(ii)
United
will, as a result, become wholly-owned by FMG.
United’s
members will receive consideration of up to $100,000,000 consisting
of:
(i)
$25,000,000 in cash;
(ii)
8,750,000 shares of FMG common stock, par value $.0001 per share (assuming
an
$8.00 per share value); and
(iii)
up to
$5,000,000 of additional consideration will be paid to the members of United
in
the event certain net income targets are met by United, as set forth more
particularly herein.
Our
units, common stock and warrants are traded on the OTC Bulletin Board under the
symbols FMGQU, FMGQ and FMGQW, respectively. On June 11, 2008, our units,
common stock and warrants had a closing price of $7.62, $7.28 and $0.35,
respectively.
The
registration statement of which this proxy statement/prospectus is a part
relates to the offering by FMG of up to 8,750,000 shares of FMG common
stock.
IF
YOU RETURN YOUR PROXY CARD WITHOUT AN INDICATION OF HOW YOU DESIRE TO VOTE,
YOU
WILL NOT BE ELIGIBLE TO HAVE YOUR STOCK CONVERTED INTO A PRO RATA PORTION OF
THE
TRUST ACCOUNT IN WHICH A SUBSTANTIAL PORTION OF OUR IPO NET PROCEEDS ARE HELD.
YOU MUST AFFIRMATIVELY VOTE AGAINST THE MERGER PROPOSAL AND DEMAND WE CONVERT
YOUR STOCK INTO CASH NO LATER THAN THE VOTE ON THE MERGER PROPOSAL TO EXERCISE
YOUR CONVERSION RIGHTS. IN ORDER TO CONVERT YOUR SHARES OF COMMON STOCK, YOU
MUST ALSO PRESENT OUR STOCK TRANSFER AGENT WITH YOUR PHYSICAL STOCK CERTIFICATE
AT OR PRIOR TO THE SPECIAL MEETING. SEE “SPECIAL MEETING OF
STOCKHOLDERS—CONVERSION RIGHTS” FOR MORE SPECIFIC
INSTRUCTIONS.
SEE
ALSO “RISK FACTORS”, BEGINNING ON PAGE 20
FOR
A DISCUSSION OF VARIOUS FACTORS YOU SHOULD CONSIDER IN CONNECTION WITH THE
MERGER.
Enclosed
is our Notice of
Special Meeting and proxy statement and proxy card. Your vote is very important.
Whether or not you plan to attend the Special Meeting, please take the time
to
vote by marking your vote on your proxy card, signing and dating the proxy
card,
and returning it to us in the enclosed envelope. The Special Meeting will be
held
at on
at .
The
Company’s Board of Directors unanimously recommends Company stockholders vote
FOR approval and adoption of the Merger Agreement, as well as all other
proposals contained herein.
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Very
truly yours,
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Gordon
G. Pratt
Chairman,
President and Chief Executive
Officer
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Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these securities or determined if the attached proxy
statement/ prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
UNTIL ,
2008, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR
NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
IS
IN ADDITION TO THE DEALERS’ OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
FMG
ACQUISITION CORP.
Four
Forest Park
Farmington,
Connecticut 06032
NOTICE
OF SPECIAL MEETING OF STOCKHOLDERS
TO
BE HELD
ON ,
2008
TO
THE
STOCKHOLDERS OF FMG ACQUISITION CORP.:
NOTICE
IS HEREBY GIVEN that a Special Meeting of stockholders of FMG Acquisition Corp.,
a Delaware corporation (“FMG” or the “Company”), relating to the proposed
acquisition of all of the issued and outstanding membership units of United
Insurance Holdings, L.C., which Special Meeting will be held at 10:00 a.m.
Eastern Time, on
,
2008, at the offices
of .
At
the Special Meeting, you will be asked to consider and vote upon the
following:
(i)
the Merger Proposal—the proposed acquisition of all of the issued membership
units of United Insurance Holdings, L.C., a Florida limited liability company,
pursuant to the Agreement and Plan of Merger, dated as of April 2, 2008, by
and
among the Company, United and United Subsidiary, and the transactions
contemplated thereby (“Proposal 1” or the “Merger Proposal”);
(ii)
the First Amendment Proposal—the amendment to the Company’s amended and restated
certificate of incorporation (the “First Certificate of Incorporation
Amendment”), to remove certain provisions containing procedural and approval
requirements applicable to the Company prior to the consummation of the business
combination that will no longer be operative following consummation of the
Merger (“Proposal 2” or the “First Amendment Proposal”);
(iii)
the Second Amendment Proposal—the amendment to the Company's amended and
restated certificate of incorporation (the “Second Certificate of Incorporation
Amendment”), to increase the amount of authorized shares of common stock from
20,000,000 to 50,000,000 (“Proposal 3” or the “Second Amendment
Proposal”);
(iv)
the Third Amendment Proposal—the amendment to the Company’s amended and restated
certificate of incorporation (the “Third Certificate of Incorporation
Amendment”), to change the name of the Company to United Insurance Holdings
Corp. (“Proposal 4” or the “Third Amendment Proposal”);
(v)
Director Proposal—to elect three (3) directors to the Company’s Board of
Directors to hold office until their successors are elected and qualified
(“Proposal 5” or the “Director Proposal”);
(vi)
the Adjournment Proposal—to consider and vote upon a proposal to adjourn the
Special Meeting to a later date or dates, if necessary, to permit further
solicitation and vote of proxies in the event that, based upon the tabulated
vote at the time of the Special Meeting, the Company would not have been
authorized to consummate the Merger—which we refer to as the adjournment
proposal (“Proposal 6” or the “Adjournment Proposal”); and
(vii)
such other business as may properly come before the meeting or any adjournment
or postponement thereof.
These
proposals are described in the attached proxy statement/prospectus which the
Company urges you to read in its entirety before voting. The Board of Directors
of the Company has fixed the close of business
on ,
2008, as the record date (the “Record Date”) for the determination of
stockholders entitled to notice of and to vote at the Special Meeting and at
any
adjournment thereof.
Your
vote is important.
Please
sign, date and return your proxy card as soon as possible to make sure your
shares are represented at the Special Meeting. If you are a stockholder of
record of the Company’s common stock, you may also cast your vote in person at
the Special Meeting. If your shares are held in an account at a brokerage firm
or bank, you must instruct your broker or bank on how to vote your shares.
|
By
Order of the Board of Directors,
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|
|
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Gordon
G. Pratt
Chairman
of the Board, President and Chief Executive Officer
,
2008
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Page
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QUESTIONS
AND ANSWERS ABOUT THE PROPOSALS
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1
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SUMMARY
OF THE PROXY STATEMENT
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8
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THE
MERGER PROPOSAL
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8
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THE
PARTIES
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8
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OUR
INSIDER STOCKHOLDERS
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9
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COMPANY
SHARES ENTITLED TO VOTE
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9
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UNITED
MEMBERSHIP UNITS ENTITLED TO VOTE
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9
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TAX
CONSIDERATIONS
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9
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CONDITIONS
TO CLOSING THE MERGER
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9
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DIRECTOR
NOMINEES
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10
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ACCOUNTING
TREATMENT
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10
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RISK
FACTORS
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10
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CONVERSION
RIGHTS
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10
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APPRAISAL
OR DISSENTERS’ RIGHTS
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11
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STOCK
OWNERSHIP
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11
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REASONS
FOR THE MERGER
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12
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COMPANY
BOARD OF DIRECTORS RECOMMENDATIONS
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12
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INTERESTS
OF THE COMPANY DIRECTORS AND OFFICERS IN THE MERGER
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13
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INTERESTS
OF UNITED IN THE MERGER
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14
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INTERESTS
OF PALI CAPITAL IN THE MERGER; FEES
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14
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FAIRNESS
OPINION
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14
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REGULATORY
MATTERS
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14
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OVERVIEW
OF THE MERGER
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14
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DIRECTORS
AND MANAGEMENT
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15
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FIRST
AMENDMENT PROPOSAL
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15
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SECOND
AMENDMENT PROPOSAL
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15
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THIRD
AMENDMENT PROPOSAL
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15
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DIRECTOR
PROPOSAL
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15
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ADJOURNMENT
PROPOSAL
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15
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THE
SPECIAL MEETING
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15
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DATE,
TIME AND PLACE OF SPECIAL MEETING OF OUR STOCKHOLDERS
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15
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RECORD
DATE; WHO IS ENTITLED TO VOTE
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15
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QUORUM
AND VOTE REQUIRED
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16
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VOTING
YOUR SHARES
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16
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FMG
ACQUISITION CORP. SELECTED FINANCIAL DATA
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17
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MARKET
PRICE INFORMATION AND DIVIDEND DATA FOR COMPANY SECURITIES
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19
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RISK
FACTORS
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20
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RISKS
PARTICULAR TO THE MERGER
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20
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RISKS
RELATED TO UNITED’ S BUSINESS
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22
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RISKS
RELATING TO THE COMPANY’S CURRENT STATUS AS A BLANK CHECK
COMPANY
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27
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FORWARD-LOOKING
STATEMENTS
|
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30
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THE
COMPANY SPECIAL MEETING OF STOCKHOLDERS
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31
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THE
COMPANY SPECIAL MEETING
|
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31
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DATE,
TIME AND PLACE
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31
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PURPOSE
OF THE SPECIAL MEETING
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31
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RECORD
DATE, WHO IS ENTITLED TO VOTE
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32
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VOTING
YOUR SHARES
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32
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WHO
CAN ANSWER YOUR QUESTIONS ABOUT VOTING YOUR SHARES
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32
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NO
ADDITIONAL MATTERS MAY BE PRESENTED AT THE SPECIAL MEETING
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32
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REVOKING
YOUR PROXY
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32
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QUORUM;
VOTE REQUIRED
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33
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ABSTENTIONS
AND BROKER NON-VOTES
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33
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CONVERSION
RIGHTS
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33
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APPRAISAL
OR DISSENTER RIGHTS
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34
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SOLICITATION
COSTS
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35
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STOCK
OWNERSHIP
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35
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PROPOSAL 1—THE
MERGER PROPOSAL
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38
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GENERAL
DESCRIPTION OF THE MERGER
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38
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BACKGROUND
OF THE MERGER
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39
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INTERESTS
OF UNITED DIRECTORS AND OFFICERS IN THE MERGER
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44
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INTERESTS
OF FMG DIRECTORS AND OFFICERS IN THE MERGER
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44
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COMPANY’S
REASONS FOR THE MERGER AND RECOMMENDATION OF THE COMPANY’ S
BOARD
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45
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UNITED'S
REASONS FOR THE MERGER WITH THE COMPANY
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46
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FAIRNESS
OPINION OF PIPER JAFFRAY & CO.
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46
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THE
MERGER AGREEMENT
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51
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UNITED
STATES FEDERAL INCOME TAX CONSIDERATIONS OF THE MERGER
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55
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SATISFACTION
OF THE 80% REQUIREMENT
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58
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REGULATORY
MATTERS
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58
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CONSEQUENCES
IF MERGER PROPOSAL IS NOT APPROVED
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58
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REQUIRED
VOTE
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59
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ABSTENTIONS
AND BROKER NON-VOTES
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59
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DISSENTERS’
RIGHTS
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60
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ACCOUNTING
TREATMENT
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60
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RECOMMENDATION
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60
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PROPOSAL 2
- THE FIRST AMENDMENT PROPOSAL
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61
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RECOMMENDATION
|
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64
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PROPOSAL 3
- THE SECOND AMENDMENT PROPOSAL
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65
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|
RECOMMENDATION
|
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66
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PROPOSAL
4 - THE THIRD AMENDMENT PROPOSAL
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67
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RECOMMENDATION
|
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67
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PROPOSAL 5
- DIRECTOR PROPOSAL
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68
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INFORMATION
ABOUT THE NOMINEES
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68
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COMPLIANCE
WITH SECTION 16(a)
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71
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BOARD
OF DIRECTORS AND COMMITTEES OF THE BOARD
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71
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CODE
OF CONDUCT AND ETHICS
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71
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COMPENSATION
ARRANGEMENTS FOR DIRECTORS
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71
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EXECUTIVE
COMPENSATION
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71
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OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
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73
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DIRECTOR
COMPENSATION
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73
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BENCHMARKS
OF CASH AND EQUITY COMPENSATION
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74
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COMPENSATION
COMPONENTS
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74
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CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS OF FMG
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74
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CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS OF UNITED
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76
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RECOMMENDATION
|
|
77
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PROPOSAL 6
- THE ADJOURNMENT PROPOSAL
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78
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RECOMMENDATION
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78
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UNITED
MEMBER APPROVAL
|
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79
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INFORMATION
ABOUT THE INSURANCE INDUSTRY
|
|
80
|
INFORMATION
ABOUT FMG ACQUISITION CORP.
|
|
83
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF FMG ACQUISITION CORP.
|
|
85
|
INFORMATION
ABOUT UNITED INSURANCE HOLDINGS, L.C.
|
|
88
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MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF UNITED INSURANCE HOLDINGS, L.C.
|
|
97
|
UNAUDITED
PRO FORMA COMBINED FINANCIAL INFORMATION AS OF MARCH 31, 2008 AND
DECEMBER 31, 2007
|
|
116
|
DIRECTORS
AND MANAGEMENT OF THE COMPANY FOLLOWING THE MERGER
|
|
121
|
CURRENT
DIRECTORS AND MANAGEMENT OF UNITED SUBSIDIARY CORP.
|
|
122
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BENEFICIAL
OWNERSHIP OF SECURITIES
|
|
122
|
BENEFICIAL
OWNERSHIP FOLLOWING THE MERGER
|
|
124
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PRICE
RANGE OF SECURITIES AND DIVIDENDS
|
|
127
|
DESCRIPTION
OF FMG ACQUISTION CORP. SECURITIES
|
|
128
|
COMPARISON
OF RIGHTS OF FMG STOCKHOLDERS AND UNITED MEMBERS
|
|
132
|
SHARES
ELIGIBLE FOR FUTURE SALE
|
|
136
|
EXPERTS
|
|
138
|
LEGAL
MATTERS
|
|
138
|
STOCKHOLDER
PROPOSALS AND OTHER MATTERS
|
|
138
|
WHERE
YOU CAN FIND MORE INFORMATION
|
|
138
|
INDEX
TO FINANCIAL STATEMENTS
|
|
F-1
|
ANNEXES
|
|
|
Annex A—Agreement
and Plan of Merger
|
|
|
Annex B—Second
Amended and Restated Certificate of Incorporation
|
|
|
Annex C—Opinion
of Piper Jaffray & Co.
|
|
|
QUESTIONS
AND ANSWERS ABOUT THE PROPOSALS
Why
am I receiving this proxy statement?
Because
you are a stockholder of FMG. FMG, United and United Subsidiary have agreed
to a
business transaction under the terms of an Agreement and Plan of Merger dated
April 2, 2008, pursuant to which FMG will purchase all of the membership units
of United. A copy of the Merger Agreement is attached to this proxy
statement/prospectus as Annex A, which we encourage you to review in its
entirety. The Merger is structured such that United will become wholly-owned
by
FMG in a series of steps as outlined below. FMG and United will merge pursuant
to a merger transaction summarized as follows:
(i)
FMG will create a transitory merger subsidiary, United Subsidiary Corp., and
will merge such subsidiary with and into United, with United surviving;
and
(ii)
United will, as a result, become wholly-owned by FMG.
United’s
members will receive consideration of up to $100,000,000 consisting
of:
(i)
$25,000,000 in cash;
(ii)
8,750,000 shares of FMG common stock, par value $.0001 per share (assuming
an
$8.00 per share value); and
(iii)
up
to $5,000,000 of additional consideration will be paid to the members of United
in the event certain net income targets are met by United, as set forth more
particularly herein.
In
order to consummate the Merger, a majority of the shares issued in the IPO
voting at the meeting (whether in person or by proxy) must vote to approve
and
adopt the Merger Agreement and the transactions contemplated thereby. Further,
the Merger may not be consummated if more than 29.99% of such shares vote
against the Merger and elect to convert their shares to cash from the trust
account established with the proceeds of our IPO.
The
Company will hold a Special Meeting of its stockholders to obtain these
approvals. In connection with the Merger, this proxy statement/prospectus
contains important information about the proposed Merger, the proposed First
Certificate of Incorporation Amendment, the proposed Second Certificate of
Incorporation Amendment, the proposed Third Certificate of Incorporation
Amendment and the Director Proposal.
This
proxy statement/prospectus also contains important information about the
proposed Director election and proposed Adjournment. You should read it
carefully; in particular the section entitled “Risk Factors.”
Your
vote is important. We encourage you to vote as soon as possible after carefully
reviewing this proxy statement.
What
is being voted on?
There
are six proposals on which you are being asked to vote. The first proposal
is to
approve the Merger among FMG, United and United Subsidiary and the transactions
contemplated thereby.
The
second proposal is to approve the First Amendment to our Certificate of
Incorporation to remove certain provisions that are specific to blank check
companies. This proposal is conditioned upon approval of the Merger
Proposal.
The
third
proposal is to approve the Second Amendment to our Certificate of Incorporation
to increase the amount of authorized shares of common stock from 20,000,000
to
50,000,000. This proposal is conditioned upon approval of the Merger
Proposal.
The
fourth proposal is to approve the Third Amendment to our Certificate of
Incorporation to change the name of the Company to United Insurance Holdings
Corp. This proposal is conditioned upon approval of the Merger
Proposal.
The
fifth proposal is to elect additional members to the Company’s Board of
Directors. We have nominated the Class B directors (consisting of Messrs.
Gregory C. Branch, Alec L. Poitevint, II and Kent G. Whittemore) for election.
Under the Merger Agreement, United has the right to nominate, and the Company
has agreed to cause the appointment and election of, the foregoing three
additional members to the Board of Directors of FMG. If the Merger is approved,
then the directors of FMG will be Gregory C. Branch, Alec L. Poitevint, II,
Gordon G. Pratt, Larry G. Swets, Jr., Kent G. Whittemore and James R. Zuhlke.
In
the event the fifth proposal is approved by the stockholders, two of the
Company’s current directors, Thomas D. Sargent and David E. Sturgess, will
immediately resign from the Board of Directors upon consummation of the Merger.
This proposal is conditioned upon approval of the Merger Proposal.
The
sixth proposal is to approve the adjournment of the Special Meeting to a later
date or dates, if necessary, to permit further solicitation and vote of proxies
in the event that, based upon the tabulated vote at the time of the Special
Meeting, the Company would not have been authorized to consummate the
Merger.
It
is important for you to note that in the event the Merger Proposal does not
receive the necessary vote to approve such proposal, then the Company will
not
consummate the Merger or be permitted to implement the First, Second or Third
Amendment or director proposals.
Are
the proposals conditioned on one another?
Yes.
Proposals 2, 3 and 5 are all conditioned upon approval of Proposal 1, The
Merger Proposal, and consummation of the Merger is conditioned on Proposals
1,
2, 3 and 5 being approved in accordance herewith.
What
happens if I vote against the Merger?
Each
Company stockholder who holds shares of common stock issued in the Company’s IPO
or purchased following such offering in the open market has the right to vote
against the Merger Proposal and, at the same time, demand the Company convert
such stockholder’s shares into cash equal to a pro rata portion of the trust
account. These shares will be converted into cash only if a stockholder votes
against a business combination, affirmatively elects to have its shares of
common stock converted and such business combination is consummated. Based
upon
the amount of cash held in the trust account as of March 31, 2008, without
taking into account any interest or income taxes accrued after such date,
stockholders who vote against the Merger Proposal and elect to convert such
stockholder’s shares as described above will be entitled to convert each share
of common stock it holds into approximately $7.91 per share (after a provision
for payment of working capital costs and taxes). However, if the holders of
1,419,615 or more shares of common stock issued in the Company’s IPO (an amount
equal to 29.99% of the total number of shares issued in the IPO) vote against
the Merger and demand conversion of their shares into a pro rata portion of
the
trust account, then the Company will not be able to consummate the Merger and,
assuming the Company is not able to consummate another business combination
by
October 4, 2009, stockholders will only receive cash upon the liquidation
of the Company. Furthermore, if more than 29.99% of the total number of shares
issued in the IPO vote against the Merger Proposal, the Merger will not
occur.
Why
is the Company proposing the First Amendment to its Certificate of
Incorporation?
Currently,
the Company’s certificate of incorporation contains provisions specific to blank
check companies. Specifically, the Third, Fifth and Sixth Articles of the
Company’s amended and restated certificate of incorporation contain provisions
that will not apply to the Company following consummation of the Merger. Article
Third limits the powers and privileges conferred upon the Company to dissolving
and liquidating in the event a business combination is not consummated prior
to
October 4, 2009. Article Fifth provides that the Company’s corporate
existence will terminate on October 4, 2009 and mandates that an amendment
to this Article allowing continued corporate existence be submitted to
stockholders along with the Merger Proposal. Article Sixth provides the
procedural steps required for the approval of a business combination and the
exercise of conversion rights. Assuming the Merger is consummated, the
provisions of Articles Third and Sixth will no longer apply to the Company,
and
the Company will be obligated to amend Article Fifth in order to extend the
corporate life of the Company beyond October 4, 2009.
Why
is the Company proposing the Second Amendment to its Certificate of
Incorporation and are there any other issuances of common stock contemplated
by
the Company other than in connection with the Merger
Proposal?
Currently,
the Company is authorized to issue up to 20,000,000 shares of common stock.
There are 5,917,031 shares of common stock currently outstanding and 6,883,625
shares of common stock issuable upon the exercise of our outstanding warrants
and the underwriters purchase option. In order to have sufficient authorized
shares of common stock to cover the common stock issuable pursuant to the
Merger
Agreement and for general corporate purposes, the Company will need to increase
its authorized common stock if the Merger is approved. Other than in connection
with the Merger, there are no plans to issue any other shares of common stock
or
other securities convertible into common stock.
Why
is the Company proposing the Third Amendment to its Certificate of
Incorporation?
In
the judgment of our Board of Directors, the change of our corporate name to
United Insurance Holdings Corp. is desirable to maintain the branding of the
insurance operations and to reflect our merger with United.
If
I am not going to attend the Special Meeting in person, should I return my
proxy
card instead?
Yes.
Whether or not you plan to attend the Special Meeting, after carefully reading
and considering the information contained in this proxy statement, please
complete and sign your proxy card. Then return the enclosed proxy card in the
return envelope provided herewith as soon as possible, so your shares may be
represented at the Special Meeting.
What
will happen if I abstain from voting or fail to vote at the Special
Meeting?
The
Company will count a properly executed proxy marked ABSTAIN with respect to
a
particular proposal as present for purposes of determining whether a quorum
is
present. For purposes of approval, an abstention or failure to vote on the
Merger will have no effect on the proposal, provided a quorum is present, and
will not have the effect of converting your shares into a pro rata portion
of
the trust account in which a substantial portion of the net proceeds of the
Company’s IPO are held. In order for a stockholder to convert his or her shares,
he or she must cast a vote against the Merger Proposal and make an affirmative
election on the proxy card to convert such shares of common stock. An abstention
from voting on any of the First Amendment Proposal, Second Amendment Proposal
or
Third Amendment Proposal, or the Adjournment Proposal, will have the same effect
as a vote against these proposals. An abstention from the Director Proposal
will
not have the effect of voting against such proposals.
What
will happen if I sign and return my proxy card without indicating how I wish
to
vote?
Stockholders
will not be entitled to exercise their conversion rights if such stockholders
return proxy cards to the Company without an indication of how they desire
to
vote with respect to the Merger Proposal or, for stockholders holding their
shares in street name, if such stockholders fail to provide voting instructions
to their brokers. Proxies received by the Company without an indication of
how
the stockholders intend to vote on a proposal will be voted in favor of such
proposal.
If
my shares are held in “street name” by my broker, will my broker vote my shares
for me?
If
you hold your shares in “street name,” your bank or broker cannot vote your
shares with respect to the Merger Proposal, the First Amendment Proposal, the
Second Amendment Proposal, the Third Amendment Proposal or the Adjournment
Proposal without specific instructions from you, which are sometimes referred
to
in this proxy statement as the broker “non-vote” rules. If you do not provide
instructions with your proxy, your bank or broker may deliver a proxy card
expressly indicating that it is NOT voting your shares; this indication that
a
bank or broker is not voting your shares is referred to as a “broker non-vote.”
Broker non-votes will be counted for the purpose of determining the existence
of
a quorum, but will not count for purposes of determining the number of votes
cast at the Special Meeting. Your broker can vote your shares only if you
provide instructions on how to vote. You should instruct your broker to vote
your shares in accordance with directions you provide to your
broker.
What
do I do if I want to change my vote?
If
you desire to change your vote, please send a later-dated, signed proxy card
to
our corporate Secretary, Larry G. Swets, Jr. at FMG Acquisition Corp. prior
to
the date of the Special Meeting or attend the Special Meeting and vote in
person. You also may revoke your proxy by sending a notice of revocation to
Larry G. Swets, Jr. at the address of the Company’s corporate headquarters,
provided such revocation is received prior to the Special Meeting.
Will
I receive anything in the Merger?
If
the Merger is consummated and you vote your shares against the Merger Proposal
but do not affirmatively elect conversion or you abstain, you will not receive
a
cash conversion of your shares upon the completion of the Merger. If the Merger
is consummated but you have voted your shares against the Merger Proposal and
have elected a cash conversion, your shares of Company common stock will be
cancelled and you will be entitled to receive cash equal to a pro rata portion
of the trust account, which, as of March 31, 2008, was equal to approximately
$7.91 per share (after a provision for payment of working capital costs and
taxes); provided, however, you must deliver your physical certificates to the
Company’s stock transfer agent prior to the date of the Special
Meeting.
How
is the Company paying for the Merger?
The
$95,000,000 cost of the Merger will be funded with $25,000,000 of cash drawn
from the cash currently in the Company’s trust account and by the Company
issuing 8,750,000 shares of common stock, valued at $70,000,000, based on a
price of $8.00 per share.
Will
I experience dilution as a result of the Merger?
Prior
to the Merger, those stockholders who hold shares issued in the Company’s IPO
owned approximately 80.0% of our issued and outstanding common stock. After
giving effect to the Merger and to the shares of common stock to be issued
to
United in connection with the Merger, and assuming no exercise of the warrants
then outstanding, the Company’s current public stockholders will own
approximately 32.3% of the Company post-Merger.
Do
I have conversion rights in connection with the Merger?
If
you
hold shares of common stock issued in the Company’s IPO, then you have the right
to vote against the Merger Proposal and demand the Company convert your shares
of Company common stock into a pro rata portion of the cash in the trust
account. The right to vote against the Merger and demand conversion of your
shares into a pro rata portion of the trust account is sometimes referred to
herein as conversion rights.
If
I have conversion rights, how do I exercise them?
If
you
desire to exercise your conversion rights, you must vote against the Merger
Proposal and, at the same time, demand the Company convert your shares into
cash
by marking the appropriate space on the proxy card. If, notwithstanding your
vote, the Merger is consummated, then you will be entitled to receive a pro
rata
share of the trust account in which a substantial portion of the net proceeds
of
the Company’s IPO are held, including any pro rated interest earned thereon
through the date of the Special Meeting. Based on the amount of cash held
in the
trust account as of June 12, 2008, without taking into account any interest
or
income taxes accrued after such date, you would be entitled to convert each
share of Company common stock that you hold into approximately $7.91 per
share
(after a provision for payment of working capital costs and taxes). If you
exercise your conversion rights, then you will be exchanging your shares
of
Company common stock for cash and will no longer own these shares of common
stock. You will only be entitled to receive cash for these shares if you
tender
your stock certificates to the Company’s stock transfer agent at any time at or
prior to the vote at the Special Meeting. If you convert your shares of common
stock but you remain in possession of the warrants and have not sold or
transferred them, you will still have the right to exercise the warrants
received as part of the units purchased in the IPO in accordance with the
terms
thereof. If the Merger is not consummated: (i) then your shares will not be
converted into cash at this time, even if you so elected, and (ii) assuming
we are unable to consummate another business combination by October 4, 2009,
we
will commence the liquidation process and you will be entitled to distribution
upon liquidation. See “Conversion Rights” at page 33.
You
will
be required, whether you are a record holder or hold your shares in “street
name”, either to tender your certificates to our transfer agent or to deliver
your shares to the Company’s transfer agent electronically using the Depository
Trust Company’s DWAC (Deposit/Withdrawal At Custodian) System, at your option,
at any time at or prior to the vote at the Special Meeting. There is typically
a
$35 cost associated with this tendering process and the act of certificating
the
shares or delivering them through the DWAC system. The transfer agent will
typically charge the tendering broker this $35, and the broker may or may not
pass this cost on to you.
As
the delivery process can be accomplished by you, whether or not you are a record
holder or your shares are held in “street name”, within a business day, by
simply contacting the transfer agent or your broker and requesting delivery
of
your shares through the DWAC System, we believe you will have sufficient time
from the time we send out this proxy statement through the date of the Special
Meeting to deliver your shares if you wish to exercise your conversion
rights.
Any
request for conversion, once made, may be withdrawn at any time up to
immediately prior to the vote on the Merger Proposal at the Special Meeting
(or
any adjournment or postponement thereof). Furthermore, if you delivered a
certificate for conversion and subsequently decided prior to the meeting not
to
elect conversion, you may simply request that the transfer agent return the
certificate (physically or electronically) to you. The transfer agent will
typically charge an additional $35 for the return of the shares through the
DWAC
system.
Please
note, however, that once the vote on the Merger Proposal is held at the Special
Meeting, you may not withdraw your request for conversion and request the return
of your stock certificate (either physically or electronically). If the Merger
is not completed, your stock certificate will be automatically returned to
you.
How
much time do I have to decide whether to exercise my conversion
rights?
You
will
have approximately twenty days from the date of this proxy
statement/prospectus to determine whether to exercise your conversion rights,
at
which time you must vote on the Merger Proposal and, if voting against the
Merger Proposal, also vote to exercise your conversion rights. You may not
exercise your conversion rights following the stockholder vote on the Merger
Proposal at the Special Meeting.
What
happens to the funds deposited in the trust account after completion of the
Merger?
Upon
consummation of the Merger, a portion of the funds remaining in the trust
account after payment of amounts, if any, to stockholders demanding and
exercising their conversion rights, will be used to pay expenses associated
with
the Merger and to fund working capital of the combined company. In addition,
up
to $1,514,760 will be used to pay deferred underwriter’s compensation from the
Company’s IPO.
What
happens if the Merger is not consummated?
If
the Merger is not consummated, the Company may seek another suitable business
combination. Depending upon the timing and success of such efforts, the Company
may be forced to liquidate if it cannot consummate another business combination
by October 4, 2009. If a liquidation were to occur by approximately October
4, 2009 (the last day on which the Company would be permitted to consummate
an
acquisition under its amended and restated certificate of incorporation), the
Company estimates approximately $850,000 in interest, less applicable federal,
state and Delaware franchise taxes, would accrue on the amounts that are held
in
trust through such date, which would yield a trust balance of approximately
$38.1 million or $8.05 per share (before taking into account disbursements
for
working capital purposes). This estimate includes the $2,764,760 proceeds from
the sale of the Company’s sponsor warrants and deferred underwriter fees owed to
the underwriters from IPO. This amount, less any liabilities not indemnified
by
certain officers and members of the Company’s Board and not waived by the
Company’s creditors, would be distributed to the holders of the 4,733,625 shares
of common stock purchased in the Company’s IPO.
Separately,
the Company estimates the liquidation process would cost approximately $50,000.
FMG Investors LLC, our sponsor, has acknowledged and agreed that such costs
are
covered by its existing indemnification agreement. We do not believe there
would
be any claims or liabilities in excess of the funds out of the trust against
which would be required to indemnify the trust account in the event of such
liquidation. In the event our sponsor is unable to satisfy its indemnification
obligation or in the event there are subsequent claims such as subsequent
non-vendor claims for which our sponsor has no indemnification obligation,
the
amount ultimately distributed to stockholders may be reduced even further.
However, the Company currently has no basis to believe there will be any such
liabilities or to provide an estimate of any such liabilities since to date
the
Company has only entered into a limited number of agreements and has obtained
waivers whenever possible. The only cost of dissolution the Company is aware
of
that would not be indemnified against by such officers and directors of the
Company is the cost of any associated litigation for which officers and
directors obtained a valid and enforceable waiver. Should the Merger Agreement
be terminated due to a breach of such agreement by any of the Company, United
Subsidiary, or United or due to the Company’s failure to obtain the Company
stockholder approval, then each party would be responsible for its own expenses;
provided, however, if the Merger Agreement is not consummated as a result of
the
failure to obtain the consent of United’s members, United shall be obligated to
pay the Company for all costs, expenses and fees incurred in connection with
the
Merger, up to a maximum of $500,000.
When
do you expect the Merger to be completed?
Assuming
the approval of the Merger Proposal, it is currently anticipated the Merger
and
other proposals will be completed as promptly as practicable following the
Special Meeting of to be held
on ,
2008.
What
do I need to do now?
The
Company urges you to read carefully and consider the information contained
in
this proxy statement/prospectus, including the annexes, and to consider how
the
Merger will affect you as a stockholder of the Company. You should then vote
as
soon as possible in accordance with the instructions provided in this proxy
statement/prospectus and on the enclosed proxy card.
How
can I obtain a list of stockholders entitled to
vote?
A
list of
the stockholders entitled to vote as of the Record Date at the Special Meeting
will be open to examination by any stockholder for any purpose germane to
the
meeting, during ordinary business hours for a period of ten calendar days
before
the Special Meeting at the offices of FMG Acquisition Corp., Four Forest
Park,
Second Floor, Farmington, Connecticut 06032, telephone number of
(860) 677-2701; Secretary Larry G. Swets, Jr., and at the time and place of
the Special Meeting during the duration of the Special
Meeting.
Do
I need to send in my stock certificates?
The
Company stockholders who vote against adoption of the Merger Proposal and elect
to have their shares converted into a pro rata share of the funds in the trust
account must send their physical stock certificates to our stock transfer agent
prior to the Special Meeting. The Company stockholders who vote in favor of
the
adoption of the Merger Proposal, or who otherwise do not elect to have their
shares converted, should retain their stock certificates.
What
should I do if I receive more than one set of voting
materials?
You
may receive more than one set of voting materials, including multiple copies
of
this proxy statement/prospectus and multiple proxy cards or voting instruction
cards, if your shares are registered in more than one name or are registered
in
different accounts. For example, if you hold your shares in more than one
brokerage account, you will receive a separate voting instruction card for
each
brokerage account in which you hold shares. Please complete, sign, date and
return each proxy card and voting instruction card that you receive in order
to
cast a vote with respect to all of your Company shares.
How
can I communicate with FMG’s Board of Directors?
Stockholders
may communicate with our Board of Directors by sending a letter addressed to
the
Board of Directors, all independent directors or specified individual directors
to: FMG Acquisition Corp., Four Forest Park, Second Floor, Farmington,
Connecticut 06032; Attention: Larry G. Swets, Jr., Secretary. All communications
will be compiled by the Corporate Secretary and submitted to the Board or the
specified directors on a periodic basis.
SUMMARY
This
summary highlights certain information from this proxy statement/prospectus
including information with respect to each of the proposals, although the
Merger
is the primary reason for the calling of the Special Meeting. This summary
does
not contain all of the information that is important to you. All of the
proposals are described in detail elsewhere in this proxy statement and this
summary discusses the material items of each of the proposals. You should
carefully read this entire proxy statement and the other documents to which
this
proxy statement refers you. See, “Where You Can Find Additional Information.” on
page 138.
THE
MERGER PROPOSAL
The
Parties
FMG
Acquisition Corp.
FMG
Acquisition Corp. is a blank check company formed specifically as a vehicle
to
effect a merger, acquisition or similar business combination with one or more
operating businesses without limitation to a particular industry or to any
geographic location, although our efforts have been focused on seeking a
business combination within the insurance industry and selected small business
insurance. The principal executive offices of FMG are located at Four Forest
Park, Second Floor, Farmington, Connecticut 06032, and its telephone number
is
(860) 677-2701, Larry G. Swets, Jr., Secretary.
United
Insurance Holdings, L.C. (“United”)
United
is
a Florida limited liability company and is the parent company of United Property
& Casualty Insurance Company (“United Insurance”), a licensed insurer which
provides homeowners insurance and selected small business insurance in the
State
of Florida. Since 2000, United Insurance has received a Financial Stability
Rating of “A” for Exceptional Financial Stability by Demotech, Inc. This is the
third highest Financial Stability Rating of the six Financial Stability Ratings
(A’’ – Unsurpassed; A’ – Unsurpassed; A – Exceptional; S – Substantial; M –
Moderate; L – Licensed) utilized by Demotech, Inc. These Financial Stability
Ratings provide an objective baseline for assessing solvency and should not
be
interpreted as (and are not intended to serve as) an assessment of an insurance
company’s securities or a recommendation to buy, sell, or hold an insurance
company’s securities. Our Demotech Financial Stability Rating is recognized by
federal mortgage backed loan programs such as HUD, Fannie Mae and FHA. If
the
Merger is consummated, United Subsidiary will merge with and into United,
whereupon United will be the surviving entity and a wholly-owned subsidiary
of
FMG. United’s principal executive offices are located at 700 Central Avenue,
Suite 302, Saint Petersburg, Florida 33701, and its phone number is (727)
895-7737.
United
Subsidiary Corp.
United
Subsidiary Corp. is a Florida corporation recently incorporated solely for
the
purpose of effectuating the Merger. United Subsidiary is a wholly-owned
subsidiary of FMG. As part of the Merger, United Subsidiary will be merged
with
and into United, with United remaining as the surviving entity and a
wholly-owned subsidiary of FMG.
Following
the effective date of the Merger, United and its members are expected to own
approximately 60% of the issued and outstanding shares of common stock of FMG,
depending upon the shares of the Company’s common stock redeemed for cash. See
“Description of FMG Acquisition Corp. Securities—Common Stock.”
The
Merger Proposal (Page 38
)
On
April 2, 2008, the Company entered into the Merger Agreement pursuant to which
United Subsidiary has agreed to merge with and into United, and United has
agreed, subject to receipt of the Merger consideration from FMG, to become
a
wholly-owned subsidiary of FMG. If the stockholders of the Company and the
members of United approve the transactions contemplated by the Merger Agreement,
FMG, through United Subsidiary, will purchase all of the membership units of
United in a series of steps as outlined below.
FMG
and United will merge pursuant to a merger transaction summarized as
follows:
(i)
FMG will create a transitory merger subsidiary, United Subsidiary Corp., and
will merge such subsidiary with and into United, with United surviving;
and
(ii)
United will, as a result, become wholly-owned by FMG.
United’s
members will receive consideration of up to $100,000,000 consisting
of:
(i)
$25,000,000 in cash;
(ii)
8,750,000 shares of FMG common stock, par value $.0001 per share (assuming
an
$8.00 per share value); and
(iii)
up
to $5,000,000 of additional consideration will be paid to the members of United
in the event certain net income targets are met by United, as set forth more
particularly herein.
The
aggregate consideration will be paid pursuant to the Merger Agreement for
the
purchase of the membership units of United. The aggregate market value of
the consideration to be paid pursuant to the Merger Agreement on the last
trading day prior to the public announcement of the Merger Agreement was
$93,350,000 (based on a share price of $7.24 as of such date) and includes
$5,000,000 in contingent consideration and such amount will fluctuate based
on
the then-current trading price of the Company’s common stock. The Company’s
Board of Directors has determined United has a fair market value that is
equal
to at least 80% of the Company’s net assets held in trust.
The
Company, United and United Subsidiary plan to consummate the Merger as promptly
as practicable after the Special Meeting, provided that:
•
the Company’s stockholders have approved the Merger Agreement and the
transactions contemplated thereby;
•
not less than 66% of all membership units of United approve the Merger Agreement
and the transactions contemplated thereby;
•
holders of not more than 29.99% of the shares of common stock issued in the
Company’s IPO vote against the Merger and demand conversion of their stock into
cash;
•
the Securities and Exchange Commission has declared effective the registration
statement and prospectus which form a part of this proxy statement;
and
•
the other conditions specified in the Merger Agreement have been satisfied
or
waived.
See
the description of the Merger Agreement in the section entitled “The Merger
Agreement” beginning on page 51. The Merger Agreement is included as
Annex A to this proxy statement/prospectus. We encourage you to read the
Merger Agreement in its entirety.
Under
the terms of the Company’s amended and restated certificate of incorporation,
the Company may proceed with the Merger provided that not more than
29.99% of the Company’s public stockholders elect to convert their shares
of common stock to cash. The shares converted, if any, will reduce the shares
of
our common stock outstanding after the Merger and will reduce the amount
available to us from the trust account.
Our
“Insider” Stockholders
As of the Record Date, the Company’s initial stockholders, including all of its
directors, officers and a special advisor, who purchased or received shares
of
common stock prior to the Company’s IPO, presently, together with their
affiliates, own an aggregate of approximately 20% of the outstanding shares
of
the Company common stock (an aggregate of 1,183,406 shares). All of these
persons have agreed to vote all of the shares acquired prior to the IPO in
accordance with the vote of the majority of all other voting Company
stockholders on the Merger Proposal. Moreover, all of these persons have
agreed
to vote all of their shares which were acquired in or following the IPO in
favor
of the Merger Proposal. As of the date hereof, no members of management
purchased any shares in or following the IPO. Management will also vote “FOR”
Proposal 2, the First Amendment Proposal; “FOR” Proposal 3, the Second
Amendment Proposal; “FOR” Proposal 4, the Third Amendment Proposal; “FOR”
Proposal 5, the Director Proposal; and “FOR” Proposal 6, the
Adjournment Proposal.
Company
Shares Entitled to Vote
Holders
of all issued and outstanding shares of Company common stock are entitled
to
vote on all matters at the Special Meeting. Approval of the Merger Proposal
will
require the affirmative vote of a majority of the shares of common stock
purchased in the IPO which vote at the Special Meeting. Approval of the Merger
Proposal requires that no more than 1,419,614 shares of common stock purchased
in the IPO vote against the Merger and elect to convert their common stock
into
their pro rata portion of the cash from the trust account.
United
Membership Units Entitled to Vote
As
of
March 31, 2008, there were 100,000 United membership units issued and
outstanding. The holders of these membership units are entitled to one vote
per
unit on all matters to be voted upon by the members. In accordance with Florida
law, the affirmative vote of a majority of the units represented and voting
at a
duly held meeting at which a quorum is present (which units voting affirmatively
also constitute at least a majority of the required quorum) shall be the act
of
the members, except that approval of certain business transactions, including
the Merger, requires the affirmative vote of 66% of the units issued and
outstanding.
The
managers and officers of United, presently, together with their affiliates,
own
an aggregate of approximately 59% of United’s outstanding membership units, all
of which are entitled to vote on the Merger. Approval of the Merger Proposal
will require the affirmative vote of not less than 66% of all membership units
outstanding, which means United needs only an additional 7% of the aggregate
outstanding membership units in order to approve the Merger, provided that
the
current managers and officers of United approve the Merger
Proposal.
United
is
not soliciting proxies for approval of the Merger at this time, however, in
accordance with Florida law, United does intend to solicit written consents
from
its members in favor of the Merger and the Merger Agreement. When United
solicits written consents from its members, it will also send notice pursuant to
Florida Statute 608.4354 to its members who are entitled to appraisal
rights.
Tax
Considerations (Page 55)
There
will be no tax consequences to our stockholders resulting from the Merger,
except to the extent they exercise their conversion rights. A stockholder who
exercises conversion rights will generally be required to recognize capital
gain
or loss upon the conversion, if such shares were held as a capital asset on
the
date of the conversion. This gain or loss will be measured by the difference
between the amount of cash received and the stockholder’s tax basis in the
converted shares. If you purchased shares in our IPO, the gain or loss will
be
short-term gain or loss if the Merger closes as scheduled. If you purchased
shares in the aftermarket and have held such shares for less than a year, the
gain or loss will be short term gain or loss.
Conditions
to Closing the Merger (Page 52)
The
obligations of the Company, United and United Subsidiary to consummate the
Merger are subject to the satisfaction or waiver of the following specified
conditions set forth in the Merger Agreement before completion of the
Merger:
(i)
the accuracy in all material respects on the date of the Merger Agreement and
the Closing Date of all of United’s representations and warranties;
(ii)
United’s
performance in all material respects of all covenants and obligations required
to be performed by the Closing Date (as more fully described below in “Covenants
of the Parties”);
(iii)
a
majority of the Company’s stockholders must vote in favor of approving the
Merger;
(iv)
not more than 29.99% of the shares of the common stock issued in the Company’s
IPO vote against the Merger and demand conversion of their stock into
cash;
(v)
stockholder approval of the First and Second Amendment Proposals;
(vi)
the
Securities and Exchange Commission has declared effective the registration
statement and prospectus which form a part of this proxy
statement;
(vii)
no
governmental authority has enacted, issued, promulgated, enforced or entered
any
law or order that is in effect and has the effect of making the Merger illegal
or otherwise preventing or prohibiting consummation of the
Merger;
(viii)
the officers are, and the Board of Directors of FMG following the Merger
is
constituted, as set forth as the Board of Directors recommends, as fully
described herein; and
(ix)
the consent of not less than 66% of the membership units of United to the
Merger
and no more than ten percent (10%) of the outstanding membership units of
United
shall constitute dissenting membership units under Florida
law.
Conditions
(i), (ii) and (viii), as well as the Third Amendment Proposal, are waivable
by
the Company or United, as applicable.
United’s
obligation to close on the Merger is further contingent upon:
(i)
the accuracy in all material respects on the date of the Merger Agreement
and
the Closing Date of all of FMG’s representations and warranties;
and
(ii)
FMG’s performance in all material respects of all covenants and obligations
required to be performed by the Closing Date (as more fully described below
in
“Covenants of the Parties”).
Director
Nominees (Page 68)
Under
the
Merger Agreement, United or its designated affiliate has the right to nominate,
and the Company has agreed to cause the appointment and election of, three
additional members of the Board of Directors of the Company.
Accounting
Treatment (Page 60)
The
Merger will be accounted for as a reverse merger and recapitalization since
United and its members will control FMG immediately following the completion
of
the Merger. United will be deemed to be the accounting acquirer in the Merger
and, consequently, the Merger is treated as a recapitalization of United.
Accordingly, the assets and liabilities and the historical operations that
are
reflected in the financial statements will be those of United and will be
recorded at the historical cost basis of United. FMG’s assets, liabilities and
results of operations will be consolidated with the assets, liabilities and
results of operations of United after consummation of the Merger.
Risk
Factors (Page 20)
Before
you grant your proxy or vote or instruct the vote with respect to the Merger,
you should be aware that the occurrence of the events described in the “Risk
Factors” section and elsewhere in this proxy statement could have a material
adverse effect on the Company, United and United Subsidiary. Principal risks
include dilution which our stockholders will suffer as a consequence of the
Merger, the concentration of ownership of FMG common stock following the
Merger,
the fact one or more conditions to the Merger may be waived by FMG without
resoliciting stockholder approval, risks inherent to providers of homeowners
insurance in the southeast United States, our failure following the Merger
to
collect all amounts due from reinsurers and the potential lack of availability
of reinsurance coverage, heavy regulation of the insurance industry by various
federal and state governments and disruptions to United’s relationships with its
independent agents and brokers.
Conversion
Rights (Page 33)
Pursuant
to the Company’s existing amended and restated certificate of incorporation, a
holder of shares of the Company’s common stock issued in its IPO may, if the
stockholder votes against the Merger Proposal, demand the Company convert such
shares into a pro rata portion of the trust account. This demand must be made
on
the proxy card at the same time the stockholder votes against the Merger
Proposal. We issued a total of 4,733,625 shares in our IPO and, other than
the
1,183,406 shares issued to our management, we have no other shares of common
stock issued and outstanding. If properly demanded in connection with a vote
against the Merger Proposal, the Company will convert each share of common
stock
as to which such demand has been made into a pro rata portion of the trust
account in which a substantial portion of the net proceeds of the Company’s IPO
are held, plus all pro rata interest earned thereon. If you exercise your
conversion rights, then you will be exchanging your shares of the Company common
stock for cash and will no longer own these shares. Based on the amount of
cash
held in the trust account as of March 31, 2008, without taking into account
any
interest or income taxes accrued after such date, you would be entitled to
convert each share of common stock that you hold into approximately $7.91 (after
a provision for payment of working capital costs and taxes) per share. You
will
only be entitled to receive cash for these shares if you tender your stock
certificate to the Company’s stock transfer agent at or prior to the vote at the
Special Meeting on the Merger Proposal. If the Merger is not consummated, then
these shares will not be converted into cash immediately. If you convert your
shares of common stock, you will still have the right to exercise the warrants
received as part of the units purchased in our IPO in accordance with the terms
thereof. If the Merger is not consummated, then your shares will not be
converted to cash after the Special Meeting, even if you so elected, and your
shares will be converted into cash upon liquidation of the trust in the event
we
do not propose a subsequent business combination.
The
Merger will not be consummated if the holders of 1,419,615 or more shares of
common stock issued in the Company’s IPO, an amount equal to more than
29.99% of such shares, vote against the Merger Proposal and exercise their
conversion rights.
No
dissenter’s or appraisal rights are available under the Delaware General
Corporation Law for the stockholders of the Company in connection with the
proposals. Under Florida law, the members of United will be entitled to dissent
from the Merger and obtain cash payment for the fair value of their membership
units instead of the consideration provided for in the Merger Proposal. For
a
more complete description of the rights of United’s members, see “ United Member
Approval. ”
Stock
Ownership (Page 35)
The
following table sets forth information as of June 12, 2008, based on information
obtained from the persons named below, with respect to the beneficial ownership
of shares of the Company’s common stock by: (i) each person known by us to
be the owner of more than 5% of our outstanding shares of the Company’s common
stock, (ii) each officer and director, and (iii) all officers and
directors as a group.
Except
as
indicated in the footnotes to the table, the persons named in the table have
sole voting and investment power with respect to all shares of common stock
shown as beneficially owned by them.
|
|
Common Stock
|
|
Name and Address of Beneficial Owners(1)
|
|
Number of Shares (2)
|
|
Percentage of Common
Stock
|
|
|
|
|
|
|
|
FMG
Investors LLC(3)
|
|
|
1,099,266
|
|
|
18.57
|
%
|
Gordon
G. Pratt,
Chairman,
Chief
Executive
Officer and
President
|
|
|
1,099,266
|
(3)
|
|
18.57
|
%
|
Larry
G. Swets, Jr., Chief
Financial
Officer,
Secretary,
Treasurer,
Executive
Vice
President
|
|
|
1,099,266
|
(3)
|
|
18.57
|
%
|
Thomas
D. Sargent,
Director
|
|
|
21,035
|
|
|
0.36
|
%
|
David
E. Sturgess,
Director(4)
|
|
|
21,035
|
|
|
0.36
|
%
|
James
R. Zuhlke,
Director
|
|
|
21,035
|
|
|
0.36
|
%
|
HBK
Investments L.P.(5)
|
|
|
547,250
|
|
|
9.2
|
%
|
Brian
Taylor (6)
|
|
|
437,500
|
|
|
7.4
|
%
|
Bulldog
Investors(7)
|
|
|
1,282,167
|
|
|
21.67
|
%
|
Millenco
LLC(8)
|
|
|
189,375
|
|
|
3.2
|
%
|
D.B.
Zwirn Special
Opportunities
Fund, L.P.(9)
|
|
|
178,500
|
|
|
3.02
|
%
|
D.B.
Zwirn Special
Opportunities
Fund, Ltd. (9)
|
|
|
246,500
|
|
|
4.17
|
%
|
D.B.
Zwirn & Co., L.P. (9)
|
|
|
425,000
|
|
|
7.18
|
%
|
DBZ
GP, LLC(9)
|
|
|
425,000
|
|
|
7.18
|
%
|
Zwirn
Holdings, LLC(9)
|
|
|
350,000
|
|
|
5.92
|
%
|
Daniel
B. Zwirn(9)
|
|
|
350,000
|
|
|
5.92
|
%
|
Weiss
Asset Management, LLC(10)
|
|
|
255,002
|
|
|
4.3
|
%
|
Weiss
Capital, LLC(10)
|
|
|
130,435
|
|
|
2.2
|
%
|
Andrew
M. Weiss, Ph.D.(10)
|
|
|
385,437
|
|
|
6.5
|
%
|
|
|
|
|
|
|
|
|
All
Directors and Officers as a Group (5 persons)
|
|
|
1,162,371
|
|
|
19.64
|
%
|
(1)
|
Unless
otherwise indicated, the business address of each of the stockholders
is
Four Forest Park, Second Floor, Farmington, Connecticut
06032.
|
|
|
(2)
|
Unless
otherwise indicated, all ownership is direct beneficial
ownership.
|
|
|
(3)
|
Each
of Messrs. Pratt and Swets are the managing members of our sponsor,
FMG Investors LLC, and may be deemed to each beneficially own the
1,099,266 shares owned by FMG Investors LLC.
|
|
|
(4)
|
The
business address of David E. Sturgess is c/o Updike, Kelly & Spellacy,
P.C., One State Street, Hartford, Connecticut
06103.
|
(5)
|
Based
on information contained in a Statement on Schedule 13G filed by
HBK
Investments L.P., HBK Services LLC, HBK Partners II L.P., HBK Management
LLC and HBK Master Fund L.P. on February 12, 2008. The address
of all such
reporting parties is 300 Crescent Court, Suite 700, Dallas, Texas
75201.
HBK Investments L.P. has delegated discretion to vote and dispose
of the
Securities to HBK Services LLC (“Services”). Services may, from time to
time, delegate discretion to vote and dispose of certain of the
Securities
to HBK New York LLC, a Delaware limited liability company, HBK
Virginia
LLC, a Delaware limited liability company, HBK Europe Management
LLP, a
limited liability partnership organized under the laws of the United
Kingdom, and/or HBK Hong Kong Ltd., a corporation organized under
the laws
of Hong Kong (collectively, the “Subadvisors”). Each of Services and the
Subadvisors is under common control with HBK Investments L.P. The
Subadvisors expressly declare that the filing of the statement
on Schedule
13G shall not be construed as an admission that they are, for the
purpose
of Section 13(d) or 13(g), beneficial owners of the Securities.
Jamiel A.
Akhtar, Richard L. Booth, David C. Haley, Lawrence H. Lebowitz,
and
William E. Rose are each managing members (collectively, the "Members")
of
HBK Management LLC. The Members expressly declare that the filing
of the
statement on Schedule 13G shall not be construed as an admission
that they
are, for the purpose of Section 13(d) or 13(g), beneficial owners
of the
Securities.
|
(6)
|
Based
on information contained in a Statement on Schedule 13D filed by
Brian
Taylor, Pine River Capital Management L.P. and Nisswa Master Fund
Ltd. on
October 12, 2007. All reporting parties have shared voting and dispositive
power over such securities. The address of all such reporting parties
is
800 Nicollet Mall, Suite 2850, Minneapolis, MN 55402.
|
|
|
(7)
|
Based
on information contained in a Statement on Schedule 13D filed by
Bulldog
Investors, Phillip Goldstein and Andrew Dakos on February 13, 2008.
All
reporting parties have shared voting and dispositive power over such
securities. The address of all such reporting parties is Park 80
West,
Plaza Two, Saddle Brook, NJ 07663.
|
|
|
(8)
|
Based
on information contained in a Statement on Schedule 13G filed by
Millenco
LLC, Millenium Management LLC and Israel A. Englander on December
11,
2007. All reporting parties have shared voting and dispositive power
over
such securities. The address of all such reporting parties is 666
Fifth
Avenue, New York, NY 10103.
|
|
|
(9)
|
Based
on information contained in a Statement on Schedule 13G/A filed by
D.B.
Zwirn & Co., L.P., DBZ GP, LLC, D.B. Zwirn Special Opportunities Fund,
L.P. and D.B. Zwirn Special Opportunities Fund, Ltd. on January 25,
2008.
D.B. Zwirn & Co., L.P., DBZ GP, LLC, Zwirn Holdings, LLC, and Daniel
B. Zwirn may each be deemed the beneficial owner of (i) 178,500 shares
of
common stock owned by D.B. Zwirn Opportunities Fund, L.P. and (ii)
246,500
shares of common stock owned by D.B. Zwirn Special Opportunities
Fund,
Ltd. (each entity referred to in (i) through (ii) is herein referred
to as
a "Fund" and, collectively, as the "Funds"). D.B. Zwirn & Co., L.P. is
the manager of the Funds, and consequently has voting control and
investment discretion over the shares of common stock held by the
Fund.
Daniel B. Zwirn is the managing member of and thereby controls Zwirn
Holdings, LLC, which in turn is the managing member of and thereby
controls DBZ GP, LLC, which in turn is the general partner of and
thereby
controls D.B. Zwirn & Co., L.P. The foregoing should not be construed
in and of itself as an admission by any Reporting Person as to beneficial
ownership of shares of common stock owned by another Reporting Person.
In
addition, each of D.B. Zwirn & Co., L.P., DBZ GP, LLC, Zwirn Holdings,
LLC and Daniel B. Zwirn disclaims beneficial ownership of the shares
of
common stock held by the Funds.
|
|
|
(10)
|
Based
on information contained in a Statement on Schedule 13G filed by
Weiss
Asset Management, LLC, Weiss Capital, LLC and Andrew M. Weiss, Ph.D.
on
March 24, 2008. Shares reported for Weiss Asset Management, LLC include
shares beneficially owned by a private investment partnership of
which
Weiss Asset Management, LLC is the sole general partner. Shares reported
for Weiss Capital, LLC include shares beneficially owned by a private
investment corporation of which Weiss Capital is the sole investment
manager. Shares reported for Andrew Weiss include shares beneficially
owned by a private investment partnership of which Weiss Asset Management
is the sole general partner and which may be deemed to be controlled
by
Mr. Weiss, who is the Managing Member of Weiss Asset Management,
and also
includes shares held by a private investment corporation which may
be
deemed to be controlled by Dr. Weiss, who is the managing member
of Weiss
Capital, the Investment Manager of such private investment corporation.
Dr. Weiss disclaims beneficial ownership of the shares reported herein
as
beneficially owned by him except to the extent of his pecuniary interest
therein. Weiss Asset Management, Weiss Capital, and Dr. Weiss have
a
business address of 29 Commonwealth Avenue, 10th Floor, Boston,
Massachusetts 02116.
|
Reasons
for the Merger (Page 45)
The
Company is a blank check company formed specifically as a vehicle to effect
a
merger, acquisition or similar business combination with one or more operating
businesses in the insurance industry. In the course of the Company’s search for
a business combination partner, the Company investigated the potential
acquisition of numerous candidates in the insurance industry, along with
United,
and considered United to be an attractive merger candidate because of, among
other things, the market in which United operates, growth prospects and the
ability to leverage the expertise and contacts of the Company’s and United’s
management. The value attributed to United derives from both the extensive
analysis the Company’s Board of Directors undertook in connection with its own
evaluation of United and the prior acquisition experience of each of the
Company’s board members. As a result, the Company believes the Merger will
provide Company stockholders with an opportunity to participate in a business
and industry with growth potential. Our Board of Directors has obtained a
fairness opinion from Piper Jaffray & Co., which states that the
consideration to be paid by FMG for all the issued membership units of United
is
fair, from a financial point of view, to holders of FMG common
stock.
In
reaching its decision with respect to the Merger and the transactions
contemplated thereby, the Company’s Board of Directors reviewed various
materials. Also, in reaching its decision to approve the Merger, the Board
of
Directors considered a number of factors and believes such factors support
its
determination and recommendation to approve the Merger.
The
Company’s Board of Directors’ Recommendations (Pages 60, 64, 66, 67, 77,
and 78)
After
careful consideration of the terms and conditions of the Merger Agreement,
the
Company’s Board of Directors has determined unanimously that the Merger
Agreement and the transactions contemplated thereby including the Merger, is
in
the best interests of the Company and its stockholders. Accordingly, the
Company’s Board has unanimously approved and declared advisable the Merger and
unanimously recommends that you vote or instruct your vote to be cast “FOR” the
Merger Proposal.
The
Company’s Board of Directors has also determined unanimously that the First
Amendment Proposal is in the best interest of the Company and its stockholders.
Accordingly, the Company’s Board of Directors has unanimously approved and
declared advisable the First Amendment Proposal and unanimously recommends
you
vote or instruct your vote to be cast “FOR” the approval of the First Amendment
Proposal.
The
Company’s Board of Directors has also determined unanimously that the Third
Amendment Proposal is in the best interest of the Company and its stockholders.
Accordingly, the Company’s Board of Directors has unanimously approved and
declared advisable the Third Amendment Proposal and unanimously recommends
you
vote or instruct your vote to be cast “FOR” the approval of the Third Amendment
Proposal.
The
Company’s Board of Directors has also determined unanimously that the Director
Proposal is in the best interest of the Company and its stockholders.
Accordingly, the Company’s Board of Directors has unanimously approved and
declared advisable the Director Proposal and unanimously recommends that you
vote or instruct your vote to be cast “FOR” the approval of the Director
Proposal.
The
Company’s Board of Directors has also determined unanimously that the
Adjournment Proposal is in the best interest of the Company and its
stockholders. Accordingly, the Company’s Board of Directors has unanimously
approved and declared advisable the Adjournment Proposal and unanimously
recommends that you vote or instruct your vote to be cast “FOR” the approval of
the Adjournment Proposal.
Interests
of the Company Directors and Officers in the Merger (Page
44)
When
you consider the recommendation of the Company’s Board of Directors that you
vote in favor of the Merger Proposal, you should keep in mind that certain
of
the Company’s Directors and officers have interests in the Merger that are
different from, or in addition to, your interests as a stockholder. If the
Merger is not approved, the Company may be required to liquidate, and the
warrants owned by certain of the Company’s officers and directors and the shares
of common stock issued at an effective price per share of $0.021 prior to the
Company’s IPO and held by the Company’s executives and directors may be
worthless because the Company’s executives and directors are not entitled to
receive any of the net proceeds of the Company’s IPO that are held in trust and
will be distributed upon liquidation of the Company. Additionally, the Company’s
officers and directors who acquired shares of Company common stock prior to
the
Company’s IPO at a price per share of $0.021, after giving effect to the forward
stock split and the forfeiture of shares of common stock following the IPO,
will
benefit if the Merger is approved because they will continue to hold their
shares.
The
table below sets forth the value of the shares and warrants owned by the
officers and directors of the Company upon consummation of the Merger and
the
unrealized profit from such securities based on the market price of the common
stock and the warrants of the Company, as of June 11, 2008, of $7.28 and
$0.35,
respectively.
|
|
Common Stock(a)
|
|
Warrants(b)
|
|
|
|
Owned
|
|
Amount
Paid ($)
|
|
Current
Market
Value ($)
|
|
Unrealized
Profit ($)
|
|
Owned
|
|
Amount
Paid ($)
|
|
Current
Market
Value ($)
|
|
Unrealized
Profit
(Loss) ($)
|
|
Gordon
G. Pratt, Chairman, Chief Executive Officer and President
|
|
|
1,099,266
|
|
$
|
0.021
|
|
$
|
8,002,656
|
|
$
|
7,979,571
|
|
|
1,250,000
|
|
$
|
1,250,000
|
|
$
|
437,500
|
|
$
|
(812,500
|
)
|
Larry
G. Swets, Jr., Chief Financial Officer, Secretary, Treasurer, Executive
Vice President
|
|
|
1,099,266
|
|
$
|
0.021
|
|
$
|
|
|
$
|
|
|
|
1,250,000
|
|
$
|
1,250,000
|
|
$
|
|
|
$
|
(812,500
|
)
|
Thomas
D. Sargent, Director
|
|
|
21,035
|
|
$
|
0.021
|
|
$
|
153,135
|
|
$
|
152,693
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
David
E. Sturgess, Director
|
|
|
21,035
|
|
$
|
0.021
|
|
$
|
|
|
$
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
James
R. Zuhlke, Director
|
|
|
21,035
|
|
$
|
0.021
|
|
$
|
|
|
$
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
(a)
The
weighted average purchase price per share for this common stock was $0.021
per
share. Pursuant to escrow agreements signed by these stockholders, these shares
may not be sold or pledged until one year after the consummation of a business
combination. Additionally, these shares are currently not registered, although
after the release from escrow, these stockholders may demand the Company use
its
best efforts to register the resale of such shares.
(b)
These
warrants were purchased in a private placement that closed concurrently with
the
Company IPO. The exercise price of the warrants is $6.00. These warrants may
not
be sold or transferred until 90 days after the consummation of a business
combination
All
of the shares of the Company common stock and the warrants acquired by our
officers, directors and special advisor prior to the Company’s IPO were placed
in escrow with Continental Stock Transfer & Trust Company, as escrow
agent. During the escrow period, the holders of these shares are not able to
sell or transfer their securities except to their spouses and children or trusts
established for their benefit, but will retain all other rights as our
stockholders, including, without limitation, the right to vote their shares
of
common stock and the right to receive cash dividends, if declared. If dividends
are declared and payable in shares of common stock, such dividends will also
be
placed in escrow. If we are unable to effect a business combination and
liquidate, none of these stockholders will receive any portion of the
liquidation proceeds with respect to common stock owned by them prior to the
Company’s IPO.
Interests
of United in the Merger
Upon
completion of the Merger, the members of United will beneficially own, in the
aggregate, approximately 60% of the issued shares of FMG.
In
addition, certain of United’s directors will be directors of the surviving
company after the Merger.
Interests
of Pali Capital in the Merger; Fees
Pali
Capital, Inc. served as the representative of the underwriters in our IPO and
agreed to defer $1,514,760 of the underwriting discounts and commissions until
after the consummation of a business combination. The deferred amount payable
in
connection with the IPO will be paid out of the trust account established for
the proceeds of the IPO only if we consummate the Merger. Pali Capital, Inc.,
therefore, has an interest in our consummating the Merger that will result
in
the payment of its deferred compensation. Further, Pali Capital, Inc. owns
an
option to purchase 450,000 units (comprised of one share of common stock and
one
warrant) at an exercise price of $10.00 per unit, received as consideration
as
the representative of the underwriters in our IPO. Additionally, upon
consummation of the Merger Pali Capital, Inc. shall be entitled to a $200,000
investment banking fee.
Fairness
Opinion (Page 46)
Pursuant
to an engagement letter dated March 4, 2008, we engaged Piper Jaffray to render
an opinion that the consideration to be paid for the Merger on the terms and
conditions set forth in the Merger Agreement is fair, from a financial point
of
view, to the holders of the common stock of the Company. Our Board of Directors
decided to use the services of Piper Jaffray because it is an investment banking
firm that regularly evaluates businesses and their securities in connection
with
acquisitions, corporate restructurings, private placements and for other
purposes.
Piper
Jaffray delivered its oral opinion to our Board of Directors on March 20, 2008,
which stated that, as of March 20, 2008 and based upon and subject to the
assumptions made, matters considered and limitations on its review as set forth
in the opinion that the consideration to be paid for United is fair, from a
financial point of view, to the holders of Company common stock. The amount
of
such consideration was determined pursuant to negotiations between us and United
and its members and not pursuant to recommendations of Piper Jaffray. The Piper
Jaffray opinion is not a recommendation as to how any stockholder should vote
or
act with respect to any matters relating to the Merger (including, without
limitation, with respect to the exercise of rights to convert the Company common
stock into cash). Further, the Piper Jaffray opinion does not in any manner
address the underlying business decision of the Company to engage in the Merger
or the relative merits of the Merger as compared to any alternative business
transaction or strategy (including, without limitation, liquidation of the
Company after not completing a business combination transaction within the
allotted time). The decision as to whether to approve the Merger or any related
transaction may depend on an assessment of factors unrelated to the financial
analysis on which the Piper Jaffray opinion is based. The full text of the
Piper
Jaffray written opinion, attached hereto as Annex C, is incorporated by
reference into this proxy statement/prospectus. You are encouraged to read
the
Piper Jaffray opinion carefully and in its entirety for a description of the
assumptions made, matters considered, procedures followed and limitations on
the
review undertaken by Piper Jaffray in rendering its opinion. The summary of
the
Piper Jaffray opinion set forth in this proxy statement is qualified in its
entirety by reference to the full text of the opinion.
Regulatory
Matters (Page 58)
The
Company does not expect that the Merger will be subject to any state or federal
regulatory requirements other than approval of the Florida Office of Insurance
Regulation, filings under applicable securities laws and the effectiveness
of
the registration statement of the Company of which this proxy
statement/prospectus is part. The Company intends to comply with all such
requirements. We do not believe that, in connection with the completion of
the
Merger, any further consent, approval, authorization or permit of, or filing
with, any acquisition control authority will be required in any
jurisdiction.
Overview
of the Merger (Page 51)
As
part of the Merger, and pursuant to the Merger Agreement, United and United
Subsidiary will engage in a reverse merger as outlined below pursuant to which
United Subsidiary will merge with and into United, and United will become a
wholly-owned subsidiary of the Company and the current members of United will
become stockholders of FMG. As part of the Merger, FMG will be renamed United
Insurance Holdings Corp. (“UIH”).
After
giving effect to the Merger, the members of United will own approximately 60%
of
the outstanding shares of UIH, and the current stockholders of FMG will own
the
remaining 40% without regard to exercise of any outstanding
warrants.
Directors
and Management (Page 121)
Upon
completion of the Merger, the Board of Directors of the Company and its
wholly-owned subsidiary will consist of six members. Assuming the consummation
of the Merger, three of the Company’s current directors: Messrs. Gordon G.
Pratt, Larry G. Swets, Jr. and James R. Zuhlke will serve as directors of the
Company and United. Additionally, assuming the consummation of the Merger,
Messrs. Gregory C. Branch, Alec L. Poitevint, II and Kent G. Whittemore
will also serve as directors of the Company and United. Upon completion of
the
Merger, Donald J. Cronin will serve as President and Chief Executive Officer
and
Nicholas W. Griffin will serve as Chief Financial Officer of the Company. Melvin
A. Russell, Jr. will serve as Chief Underwriting Officer of United.
FIRST
AMENDMENT TO CERTIFICATE OF INCORPORATION PROPOSAL
(PAGE 61)
We
are seeking your approval to authorize the Board of Directors to amend and
restate our Certificate of Incorporation to delete provisions in the certificate
of incorporation that are specific to blank check companies. This proposal
to
approve the amendment to our Certificate of Incorporation is conditioned upon
and subject to the approval of the Merger Proposal. See the section entitled
“
The
First Amendment Proposal
.”
SECOND
AMENDMENT TO CERTIFICATE OF INCORPORATION PROPOSAL
(PAGE 65)
We
are seeking your approval to authorize the Board of Directors to amend and
restate our Certificate of Incorporation to increase the amount of authorized
shares of common stock from 20,000,000 to 50,000,000. This proposal to approve
the amendment to our Certificate of Incorporation is conditioned upon and
subject to the approval of the Merger Proposal. See the section entitled “
The
Second Amendment Proposal
.”
THIRD
AMENDMENT TO CERTIFICATE OF INCORPORATION PROPOSAL
(PAGE 67)
We
are seeking your approval to authorize the Board of Directors to amend and
restate our Certificate of Incorporation to change the name of the Company
to
United Insurance Holdings Corp. This proposal to approve the amendment to our
Certificate of Incorporation is conditioned upon and subject to the approval
of
the Merger Proposal. See the section entitled “
The
Third Amendment Proposal
.”
DIRECTOR
PROPOSAL (PAGE 68)
Director
Proposal—to elect three (3) directors to the Company’s Board of Directors
to hold office until the next annual meeting of stockholders and until their
successors are elected and qualified. This proposal to elect three directors
to
our Board of Directors is conditioned upon and subject to the approval of the
Merger Proposal. See the section entitled “
The
Director Proposal
.”
ADJOURNMENT
PROPOSAL (PAGE 78)
If,
based on the tabulated vote, there are not sufficient votes at the time of
the
Special Meeting authorizing the Company to consummate the Merger, the Company’s
Board of Directors may submit a proposal to adjourn the Special Meeting to
a
later date or dates, if necessary, to permit further solicitation of proxies.
See the section entitled “
The
Adjournment Proposal
.”
Prior
to the record date for this Special Meeting, the officers, directors or
affiliates of the Company may purchase outstanding securities of the Company
in
open market transactions and the shares so acquired would be voted in favor
of
the Merger. In the event an adjournment proposal is presented at the Special
Meeting and approved by the stockholders, the officers, directors or affiliates
of the Company may, during such adjournment period, make investor presentations
telephonically and/or in person to investors who have indicated their intent
to
vote against the Merger Proposal. Such investor presentations would be
informational only, and would be filed publicly on Current Report on
Form 8-K prior to or concurrently with presentation to any third party. The
Company will not conduct any such activities in violation of applicable federal
securities laws, rules or regulations.
THE
SPECIAL MEETING
Date,
Time and Place of Special Meeting of Our Stockholders
(Page 31)
The
Special Meeting of our stockholders will be held at 10:00 a.m. Eastern
Time,
on ,
2008, at the offices
of .
Record
Date; Who is entitled to Vote (Page 32)
You
will be entitled to vote or direct votes to be cast at the Special Meeting
if
you owned shares of our common stock at the close of business on
,
2008, which is the record date for the Special Meeting. You will have one vote
for each share of our common stock you owned at the close of business on the
record date. On the record date, there were 5,917,031 shares of our common
stock
outstanding, of which 4,733,625 shares were IPO shares. The remaining 1,183,406
shares were issued to our founders prior to our IPO.
Voting
Your Shares (Page 32)
You
can vote by signing and returning the enclosed proxy card. If you vote by proxy
card, your “proxy,” whose name is listed on the proxy card, will vote your
shares as you instruct on the proxy card. If you sign and return the proxy
card,
but do not give instructions on how to vote your shares, your shares will be
voted, as recommended by the FMG Board of Directors, “FOR” Proposal 1, the
Merger Proposal, “FOR” Proposal 2, the First Amendment Proposal; “FOR”
Proposal 3, the Second Amendment Proposal; “FOR” Proposal 4, the Third
Amendment Proposal; “FOR” Proposal 5, the Director Proposal; and “FOR”
Proposal 6, the Adjournment Proposal.
Proxies
may be solicited by mail, telephone or in person.
If
you grant a proxy, you may still vote your shares in person if you revoke your
proxy at or before the Special Meeting. If you hold your shares in street name
you can obtain physical delivery of your shares into your name, and then vote
the shares yourself. In order to obtain shares directly into your name, you
must
contact your brokerage firm representative. Brokerage firms may assess a fee
for
your conversion; the amount of such fee varies.
Quorum
and Vote Required (Page 33)
A
quorum of our stockholders is necessary to hold a valid stockholders meeting.
A
quorum will be present at the Special Meeting if a majority of the shares of
our
common stock outstanding as of the record date are presented in person or by
proxy. Abstentions and broker non-votes will count as present for the purposes
of establishing a quorum.
For
purposes of Proposal 1, under our amended and restated certificate of
incorporation, approval of the Merger Proposal will require: (i) the
affirmative vote of a majority of the shares of the Company’s common stock
issued in the IPO who vote on this proposal at the Special Meeting, and
(ii) not more than 29.99% of the shares of the Company’s common stock
issued in the IPO vote against the Merger Proposal and elect a cash conversion
of their shares. For the purposes of Proposal 2, the affirmative vote of
the majority of the Company’s issued and outstanding common stock as of the
Record Date is required to approve the First Amendment Proposal. For the
purposes of Proposal 3, the affirmative vote of the majority of the
Company’s issued and outstanding common stock as of the Record Date is required
to approve the Second Amendment Proposal. For the purposes of Proposal 4,
the affirmative vote of the majority of the Company’s issued and outstanding
common stock as of the Record Date is required to approve the Third Amendment
Proposal. For purposes of Proposal 5, the affirmative vote of the holders
of a plurality of the shares of common stock cast in the election of directors
is required. Proposals 2, 3, 4 and 5 are contingent upon our stockholders’
approval of the Merger. For purposes of Proposal 6 the affirmative vote of
a majority of the shares of the Company’s common stock that are present in
person or by proxy and entitled to vote is required to approve the
adjournment.
As
long as a quorum is established at the Special Meeting, if you return your
proxy
card without an indication of how you desire to vote, it: (i) will have the
same effect as a vote in favor of the Merger Proposal and will not have the
effect of converting your shares into a pro rata portion of the trust account
(in order for a stockholder to convert his or her shares, he or she must cast
an
affirmative vote against the Merger Proposal and make an affirmative election
on
the proxy card to convert such shares of common stock); (ii) will have the
same effect as a vote in favor of the First Amendment Proposal; (iii) will
have the same effect as a vote in favor of the Second Amendment Proposal; (iv)
will have the same effect as a vote in favor of the Third Amendment Proposal;
(v) will have no effect on the Director Proposal; and (vi) will have the same
effect as a vote in favor of the Adjournment Proposal.
FMG
ACQUISITION CORP. SELECTED FINANCIAL DATA
The
Company is providing the following selected financial information to assist
you
in your analysis of the financial aspects of the Merger. The following selected
financial and other operating data should be read in conjunction with FMG
Acquisition Corp.’s Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and its financial statements and the related notes to
those statements included elsewhere in this proxy statement. The statements
of
operations data from the period from May 22, 2007 (inception)
through March 31, 2008, and the balance sheet data as of March
31, 2008 have been derived from the Company’s financial statements included
elsewhere in this proxy statement/prospectus. Interim results are not
necessarily indicative of results for the full fiscal year and historical
results are not necessarily indicative of results to be expected in any future
period.
STATEMENTS
OF OPERATIONS
(Unaudited)
|
|
For
the three months ended March 31, 2008
|
|
May
22, 2007 (inception) to March 31, 2008
|
|
Interest
Income
|
|
$
|
166,486
|
|
$
|
434,714
|
|
|
|
|
|
|
|
|
|
Operating
costs
|
|
|
356,846
|
|
|
471,112
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
62,998
|
|
|
134,503
|
|
Net
(loss)/income
|
|
$
|
(253,358
|
)
|
$
|
(170,901
|
)
|
|
|
|
|
|
|
|
|
Maximum
number of shares subject to possible redemption:
|
|
|
|
|
|
|
|
Weighted
average number of common shares, basic and diluted
|
|
|
1,419,614
|
|
|
1,419,614
|
|
|
|
|
|
|
|
|
|
Net
income per common share,
for shares subject to possible redemption
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Approximate
weighted average number of common shares
outstanding (not subject to possible redemption)
|
|
|
|
|
|
|
|
Basic
& Diluted
|
|
|
5,917,031
|
|
|
5,917,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per common share not subject to possible
redemption,
|
|
|
|
|
|
|
|
Basic
& Diluted
|
|
$
|
(0.043
|
)
|
$
|
(0.029
|
)
|
BALANCE
SHEET
(Unaudited)
FMG
ACQUISITION CORP.
(a
corporation in the development stage)
|
|
March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
Cash
|
|
$
|
55,042
|
|
Prepaid
expenses
|
|
|
42,000
|
|
|
|
|
|
|
|
|
|
97,042
|
|
|
|
|
|
|
Other
assets
|
|
|
|
|
Cash
and cash equivalents held in Trust Account
|
|
|
37,737,092
|
|
Deferred
tax asset
|
|
|
32,210
|
|
|
|
|
|
|
|
|
|
37,769,302
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
37,866,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities,
accounts payable and accrued expenses
|
|
$
|
416,008
|
|
|
|
|
|
|
Long-term
liabilities,
deferred underwriters' fee
|
|
|
1,514,760
|
|
|
|
|
|
|
Common
stock, subject to possible redemption, 1,419,614 shares, at redemption
value
|
|
|
11,232,133
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
|
|
Preferred
stock, $.0001 par value; 1,000,000 shares authorized; none
issued
|
|
|
-
|
|
Common
stock, $.0001 par value, authorized 20,000,000 shares; 5,917,031
shares
issued and outstanding, (including 1,419,614 shares subject to
possible
redemption)
|
|
|
602
|
|
Additional
paid-in capital
|
|
|
24,873,742
|
|
Deficit accumulated
during the development stage
|
|
|
(170,901
|
)
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
24,703,443
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
37,866,344
|
|
MARKET
PRICE INFORMATION AND DIVIDEND DATA FOR COMPANY SECURITIES
The
Company consummated its IPO on October 4, 2007. In the IPO, the Company sold
4,733,625 units, each consisting of one share of the Company’s common stock and
one warrant to purchase common stock. The units were quoted on the OTC Bulletin
Board from the consummation of the IPO under the symbol FMGQU. On November
7,
2007, the common stock and warrants included in the units began trading
separately and the trading in the units continued. The shares of the Company’s
common stock and warrants are currently quoted on the OTC Bulletin Board under
the symbols “FMGQ” and “FMGQW”, respectively. The closing prices per unit, per
share of common stock and per warrant of the Company on April 1, 2008, the
last
trading day before the announcement of the execution of the Merger Agreement,
were $7.62, $7.24 and $0.36, respectively. Each warrant entitles the holder
to
purchase from the Company one share of common stock at an exercise price of
$6.00 commencing on the later of the consummation of a business combination
(if
consummated) or October 4, 2008. The Company warrants will expire at
5:00 p.m., New York City time, on October 4, 2011, or earlier upon
redemption. Prior to October 4, 2007, there was no established public trading
market for the Company’s securities.
The
following table sets forth, for the calendar quarter indicated, the quarterly
high and low sales prices of the Company’s common stock, warrants and units as
reported on the OTC Bulletin Board. The over-the-counter market quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission
and
may not necessarily represent actual transactions.
|
|
Common
Stock
|
|
Warrants
|
|
Units
|
|
Quarter
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2008
|
|
$
|
7.25
|
|
$
|
7.12
|
|
$
|
0.70
|
|
$
|
0.35
|
|
$
|
7.93
|
|
$
|
7.62
|
|
December
31, 2007
|
|
$
|
7.30
|
|
$
|
7.15
|
|
$
|
0.70
|
|
$
|
0.70
|
|
$
|
8.00
|
|
$
|
7.90
|
|
On June 11, 2008 the closing prices of our units, common stock and
warrants were $7.62, $7.28 and $0.35, respectively.
Holders
As
of ,
2008, the Record Date of the Special Meeting, there were
[ ] holders of record of
units, [ ] holders of record of the common
stock and [ ] holders of record of the
warrants. We estimate there are [ ] beneficial
owners of our units, [ ] beneficial owners of our
common stock and [ ] beneficial owners of our
warrants. Upon consummation of the Merger, FMG will be obligated to issue
8,750,000 shares of common stock to the members of United as partial
consideration for the membership units of United. For more information on
the
shares to be issued to United, see the section entitled “The Merger
Proposal—Consideration”. For more information on the effect of the issuance of
the 8,750,000 shares of common stock on the amount and percentage of present
holdings of the Company’s common equity owned beneficially by (i) each person
known by us to be the owner of more than 5% of our outstanding shares of
the
Company’s common stock, (ii) each officer and director and (iii) all officers
and directors as a group see the section entitled “Beneficial Ownership
following the Merger” on page 124.
Dividends
The
Company has not paid any cash dividends on its common stock and does not intend
to pay dividends prior to consummation of the Merger.
RISK
FACTORS
You
should consider carefully all of the material risks described below, together
with the other information contained elsewhere in this proxy statement, before
you decide whether to vote or instruct your vote to be cast to adopt the
Merger.
Additional risks and uncertainties that we are unaware of, or that we currently
deem immaterial, also may become important factors that affect us. If any
of the
following risks occur, our business, financial conditions or results of
operating may be materially and adversely affected.
RISKS
PARTICULAR TO THE MERGER
FMG’s
and United Subsidiary’s businesses are difficult to evaluate due to a lack of
operational history.
FMG
was formed on May 22, 2007 for the purpose of effecting a merger, capital stock
exchange, asset or stock acquisition, exchangeable share transaction, joint
venture or other similar business combination with one or more domestic or
international operating businesses. On October 4, 2007, the Company consummated
its IPO. Accordingly, we have limited operational history which consists of
the
founding of the Company and the evaluation of potential acquisitions. United
Subsidiary was formed solely for the purpose of the Merger and has no operating
history. FMG’s, and United Subsidiary’s operating history, to date, is not
indicative of future operating or financial performance.
Our
stockholders will experience immediate dilution as a consequence of the issuance
of common stock as consideration in the Merger. Having a minority share position
may reduce the influence our current stockholders have on the management of
the
combined company.
Following
the consummation of the Merger, the influence of our public stockholders, in
their capacity as stockholders of FMG following the Merger, will be
significantly reduced. Our current stockholders will hold, in the
aggregate, approximately 40% of the issued and outstanding common stock of
FMG
(excluding as outstanding for purposes of the calculation securities issuable
upon the exercise of our outstanding warrants and upon the exercise of the
purchase option issued to underwriters in our IPO).
Concentration
of ownership of our common stock after the Merger could delay or prevent
a
change of control.
Our
directors, executive officers and principal stockholders will beneficially
own a
significant percentage of our common stock after the Merger. They also have,
through the exercise of warrants, the right to acquire additional shares
of
common stock. As a result, these stockholders, if acting together, have the
ability to significantly influence the outcome of corporate actions requiring
stockholder approval. Additionally, under the terms of the Merger Agreement,
United and its members shall have the right to appoint up to three designees
to
serve on the Company’s Board of Directors after the Merger is consummated. The
concentration of ownership among management may have the effect of delaying
or
preventing a change in control of the post-acquisition company even if such
a
change in control would be in your interest. As of June 12, 2008, our directors,
officers and principal stockholders beneficially owned approximately 20%
of
FMG’s common stock. Following the Merger, former members of United will
beneficially own approximately 15% of the common stock of FMG, and our
reconstituted Board of Directors, management and principal stockholders will
beneficially own approximately 23% of the common stock of
FMG.
We
may waive one or more conditions to the Merger without resoliciting stockholder
approval for the Merger.
One
or more conditions to our obligation to complete the Merger may be waived
in
whole or in part to the extent legally allowable either unilaterally or by
agreement of FMG, United and United Subsidiary. Waivable conditions include
the
accuracy of the representations and warranties contained in the Merger
Agreement, performance of all covenants and obligations required to be performed
prior to consummation of the Merger (other than approval of the required
number
of our stockholders and United’s members and conversion of not more than 29.99%
of our shares issued in the Company's IPO). These conditions may be waived
unilaterally by any of the parties to the Merger Agreement. Depending upon
the
condition, our Board of Directors will evaluate the materiality of any such
waiver to determine whether amendment to this proxy statement and
re-solicitation of proxies is necessary. FMG will act in compliance with
relevant state laws and U.S. securities laws with respect to determining
whether
an amendment to the proxy statement and re-solicitation of the proxies is
necessary. In the event our Board of Directors determines any such waivers
are
not significant enough to require re-solicitation of stockholders, we would
have
the discretion to complete the Merger without seeking further stockholder
approval.
There
may be a conflict of interest between our management and our stockholders,
which
may have influenced management’s decision to enter into the Merger Agreement and
recommending our stockholders to vote in favor of the
Merger.
Our
officers and directors will not receive reimbursement for any out-of-pocket
expenses incurred by them to the extent such expenses exceed the amount of
proceeds available to the Company for working capital, unless a business
combination is completed. In addition, if we do not complete the Merger or
another business combination and are forced to liquidate, the trust account
proceeds may be subject to claims that could take priority over the claims
of
our public stockholders. Gordon G. Pratt, our current President and Chief
Executive Officer, and Larry G. Swets, Jr., our current Chief Financial Officer
and Secretary, have each entered into separate indemnity agreements under
which
they will be personally liable under certain circumstances to ensure that
the
proceeds of the trust account are not reduced by the claims of various vendors
that are owed money by us for services rendered or contracted for, or claims
of
other parties with which we have contracted. Further, all of our directors
own
common stock and warrants purchased in private placements consummated prior
to
our IPO, but have waived their right to proceeds from the liquidation of
the
trust account if we are unable to complete a business combination. The shares
of
common stock and warrants owned by our officers and directors and their
affiliates will be worthless if we do not consummate a business combination.
The
financial interests of all of our officers and directors may have influenced
their motivation in causing us to enter into the Merger Agreement and
recommending our stockholders to vote in favor of the Merger.
Completion
of the Merger is subject to a number of conditions.
The
obligations of FMG, United and United Subsidiary to consummate the Merger
are
subject to the satisfaction or waiver of specified conditions set forth in
the
Merger Agreement. Such conditions include, but are not limited to, satisfaction
by all parties of covenants and obligations contained in the Merger Agreement,
the accuracy in all material respects on the date of the Merger Agreement
and
the Closing Date of all of FMG’s and United’s representations and warranties,
non-existence of legal action against FMG, United and United Subsidiary,
effectiveness of the registration statement of which this proxy
statement/prospectus is part, obtaining material consents, approval of the
required number of our stockholders and United’s members and conversion of not
more than 29.99% of our shares issued in the Company's IPO, stockholder approval
of the First and Second Amendment Proposals, and execution of ancillary
agreements. It is possible some or all of these conditions will not be satisfied
or waived by any of FMG, United or United Subsidiary, and therefore, the
Merger
may not be consummated. See “Conditions to the Consummation of the Merger.” In
the event the Merger is not consummated, we will seek to effectuate a different
business combination.
The
sale or even the possibility of sale of the common stock to be issued to United
and its members could have an adverse effect on the price of FMG’s securities
and make it more difficult to obtain financing in the
future.
In
connection with the Merger, we agreed to grant to United and their members,
8,750,000 shares of common stock as part of the consideration. The sale or
even
the possibility of sale of these shares could have an adverse effect on the
price of our securities on the equity market and on our ability to obtain
financing in the future, in the event such financing is required. We do not
expect to seek debt or equity financing for at least the first twelve months
following consummation of the Merger. At the time any financing is required,
we
will make a determination of the preferred form of such financing and the
type
of financing source to approach (e.g. debt or equity or bank line of credit).
In
the event a substantial percentage of our public stockholders vote against
the
Merger and seek conversion of their common stock, we may need to borrow
additional funds to consummate the Merger.
The
Merger may still be consummated as long as less than 30% of the common stock
initially purchased in the initial public offering is voted against the Merger
and the holders of such shares seek conversion of their common stock into
a pro
rata portion of the amount held in the trust account. In such case, those
stockholders seeking conversion shall be entitled to payments out of the
trust
account prior to our paying the $25,000,000 cash portion of the Merger
consideration to United. Accordingly, we may need to arrange third party
financing to help fund the Merger or issue additional shares of common stock
to
United to make up for a shortfall in funds in the event a larger percentage
of
stockholders exercise their conversion rights than we expect. Raising additional
funds to cover any shortfall may involve dilutive equity financing or incurring
indebtedness at higher than desirable levels. The issuance of additional
securities may result in further dilution to our existing stockholders. In
the
event we are unable to raise such additional funds or United refuses to accept
additional securities in lieu of cash, we may be unable to consummate the
Merger. In the event the Merger is consummated, the combined company will
have
less cash available to fund its operations. However, the current cash flow
of
United is adequate to support its operations for at least twelve
months following the Merger. In the event we are able to secure financing,
the incurrence of debt could result in:
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default
and foreclosure on our assets if our operating cash flow after
the Merger
were insufficient to pay our debt
obligations;
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acceleration
of our obligations to repay the indebtedness even if we have made
all
principal and interest payments when due, if the debt security
contained
covenants that required the maintenance of certain financial ratios
or
reserves and any such covenant were breached without a waiver or
renegotiation of that
covenant;
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our
immediate payment of all principal and accrued interest, if any,
if the
debt security was payable on
demand;
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·
|
covenants
that limit our ability to pay dividends on our common stock, to
acquire
capital assets or make additional acquisitions;
and
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our
inability to obtain additional financing, if necessary, if the
debt
security contained covenants restricting our ability to obtain
additional
financing while such security was
outstanding.
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Management
of the Company following the Merger will have broad discretion with respect
to
the specific application of the net proceeds of the trust
account.
In
the
event the Merger is consummated, the amounts then-remaining in the trust
account
will be released to the Company, which will have unlimited discretion as
to the
use of such proceeds. Management may use these proceeds in a manner with
which
you may not agree.
We
May Pay Cash Dividends On Our Common Stock.
We
have
not paid or declared any dividends on our common stock and do not currently
intend to do so. However, we may determine to pay dividends in the future,
including prior to the consummation of the Merger. In the event we pay any
dividends prior to the Merger, such payment, whether alone or when taken
together with any payments required to be made to holders of common stock
seeking conversion, may leave us with insufficient funds remaining in the
trust
account to pay to the members of United as part of the Merger consideration.
In
such event, we may have to raise additional funds from third parties through
the
sale of equity or debt securities, which could, among other things, encumber
our
assets, place restrictions on our ability to manage our business or further
dilute your ownership interest in FMG. In the event any dividend is paid
following consummation of the Merger, it would have the effect of reducing
the
amount of cash available to the Company.
RISKS
RELATED TO UNITED’S BUSINESS
Exposure
to natural and man-made catastrophes could materially and adversely affect
United’s results of operations, financial condition and
liquidity.
United’s
property and casualty insurance operations expose it to claims arising out
of
catastrophes. Catastrophes can be caused by various natural events, including
hurricanes, windstorms, earthquakes, hail, severe winter weather and fires.
Catastrophes can also be man-made, such as terrorist attacks (including those
involving nuclear, biological, chemical or radiological events) or consequences
of war or political instability. The incidence and severity of catastrophes
are
inherently unpredictable. It is possible that both the frequency and severity
of
natural and man-made catastrophic events will increase. Although the trend
of
increased severity and frequency of storms was not evident in the United
States
in 2007 and 2006, it is possible the overall trend of increased severity
and
frequency of storms experienced in the United States in 2005 and 2004, and
in
the Caribbean during 2007, may continue in the foreseeable
future.
Catastrophes
can result in losses in United’s property insurance lines and may generally
result in both an increase in the number of claims incurred and an increase
in
the dollar amount of each claim asserted. The occurrence of such claims from
natural and man-made catastrophes could therefore materially and adversely
affect United’s results of operations for any year and may materially harm its
financial position, which in turn could adversely affect its financial strength
and impair its ability to raise capital on acceptable terms or at all. In
addition, catastrophic events could cause United to exhaust its available
reinsurance limits and could adversely impact the cost and availability of
reinsurance. Such events can also impact the credit of its reinsurers.
Catastrophic events could also adversely impact the credit of the issuers
of
securities, such as states or municipalities, in whom United has invested,
which
could materially and adversely affect United’s results of
operations.
In
addition to catastrophes, the accumulation of losses from smaller
weather-related events in a fiscal quarter or year could materially and
adversely impact United’s results of operations in those periods.
United’s
ability to manage its exposure to catastrophic events may be limited by new
legislation and regulations.
States
have from time to time passed legislation, and regulators have taken action,
that has the effect of limiting the ability of insurers to manage catastrophe
risk, such as legislation prohibiting insurers from reducing exposures or
withdrawing from catastrophe-prone areas or mandating that insurers participate
in residual markets. In addition, following catastrophes, there are sometimes
legislative initiatives and court decisions which seek to expand insurance
coverage for catastrophe claims beyond the original intent of the policies.
Further, United’s ability to increase pricing to the extent necessary to offset
rising costs of catastrophes requires approval of regulatory authorities.
United’s ability or willingness to manage its catastrophe exposure by raising
prices, modifying underwriting terms or reducing exposure to certain geographies
may be limited due to considerations of public policy, the evolving political
environment and United’s ability to penetrate other geographic markets. United
cannot predict whether and to what extent new legislation and regulations
that
would affect its ability to manage its exposure to catastrophic events will
be
adopted, the timing of adoption or the effects, if any, they would have on
United’s ability to manage its exposure to catastrophic events.
Because
United currently conducts business in only one state, its financial results
may
be disproportionately affected by catastrophes and other conditions in that
state.
United’s
business is currently concentrated in only one state – the State of
Florida. Therefore, its revenues and profitability are subject to prevailing
regulatory, legal, economic, political, demographic, competitive, weather
and
other conditions in the State of Florida. Changes in any of these conditions
could make it less attractive for United to do business in Florida and would
have a more pronounced effect on United than it would on other insurance
companies that are geographically diversified. In addition, the fact United’s
business is concentrated only in the State of Florida subjects it to increased
exposure to certain catastrophic events such as hurricanes and floods. This
increased exposure to catastrophic events also results in an increased risk
of
losses as the extent of losses from a catastrophic event is a function of
both
the total amount of insured exposure in the area affected by the event and
the
severity of the event. Because United’s business is concentrated in Florida, the
occurrence of one or more catastrophic events or other conditions affecting
losses in Florida could have a material adverse effect on United’s financial
condition and results of operations.
If
market conditions increase the cost or decrease the availability of reinsurance,
United may be required to bear increased risks or reduce the level of its
underwriting commitment.
As
part
of United’s risk management strategy, it purchases reinsurance coverage from
third-party reinsurers. Market conditions beyond United’s control, including
catastrophic events, determine the availability and cost of the reinsurance
it
purchases, which may in turn affect the growth of its business and its
profitability. United may be unable to maintain its current reinsurance
coverage, to obtain additional reinsurance coverage in the event its current
reinsurance limits are exhausted by a catastrophic event, or to obtain other
reinsurance coverage in adequate amounts or at acceptable rates. Similar
risks
exist whether United is seeking to replace coverage terminated during the
applicable coverage period or to renew or replace coverage upon the expiration
of such coverage. If United is unable to renew its expiring coverage or to
obtain new reinsurance coverage, either its net exposure to risk would increase
or, if it is unwilling to accept an increase in net risk exposures, United
would
have to reduce the amount of risk it underwrites.
A
single catastrophe could cause us to exhaust available reinsurance limits
and
could adversely impact the cost and availability of reinsurance.
In
the
event United exhausts its available reinsurance limits, it may have to pay
any
future claims out of its own pocket. Alternatively, they could seek additional
sources of reinsurance, which can be expected to be a costly and time consuming
process which may not ultimately be successful. In the event United is
successful in finding an additional or replacement reinsurer, such reinsurance
policy can be expected to be costly. Catastrophic events can also impact
the
credit of United’s reinsurers and the credit of the issuers of securities, such
as states or municipalities, in whom United has invested, any of which could
materially and adversely affect United’s results of
operations.
If
United’s actual claims exceed its loss reserves, its financial results could be
materially and adversely affected.
If
actual
claims exceed United’s loss reserves, or if changes in the estimated level of
loss reserves are necessary, United’s financial results could be materially and
adversely affected. Claims and claim adjustment expense reserves (loss reserves)
represent management's estimate of ultimate unpaid costs of losses and loss
adjustment expenses for claims that have been reported and claims that have
been
incurred but not yet reported. Loss reserves do not represent an exact
calculation of liability, but instead represent management estimates, generally
utilizing actuarial expertise and projection techniques, at a given accounting
date. These loss reserve estimates are expectations of what the ultimate
settlement and administration of claims will cost upon final resolution in
the
future, based on United’s assessment of facts and circumstances then known,
reviews of historical settlement patterns, estimates of trends in claims
severity and frequency, expected interpretations of legal theories of liability
and other factors. In establishing reserves, United has also taken into account
estimated recoveries from reinsurance, salvage and
subrogation.
The
process of estimating loss reserves involves a high degree of judgment and
is
subject to a number of variables. These variables can be affected by both
internal and external events, such as changes in claims handling procedures,
economic inflation, legal trends and legislative changes, and varying judgments
and viewpoints of the individuals involved in the estimation process, among
others. The impact of many of these items on ultimate costs for claims and
claim
adjustment expenses is difficult to estimate. Loss reserve estimation
difficulties also differ significantly by product line due to differences in
claim complexity, the volume of claims, the potential severity of individual
claims, the determination of occurrence date for a claim and reporting lags
(the
time between the occurrence of the policyholder event and when it is actually
reported to the insurer).
United
continually refines its loss reserve estimates in a regular, ongoing process
as
historical loss experience develops and additional claims are reported and
settled. Informed judgment is applied throughout the process, including the
application of various individual experiences and expertise to multiple sets
of
data and analyses. Different experts may choose different assumptions when
faced
with material uncertainty, based on their individual backgrounds, professional
experiences and areas of focus. Hence, such experts may at times produce
estimates materially different from each other. Experts providing input to
the
various estimates and underlying assumptions include actuaries, underwriters,
claims personnel and lawyers. Therefore, management may have to consider
varying
individual viewpoints as part of its estimation of loss
reserves.
United
attempts to consider all significant facts and circumstances known at the time
loss reserves are established. Due to the inherent uncertainty underlying loss
reserve estimates, the final resolution of the estimated liability for claims
and claim adjustment expenses will likely be higher or lower than the related
loss reserves at the reporting date. Therefore, actual paid losses in the future
may yield a materially different amount than is currently reserved.
Because
of the uncertainties set forth above, additional liabilities resulting from
one
insured event, or an accumulation of insured events, may exceed the current
related reserves. In addition, our estimate of claims and claim adjustment
expenses may change. These additional liabilities or increases in estimates,
or
a range of either, cannot now be reasonably estimated and could materially
and
adversely affect United’s results of operations.
There
are inherent difficulties in estimating the ultimate costs of catastrophes,
which further complicate our ability to estimate reserves.
There
are
inherent difficulties in estimating risks that impact the estimation of ultimate
costs for catastrophes. These difficulties also affect United’s ability to
estimate reserves for catastrophes. For example, the estimation of reserves
related to hurricanes can be affected by the inability to access portions
of the
impacted areas, the complexity of factors contributing to the losses, the
legal
and regulatory uncertainties and the nature of the information available
to
establish the reserves. Complex factors include, but are not limited to,
determining whether damage was caused by flooding versus wind; evaluating
general liability and pollution exposures; estimating additional living
expenses; the impact of demand surge; infrastructure disruption; fraud; the
effect of mold damage; business interruption costs; and reinsurance
collectibility. The timing of a catastrophe's occurrence, such as at or near
the
end of a reporting period, can also affect the information available to United
in estimating reserves for that reporting period. The estimates related to
catastrophes are adjusted as actual claims emerge and additional information
becomes available. Because of the inherent uncertainty in estimating reserves
for catastrophes, we cannot be sure that our ultimate losses and loss adjustment
expenses will not exceed our reserves. If and to the extent that our reserves
are inadequate, we will be required to increase our reserves for losses and
loss
adjustment expenses and incur a charge to earnings in the period during which
our reserves are increased, which could materially and adversely affect our
financial condition and results of operations.
United's business
is cyclical, which affects its financial performance and may affect the
market price of the combined company's common stock.
Historically,
the financial performance of the property and casualty insurance
industry has been cyclical, characterized by periods of severe price
competition and excess underwriting capacity, or soft markets, followed by
periods of high premium rates and shortages of underwriting capacity, or
hard
markets. The profitability of most property and casualty insurance
companies, including United, tend to follow this cyclical pattern.
This cyclicality is due in large part to the actions of United's
competitors and to general economic factors that are not within United's
control, and therefore, United cannot predict how long any given hard or
soft market will last. If United has to reduce premiums or limit premium
increases due to competitive pressures on pricing in a softening
market, United may experience a reduction in its premiums written and
in its profit margins and revenues, which could adversely
affect United's financial results and the market price of the combined
company's common stock.
United's business
is seasonal, which affects its financial performance and may affect the
market price of the combined company’s common
stock.
United’s
business has historically been seasonal. We generally experience higher
losses during the third quarter of the year as a result of an increase
in claims due to weather conditions in Florida during hurricane
season. For example, storms may cause property damage that impacts claim
incidence and severity. The recurrence of these seasonal patterns, or any
deviation from them, could affect the market price of our common stock.
The
market price of our common stock may be volatile.
The
trading price of our common stock following the Merger may fluctuate
substantially, depending on many factors, some of which are beyond our control
and may not be related to our operating performance. Factors that could cause
such fluctuations include, but are not limited to, the following:
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variations
in actual or anticipated operating results or changes in the expectations
of financial market analysts with respect to our
results;
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investor
perception of the property and casualty insurance industry in general
and
us in particular;
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market
conditions in the insurance industry and any significant volatility
in the
market price and trading volume of insurance
companies;
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major
catastrophic events, especially
hurricanes;
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sales
of large blocks of Company stock or sales by Company insiders;
or
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departures
of key personnel.
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United
has debt outstanding and failure to comply with the terms of its loan agreements
could have an adverse effect on United’s ability to grow and write additional
insurance policies.
As
of May
26, 2008, United’s total long-term debt outstanding was approximately $26.2
million. Its long-term debt includes the following:
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$6.2
million in principal amount outstanding under the loan agreement
between
Columbus Bank and Trust Company (“CB&T”), United, and United Insurance
Management, L.C. (
“
UIM
”
)
consisting
of a term loan in the principal amount of $33 million;
and
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$20.0
million in principal and interest under UPCIC’s surplus note with the
State Board of Administration of Florida
(“SBA”).
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These
loan agreements contain certain significant covenants, including covenants
requiring the maintenance of minimum specified financial ratios and balances.
United’s failure to meet its payment obligations or to comply with any of these
covenants could result in an event of default which, if not cured or waived,
could result in increased interest rates on United’s indebtedness or the
acceleration of United’s outstanding debt obligations or both. In addition, if
an event of default occurs under one of these loan agreements, CB&T can
elect to take possession of, sell, lease or otherwise dispose of any of United’s
assets that were pledged as collateral for its loan.
As
of
December 31, 2007 and March 31, 2008, UPCIC was not in compliance with the
ratio
of net written premium to surplus requirement of 2:1 (the “Minimum Writing
Ratio”) contained in the SBA loan agreement. As a result, the SBA increased
UPCIC’s interest rate on the SBA loan from the stated rate of interest by 450
basis points to 8.6% for the quarter ended March 31, 2008. If UPCIC is not
in
compliance with the Minimum Writing Ratio by June 30, 2008, it will continue
to
incur an increased rate of interest on the SBA loan of up to 450 basis points
depending on the amount of the deficiency. United’s management expects that
UPCIC’s ratio of net written premium to surplus will be at least 1.5:1 at June
30, 2008, and, as a result, UPCIC will incur an interest rate charge of 25
basis
points above the stated rate of interest for the third quarter of 2008. If
UPCIC’s ratio of net written premium to surplus is below 1.5:1 for three
consecutive quarters following December 31, 2007, UPCIC will be obligated
to
repay a portion of the SBA note such that the Minimum Writing Ratio will
be
obtained for the following quarter.
The
SBA
note provides that the SBA may, among other things, declare its loan immediately
due and payable for all defaults existing under the SBA note.
Acceleration
of the principal and interest under the SBA loan would limit, but not preclude,
United Insurance’s ability to write additional insurance policies.
The
effects of emerging claim and coverage issues on the insurance business are
uncertain.
As
industry practices and legal, judicial, social and other environmental
conditions change, unexpected and unintended issues related to claim and
coverage may emerge. These issues may adversely affect United’s business
following the Merger by either extending coverage beyond its underwriting intent
or by increasing the number or size of claims. Examples of emerging claims
and
coverage issues include, but are not limited to:
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adverse
changes in loss cost trends, including inflationary pressures in
medical
costs and home repair costs;
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judicial
expansion of policy coverage and the impact of new theories of liability;
and
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plaintiffs
targeting property and casualty insurers, in purported class action
litigation relating to claims-handling and other
practices.
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In
some
instances, these emerging issues may not become apparent for some time after
issuance of the affected insurance policies. As a result, the full extent of
liability under insurance policies we may issue following the Merger may not
be
known for many years after the policies are issued.
The
effects of these and other unforeseen emerging claim and coverage issues are
extremely hard to predict and could harm United’s business and materially and
adversely affect our results of operations and future operations.
United
may not be able to collect all amounts due to it from reinsurers, and
reinsurance coverage may not be available in the future at commercially
reasonable rates or at all.
United
uses, and we expect to continue to use following the Merger, reinsurance
to help
manage our exposure to property and casualty risks. The availability and
cost of
reinsurance are each subject to prevailing market conditions which can affect
business volume and profitability. Although reinsurers are liable to United
to
the extent of the ceded reinsurance, United remains liable as the direct
insurer
on all risks reinsured. As a result, ceded reinsurance arrangements do not
eliminate United’s obligation to pay claims. Accordingly, United is subject to
credit risk with respect to its ability to recover amounts due from reinsurers.
In the past, certain reinsurers have ceased writing business and entered
into
runoff. Some of United’s reinsurance claims may be disputed by the reinsurers,
and United may ultimately receive partial or no payment.
In
a
number of jurisdictions, particularly the European Union and the United Kingdom,
a reinsurer is permitted to transfer a reinsurance arrangement to another
reinsurer, which may be less creditworthy, without a counterparty's consent,
provided that the transfer has been approved by the applicable regulatory
and/or
court authority. United does not currently have any reinsurance arrangements
that permit such a transfer. However, United may enter into such arrangements
in
the future, in which case the ability of reinsurers to transfer their risks
to
other, less creditworthy reinsurers would impact United’s risk of collecting
amounts due to it.
Based
on
the foregoing, United may not be able to collect all amounts due to it from
reinsurers, and reinsurance coverage may not be available to it in the future
at
commercially reasonable rates or at all, and thus United’s results of operations
and future operations could be materially and adversely
affected.
We
will be exposed to credit risk in certain of our business operations and in
our
investment portfolio.
We
will
be exposed to credit risk in several areas of our business operations, including
credit risk relating to reinsurance, as discussed above, and credit risk
associated with commissions paid to independent agents. We pay commissions
to
our agents in advance, on an annual basis. Therefore, if an insurer cancels
a
policy during the policy year, the agent will owe us a pro rata portion of
the
commission we paid to such agent, based on the number of months during the
policy year that the policy was not in force. Typically, we deduct any such
commissions owed to us from commissions on other policies we owe to the agent.
If we do not owe the agent any other commissions, then we will be subject
to the
risk that the agent may not be able to repay us the balance of a commission,
which could adversely affect our financial position.
The
value
of our investment portfolio will also be subject to the risk that certain
investments may become impaired due to a deterioration in the financial position
of one or more issuers of securities held in our portfolio, or due to a
downgrade of the credit ratings of an insurer that guarantees an issuer's
payments of such investments in our portfolio. In addition, defaults by the
issuer and, where applicable, its guarantor, of certain investments that result
in the failure of such parties to fulfill their obligations with regard to
any
of these investments could reduce our net investment income and net realized
investment gains or result in investment losses.
While
we
will attempt to manage these risks through underwriting and investment
guidelines, collateral requirements and other oversight mechanisms, our efforts
may not be successful. To a large degree, the credit risk we face is a function
of the economy; accordingly, we face a greater risk in an economic downturn
or
recession. As a result, our exposure to any of the above credit risks could
materially and adversely affect our results of operations.
Competition
could harm our ability to maintain or increase United’s profitability and
premium volume following the Merger.
The
property and casualty insurance industry is highly competitive, and we believe
it will remain highly competitive for the foreseeable future. We compete
with
both regional and national insurers as well as Florida domestic property
and
casualty companies, some of which have greater financial resources than we
do.
Based on legislation passed in 2007, Citizens Property Insurance Corporation
(“Citizens”), a Florida state-supported insurer, is also authorized to compete
with us. Our primary competitors include Universal Insurance Company of North
America, Olympus Insurance Group and Universal Property & Casualty. The
principal competitive factors in our industry are price, service, commission
structure and financial condition. In addition, our competitors may offer
products for alternative forms of risk protection. If competition limits
our
ability to retain existing business or write new business at adequate rates,
our
results of operations could be materially and adversely affected.
The
insurance industry is the subject of a number of investigations by state and
federal authorities in the United States. We cannot predict the outcome of
these
investigations or the impact on our business practices or financial
results.
As
part
of ongoing, industry-wide investigations, we may from time to time receive
subpoenas and written requests for information from government agencies and
authorities, including from the Attorney General of the State of Florida,
Florida insurance and business regulators and the Securities and Exchange
Commission. If we are subpoenaed for information by government agencies and
authorities, potential outcomes could include enforcement proceedings or
settlements resulting in fines, penalties and/or changes in business practices
that could materially and adversely affect our results of operations and future
growth prospectus. In addition, these investigations may result in changes
in
laws and regulations affecting the industry in general which could, in turn,
also materially and adversely affect our results of operations.
The
insurance business is heavily regulated and changes in regulation may reduce
our
profitability and limit our growth following the Merger.
Following
the Merger, we will be extensively regulated and supervised in the jurisdictions
in which we conduct business, including licensing and supervision by government
regulatory agencies in such jurisdictions. This regulatory system is generally
designed to protect the interests of policyholders, and not necessarily the
interests of insurers, their stockholders and other investors. This regulatory
system also addresses authorization for lines of business, capital and surplus
requirements, limitations on the types and amounts of certain investments,
underwriting limitations, transactions with affiliates, dividend limitations,
changes in control, premium rates and a variety of other financial and
non-financial components of an insurer's business.
In
recent
years, the state insurance regulatory framework has come under increased federal
scrutiny, and some state legislatures have considered or enacted laws that
may
alter or increase state authority to regulate insurance companies and insurance
holding companies. Further, the National Association of Insurance Commissioners
(“NAIC”) and state insurance regulators continually reexamine existing laws and
regulations, specifically focusing on modifications to holding company
regulations, interpretations of existing laws and the development of new laws
and regulations. In addition, Congress and some federal agencies from time
to
time investigate the current condition of insurance regulation in the United
States to determine whether to impose federal or national regulation or to
allow
an optional federal charter, similar to the option available to most banks.
We
cannot predict the effect any proposed or future legislation or NAIC initiatives
may have on the conduct of our business following the Merger.
Although
the United States federal government does not directly regulate the insurance
business, changes in federal legislation, regulation and/or administrative
policies in several areas, including changes in financial services regulation
(e.g., the repeal of the McCarran-Ferguson Act) and federal taxation, can
significantly harm the insurance industry.
Insurance
laws or regulations that are adopted or amended may be more restrictive than
current laws or regulations and may result in lower revenues and/or higher
costs
and thus could materially and adversely affect our results of operations and
future growth prospectus.
A
downgrade in United’s financial strength rating could adversely impact our
business volume, adversely impact our ability to access the capital markets
and
increase our borrowing costs, following the Merger.
Financial
strength ratings have become increasingly important to an insurer's competitive
position. Rating agencies review their ratings periodically, and our current
ratings may not be maintained in the future. A downgrade in our rating following
the Merger could negatively impact our business volumes, as it is possible
demand for certain of our products in certain markets may be reduced or our
ratings could fall below minimum levels required to maintain existing business.
Additionally, we may find it more difficult to access the capital markets and
we
may incur higher borrowing costs. If significant losses, such as those resulting
from one or more major catastrophes, or significant reserve additions were
to
cause our capital position to deteriorate significantly, or if one or more
rating agencies substantially increase their capital requirements, we may need
to raise equity capital in the future in order to maintain our ratings or limit
the extent of a downgrade. For example, a continued trend of more frequent
and
severe weather-related catastrophes may lead rating agencies to substantially
increase their capital requirements.
Our
investment portfolio may suffer reduced returns or losses.
Investment
returns are expected to be an important part of our overall profitability
following the Merger. Accordingly, fluctuations in interest rates or in the
fixed income, real estate, equity or alternative investment markets could
materially and adversely affect our results of operations.
Changes
in the general interest rate environment will affect our returns on, and the
market value of, our fixed income and short-term investments following the
Merger. A decline in interest rates reduces the returns available on new
investments, thereby negatively impacting our net investment income. Conversely,
rising interest rates reduces the market value of existing fixed income
investments. In addition, defaults under, or impairments of, any of these
investments as a result of financial problems with the issuer and, where
applicable, its guarantor of the investment could reduce our net investment
income and net realized investment gains or result in investment
losses.
We
may
decide to invest a portion of our assets following the Merger in equity
securities or other investments, which are subject to greater volatility than
fixed income investments. General economic conditions, stock market conditions
and many other factors beyond our control can adversely affect the value of
our
non-fixed income investments and the realization of net investment income.
As a
result of these factors, we may not realize an adequate return on our
investments, we may incur losses on sales of our investments and we may be
required to write down the value of our investments, which could reduce our
net
investment income and net realized investment gains or result in investment
losses.
The
value
of our investment portfolio can be subject to valuation uncertainties when
the
investment markets are dislocated. The valuation of investments is more
subjective when the markets are illiquid and may increase the risk that the
estimated fair value (i.e., the carrying amount) of the investment portfolio
is
not reflective of prices at which actual transactions would occur.
Our
investment portfolio may be invested, in significant part, in tax-exempt
obligations. Our portfolio may also benefit from certain other tax laws,
including, but not limited to, those governing dividends-received deductions
and
tax credits. Federal and/or state tax legislation could be enacted that would
lessen or eliminate some or all of these tax advantages and could adversely
affect the value of our investment portfolio. This result could occur in the
context of deficit reduction or various types of fundamental tax
reform.
United
depends on its network of independent agents for revenues, and therefore,
United’s business may be materially and adversely affected if it cannot retain
and attract independent agents or if it experiences disruptions in its
relationships with its independent agents.
United’s
network of 1,400 independent agents accounts for approximately 64% of the
gross
premiums on insurance policies that it writes and constitutes its primary
distribution channel for its products. Many of United’s competitors also rely on
independent agents. Independent agents are not obligated to market or sell
United’s insurance products or consult with United. As a result, United must
compete with other insurers for independent agents’ business. Some of
United’s competitors may offer a larger variety of products, lower prices for
insurance coverage and higher commissions for independent agents. If United’s
products, pricing and commissions do not remain competitive, United may find
it
more difficult to attract business from independent agents to sell its
products. A material reduction in the amount of United’s products that
independent agents sell would negatively affect its results of operations.
A
certain portion of United’s business is concentrated with relatively few agents.
For example, for the three months ended March 31, 2008, and the year ended
December 31, 2007, our top five agents produced 36% and 25%, respectively,
of our gross premiums written. Loss of all or a substantial portion of the
business provided through such agents and brokers could materially and adversely
affect United’s future business volume and results of operations.
United
relies on Internet applications for the marketing and sale of certain products
through its agents, and may increasingly rely on Internet applications and
toll-free numbers for distribution following the Merger. If Internet disruptions
occur causing United’s independent agents frustration with its business
platforms or distribution initiatives, the resulting loss of business could
materially and adversely affect United’s future business volume and results of
operations.
We
could be adversely affected if United’s controls to ensure compliance with
guidelines, policies and legal and regulatory standards are not effective.
United’s
business is highly dependent on its ability to engage on a daily basis in
a
large number of insurance underwriting, claim processing and investment
activities, many of which are highly complex and are subject to state laws
and
regulations in Florida. These activities, involve, among other things:
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the
use of non-public consumer information and related privacy
issues;
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the
use of credit history in
underwriting;
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limitations
on the ability to charge additional policy
fees;
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limitations
on the payment of dividends;
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limitations
on types and amounts of
investments;
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the
acquisition or disposition of an insurance company or of any company
controlling an insurance
company;
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the
purchase of reinsurance;
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reporting
with respect to financial condition;
and
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periodic
financial and market conduct examinations performed by state insurance
department examiners.
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United
develops internal guidelines and policies in an effort to ensure compliance
with
legal and regulatory standards governing its business. A control system,
no
matter how well designed and operated, can provide only reasonable assurance
that the control system's objectives will be met. If United’s controls prove to
be ineffective, it could lead to financial loss, unanticipated risk exposure
(including underwriting, credit and investment risk) or damage to United’s
reputation.
United’s
failure to implement and maintain adequate internal controls over financial
reporting in its business could have a material adverse effect on its business,
financial condition, results of operations and stock price.
If
the
Merger is consummated, United expects to comply with Section 404 of the
Sarbanes-Oxley Act of 2002 no later than the time it is required to file
its
annual report for fiscal year 2008 with the Securities and Exchange Commission.
Section 404 requires annual management assessments of the effectiveness of
United’s internal controls over financial reporting and a report by United’s
independent auditors on the effectiveness of our internal controls. United
is in
the process of documenting its internal control procedures in order to satisfy
the requirements of Section 404. United has begun to take measures to
address and improve its financial reporting and compliance capabilities and
it
is in the process of instituting changes to satisfy its obligations as a
public
company, including the requirements associated with the Sarbanes-Oxley Act
of
2002.
If
United
fails to achieve and maintain the adequacy of its internal controls in
accordance with applicable standards as then in effect, and as supplemented
or
amended from time to time, United may be unable to conclude on an ongoing
basis
that it has effective internal controls over financial reporting in accordance
with Section 404. Moreover, effective internal controls are necessary for
United to produce reliable financial reports. If United cannot produce reliable
financial reports or otherwise maintain appropriate internal controls, its
business, financial condition and results of operations could be harmed,
investors could lose confidence in its reported financial information, and
the
market price for its stock could decline.
If
we experience difficulties with technology, data security and/or outsourcing
relationships following the Merger our ability to conduct our business could
be
negatively impacted.
While
technology can streamline many business processes and ultimately reduce the
cost
of operations, technology initiatives present certain risks. United’s business
is highly dependent upon its contractors and third-party administrators ability
to perform, in an efficient and uninterrupted fashion, necessary business
functions, such as the processing of new and renewal business, and the
processing and payment of claims. Because our information technology and
telecommunications systems interface with and depend on these third-party
systems, we could experience service denials if demand for such service exceeds
capacity or a third-party system fails or experiences an interruption. If
sustained or repeated, such a business interruption, system failure or service
denial could result in a deterioration of our ability to write and process
new
and renewal business, provide customer service, pay claims in a timely manner
or
perform other necessary business functions. Computer viruses, hackers and other
external hazards could expose our data systems to security breaches. These
increased risks, and expanding regulatory requirements regarding data security,
could expose us to data loss, monetary and reputational damages and significant
increases in compliance costs. As a result, our ability to conduct our business
might be adversely affected.
Attempts
to grow our business could have an adverse effect on the
Company.
Although
rapid growth may not occur, to the extent that it does occur, it could place
a
significant strain on our financial, technical, operational and administrative
resources. Our planned growth may result in increased responsibility for both
existing and new management personnel. Effective growth management will depend
upon our ability to integrate new personnel, to improve our operational,
management and financial systems and controls, to train, motivate and manage
our
employees, and to increase our services and capabilities. Our ability to
effectively manage our future growth may have a material and adverse effect
on
our results of operations, financial condition, and viability as a business.
In
addition, growth may not occur or growth may not produce profits for the
Company.
United
has entered into certain debt agreements, which may reduce our financial
flexibility following the Merger.
In
February of 2007, United and UIM entered into a loan agreement with CB&T
which provides for a term loan in the amount of $33 million. The CB&T term
note provides for accrual and monthly payment of interest on the amount of
principal then outstanding under the note and provides for principal to be
paid
in 36 equal monthly installments of approximately $0.9 million. The entire
unpaid principal balance, as well as all accrued and unpaid interest thereon,
will be due and payable no later than February 20, 2010.
On
September 22, 2006, UPCIC entered into a surplus note with the SBA (the “SBA
note”). Under the SBA note, which has a 20 year term, UPCIC is required to make
quarterly payments (October 1, January 1, April 1, and July 1). For the first
three years of the SBA note, UPCIC is only required to make interest payments.
Because United Insurance failed to meet certain financial covenants contained
in
the SBA note, the interest rate under the SBA note was 8.6% for the first
quarter of 2008 and will be 450 basis points above the stated rate which
is the
10 year Contant Treasury rate, for the second quarter of 2008.
Management
believes that United Insurance’s Minimum Writing Ratio will be at or above 1.5:1
at June 30, 2008 and United Insurance’s interest rate will be 25 basis points
above the stated rate for third quarter of 2008.
UPCIC has no debt
service obligation under the SBA note until September 2009
and
management does not anticipate making any debt payments on the loan during
the
fiscal year ended December 31, 2008.
We
expect
we will continue to have outstanding debt obligations under both the CB&T
loan agreement and the SBA note following the Merger. This level of debt
may
affect our operations in several important ways, including the following:
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a
portion of our cash flow from operations is likely to be dedicated
to the
payment of the principal of and interest on this
indebtedness;
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our
ability to obtain additional financing in the future for working
capital,
capital expenditures or acquisitions may be
limited;
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we
may be unable to refinance this indebtedness on terms acceptable
to us, or
at all; and
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we
may default on our obligations and the lenders may accelerate the
indebtedness or foreclose on their security interests that secure
their
loans.
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From
time to time we may enter into additional secured credit facilities to finance
any or all of the Company’s capital requirements. Any such secured credit
facility may have a material and adverse effect on the
Company.
From
time
to time following the Merger, we may enter into additional secured credit
facilities to finance any or all of our capital requirements. As part of
a
secured credit facility, we would likely be required to make periodic payments
of principal and interest to the lender. We can provide no assurance we will
have cash flow in an amount sufficient to repay our debt obligations under
any
or all of such secured credit facilities. Furthermore, these secured credit
facilities normally contain numerous default provisions and may or may not
provide us with the possibility to cure a default before accelerating the
due
date. If this were to happen, we might not be able to repay any or all of
our
secured debts in full and might be forced to declare bankruptcy. If the lender
is a secured lender, the lender would have a priority right to receive repayment
from a bankruptcy estate or may have the right to foreclose on the secured
assets if we are not in bankruptcy but are in default of its secured contract.
In addition, a default under any secured credit facility may force us to
seek
bankruptcy protection. As such, the fact that we may, from time to time,
enter
into secured credit facilities with any person, business, or organization,
whether related or unrelated, may have a material and adverse effect on the
financial position, results of operations and viability of the
Company.
Our
sponsor warrants are non-redeemable provided they are held by the initial
purchasers or their permitted transferees, which could provide such purchasers
the ability to realize a larger gain than our public warrants
holders.
As set forth above, the warrants held by our public warrant holders may be
called for redemption at any time after the warrants become exercisable upon
satisfaction of certain conditions. However, the 1,250,000 warrants purchased
by
our founders are not subject to redemption. As a result, holders of the insider
warrants, or their permitted transferees, could realize a larger gain than
our
public warrant holders.
Our
directors may not be considered "independent" under the policies of the North
American Securities Administrators Association, Inc. and we thus may not
have the benefit of independent directors examining our financial statements
and
the propriety of expenses incurred on our behalf subject to
reimbursement.
All
of our officers and directors own shares of our common stock and will own
common
stock following consummation of the Merger. No salary or other compensation
has
been or will be paid to our officers or directors for services rendered by
them
on our behalf prior to or in connection with the Merger. Although we believe
three of the members of our Board of Directors are “independent” as that term is
commonly used, under the policies of the North American Securities
Administrators Association, Inc., because our directors may receive
reimbursement for out-of-pocket expenses incurred by them in connection with
activities on our behalf such as identifying potential merger partners and
performing due diligence on suitable business combinations, it is likely
state
securities administrators would take the position we do not have the benefit
of
independent directors examining the propriety of expenses incurred on our
behalf
and subject to reimbursement. Additionally, there is no limit on the amount
of
out-of-pocket expenses that could be incurred and there is no review of the
reasonableness of the expenses by anyone other than our Board of Directors,
which would include persons who may seek reimbursement, or a court of competent
jurisdiction if such reimbursement is challenged. Although we believe all
actions taken by our directors on our behalf have been and will be in our
best
interests, whether or not any directors are deemed to be "independent," we
cannot assure you this will actually be the case. If actions are taken or
expenses are incurred that are actually not in our best interests, it could
have
a material adverse effect on our business and operations and the price of
our
stock held by the public stockholders.
Our
outstanding warrants may have an adverse effect on the market price of common
stock and make it more difficult to obtain public financing in the
future.
In
connection with the IPO, we issued warrants to purchase 4,733,625 shares of
common stock. Furthermore certain of our directors own an aggregate of 1,099,266
shares of common stock and 1,250,000 warrants. The sale or even the possibility
of sale, of the shares underlying these warrants, could have an adverse effect
on the price for our securities on the equity market and on our ability to
obtain public financing in the future. If and to the extent these warrants
are
exercised, you may experience dilution to your holdings which may correspond
with a decline in value of the market price for our stock.
If
our initial stockholders exercise their registration rights, it may have an
adverse effect on the market price of our common stock.
Our
initial stockholders are entitled to require us to register the resale of their
shares of common stock at any time after the date on which their shares are
released from escrow, which, except in limited circumstances, will not be before
the one year anniversary of the consummation of a business combination. If
our
initial stockholders exercise their registration rights with respect to all
of
their 1,183,406 shares of common stock and the shares of common stock underlying
the 1,250,000 warrants, then there will be an additional 2,433,406 shares of
common stock eligible for trading in the public market, assuming the Merger
is
approved. The presence of this additional number of shares of common stock
eligible for trading in the public market may have an adverse effect on the
market price of our common stock.
Provisions
in our charter documents and Delaware law may inhibit a takeover of us, which
could limit the price potential investors might be willing to pay in the future
for our common stock and could entrench management.
Our
charter and bylaws contain provisions that may discourage unsolicited takeover
proposals that stockholders may consider to be in their best interests. Our
Board of Directors is divided into two classes, each of which will generally
serve for a term of two years with only one class of directors being elected
in
each year. As a result, at any annual meeting not all of the Board of Directors
will be considered for election. Since our "staggered board" could prevent
our
stockholders from replacing a majority of our Board of Directors at any annual
meeting, it may entrench management and discourage unsolicited stockholder
proposals that may be in the best interests of stockholders.
Moreover,
our Board of Directors has the ability to designate the terms of and issue
new
series of preferred stock which could be issued to create different or greater
voting rights which may affect an acquiror's ability to gain control of the
Company.
We
are also subject to anti-takeover provisions under Delaware law, which could
delay or prevent a change of control. Together these provisions may make more
difficult the removal of management and may discourage transactions that
otherwise could involve payment of a premium over prevailing market prices
for
our securities.
If
we are forced to declare bankruptcy prior to consummation of our initial
business combination, you may receive less than $7.91 per share from the
trust
account.
If
we are forced to file a bankruptcy case or an involuntary bankruptcy case is
filed against us under Chapters 7 or 11 of the United States Bankruptcy
Code, and that claim is not dismissed, the funds held in our trust account
will
be subject to applicable bankruptcy law and may be included in our bankruptcy
estate. Furthermore, the estate may be subject to administrative expenses,
including but not limited to post-petition legal fees including court costs,
the
securitization of cash collateral to maintain the business as a going concern,
obtaining additional financing, taxes owed, and claims of both secured and
unsecured third parties with priority over those claims of our public
stockholders. To the extent bankruptcy claims deplete the trust account; we
cannot assure you we will be able to return to our public stockholders the
liquidation amounts due to them. Accordingly, the actual per share amount
distributed from the trust account to our public stockholders could be
significantly less than approximately $7.91 per share due to the claims of
creditors. This amount has been calculated without taking into account interest
earned on the trust account. Claims by creditors could cause additional delays
in the distribution of trust accounts to the public stockholders beyond the
time
periods required to comply with the Delaware General Corporation Law procedures
and federal securities laws and regulations.
FORWARD-LOOKING
STATEMENTS
We
believe some of the information in this proxy statement/prospectus constitutes
forward-looking statements. You can identify these statements by forward-looking
words such as “may,” “expect,” “anticipate,” “contemplate,” “believe,”
“estimate,” “intends,” and “continue” or similar words. You should read
statements that contain these words carefully because they:
·
discuss
future expectations;
·
contain
projections of future results of operations or financial condition;
and
·
state
other “forward-looking” information.
There
may be events in the future the Company is not able to accurately predict or
over which the Company has no control. The risk factors and cautionary language
discussed in this proxy statement/prospectus provide examples of risks,
uncertainties and events which may cause actual results to differ materially
from the expectations described by the Company in its forward-looking
statements, including among other things:
·
changing
interpretations of generally accepted accounting principles;
·
the
general volatility of the market price of our securities;
·
the
availability of qualified personnel;
·
changes
in interest rates or the debt securities markets
·
outcomes
of government reviews, inquiries, investigations and related
litigation;
·
continued
compliance with government regulations;
·
legislation
or regulatory environments, requirements or changes adversely affecting the
businesses in which United is engaged;
·
statements
about industry trends;
·
general
economic conditions; and
·
geopolitical
events.
You
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date of this proxy statement/prospectus.
All
forward-looking statements included herein attributable to the Company, United
or any person acting on either party’s behalf are expressly qualified in their
entirety by the cautionary statements contained or referred to in this section.
We caution you that these statements are based on a combination of facts
currently known by FMG and United and our projections of the future, about
which
we cannot be certain. Except to the extent required by applicable laws and
regulations, the Company undertakes no obligation to update these
forward-looking statements to reflect events or circumstances after the date
of
this proxy statement/prospectus or to reflect the occurrence of unanticipated
events.
Before
you grant your proxy or instruct how your vote should be cast or vote on the
approval of the Merger you should be aware that the occurrence of the events
described in the “Risk Factors” section and elsewhere in this proxy
statement/prospectus could have a material adverse effect on the Company, or
United, upon completion of the Merger.
THE
COMPANY SPECIAL MEETING OF STOCKHOLDERS
The
Company Special Meeting
The
Company is furnishing this proxy statement to you as part of the solicitation
of
proxies by the Company Board of Directors for use at the Special Meeting in
connection with the proposed Acquisition, the proposed First Amendment, the
proposed Second Amendment, the proposed Third Amendment, the proposed Director
elections and the proposed Adjournment. This proxy statement provides you with
the information you need to be able to vote or instruct your vote to be cast
at
the Special Meeting.
Date,
Time and Place
The
Special Meeting will be held
at ,
Eastern Time,
on ,
2008, at the offices
of ,
to vote on each of the Merger Proposal, the First Amendment Proposal, the Second
Amendment Proposal, the Third Amendment Proposal, the Director Proposal and
the
Adjournment Proposal.
Purpose
of the Special Meeting
At
the Special Meeting, you will be asked to consider and vote upon the
following:
(i)
the
Merger Proposal—the proposed acquisition of all of the membership units of
United Insurance Holdings, L.C., a limited liability company formed under the
laws of the State of Florida, pursuant to the Merger Agreement, dated as of
April 2, 2008, by and among the Company, United and United Subsidiary and the
transactions contemplated thereby (“Proposal 1” or the “Merger
Proposal”);
(ii)
the
First
Amendment Proposal—the amendment to the Company’s amended and restated
certificate of incorporation (the “First Amendment”), to remove certain
provisions containing procedural and approval requirements applicable to the
Company prior to the consummation of the business combination that will no
longer be operative after the consummation of the Merger (“Proposal 2” or
the “First Amendment Proposal”);
(iii)
the
Second Amendment Proposal—the amendment to the Company’s amended and restated
certificate of incorporation (the “Second Amendment”), to increase the amount of
authorized shares of common stock from 20,000,000 to 50,000,000
(“Proposal 3” or the “Second Amendment Proposal”);
(iv)
the
Third
Amendment Proposal—the amendment to the Company’s amended and restated
certificate of incorporation (the “Third Certificate of Incorporation
Amendment”), to change the name of the Company to United Insurance Holdings
Corp. (“Proposal 4” or the “Third Amendment Proposal”);
(v)
Director
Proposal—to elect three (3) directors to the Company’s Board of Directors
to hold office until the next annual meeting of stockholders and until their
successors are elected and qualified (“Proposal 4” or the “Director
Proposal”);
(vi)
the
Adjournment Proposal—to consider and vote upon a proposal to adjourn the special
meeting to a later date or dates, if necessary, to permit further solicitation
and vote of proxies in the event that, based upon the tabulated vote at the
time
of the Special Meeting, the Company would not have been authorized to consummate
the Merger—we refer to this proposal as the adjournment proposal. (“Proposal 5”
or the “Adjournment Proposal”); and
(vii)
such
other business as may properly come before the meeting or any adjournment or
postponement thereof.
The
Company’s Board of Directors:
·
has
unanimously determined the Merger Proposal, the First Amendment Proposal, the
Second Amendment Proposal, the Third Amendment Proposal, the Director Proposal,
and the Adjournment Proposal are fair to, and in the best interests of, the
Company and its stockholders;
·
has
determined the consideration to be paid in connection with the Merger is fair
to
our current stockholders from a financial point of view and the fair market
value of United is equal to or greater than 80% of the value of the net assets
of the Company;
·
has
unanimously approved and declared it advisable to approve the Merger Proposal,
the First Amendment Proposal, the Second Amendment Proposal, the Third Amendment
Proposal, the Director Proposal and the Adjournment Proposal; and
·
unanimously
recommends the holders of the Company common stock vote “FOR” Proposal 1,
the Merger Proposal, “FOR” Proposal 2, the First Amendment Proposal; “FOR”
Proposal 3, the Second Amendment Proposal; “FOR” Proposal 4, the Third
Amendment Proposal; “FOR” Proposal 5, the Director Proposal; and “FOR”
Proposal 6, the Adjournment Proposal.
Record
Date; Who is Entitled to Vote
The
Record Date for the Special Meeting
is ,
2008. Record holders of the Company common stock at the close of business on
the
Record Date are entitled to vote or have their votes cast at the Special
Meeting. On the Record Date, there
were outstanding
shares of the Company common stock.
Each
share of the Company common stock is entitled to one vote at the Special
Meeting.
Any
shares of the Company common stock held by our officers and directors prior
to
the Company’s IPO will be voted in accordance with the majority of the votes
cast at the Special Meeting with respect to the Merger Proposal. Any shares
of
the Company common stock acquired by our officers and directors in the Company’s
IPO or afterwards will be voted in favor of the Merger. We have a total of
5,917,031 shares outstanding, of which 1,183,406 were issued prior to the IPO
and are held by our officers, directors and special advisor.
The
Company’s issued and outstanding warrants do not have voting rights and record
holders of the Company warrants will not be entitled to vote at the Special
Meeting.
Voting
Your Shares
Each
share of the Company common stock that you own in your name entitles you to
one
vote. Your proxy card shows the number of shares of the Company common stock
that you own.
There
are two ways to vote your shares of Company common stock:
·
You
can
vote by signing and returning the enclosed proxy card. If you vote by proxy
card, your “proxy,” whose name is listed on the proxy card, will vote your
shares as you instruct on the proxy card. If you sign and return the proxy
card,
but do not give instructions on how to vote your shares, your shares will be
voted, as recommended by the Company Board, “FOR” Proposal 1, the Merger
Proposal, “FOR” Proposal 2, the First Amendment Proposal; “FOR” Proposal 3,
the Second Amendment Proposal; “FOR” Proposal 4, the Third Amendment Proposal;
“FOR” Proposal 5, the Director Proposal; and “FOR” Proposal 6, the
Adjournment Proposal.
·
You
can
attend the Special Meeting and vote in person. The Company will give you a
ballot when you arrive. However, if your shares are held in the name of your
broker, bank or another nominee, you must get a proxy from the broker, bank
or
other nominee. That is the only way the Company can be sure that the broker,
bank or nominee has not already voted your shares.
Who
Can Answer Your Questions About Voting Your Shares
If
you have any questions about how to vote or direct a vote in respect of your
Company common stock, you may call our Secretary, Larry G. Swets, Jr. at
(860) 677-2701.
No
Additional Matters May Be Presented at the Special Meeting
The
Special Meeting has been called only to consider the approval of the Merger
Proposal, the First Amendment Proposal, the Second Amendment Proposal, the
Third
Amendment Proposal, the Director Proposal and the Adjournment Proposal. Under
the Company’s bylaws, other than procedural matters incident to the conduct of
the meeting, no other matters may be considered at the Special Meeting if they
are not included in the notice of the meeting.
Revoking
Your Proxy
If
you give a proxy, you may revoke it at any time before it is exercised by doing
any one of the following:
·
You
may
send another proxy card with a later date;
·
You
may
notify Corporate Secretary, addressed to the Company, in writing before the
Special Meeting that you have revoked your proxy; and
·
You
may
attend the Special Meeting, revoke your proxy, and vote in person.
Quorum;
Vote Required
The
approval and adoption of the Merger Agreement and the transactions contemplated
thereby will require the affirmative vote of a majority of the shares of the
Company’s common stock issued in the Company’s IPO cast at the Special Meeting.
A total of 4,733,625 shares were issued in our IPO. In addition, notwithstanding
the approval of a majority, if the holders of 1,419,615 or more shares of common
stock issued in the Company’s IPO vote against the Merger and demand conversion
of their shares into a pro rata portion of the trust account, then the Company
will not be able to consummate the Merger. Each Company stockholder that holds
shares of common stock issued in the Company’s IPO or purchased following such
offering in the open market has the right, assuming such stockholder votes
against the Merger Proposal and, at the same time, demands the Company convert
such stockholder’s shares into cash equal to a pro rata portion of the trust
account in which a substantial portion of the net proceeds of the Company’s IPO
is deposited. These shares will be converted into cash only if the Merger is
consummated and the stockholder requesting conversion holds such shares until
the date the Merger is consummated and tenders such shares to our stock transfer
agent at or prior to the vote at the Special Meeting on the Merger
Proposal.
For
the purposes of Proposal 2, the affirmative vote of the majority of the
Company’s issued and outstanding common stock as of the Record Date is required
to approve the First Amendment Proposal. For the purposes of Proposal 3,
the affirmative vote of the majority of the Company’s issued and outstanding
common stock as of the Record Date is required to approve the Second Amendment
Proposal. For the purposes of Proposal 4, the affirmative vote of the
majority of the Company’s issued and outstanding common stock as of the Record
Date is required to approve the Third Amendment Proposal. For purposes of
Proposal 5, the affirmative vote of the holders of a plurality of the
shares of common stock cast in the election of directors is required. For
purposes of Proposal 6 the affirmative vote of a majority of the shares of
the Company’s common stock that are present in person or by proxy and entitled
to vote is required to approve the Adjournment Proposal.
It
is important for you to note that in the event the Merger Proposal does not
receive the necessary vote to approve such proposal, the Company will not
consummate that Acquisition or any other proposal, unless the Adjournment
Proposal is approved. None of United or its affiliates own any shares of
Company
common stock entitled to vote at the Special Meeting; however, they are not
prohibited from making such purchases in the event they determine to do
so.
Abstentions
and Broker Non-Votes
If
your broker holds your shares in its name and you do not give the broker voting
instructions, under the rules of FINRA, your broker may not vote your shares
on
the proposals to approve the Merger pursuant to the Merger Agreement. If you
do
not give your broker voting instructions and the broker does not vote your
shares, this is referred to as a “broker non-vote.” Abstentions and broker
non-votes are counted for purposes of determining the presence of a
quorum.
As
long as a quorum is established at the Special Meeting, if you return your
proxy
card without an indication of how you desire to vote, it: (i) will have the
same effect as a vote in favor of the Merger Proposal and will not have the
effect of converting your shares into a pro rata portion of the trust account
in
which a substantial portion of the net proceeds of the Company’s IPO are held,
unless an affirmative vote against the Merger Proposal is made and an
affirmative election to convert such shares of common stock is made on the
proxy
card; (ii) will have the same effect as a vote in favor of the First
Amendment Proposal; (iii) will have the same effect as a vote in favor of
the Second Amendment Proposal; (iv) will have the same effect as a vote in
favor of the Third Amendment Proposal; (v) will have no effect on the Director
Proposal; and (vi) will have the same effect as a vote in favor of the
Adjournment Proposal.
Since
the Merger Proposal requires only the affirmative vote of a majority of the
Company shares issued in the IPO that cast a vote at the Special Meeting,
abstentions or broker non-votes will not count towards such number. This has
the
effect of making it easier for the Company to obtain a vote in favor of the
Merger Proposal as opposed to some of the Company’s other proposals or as
opposed to the vote generally required under the Delaware General Corporation
Law, namely a majority of the shares issued and outstanding. Furthermore, in
connection with the vote required for the Merger Proposal, the founding
stockholders of the Company have agreed to vote their shares of common stock
owned or acquired by them at or prior to the IPO in accordance with the majority
of the Company’s shares issued in the IPO.
Conversion
Rights
Any
stockholder of the Company holding shares of common stock issued in the
Company’s IPO who votes against the Merger Proposal may, at the same time,
demand the Company convert his shares into a pro rata portion of the trust
account. You must mark the appropriate box on the proxy card in order to demand
the conversion of your shares. If so demanded, the Company will convert these
shares into a pro rata portion of the net proceeds from the IPO that were
deposited into the trust account, plus your pro rated interest earned thereon
after such date (net of taxes and amounts disbursed for working capital purposes
and excluding the amount held in the trust account representing a portion of
the
underwriters’ discount), if the Merger is consummated. If the holders of
1,419,615 or more shares of common stock issued in the Company’s IPO vote
against the Merger Proposal and demand conversion of their shares into a pro
rata portion of the trust account, the Company will not be able to consummate
the Merger. Based on the amount of cash held in the trust account as of March
31, 2008, without taking into account any interest or income taxes accrued
after
such date, you will be entitled to convert each share of common stock that
you
hold into approximately $7.91 per share (after a provision for payment of
working capital costs and taxes). In addition, the Company will be liquidated
if
a business combination is not consummated by October 4, 2009. In any
liquidation, the net proceeds of the Company’s IPO held in the trust account,
plus any interest earned thereon (net of taxes and amounts disbursed for working
capital purposes and excluding the amount held in the trust account representing
a portion of the underwriters’ discount), will be distributed on a pro rata
basis to the holders of the Company’s common stock other than the officers,
directors, special advisors and sponsor of FMG, none of whom will share in
any
such liquidation proceeds.
If
you exercise your conversion rights, then you will be exchanging your shares
of
Company common stock for cash and will no longer own these shares. You will
only
be entitled to receive cash for these shares if you tender your stock
certificate to the Company at or prior to the Special Meeting. The closing
price
of the Company’s common stock on June 11, 2008, the most recent trading day
practicable before the printing of this proxy statement/prospectus, was $7.28.
The amount of cash held in the trust account was approximately $37.7 million
as
of March 31, 2008 (before taking into account disbursements for working capital
and taxes). If a Company stockholder would have elected to exercise his
conversion rights on such date, then he would have been entitled to receive
$7.91 per share, plus interest accrued thereon subsequent to such date (net
of
taxes and amounts disbursed for working capital purposes and excluding the
amount held in the trust account representing a portion of the underwriters’
discount). Prior to exercising conversion rights, the Company stockholders
should verify the market price of the Company’s common stock as they may receive
higher proceeds from the sale of their common stock in the public market
than
from exercising their conversion rights.
You
will be required, whether you are a record holder or hold your shares in “street
name”, either to tender your certificates to our transfer agent or to deliver
your shares to the Company’s transfer agent electronically using the Depository
Trust Company’s DWAC (Deposit/Withdrawal At Custodian) System, at your option,
at any time at or prior to the vote at the Special Meeting on the Merger
Proposal. There is typically a $35 cost associated with this tendering process
and the act of certificating the shares or delivering them through the DWAC
system. The transfer agent will typically charge the tendering broker this
$35,
and the broker may or may not pass this cost on to you.
You
will have sufficient time from the time we send out this proxy
statement/prospectus through the time of the vote on the Merger Proposal to
deliver your shares if you wish to exercise your conversion rights. However,
as
the delivery process can be accomplished by you, whether or not you are a record
holder or your shares are held in “street name”, within a business day, by
simply contacting the transfer agent or your broker and requesting delivery
of
your shares through the DWAC System, we believe this time period is sufficient
for an average investor.
Any
request for conversion, once made, may be withdrawn at any time up to
immediately prior to the vote on the Merger Proposal at the Special Meeting
(or
any adjournment or postponement thereof). Furthermore, if you delivered a
certificate for conversion and subsequently decided prior to the meeting not
to
elect conversion, you may simply request that the transfer agent return the
certificate (physically or electronically) to you. The transfer agent will
typically charge an additional $35 for the return of the shares through the
DWAC
System.
Please
note, however, that once the vote on the Merger Proposal is held at the Special
Meeting, you may not withdraw your request for conversion and request the return
of your stock certificate (either physically or electronically). If the Merger
is not completed, your stock certificate will be automatically returned to
you.
Stockholders
will not be entitled to exercise their conversion rights if such stockholders
return proxy cards to the Company without an indication of how they desire
to
vote with respect to the Merger Proposal or, for stockholders holding their
shares in street name, if such stockholders fail to provide voting instructions
to their brokers. Proxies received by the Company without an indication of
how
the stockholders intend to vote on a proposal will be voted in favor of such
proposal.
Appraisal
or Dissenters Rights
No
appraisal rights are available under the Delaware General Corporation Law to
the
stockholders of the Company in connection with the Merger Proposal. The only
rights for those stockholders voting against the Merger who wish to receive
cash
for their shares is to simultaneously demand payment for their shares from
the
trust account.
Under
Florida Statute 608.4352 of the Florida Limited Liability Company Act (the
“FLLCA”), the members of United will be entitled to dissent from the Merger and
obtain cash payment for the fair value of their membership units instead of
the
consideration provided for in the Merger Proposal. For a more complete
description of these rights, see “United Member Approval.”
Solicitation
Costs
The
Company is soliciting proxies on behalf of the Company Board of Directors.
This
solicitation is being made by mail but also may be made by telephone or in
person. The Company and its respective directors and officers may also solicit
proxies in person, by telephone or by other electronic means, and in the event
of such solicitations, the information provided will be consistent with this
proxy statement and enclosed proxy card. These persons will not be paid for
doing this. The Company may engage the services of a professional proxy
solicitation firm. The Company will ask banks, brokers and other institutions,
nominees and fiduciaries to forward its proxy statement materials to their
principals and to obtain their authority to execute proxies and voting
instructions. The Company will reimburse them for their reasonable
expenses.
Stock
Ownership
Of
the 5,917,031 outstanding shares of the Company common stock, the Company’s
initial stockholders, including all of its officers, directors and its special
advisor and their affiliates, who purchased shares of common stock prior to
the Company’s IPO and who own an aggregate of approximately 20% of the
outstanding shares of the Company common stock (1,183,406 shares), have agreed
to vote such shares acquired prior to the IPO in accordance with the vote of
the
majority in interest of all other Company stockholders on the Merger Proposal.
Moreover, all of these persons have agreed to vote all of their shares which
were acquired in or following the IPO, if any, in favor of the Merger
Proposal.
The
following table sets forth information regarding the beneficial ownership
of our
common stock as of June 12, 2008 and as adjusted to reflect the sale of founder
securities and the sale of our common stock included in the units offered
by
this prospectus (assuming none of the individuals listed purchase units in
this
offering), by:
·
each
person known by us to be the beneficial owner of more than 5% of our outstanding
shares of common stock;
·
each
of
our officers and directors; and
·
all
our
officers and directors as a group.
Unless
otherwise indicated, we believe all persons named in the table have sole voting
and investment power with respect to all shares of common stock beneficially
owned by them.
|
|
Common
Stock
|
|
Name and Address
of Beneficial
Owners(1)
|
|
Number of Shares (2)
|
|
Percentage of Common
Stock
|
|
|
|
|
|
|
|
FMG
Investors LLC(3)
|
|
|
1,099,266
|
|
|
18.57
|
%
|
Gordon
G. Pratt, Chairman, Chief Executive Officer and President
|
|
|
1,099,266
|
(3)
|
|
18.57
|
%
|
Larry
G. Swets, Jr., Chief Financial Officer, Secretary, Treasurer, Executive
Vice President
|
|
|
1,099,266
|
|
|
18.57
|
%
|
Thomas
D. Sargent, Director
|
|
|
21,035
|
|
|
0.36
|
%
|
David
E. Sturgess, Director(4)
|
|
|
21,035
|
|
|
0.36
|
%
|
James
R. Zuhlke, Director
|
|
|
21,035
|
|
|
0.36
|
%
|
HBK
Investments L.P.(5)
|
|
|
547,250
|
|
|
9.2
|
%
|
Brian
Taylor (6)
|
|
|
437,500
|
|
|
7.4
|
%
|
Bulldog
Investors(7)
|
|
|
1,282,167
|
|
|
21.67
|
%
|
Millenco
LLC(8)
|
|
|
189,375
|
|
|
3.2
|
%
|
D.B.
Zwirn Special Opportunities Fund, L.P.(9)
|
|
|
178,500
|
|
|
3.02
|
%
|
D.B.
Zwirn Special Opportunities Fund, Ltd. (9)
|
|
|
246,500
|
|
|
4.17
|
%
|
D.B.
Zwirn & Co., L.P. (9)
|
|
|
425,000
|
|
|
7.18
|
%
|
DBZ
GP, LLC(9)
|
|
|
425,000
|
|
|
7.18
|
%
|
Zwirn
Holdings, LLC(9)
|
|
|
350,000
|
|
|
5.92
|
%
|
Daniel
B. Zwirn(9)
|
|
|
350,000
|
|
|
5.92
|
%
|
Weiss
Asset Management, LLC(10)
|
|
|
255,002
|
|
|
4.3
|
%
|
Weiss
Capital, LLC(10)
|
|
|
130,435
|
|
|
2.2
|
%
|
Andrew
M. Weiss, Ph.D.(10)
|
|
|
385,437
|
|
|
6.5
|
%
|
|
|
|
|
|
|
|
|
All
Directors and Officers as a Group (5 persons)
|
|
|
1,162,371
|
|
|
19.64
|
%
|
(1)
|
Unless
otherwise indicated, the business address of each of the stockholders
is
Four Forest Park, Second Floor, Farmington, Connecticut
06032.
|
|
|
(2)
|
Unless
otherwise indicated, all ownership is direct beneficial
ownership.
|
|
|
(3)
|
Each
of Messrs. Pratt and Swets are the managing members of our sponsor,
FMG Investors LLC, and may be deemed to each beneficially own the
1,099,266 shares owned by FMG Investors LLC.
|
|
|
(4)
|
The
business address of David E. Sturgess is c/o Updike, Kelly & Spellacy,
P.C., One State Street, Hartford, Connecticut
06103.
|
(5)
|
Based
on information contained in a Statement on Schedule 13G filed by
HBK
Investments L.P., HBK Services LLC, HBK Partners II L.P., HBK Management
LLC and HBK Master Fund L.P. on February 12, 2008. The address
of all such
reporting parties is 300 Crescent Court, Suite 700, Dallas, Texas
75201.
HBK Investments L.P. has delegated discretion to vote and dispose
of the
Securities to HBK Services LLC (“Services”). Services may, from time to
time, delegate discretion to vote and dispose of certain of the
Securities
to HBK New York LLC, a Delaware limited liability company, HBK
Virginia
LLC, a Delaware limited liability company, HBK Europe Management
LLP, a
limited liability partnership organized under the laws of the United
Kingdom, and/or HBK Hong Kong Ltd., a corporation organized under
the laws
of Hong Kong (collectively, the “Subadvisors”). Each of Services and the
Subadvisors is under common control with HBK Investments L.P. The
Subadvisors expressly declare that the filing of the statement
on Schedule
13G shall not be construed as an admission that they are, for the
purpose
of Section 13(d) or 13(g), beneficial owners of the Securities.
Jamiel A.
Akhtar, Richard L. Booth, David C. Haley, Lawrence H. Lebowitz,
and
William E. Rose are each managing members (collectively, the "Members")
of
HBK Management LLC. The Members expressly declare that the filing
of the
statement on Schedule 13G shall not be construed as an admission
that they
are, for the purpose of Section 13(d) or 13(g), beneficial owners
of the
Securities.
|
(6)
|
Based
on information contained in a Statement on Schedule 13D filed by
Brian
Taylor, Pine River Capital Management L.P. and Nisswa Master Fund
Ltd. on
October 12, 2007. All reporting parties have shared voting and dispositive
power over such securities. The address of all such reporting parties
is
800 Nicollet Mall, Suite 2850, Minneapolis, MN 55402.
|
|
|
(7)
|
Based
on information contained in a Statement on Schedule 13D filed by
Bulldog
Investors, Phillip Goldstein and Andrew Dakos on February 13, 2008.
All
reporting parties have shared voting and dispositive power over such
securities. The address of all such reporting parties is Park 80
West,
Plaza Two, Saddle Brook, NJ 07663.
|
|
|
(8)
|
Based
on information contained in a Statement on Schedule 13G filed by
Millenco
LLC, Millenium Management LLC and Israel A. Englander on December
11,
2007. All reporting parties have shared voting and dispositive power
over
such securities. The address of all such reporting parties is 666
Fifth
Avenue, New York, NY 10103.
|
(9)
|
Based
on information contained in a Statement on Schedule 13G/A filed by
D.B.
Zwirn & Co., L.P., DBZ GP, LLC, D.B. Zwirn Special Opportunities Fund,
L.P. and D.B. Zwirn Special Opportunities Fund, Ltd. on January 25,
2008.
D.B. Zwirn & Co., L.P., DBZ GP, LLC, Zwirn Holdings, LLC, and Daniel
B. Zwirn may each be deemed the beneficial owner of (i) 178,500 shares
of
common stock owned by D.B. Zwirn Opportunities Fund, L.P. and (ii)
246,500
shares of common stock owned by D.B. Zwirn Special Opportunities
Fund,
Ltd. (each entity referred to in (i) through (ii) is herein referred
to as
a "Fund" and, collectively, as the "Funds"). D.B. Zwirn & Co., L.P. is
the manager of the Funds, and consequently has voting control and
investment discretion over the shares of common stock held by the
Fund.
Daniel B. Zwirn is the managing member of and thereby controls Zwirn
Holdings, LLC, which in turn is the managing member of and thereby
controls DBZ GP, LLC, which in turn is the general partner of and
thereby
controls D.B. Zwirn & Co., L.P. The foregoing should not be construed
in and of itself as an admission by any Reporting Person as to beneficial
ownership of shares of common stock owned by another Reporting Person.
In
addition, each of D.B. Zwirn & Co., L.P., DBZ GP, LLC, Zwirn Holdings,
LLC and Daniel B. Zwirn disclaims beneficial ownership of the shares
of
common stock held by the Funds.
|
|
|
(10)
|
Based
on information contained in a Statement on Schedule 13G filed by
Weiss
Asset Management, LLC, Weiss Capital, LLC and Andrew M. Weiss, Ph.D.
on
March 24, 2008. Shares reported for Weiss Asset Management, LLC include
shares beneficially owned by a private investment partnership of
which
Weiss Asset Management, LLC is the sole general partner. Shares reported
for Weiss Capital, LLC include shares beneficially owned by a private
investment corporation of which Weiss Capital is the sole investment
manager. Shares reported for Andrew Weiss include shares beneficially
owned by a private investment partnership of which Weiss Asset Management
is the sole general partner and which may be deemed to be controlled
by
Mr. Weiss, who is the Managing Member of Weiss Asset Management,
and also
includes shares held by a private investment corporation which may
be
deemed to be controlled by Dr. Weiss, who is the managing member
of Weiss
Capital, the Investment Manager of such private investment corporation.
Dr. Weiss disclaims beneficial ownership of the shares reported herein
as
beneficially owned by him except to the extent of his pecuniary interest
therein. Weiss Asset Management, Weiss Capital, and Dr. Weiss have
a
business address of 29 Commonwealth Avenue, 10th Floor, Boston,
Massachusetts 02116.
|
PROPOSAL 1
THE
MERGER PROPOSAL
The
discussion in this proxy statement/prospectus of the Merger Proposal and the
principal terms of the Merger Agreement, dated April 2, 2008, by and among
the
Company, United and United Subsidiary Corp., and the associated agreements
are
subject to, and are qualified in their entirety by reference to, the Merger
Agreement, which is attached as Annex A, to this proxy statement/prospectus
and is incorporated in this proxy statement/prospectus by
reference.
General
Description of the Merger
On
April 2, 2008, the Company entered into an Agreement and Plan of Merger (the
“Merger Agreement”) pursuant to which United Subsidiary has agreed to merge with
and into United, and United has agreed, subject to receipt of the Merger
consideration from FMG, to become a wholly-owned subsidiary of FMG (the
“Merger”). If the stockholders of the Company approve the transactions
contemplated by the Merger Agreement, FMG, through United Subsidiary, which
was
newly incorporated in order to facilitate the Merger contemplated thereby,
will
purchase all of the membership units of United in a series of steps as outlined
below.
FMG
and United will merge pursuant to a merger transaction summarized as
follows:
(i)
FMG
will
create a transitory merger subsidiary, United Subsidiary Corp., and will merge
such subsidiary with and into United, with United surviving; and
(ii)
United
will, as a result, become wholly-owned by FMG.
United’s
members will receive consideration of up to $100,000,000 consisting
of:
(i)
$25,000,000
in cash;
(ii)
8,750,000
shares of FMG common stock, par value $.0001 per share (assuming an $8.00 per
share value); and
(iii)
up
to
$5,000,000 of additional consideration will be paid to the members of United
in
the event certain net income targets are met by United, as set forth more
particularly herein.
The
aggregate consideration will paid pursuant to the Merger Agreement for the
purchase of the membership units of United. The Company’s Board of Directors has
determined United has a fair market value equal to at least 80% of the Company’s
net assets held in trust.
The
Company, United and United Subsidiary Corp. plan to consummate the Merger as
promptly as practicable after the Special Meeting, provided that:
·
the
Company’s stockholders have approved and adopted the Merger Proposal and the
transactions contemplated thereby;
·
holders
of not more than 29.99% of the shares of the common stock issued in the
Company’s IPO vote against the Merger Proposal and demand conversion of their
shares into cash;
·
holders
of not less than 66% of the membership units of United vote in favor of the
Merger;
·
the
Securities and Exchange Commission has declared effective the registration
statement and prospectus which form a part of this proxy statement/prospectus;
and
·
the
other
conditions specified in the Merger Agreement have been satisfied or
waived.
The
obligation of FMG to close on the Merger is contingent on satisfaction or
waiver
of the following conditions:
(i)
the
accuracy in all material respects on the date of the Merger Agreement and
the
Closing Date of all of United’s representations and warranties, when considered
both collectively and individually;
(ii)
United’s
performance in all material respects of all covenants and obligations required
to be performed by the Closing Date;
(iii)
a
majority of the Company’s stockholders must vote in favor of approving the
Merger;
(iv)
not
more than 29.99% of the shares of the common stock issued in the Company’s
IPO vote against the Merger and demand conversion of their stock into
cash;
(v)
stockholder
approval of the First and Second Amendment Proposals;
(vi)
the
Securities and Exchange Commission has declared effective the registration
statement and prospectus which form a part of this proxy
statement;
(vii)
no
governmental authority has enacted, issued, promulgated, enforced or entered
any
law or order that is in effect and has the effect of making the Merger illegal
or otherwise preventing or prohibiting consummation of the
Merger;
(viii)
the
officers are, and the Board of Directors of FMG following the Merger is
constituted, as set forth as the Board of Directors recommends, as fully
described herein; and
(ix)
the
consent of not less than 66% of the membership units of United to the Merger
and
no more than ten percent (10%) of the outstanding membership units of United
shall constitute dissenting membership units under Florida
law.
Conditions
(i), (ii) and (viii), as well as the Third Amendment Proposal, are waivable
by
the Company.
United’s
obligation to close on the Merger is contingent upon:
(i)
the
accuracy in all material respects on the date of the Merger Agreement and
the
Closing Date of all of FMG’s representations and warranties;
(ii)
FMG’s
performance in all material respects of all covenants and obligations required
to be performed by the Closing Date;
(iii)
a
majority of the Company’s stockholders must vote in favor of approving the
Merger;
(iv)
not
more than 29.99% of the shares of the common stock issued in the Company’s
IPO vote against the Merger and demand conversion of their stock into
cash;
(v)
stockholder
approval of the First, Second and Third Amendment Proposals;
(vi)
the
Securities and Exchange Commission has declared effective the registration
statement and prospectus which form a part of this proxy
statement;
(vii)
no
governmental authority has enacted, issued, promulgated, enforced or entered
any
law or order that is in effect and has the effect of making the Merger illegal
or otherwise preventing or prohibiting consummation of the Merger;
and
(viii)
the
officers and the Board of Directors of FMG following the Merger is constituted
as set forth as the Board of Directors recommends, as fully described
herein.
Conditions
(i), (ii) and (viii), as well as the Third Amendment Proposal, are waivable
by
United.
See
the
description of the Merger Agreement in the section entitled “The Merger
Agreement” beginning on page 51. The Merger Agreement is included
as Exhibit 1.1 to this proxy statement/prospectus. We encourage you to
read the Merger Agreement in its entirety.
Under
the
terms of the Company’s amended and restated certificate of incorporation, the
Company may proceed with the Merger provided that not more than
29.99% of the Company's public stockholders electing to convert their
shares of common stock to cash and not participate in the Merger.
Background
of the Merger
During
the period immediately subsequent to our initial public offering on October
11,
2007 through March 2008, we were involved in identifying and evaluating
prospective businesses regarding potential business combinations. On October
12,
2007, the day after the consummation of our initial public offering, management
convened a discussion with our Board of Directors to institute centralized
corporate governance procedures and to discuss and begin implementing our
overall plan for identifying, evaluating and, where appropriate, pursuing a
potential business combination. We discussed the most effective means for us
to
solicit and track opportunities, and we determined that we should plan regular
telephonic conferences with our board to discuss our progress. Given our
commitment to source, review and negotiate a transaction, we agreed immediately
to identify and begin the process of making contact with: (i) private companies
we know to be active in the insurance industry and (ii) various prospective
sources of deal flow, including investment banks, actuaries, consultants,
private equity firms and business acquaintances we have established over a
professional lifetime within the insurance industry to encourage them to contact
us with new and old ideas or specific business combination opportunities they
might wish for us to consider and explore. Messrs. Pratt and Swets
discussed with the board various areas within the insurance industry where
they
expected there to be a higher probability of identifying attractive companies
for a business combination, with particular focus on specialty property-casualty
insurance companies, wholesale insurance brokerages and program management
businesses. Messrs. Pratt and Swets discussed with the board some of the
opportunities and risks of a business combination with an insurance company
when
compared to an insurance wholesale broker or program, pointing out that each
type of business holds attractive elements and other elements to
consider.
We
were able to source opportunities both by approaching private companies and
by
responding to inquiries or references from the various sources of deal flow
noted above. We did not limit ourselves to any single transaction structure
(i.e. cash vs. stock issued to potential seller, straight merger, corporate
spin-out or management buy-out). Although the search stayed within the insurance
industry, the definition of insurance remained broad. Active sourcing involved
FMG management, among other things:
|
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Initiating
conversations, via phone, e-mail or other means (whether directly
or via a
private company’s major stockholders, members, or directors as well as
professionals and industry contacts we have known during our professional
careers) with private companies which management believed could make
attractive business combination
partners;
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Contacting
professional service providers (accountants, attorneys, actuaries
and
consultants);
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Using
their network of business associates and friends for
leads;
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Working
with third-party intermediaries, including investment bankers;
and
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Inquiring
directly of business owners, including private equity firms, of their
interest in having one of their businesses enter into a business
combination.
|
Management
also fielded inquiries and responded to solicitations by: (i) companies
looking for capital or investment alternatives and (ii) investment bankers
or other similar professionals who represent companies engaged in a sale or
fund-raising process. We considered numerous companies in various sectors of
the
insurance industry, including underwriting property-casualty insurance
companies, retail insurance brokerage, wholesale insurance brokerage, insurance
program management, United Kingdom-based employee benefits management, critical
care insurance and management, wholesale life insurance brokerage and
professional employer organization workers’ compensation insurance. Several
non-disclosure agreements were signed.
In
considering potential targets, the Company's management considered the following
factors concerning potential business combination partner, as being material
to
their decision:
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Specialty
focus, for example by line of business, geography, product, distribution
or client base;
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Record
of growth and profitability;
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Ability
to operate in difficult, dislocated or fragmented
markets;
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Business
model and approach to building recurring
revenue;
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Ability
to achieve incremental revenue or decrease costs from current core
business;
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Potential
for greater economies of scale or higher profitability through
consolidation;
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Opportunity
to deploy capital at appropriate rates of return in the current business
plan;
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Experience
and skill of management and availability of additional
personnel;
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Capital
requirements;
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Competitive
position;
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Financial
condition;
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Barriers
to entry;
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Stage
of development of the products, processes or services;
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Breadth
of services offered;
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Degree
of current or potential market acceptance of the
services;
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Regulatory
environment of the industry;
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Costs
associated with effecting the business combination; and
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Probability
of successfully negotiating and consummating a business combination
with
the potential
partner.
|
The
evaluation relating to the merits of a particular business combination were
based primarily, to the extent relevant, on the above factors. In evaluating
a
prospective business combination partner, we conducted such diligence as we
deemed necessary to understand a particular potential business combination
partner’s business that included, among other things, meetings with the
potential business partner’s management, where applicable, as well as review of
financial and other information made available to us.
As
a
result of these efforts, the Company initiated contact, either directly or
through a third party intermediary, with approximately twelve
(12) potential business combination companies. In addition, we received
business plans, reviewed financial summaries or received presentation books
of
at least ten (10) potential target business combination companies. We
signed non-disclosure agreements relating to several potential business
combination opportunities. We also had discussions with a number of potential
business combination companies with whom a non-disclosure agreement was not
signed. With respect to some of the opportunities, discussions among the
Company's management and the potential business combination partners included
financial disclosures, reviews of potential transaction structures, discussions
of preliminary estimates of transaction values and discussions of management
objectives, business plans, and projections. Discussions, including introductory
meetings attended by some combination of Messrs. Pratt and Swets, occurred
with potential business combination partners on a regular basis during the
period from October 2007 through March 2008.
Among
the
potential merger candidates FMG contacted were: five insurance companies
in
various segments of the property-casualty business with estimated merger
values
of $100 million to $700 million; four wholesale brokers/program managers
of
insurance businesses with estimated merger values of $90 million to $400
million; and three retail brokers/service companies of insurance businesses
with
estimated merger values of $100 million to $200 million. Our management
evaluated these candidates in light of the factors described above and discussed
their findings with our Board of Directors, also applying the following
criteria: the state of the insurance markets within which the businesses
operated; the potential merger value of each business; the probability of
negotiating an acceptable business combination; and the timeframe for so
doing.
FMG’s board agreed with management’s assessment of United as the best merger
candidate among those discussed. No firm offers were made to any other merger
candidate.
On
November 15, 2007, our Board of Directors met to discuss certain ongoing,
routine corporate matters, including review and approval of our filings with
the
SEC, and to review our progress to date in identifying and discussing candidates
for a potential business combination. Our management: (i) reported concerning
its efforts since the last board meeting to reach out to potential business
combination candidates and their owners and advisors and (ii) reviewed the
results of these efforts, namely more than twelve (12) potential business
combination companies. Among other matters, management reported that, based
on
its research and experience in evaluating insurance markets that offer
specialized risk and reward prospects, the Florida homeowners insurance market
held particular promise.
In
the
first half of 2006, prior to the formation of our company, James R. Zuhlke,
one
of our directors, and a private equity firm with whom he was working had
discussions with representatives of United to consider a possible transaction
with United. This firm ultimately did not make any proposal for a transaction
with United. In the second half of 2006 and early 2007, Mr. Zuhlke and Gordon
Pratt, the Managing Director of Fund Management Group, had discussions with
representatives of United regarding a possible transaction with United. Fund
Management Group specializes in managing investments in, and providing advice
to, privately held insurance related businesses. In late 2006 and early 2007,
Fund Management Group indicated to United’s management an interest in acquiring
United. In February 2007, United notified Fund Management Group only that
United
intended to remain independent and was not interested in pursuing a transaction.
There was no further contact between Messrs. Pratt and Zuhlke and United
regarding such a transaction after February 26, 2007.
Mr.
Pratt
reported he had attended a meeting at United’s offices with Messrs. Cronin,
Griffin, and Russell on November 14, 2007, and later that evening attended
a
dinner with several United directors and advisors, including Messrs. Branch,
Whittemore, Savage, and DeLacey. This meeting was initiated when Gordon G.
Pratt
called Don Cronin, the President and CEO of United, on October 19, 2007 to
explore United’s interest in a potential merger with FMG Acquisition Corp. and
to arrange a meeting in person with United’s senior staff. A mutually convenient
date of November 14 was set. Attending the meeting were four persons: Gordon
G.
Pratt and three officers from United, Don Cronin (CEO), Nick Griffin (CFO)
and
Melvin Russell (Chief Underwriting Officer). The nature of the meeting was
exploratory and informational. Mr. Pratt described FMG Acquisition Corp and
how
it functions as a “special purpose acquisition company.” Messrs. Cronin, Griffin
and Russell described United’s business strategy and results through October
2007. The parties agreed that it seemed worthwhile to continue discussing
a
possible merger.
At
the
November 15, 2007 Board meeting, Mr. Pratt reported that: (i) in addition
to
United, several other companies in the Florida homeowners market may be suitable
candidates for a business combination and (ii) United may be receptive to
a
proposal for a business combination. Management also gave reports concerning
other promising companies and markets the Company should consider. Based
on this
report, FMG’s Board concluded that management should continue the process of
meeting with and discussing a possible business combination with several
candidates, including United.
On
November 20,
2007,
the Company and United signed mutual non-disclosure agreements in order to
exchange information and continue discussions on a confidential basis. The
Company began to receive confidential reports concerning United on November
25
and 26, 2007. United and the Company agreed to meet on December 6, 2007 in
United’s offices. There are no direct or indirect business relationships between
any of the officers, directors, or principal stockholders of the Company and
any
of the officers, directors, or principal members of United.
On
December 6, 2007, Messrs. Pratt and Swets met with Messrs. Cronin, Griffin,
Russell and Hearn, all officers of United, in United’s offices. Also in
attendance was Mr. Brian Nestor of Raymond James & Associates in their
capacity as financial advisor to United. During the meeting and throughout
the
day, the parties discussed United’s book of business, underwriting, modeling,
changes to the policies offered to its policyholders, rates, new business
initiatives, claims operations and reinsurance. Messrs. Cronin, Griffin,
Pratt,
and Swets continued, over dinner, to discuss items including management of
the
combined companies should a business combination proceed. The participants
concluded that discussions concerning a merger should continue. The following
day, Mr. Patrick DeLacey of Raymond James & Associates (and also a director
of United) spoke with Mr. Pratt concerning a potential business combination
and
informed the Company that any business combination: (i) must meet an appropriate
value for United’s members and (ii) must be negotiated in a timely manner, since
United was considering a number of potential options, including a possible
sale
or merger to other parties or a decision to remain a private company held
by the
current members. Mr. DeLacey provided additional documents concerning United
on
December 13 and 14, 2007. Following analysis of the information from the
December 6 meeting and of the reports provided on December 13 and 14, FMG’s
management concluded it was in FMG’s best interest to express in writing FMG’s
possible interest in a business combination with United.
On
December 16, 2007, after analysis of the information provided by United to
date,
the Company delivered a non-binding letter of interest (“Interest Letter”) to
Messrs. Branch and DeLacey expressing interest in a business combination with
United in the form of a merger with the Company, with the resulting merged
company to be renamed United Insurance Holdings Corp. (“UIH”). A summary of the
material terms of the Interest Letter appears below:
Consideration:
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·
|
$25,000,000
in cash consideration at the closing
|
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·
|
8,125,000
shares of the Company
|
|
·
|
$5,000,000
in
cash as additional consideration
|
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·
|
625,000
shares of the Company as additional
consideration
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·
|
The
additional consideration would be based on UIH’s performance in the first
full four quarters post-merger. Additional consideration begins accruing
when GAAP net income for UIH exceeds $25 million and is fully earned
if
GAAP net income reaches or exceeds $29
million
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·
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The
UIH board would include Mr. Branch and other current United directors
while FMG would name an equal number of directors to the UIH
board.
|
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·
|
The
parties would mutually discuss an appropriate capital and business
plan
for UIH
|
The
Interest Letter requested that the parties enter into more detailed discussions
concerning negotiation of a non-binding letter of intent (“LOI”) and the
diligence, timetable and documentation requirements for a merger.
On
December 21, 2007, the Company’s Board convened a discussion by teleconference.
During the discussion, Messrs. Pratt and Swets described meetings held with
United and meetings and discussions with several other candidates concerning
a
potential business combination. With respect to United, management discussed
(i)
preliminary information concerning United’s business and operations gathered
from the December 6 meeting and subsequent information provided by United
on
December 13 and 14 and (ii) the Interest Letter management sent to United
concerning which we were awaiting a response. FMG’s board asked questions
concerning United’s business, underwriting approach, use of models, ability to
generate new business, claims handling philosophy and use of reinsurance.
Based
on the discussion, FMG’s board concluded (i) management had made good progress
concerning the potential business combination with United; (ii) prior to
issuing
an LOI for United or for any other candidate for a business combination,
FMG’s
board would meet to consider more detailed information concerning the candidate,
review the proposed LOI, and hold a discussion on these matters; (iii) whether
or not to issue an LOI would be subject to the Board’s discussion and to its
affirmative vote; and (iv) discussions should continue with those potential
candidates for a business combination whom FMG’s board and management agreed
potentially fit the Company’s criteria.
Later
that day, Messrs. Pratt and DeLacey spoke concerning a proposed merger. Mr.
DeLacey reported that United’s board had met on December 18, 2007 to consider
the Interest Letter and concluded that United wished to continue discussions
through Mr. Branch and Mr. DeLacey. Key points of the discussion focused
on
issues concerning proposed management of UIH and the constitution of UIH’s board
of directors, the amount of consideration at the closing of a merger, and
the
amount, timing, and form of payment for additional consideration. On December
24, 2007, Messrs. Pratt and DeLacey discussed these issues again and agreed
to
speak early in January.
From
January 4, 2008 through January 9, 2008, Messrs. Pratt and DeLacey held a
series
of discussions focused on resolving outstanding issues and discussed additional
issues concerning the appropriate representations, warranties, and
indemnification between the parties, the registration rights United’s members
would have concerning Company stock received by United’s members as merger
consideration, “lock-ups” or other restrictions on such stock, the conditions to
a closing, confidentiality and exclusivity, the conduct of each party in
the
period prior to any closing, and a waiver by United concerning the Company’s
trust fund. From these discussions, the parties concluded that each issue
had a
range of possible answers. The parties agreed that Mr. DeLacey should send
a
summary of the discussions for Messrs. Pratt and Branch to use for further
negotiation. On January 10, 2008, Messrs. Pratt and Branch continued their
discussions and came to agreement on the issues. Mr. Pratt agreed to document
the parties’ agreement in the form of a draft LOI for consideration by United
and its advisors. Mr. Pratt provided a draft LOI to United and to the Company’s
Board on January 14, 2008. The LOI contemplates a merger of United with FMG
(or
a wholly-owned subsidiary) with FMG to be renamed UIH. A summary of the material
terms of the non-binding LOI appears below:
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$25,000,000
in cash consideration at the closing
|
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8,750,000
registered shares of FMG
|
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|
$5,000,000
in cash as possible additional
consideration
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·
|
The
additional consideration would be based on UIH’s performance in the twelve
month period covering either (i) July 1, 2008 to June 30, 2009
or (ii)
calendar 2009. Additional consideration begins accruing when GAAP
net
income for UIH exceeds $25 million and is fully earned if GAAP
net income
reaches or exceeds $27.5
million
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|
The
UIH management will include Mr. Cronin (President and Chief Executive
Officer) and Mr. Griffin (Chief Financial Officer). Mr. Russell
will be
Chief Underwriting Officer of
United.
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The
UIH board would be set initially at six members with each of the
Company
and United naming three (3) members. Mr. Branch will serve as Chairman
and
Mr. Pratt as Vice Chairman of
UIH.
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|
As
soon as is practical following the execution of the definitive
merger
agreement, FMG will file with the SEC a Form S-4 registration statement
concerning the shares of the Company United’s owners will receive in the
merger.
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|
Our
officers and directors will continue to be bound by existing share
escrow
arrangements, and certain parties related to United will execute
“lock-up”
agreements.
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|
Customary
closing conditions will apply, including the negotiation of a definitive
merger agreement with mutually acceptable representations, warranties,
and
indemnification; also, conditions to close will include regulatory
approvals (such as that of the Florida Office of Insurance Regulation
(
“
OIR
”
)).
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|
An
exclusivity period of thirty (30) days during which we could conduct
diligence concerning United and prepare appropriate
documentation.
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|
Provisions
concerning: (i) United’s waiver of a claim on our trust account and (ii)
mutual promises of
confidentiality.
|
On
January 15, 2008, our Board of Directors met to discuss a possible merger
with
United and the draft LOI. Management presented a summary of information learned
to date concerning United, and a discussion ensued concerning: (i) United’s
management and its experience; (ii) the proposed valuation of United in a
merger
and its relative attractiveness from the point of view of the Company’s
stockholders; (iii) United’s capital structure and ownership; (iv) United’s
market share in Florida and that of the Florida state-owned insurance company,
Citizens Property Insurance Company (Citizens); and (v) the opportunities
and
risks in a merger with United. The Board also discussed the draft LOI and
the
remaining issues under discussion with United. Due to time constraints, the
Board decided to recess the meeting and reconvene on January 17,
2008.
On
January 17, 2008, the Board continued its discussions concerning: (i) United’s
valuation in the proposed merger; (ii) details concerning fundamental financial
results of United and comparisons to publicly-traded insurance companies;
(iii)
United’s expected balance sheet at the time of the proposed merger; (iv) the
expected returns and risks in United’s business, including giving proper account
to its exposure to catastrophe risk; and (v) the opportunities and risks
in
expanding United’s business to other states. The board also considered several
direct and indirect comparable companies, many of which overlapped with
companies used by Piper Jaffray in making its comparisons. The companies
evaluated by both FMG’s board and Piper Jaffray included 21
st
Century
Holding Company, IPC Holdings, Ltd., Universal Insurance Holdings, Inc.,
ACE,
Ltd., XL Capital Ltd., Axis Capital Holdings Ltd., Allied World Assurance
Company Holdings Ltd., Aspen Insurance Holdings Ltd., Allstate Corp., The
Travelers Companies, Inc. and Hartford Financial Services Group, Inc. However,
each of FMG’s board and Piper Jaffray did their investigation and analysis
independent of one another without discussion of which companies to use as
the
basis for comparable comparisons.
The
Board
concluded that (a) United’s management, its experience in Florida, and its
expected returns (after giving effect to its use of reinsurance and exposure
to
catastrophe risk) were positives for the transaction; (b) the opportunities
for
United were attractive, having given proper account to the risks associated
with
United’s market share size and the existence of the large competitors, including
the state-owned insurance company Citizens; and (c) United’s valuation in the
merger, its financial results to date, and its expected balance sheet at
the
time of the merger justified continuing the process of discussing a merger.
Mr.
Pratt also gave his opinion as to how the final issues in the LOI would be
resolved in final negotiation and that such resolution of the issues would
not
differ materially from the draft LOI summarized above and presented to the
Board. Following this discussion, the Board unanimously approved a resolution
authorizing management, on behalf of the Company, to enter into an LOI with
United on substantially the same terms as were presented in the draft LOI
(and
as negotiated to final resolution by management). The Board also instructed
management that discussions should continue with those potential candidates
for
a business combination whom the Board and management agreed potentially fit
the
Company’s criteria.
On
January 20, 2008, we sent to United a final LOI (comporting with the summary
above in every material way) that United executed on the
following
day.
FMG
and
United arrived at the Merger consideration through mutual negotiation and
discussion. The parties agreed the transaction should contain the following
elements: cash at the time of the Merger; no need for any additional financing
to complete the Merger; the issuance of FMG common stock as the majority
of the
Merger consideration; and an amount of additional cash consideration depending
upon United’s post-Merger performance.
On
January 24, 2008, at the Raymond James headquarters in St. Petersburg, Florida,
Messrs. Pratt and Swets met with Messrs. Cronin, Griffin, Russell and Michael
Farrell, United’s senior financial analyst and Keith Irvine (Raymond James), all
representing United, in order to discuss the process for diligence and
documentation.
Beginning
with the January 24, 2008 meeting and continuing through the signing of the
Agreement and Plan of Merger, we conducted diligence concerning United’s
business, operations and financial results. Messrs. Pratt and Swets actively
participated in numerous telephone conversations and email communications with
officers and other representatives of United. We retained outside advisors
and
consultants who supplemented our work with reports concerning the following
areas or functions: accounting, investments, policy administration, claims,
reinsurance, actuarial computations (including computations of premiums,
reserves for losses, reserves for lost adjustment expenses, unearned premiums
and reinsurance recoverables) corporate structure, ownership and any material
restrictions contained in United’s contracts and governing
documents.
On
February 22, 2008, the Company’s Board convened a discussion by teleconference.
Our management described:
|
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The
scope of the diligence being conducted by us, including portions
performed
directly by Messrs. Pratt and
Swets;
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|
The
personnel, backgrounds and references for the firms retained to perform
diligence for us, which including an accounting firm, a law firm,
an
operations and internal audit consultant, a reinsurance broker and
consultant and an actuarial consultant;
and
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|
Our
findings to date from both management and from our outside retained
firms
and consultants.
|
The
directors discussed the diligence findings and encouraged management to continue
discussions with United, including preparation of a draft definitive merger
agreement (which was delivered to United on March 7, 2008). The directors also
encouraged management to continue discussions with other candidates concerning
a
potential business combination.
On
March
14, 2008 the Company’s Board convened a discussion by teleconference. Management
described its continuing analysis of United, its management, our diligence
and
the state of discussions concerning a definitive merger agreement. In
particular, our management described:
|
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A
valuation and investment thesis for the merger with
United;
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·
|
Management’s
assessment of United and its management, particularly with respect
to
United’s underwriting focus and risk
management;
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|
An
assessment of United’s profit opportunities and risk to those profits
under various scenarios; and
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|
An
analysis of the potential combined profits and earnings per share
after a
merger, both in absolute terms and relative to certain publicly-traded
insurance companies.
|
The
directors discussed these matters and encouraged management to continue
discussions with United. We scheduled a meeting on March 20, 2008 to review
(i)
all of the steps taken by us in our discussions with United, (ii) diligence
memoranda concerning United prepared by management and by our counsel (which
were provided to the directors prior to the March 20 meeting) (iii) a draft
definitive merger agreement in a form substantially similar to its final form
(which was provided to directors prior to the March 20 meeting); (iv) a fairness
opinion (prepared by Piper Jaffray) and (v) information concerning the status
of
discussions with other candidates concerning a potential business
combination.
On
March
20, 2008, FMG’s Board of Directors met to evaluate the materials set forth above
in order to consider approval of a merger with United. Management presented
the
diligence findings and a summary of the status of discussions with other
candidates concerning a potential business combination. Representatives of
Piper
Jaffray joined the meeting to discuss their opinion concerning the
transaction.
During
the meeting our directors considered many aspects of a merger with United,
including, but not limited to:
|
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The
overall state of the Florida homeowners insurance business and the
relative attractiveness of this
market;
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|
United’s
historical record of success in the Florida
market;
|
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·
|
The
expected return on equity for United’s business in comparison to others
operating in the Florida market;
|
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·
|
The
expected profitability of United’s business after giving proper account to
United’s exposure to, and management of, catastrophe
risk;
|
|
·
|
Diligence
reports concerning United’s balance sheet, including a review of its
investment assets, loss reserves, unearned premium reserves and
reinsurance arrangements;
|
|
·
|
Confirmations
of United’s loss reserve estimates and claims practices by an independent
actuary and an independent accounting firm retained by the
Company;
|
|
·
|
United’s
reinsurance program, underlying contract arrangements, and quality
of
reinsurance providers, including review of the findings of an independent
reinsurance consultant retained by the
Company;
|
|
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|
The
status of discussions with other candidates concerning a potential
business combination, including management’s assessment of those
candidates’ potential value, the probability of negotiating an acceptable
business combination and the timeframe for so doing;
and
|
|
·
|
The
amount and form of the consideration to be paid by FMG to effect
the
merger, including the Piper Jaffray opinion that the transaction
is fair,
from a financial point of view, to the Company’s stockholders. From this,
and their own assessment of the transaction, the directors concluded
that
United’s value also exceeds $30,176,383, or 80% of the Company’s assets
held in its trust account.
|
FMG’s
board discussed the opportunity and the potential adverse effects of a merger
with United at its board meetings on January 15 and 17, on its conference
call
discussions on February 22 and March 14, and again at its meeting on March
20.
Those discussions focused on the value and potential of a merger with United
for
our stockholders and an assessment of the risks and potential adverse effects
of
the merger. As a consequence, our board made a careful review of two primary
areas that could cause adverse effects: (i) the risks of poor performance
in
United’s business and financial results, leading to an adverse effect on our
stockholders; and (ii) failure to pursue a better merger candidate (if one
could
be identified), leading to an adverse effect on our stockholders. After due
consideration, we determined to proceed with the merger proposal with
United.
Our
outside counsel, which was hired to assist with our initial public offering
and
has remained our outside counsel through the date hereof, attended all official
meetings of our board of directors as well as board discussions held by
conference call. We initiated contact with Piper Jaffray on approximately
February 15 and officially engaged them on March 4. Piper Jaffray attended
no
meetings between FMG and United. The only meeting of FMG’s board of directors
which Piper Jaffray attended was the March 20 meeting, as described above.
Pali
Capital, Inc., which served as the representative of the underwriters in
our
IPO, was retained on February 26, 2008 to render financial advisory and
investment banking services to FMG in connection with the Merger. Pali Capital
attended no meetings between FMG and United, nor did Pali attend any meetings
of
FMG’s board of directors. FMG also retained Actuarial Consultant in late
January, 2008 and were present on some due diligence phone calls between
FMG and
United, but attended no other meetings between the companies or any meetings
of
FMG’s board of directors. FMG retained Blackman Kallick to assist with
accounting due diligence. Blackman Kallick attended due diligence meetings
between FMG and United on February 4 and February 5, but attended no other
meetings. No other consultants have been retained.
During
the March 20 board meeting, FMG’s Board concluded that a merger with United on
the terms described was in the best interests of our stockholders. FMG’s Board
unanimously approved a resolution in favor of the merger with United and
a
resolution authorizing Messrs. Pratt and Swets to take all actions they deem
necessary to finalize the Merger Agreement. The Merger Agreement was finalized
and signed on April 2, 2008 and announced to the public on April 3,
2008.
Interests
of United Directors and Officers in the Merger
Gregory
C. Branch, Alec C. Poitevint, and Kent G. Whittemore, directors of United,
will
be directors of the combined company following the Merger.
Interests
of FMG Directors and Officers in the Merger
In
considering the recommendation of the Board of Directors of the Company to
vote
for the proposals to approve and adopt the Merger Agreement and the Merger,
you
should be aware that certain members of the Company’s Board have agreements or
arrangements that provide them with interests in the Merger that differ from,
or
are in addition to, those of the Company stockholders generally. In
particular:
·
If
the
Merger is not approved, the Company may be required to liquidate, and the
shares
of common stock and warrants held by the Company’s executive officers and
directors will be worthless because the Company’s executive officers and
directors are not entitled to receive any of the net proceeds of the Company’s
IPO that may be distributed upon liquidation of the Company. The Company’s
executive officers, directors and special advisor own a total
1,183,406 shares of the Company’s common stock that have a market value
of approximately $8,615,196 based on the Company’s share price of
$7.28 as of June 11, 2008. The Company’s executive officers and directors also
own a total of 1,250,000 warrants to purchase shares of the Company’s common
stock that have a market value of $437,500 based on the Company’s warrant price
of $0.35 as of June 11, 2008. The Company’s executive officers, directors and
special advisors are contractually prohibited from selling their shares of
common stock prior to one year after the consummation of a business combination,
during which time the value of the shares may increase or
decrease.
·
It
is
currently anticipated that Messrs. Gordon G. Pratt, Larry G. Swets, Jr. and
James R. Zuhlke, all of whom are current directors of the Company, will continue
as directors of the Company after the Merger.
The
Company’s Reasons for the Merger and Recommendation of the Company’s
Board
In
the
prospectus relating to our IPO, we stated our intention to focus our pursuit
of
a business combination on merger partners in the insurance industry. On page
44
of this Proxy Statement/Prospectus, we enumerate all the material factors
considered in pursuing this particular transaction. Other factors used in
making
a determination whether to proceed with the Merger, none of which were deemed
factors weighing against pursuing the Merger and none of which were material
in
any event, were results of background checks done on United’s management, the
ability of FMG’s current management team to work with United following the
Merger and the results of the various due diligence investigations undertaken
on
United.
We
believe the Merger meets our original investment objectives.
In
light
of the complexity of those factors, our Board of Directors, as a whole, did
not
consider it practicable to, nor did it attempt to, quantify or otherwise
assign
relative weights to the specific factors it considered in reaching its decision.
Individual members of our Board of Directors may have given different weight
to
different factors.
Based
upon our evaluation as set forth above, our Board of Directors has unanimously
approved the Merger and determined it is in the best interests of the Company
and our stockholders.
Terms
of the Merger Agreement
The
terms
of the Merger Agreement, including the closing conditions, are customary and
reasonable. It was important to the Company’s Board of Directors that the Merger
Agreement include customary terms and conditions as it believed such terms
and
conditions would allow for a more efficient closing process and lower
transaction expenses.
The
Company’s Board of Directors believes the above factors strongly supported its
determination and recommendation to approve the Merger. The Company’s Board of
Directors did, however, consider the following potentially negative factors,
among others, including the Risk Factors, in its deliberations concerning the
Merger:
The
risk its public stockholders would vote against the Merger and exercise their
conversion rights
The
Company’s Board of Directors considered the risk the current public stockholders
of the Company would vote against the Merger and demand to redeem their shares
for cash upon consummation of the Merger, thereby depleting the amount of cash
available to the combined company following the Merger. For reasons stated
above, the Company’s Board of Directors deemed this risk to be less with regard
to United than it would be for other merger partners and believes the Company
will still be able to implement its business plan, even if the maximum number
of
public stockholders exercised their conversion rights.
Certain
officers and directors of the Company may have different interests in the Merger
than the Company stockholders
The
Company’s Board of Directors considered the fact certain officers and directors
of the Company may have interests in the Merger different from, or in addition
to, the interests of the Company stockholders generally, including the matters
described under “Interests of the Company and Officers in the Merger”
above.
Limitations
on indemnification set forth in the Merger Agreement
The
Company’s Board of Directors considered the limitations on indemnification set
forth in the Merger Agreement. See
“The
Merger Agreement.” The Board of Directors of the Company determined that such
limitations are consistent with what could be expected.
The
risk United and its affiliates would control a significant percentage of our
issued shares stock after the transaction.
Upon
the
consummation of the Merger, the members of United will beneficially own
approximately 60% of the common stock of FMG, assuming no conversion of stock
by
public stockholders, and approximately 68% if the maximum number of shares
is
converted. Therefore, the members of United will be able to exercise significant
control over the operations of FMG and may vote its common stock in ways that
are adverse or otherwise not in the best interest of our stockholders as a
group.
The
risk the Company’s current stockholders will experience substantial dilution
upon consummation of the Merger.
If
we
consummate the Merger, we will issue, in the aggregate, 8,750,000 shares
of our
common stock. Our IPO stockholders currently own approximately 80% of the
Company’s outstanding capital stock. Following the Merger, all current
FMG stockholders will own approximately 40% of our common stock. Our net
income per share, assuming no shares are converted, will increase from $0.03 to
$2.81 on a pro-forma basis ($2.72 per share on a diluted, pro-forma basis
assuming 29.99% of our public shares convert). We believe, despite the
dilution in ownership our IPO stockholders will experience as a result of
the
Merger, this transaction is still beneficial for them.
The
lack of approval of the Merger from United’s members prior to the execution of
the Merger Agreement.
While
it
would have been preferable to have the required approval of the members of
United upon the execution of the Merger Agreement, such approval is,
necessarily, a closing condition. We expect the vote to be taken by United’s
members following the effectiveness of this proxy but prior to the date of
the
Special Meeting. Additionally, in the event the members of United do not approve
the Merger, we are entitled to terminate the Merger Agreement and receive
reimbursement from United for all costs, expenses and fees incurred in
connection with the transactions contemplated hereby, up to a maximum of
$500,000, within three (3) business days of the date of written notice of
termination of the Merger Agreement. Despite the lack of approval of United’s
members prior to the date hereof, we believe the Merger is beneficial to our
stockholders.
United’s
Reasons for the Merger with the Company
The
United board of managers believes that the proposed merger between the Company
and United is in the best interests of United and its members based on the
following:
|
·
|
|
As
of March 31, 2008, the Company had approximately $37.7 million
in its
trust account, including accrued interest (but not taking into
account
taxes payable). If the Merger is completed, the funds in the Company’s
trust account will be available for the operations of the Company
following the Merger, less expenses of the Merger and amounts paid
to
holders of up to 29.99% of the shares of the Company’s common stock issued
in the Company’s initial public offering who vote against the Merger
Proposal and properly elect to convert their shares of common stock
into a
pro rata share of the amount held in the trust account (including
the
amount held in the trust account representing the deferred portion
of the
underwriters’ fee), inclusive of any interest earned on their pro rata
share (net of taxes payable). United believes that because following
the
Merger the Company will have substantially greater capitalization
than
United alone, the combined company will be in a better position
to expand
its insurance business.
|
|
·
|
|
The
Merger would allow United to increase the statutory capital and surplus
of
its insurance company subsidiaries providing it the ability to expand
the
number of property and casualty insurance policies that it writes
in the
State of Florida.
|
|
·
|
|
The
abilities and experience of the directors of the Company who are
expected
to remain as directors of the Company after the Merger will be highly
valuable in executing its business strategy. See “
Directors
and Management of the Company Following the Merger.
”
|
|
·
|
|
The
Company common stock issued in the Merger will be publicly traded,
which
could provide liquidity to United’s members and provide the business with
access to the public capital markets, the ability to attract, retain
and
incentivize highly qualified employees with grants of options for,
or
other equity awards in the form of, publicly traded
stock.
|
|
·
|
|
The
resulting publicly traded stock will present United with greater
ability
to use stock as acquisition or partnership
currency.
|
In
addition to the primary reasons set forth above, United’s board also considered
certain potentially negative factors in its deliberations, including the risk
that the Merger may not be completed, risks associated with a potentially
illiquid trading market for the Company common stock and costs associated with
being a public company, among others.
FAIRNESS
OPINION OF PIPER JAFFRAY
The
Company retained Piper Jaffray to provide a Fairness Opinion to the Company’s
Board of Directors in connection with the Merger.
On
March
20, 2008, our Board of Directors held a meeting to evaluate the proposed Merger
with United. At this meeting, Piper Jaffray reviewed the financial aspects
of the proposed Merger and rendered an oral opinion to our Board of Directors,
which was subsequently confirmed by delivery of a written opinion, dated March
20, 2008, that as of the date of the opinion, and subject to the factors and
assumptions set forth in the written opinion, the consideration to be paid
pursuant to the Merger Agreement was fair, from a financial point of view,
to
the holders of our common stock.
The
full text of the written opinion by Piper Jaffray is attached as Annex C to
this
proxy statement. Stockholders are urged to read the opinion carefully and in
its
entirety for a description of the assumptions made, matters considered,
procedures followed and limitations on the review undertaken by Piper Jaffray
in
rendering its opinion. The summary of the Piper Jaffray opinion set forth in
this proxy statement is qualified in its entirety by reference to the full
text
of the opinion. The Piper Jaffray opinion is addressed to the Company’s Board of
Directors and addresses only the fairness to the Company, from a financial
point
of view, of the consideration to be paid by FMG in the Merger. The Piper Jaffray
opinion does not constitute a recommendation to any Company stockholder as
to
how that stockholder should vote or act on any matter relating to the Merger
(including, without limitation, with respect to the exercise of rights to
convert Company shares into cash). Further, the Piper Jaffray opinion does
not
in any manner address the underlying business decision of the Company to engage
in the Merger or the relative merits of the Merger as compared to any
alternative business decision or strategy (including, without limitation, a
liquidation of the Company after not completing a business combination
transaction within the allotted time). The decision as to whether to approve
the
Merger or any related transaction may depend on an assessment of factors
unrelated to the financial analysis on which the Piper Jaffray opinion is
based.
Piper
Jaffray’s opinion was intended solely for the use and benefit of our Board of
Directors in connection with its consideration of the Merger, does not address
the merits of the underlying decision by us to enter into the Merger Agreement
or any of the transactions contemplated thereby, including the Merger, and
does
not constitute a recommendation to any of our stockholders as to how that
stockholder should vote on, or take any action with respect to, the Merger
or
any related matter. Piper Jaffray was not asked to address nor does its opinion
address, the fairness to, or any other consideration of, the holders of any
other class of securities, creditors or other constituencies of FMG. Any
defense
of the Fairness Opinion against claims brought by Company stockholders based
on
the fact such opinion is intended solely for the use and benefit of the
Company’s board of directors is expected to be resolved by a court of competent
jurisdiction. Any such defense will have no effect on the rights and
responsibilities of FMG’s board of directors under applicable state law nor any
effect on the rights and responsibilities of Piper
J
affray
or
FMG’s board of directors under federal securities laws.
In
connection with its opinion, Piper Jaffray reviewed and analyzed the Merger
and
the financial and operating condition of United and us, including, among other
things, the following:
·
|
a
draft of the Merger Agreement, dated March 20,
2008;
|
·
|
other
relevant draft documents related to the
Merger;
|
·
|
United’s
annual reports for the fiscal years ended December 31, 2004 through
December 31, 2007;
|
·
|
forecasts
and projections prepared by United’s management with respect to United for
the fiscal years ended December 31, 2008 through December 31, 2012,
which
such projections may be deemed to differ materially from publicly
available information on United and which such information included
(a)
limited forecast information relating to United’s business, having been
advised that more detailed financial forecasts for the business
were not
available and (b) certain adjustments to United’s historical financial
statements that were prepared by the management of United and also
agreed
to by the Company’s
management;
|
·
|
certain
financial data of United and compared it to publicly available financial
data for certain other companies that Piper Jaffray deemed comparable
to
United, and publicly available prices in other business combinations
that Piper Jaffray considered relevant in its
analysis;
|
·
|
publicly
available financial information concerning the Company that Piper
Jaffray
believed to be relevant to its analysis, including the Company’s Annual
Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
on
Form 8-K, and the Registration Statement on Form S-1 filed with the
SEC on
October 4, 2007;
|
·
|
certain
other communications from the Company to its
stockholders;
|
·
|
certain
internal financial analyses and forecasts for the Company and United
prepared by Company management;
|
·
|
unit,
common stock and warrant reported price and trading activity for
the
Company; and
|
·
|
conducted
such other studies, analyses and inquiries as it deemed
appropriate.
|
Piper
Jaffray also:
·
|
held
several discussions with certain members of United’s senior management to
discuss operations, financial condition, future prospects and projected
operations and performance of United;
and
|
·
|
met
with certain members of the Company’s senior management to discuss the
existing operations and financial condition of the Company, as well
as
operations, financial condition and business strategy
post-Merger.
|
Piper
Jaffray also took into account its assessment of general economic, market and
financial conditions and its experience in other transactions, as well as its
experience in securities valuation and knowledge of the insurance industry
generally. Piper Jaffray’s opinion is necessarily based upon conditions as they
existed and could be evaluated on the date of its opinion and the information
made available to it through the date thereof. In conducting its review and
arriving at its opinion, Piper Jaffray, with our consent, assumed and relied
upon, without independent verification, the accuracy and completeness of all
of
the financial and other information provided to it or publicly available and
did
not assume any responsibility for independently verifying the accuracy or
completeness of any such information. Piper Jaffray, with our consent, relied
upon United’s management as to the reasonableness and achievability of the
financial and operating forecasts and projections (and the related assumptions
and bases) provided to it, and assumed that such forecasts and projections
were
reasonably prepared by United’s management on bases reflecting the best
currently available estimates and judgments of United’s management and that such
forecasts and projections would be realized in the amounts and in the time
periods currently estimated by United’s management. Piper Jaffray expresses no
view as to such forecasts or projections or the assumptions upon which they
were
based. Piper Jaffrey is not an expert in the independent verification of the
adequacy of reserves for loss and loss adjustment expenses and assumed, with
our
consent, that United’s aggregate reserves for loss and loss adjustment expenses
are adequate to cover such losses. In that regard, Piper Jaffray made no
analysis of, and expressed no opinion as to, the adequacy of reserves for loss
and loss adjustment expenses. In rendering its opinion, Piper Jaffray did
not make or obtain any evaluations or appraisals of the property of United
or
us, nor did it examine any of United’s individual underwriting files. In
addition, Piper Jaffray has not assumed any obligation to conduct any physical
inspection of United’s properties or facilities.
Piper
Jaffray assumed, with our consent, that the Merger would be consummated in
accordance with the terms of the Merger Agreement, without waiver, modification
or amendment of any material term, condition or agreement, and that, in the
course of obtaining the necessary regulatory or third party approvals, consents
and releases for the Merger, no delay, limitation, restriction or condition
will
be imposed that would have a material adverse effect on United or us. Piper
Jaffray further assumed that the final terms of the Merger Agreement would
not
vary materially from those set forth in the draft reviewed by Piper
Jaffray.
The
following is a summary of the material analyses presented by Piper Jaffray
to
our Board of Directors on March 20, 2008 in connection with its review of
the
financial considerations of the Merger. The summary is not a complete
description of the analyses underlying the Piper Jaffray opinion or the
presentation made by Piper Jaffray to our Board of Directors, but summarizes
the
analyses performed and presented in connection with such opinion. The
preparation of a fairness opinion is a complex analytic process involving
various determinations as to the most appropriate and relevant methods of
financial analysis and the application of those methods to the particular
circumstances. Therefore, a fairness opinion is not readily susceptible to
partial analysis or summary description. In arriving at its opinion, Piper
Jaffray did not attribute any particular weight to any analysis or factor
that
it considered, but rather made qualitative judgments as to the significance
and
relevance of each analysis and factor. Piper Jaffray did not form an opinion
as
to whether any individual analysis or factor (positive or negative) considered
in isolation supported or failed to support its opinion; rather, Piper Jaffray
made its determination that the Merger consideration to be received by holders
of United membership units was fair, from a financial point of view, to the
holders of our common stock on the basis of its experience and professional
judgment, after considering the results of all of its analyses taken as a
whole.
The financial analyses summarized below include information presented in
tabular
format, which do not constitute a complete description of Piper Jaffray’s
financial analyses and must be read in conjunction with the accompanying
text.
Accordingly, Piper Jaffray believes its analyses must be considered as a
whole
and that selecting portions of its analyses and factors or focusing on the
information presented below in tabular format, without considering all analyses
and factors or the full narrative description of the financial analyses,
including the methodologies and assumptions underlying the analyses, could
create a misleading or incomplete view of the process underlying Piper Jaffray’s
analyses and opinion. Piper Jaffray informed the Company there were no specific
factors that did not support the fairness opinion provided by Piper
Jaffray.
Summary
of Proposal.
Piper
Jaffray reviewed the financial terms of the proposed transaction. Pursuant
to
the Merger Agreement, United will receive Twenty Five Million Dollars
($25,000,000) in cash; plus, Eight Million Seven Hundred Fifty Thousand
(8,750,000) shares of FMG common stock; plus up to Five Million Dollars
($5,000,000) in cash, based on certain operating performance targets. Assuming
that certain performance targets are achieved post-Merger, aggregate transaction
value to the holders of United membership units could equal as much as $100
million based on the number of shares and options outstanding on March 20,
2008.
Comparable
Companies Analysis.
Using
publicly available information, Piper Jaffray compared United’s financial
performance and financial condition to those of a group of selected
publicly-traded personal lines property-casualty insurance companies and
“offshore” reinsurance companies. These companies: (i) are all publicly traded
in the U.S., (ii) focus on personal lines property insurance and/or property
reinsurance, (iii) have significant exposure to property catastrophe risk
in the
State of Florida, (iv) have a market capitalization of less than $2
billion and (v) are reasonably comparable to United in terms of overall
financial and operating metrics. These companies were selected based on Piper
Jaffray’s professional judgment considering characteristics such as the type of
insurance written and market capitalization. No companies that met this
selection criteria were excluded from our analysis. None of the selected
companies are directly comparable to United and, therefore, the results of
the
selected companies analysis are primarily financial calculations rather than
detailed analyses of the differences in operating characteristics and business
mixes of the various companies. Appropriate use of the data includes qualitative
judgments concerning, among other things, differences among the companies.
United and comparable company results were adjusted to omit the tax-affected
value of any “take-out” bonuses earned.
Selected
personal lines property-casualty insurance companies included:
·
|
Infinity
Property & Casualty (IPCC)
|
·
|
Hilltop
Holdings (HTH)
|
·
|
Safety
Insurance Group (SAFT)
|
·
|
Donegal
Group (DGICA)
|
·
|
First
Acceptance (FAC)
|
·
|
Universal
Insurance Holdings (UVE)
|
·
|
GAINSCO
(GAN)
|
·
|
21
st
Century Holding Company (TCHC)
|
Selected
“offshore” reinsurance companies included:
·
|
Validus
Holdings, Ltd. (VR)
|
·
|
IPC
Holdings, Ltd. (IPCR)
|
·
|
Montpelier
Re Holdings, Ltd. (MRH)
|
·
|
Flagstone
Reinsurance Holdings, Ltd. (FSR)
|
The
following is a summary of Piper Jaffray’s analysis of certain key performance
metrics and ratios:
|
|
|
|
U.S.
Personal
Lines
|
|
Bermuda
Reinsurer
|
|
2007
GAAP Statistic
|
|
United
(1)
|
|
Median
|
|
Median
|
|
Loss
& LAE Ratio
|
|
|
30.1
|
%
|
|
63.2
|
%
|
|
24.3
|
%
|
Expense
Ratio
|
|
|
54.5
|
|
|
29.2
|
|
|
30.7
|
|
Combined
Ratio
|
|
|
84.6
|
|
|
93.6
|
|
|
63.1
|
|
ROAE
|
|
|
64.9
|
|
|
11.4
|
|
|
19.4
|
|
Net
Income Margin
|
|
|
26.6
|
|
|
12.1
|
|
|
42.4
|
|
(1)
Assuming a 37.6% corporate tax rate
For
each
selected company, Piper Jaffray calculated the ratio of its earnings per share
for 2007 and estimated earnings per share for 2008, based on Reuters consensus
estimates, to its stock price as of March 19, 2008. For 2007, and excluding
first and fourth quartile multiples, Piper Jaffray calculated earnings multiples
of the selected companies as ranging from a low of 2.6x to a high of 5.9x.
For
2008, using the same methodology, Piper Jaffray calculated earnings multiples
of
the selected companies as ranging from a low of 5.9x to a high of 7.2x. By
applying the derived range of multiples for 2007 of 2.6x to 5.9x to United’s net
income of $21.5 million, Piper Jaffray derived a range of implied equity values
for United of between approximately $55.3 million and $126.6 million. By
applying the derived range of multiples for 2008 of 5.9x to 7.2x to United’s
2008 estimated net income of $19.3 million, based on United management ’ s
estimates, Piper Jaffray derived a range of implied equity values for United
of
between approximately $114.1 million and $139.5 million.
Piper
Jaffray also calculated the ratio of closing stock price as of March 19, 2008
to
reported GAAP book value per share at December 31, 2007 of the selected
companies. Piper Jaffray calculated price to book value multiples ranging from
a
low of 0.9x to a high of 1.1x, excluding first and fourth quartile
multiples. By applying the derived range of multiples to United’s reported
December 31, 2007 book value of $46.1 million, Piper Jaffray derived a range
of
implied equity values for United of between $40.4 million and $51.7
million.
Calculations
in this analysis do not include a “change of control premium” despite the fact
that one is customarily paid in the event of a merger or acquisition. Based
on
the analyses described above, Piper Jaffray calculated the following implied
ranges of approximate trading values for United:
Implied
Trading Values Based on Management Estimates
|
|
|
|
2007
Net Income
|
|
|
$55.3
– $126.6
|
|
2008E
Net Income
|
|
|
114.1
– 139.5
|
|
2007
Book Value, as of December 31, 2007
|
|
|
40.4
– 51.7
|
|
Comparable
Transactions Analysis
Using
publicly available information, Piper Jaffray reviewed the range of implied
multiples paid or payable in selected change of control transactions announced
since January 1, 2000 with announced deal values greater than $15 million
involving certain target companies participating in the United States personal
lines segment of the property-casualty insurance market. An analysis of the
resulting multiples of the selected precedent transactions necessarily involves
complex considerations and judgments concerning differences in financial and
operating characteristics of the companies and other factors that may have
affected the selected transactions and/or the Merger. Accordingly, while Piper
Jaffray assessed selected precedent transactions in the personal lines sector
of
the property-casualty insurance marketplace, it determined that many of such
transactions offered limited comparability to the Merger due to, among other
things, the limited information publicly available for many of the precedent
transactions, potential differences in operating characteristics and performance
of the target companies in the precedent transactions and changes in the
insurance industry market conditions since some of the precedent transactions
were announced. No selected comparable company or transaction was identical
to
United or the Merger.
Selected
transactions included:
Announcement
Date
|
|
Target
|
|
Acquirer
|
March
1, 2007
|
|
Bristol
West Holdings Inc.
|
|
Zurich
Financial Services AG
|
December
4, 2006
|
|
Direct
General Corp.
|
|
Elara
Holdings Inc.
|
June
14, 2005
|
|
Affirmative
Insurance Holdings
|
|
New
Affirmative LLC
|
December
15, 2003
|
|
USAuto
Holdings Inc.
|
|
Libert
é Investors
|
April
18, 2001
|
|
FL
Select Ins Holdings Inc.
|
|
Vesta
Insurance Group Inc.
|
October
31, 2000
|
|
Farm
Family Holdings Inc.
|
|
American
National Insurance
|
For
each
precedent transaction, Piper Jaffray derived and compared, among other things,
the implied equity value paid for the acquired company to the (a) GAAP net
income of the acquired company for the latest twelve months, or LTM, of results
prior to the time the transaction was announced and (b) reported GAAP book
value
of the acquired company at the most recent quarter ended prior to
announcement.
Based
on
the analyses described above, Piper Jaffray calculated the (a) multiples of
transaction equity value to the LTM GAAP net income for the target companies,
excluding first and fourth quartile multiples, as ranging from a low of 8.3x
to
a high of 15.2x and (b) multiples of transaction equity value to GAAP book
value
for the target companies prior to announcement as ranging from a low of 0.9x
to
a high of 2.0x. Based upon the minimum and maximum transaction equity values
to
LTM GAAP net income multiples derived from this analysis, Piper Jaffray
calculated a range of implied equity values for United of between $178.5 million
and $326.4 million based on United’s LTM GAAP net income of $21.5 million for
the period ending December 31, 2007. Based upon the minimum and maximum
transaction equity values to GAAP book value multiples derived from this
analysis, Piper Jaffray calculated a range of implied equity values for United
of between $42.5 million and $94.3 million based on United’s reported December
31, 2007 GAAP book value of $46.1 million.
Based
on
the analyses described above, Piper Jaffray calculated the following implied
ranges of trading values for United:
Comparable
Transaction Analysis
|
|
|
|
2007
Net Income
|
|
|
$178.5
– $326.4
|
|
2007
Book Value, as of December 31, 2007
|
|
|
42.5 – 94.3
|
|
Discounted
Cash Flow Analysis
Piper
Jaffray performed a discounted cash flow analysis to generate a range for the
implied present value of United assuming it continued to operate as a
stand-alone company.
This
range was determined by adding the (a) present value of United’s estimated
future free cash flows for the years 2008 through 2012 and (b) present value
of
the terminal value of United. Terminal values for United were calculated based
on a range of terminal multiples applied to the 2012 book value.
In
connection with this analysis, Piper Jaffray utilized, with our consent, the
five-year projections provided by United’s management reflecting United’s best
currently available estimates and judgments of the future financial performance
of United. As part of its analysis and with our consent, Piper Jaffray assumed,
among other things, that (a) all operating cash flow would be retained to
support the growth of the business and maintain financial strength ratings
at
the insurance company level and (b) United would be sold at December 31, 2012,
based on a trailing multiple with the proceeds being discounted back to present
value.
Piper
Jaffray estimated the range for the implied present value of United by varying
the following assumptions:
·
|
a
terminal multiple applied to year 2012 estimated GAAP book value
of 1.0x;
and
|
·
|
discount
rates representing a weighted average cost of capital ranging from
20% to
30%, which range Piper Jaffray, in its professional judgment, deemed
reasonable for a small market capitalization company with the risk
characteristics of United’s insurance
operations.
|
This
analysis resulted in a range for the implied present value of United of $124.6
million to $173.0 million.
Piper
Jaffray stated that, while discounted cash flow analysis is a widely accepted
and practiced valuation methodology, it is highly sensitive to the assumptions
for projected growth in net income and shareholders’ equity, terminal exit
multiples and discount rates. The valuation derived from the discounted cash
flow analysis is not necessarily indicative of United’s actual or expected
future value or results.
Miscellaneous.
Our
Board of Directors retained Piper Jaffray as an independent contractor to
render
an opinion to us regarding the Merger. The Company paid Piper Jaffray a fee
of
$50,000, plus reimbursement of its actual out-of-pocket expenses. As part
of its
investment banking business, Piper Jaffray is continually engaged in the
valuation of insurance company and insurance holding company securities in
connection with acquisitions, negotiated underwritings, secondary distributions
of listed and unlisted securities, private placements and valuations for
various
other purposes. As specialists in the securities of financial institutions,
including insurance companies, Piper Jaffray has experience in, and knowledge
of, the valuation of insurance enterprises. In the ordinary course of its
business as a broker-dealer, Piper Jaffray may from time to time purchase
securities from, and sell securities to, us, and as a market maker in
securities, Piper Jaffray may from time to time have a long or short position
in, and buy or sell, our debt or equity securities for its own account and
for
the accounts of its customers.
Piper
Jaffray made its determination as to fairness on the basis of its experience
and
professional judgment after considering the results of all of the analyses.
Piper Jaffray reviewed the foregoing analyses for purposes of providing its
opinion to our Board of Directors as to the fairness from a financial point
of
view, of the Merger consideration to be provided by holders of our common
stock.
Piper Jaffray did not, recommend any specific consideration amount to us
or to
our Board of Directors. Piper Jaffray informed the Company there were no
specific factors that did not support the fairness opinion provided by Piper
Jaffray.
As
described above, Piper Jaffray’s opinion to the Board of Directors was one of
many factors taken into consideration by our Board of Directors in making its
determination to approve the Merger Agreement. The foregoing summary does not
purport to be a complete description of the analyses performed and reviewed
by
Piper Jaffray.
In
selecting the financial advisory firm to provide an opinion concerning the
Merger, FMG considered several firms known to its management and considered
many
factors, including (i) the firm’s familiarity with analyzing the insurance
industry and with insurance company values; (ii) the knowledge and skill
of the
personnel performing the analysis to provide the basis for the opinion; and
(iii) the overall reputation of the financial advisory firm. After discussing
the assignment with Piper Jaffray, we entered into a negotiation to determine
the fee for this assignment and, after a discussion among our management,
retained Piper Jaffray to render the fairness opinion. Other than the
preparation of the Fairness Opinion, during the two years preceding the date
of
the Fairness Opinion, Piper Jaffray has not had a material relationship with
any
party to the Merger for which compensation has been received or is intended
to
be received.
THE
MERGER AGREEMENT
The
following summary of the material provisions of the Merger Agreement is
qualified by reference to the complete text of the Merger Agreement, a copy
of
which is attached as Annex A to this proxy statement/prospectus and is
incorporated herein by reference. All stockholders are encouraged to read the
Merger Agreement in its entirety for a more complete description of the terms
and conditions of the Merger.
Overview
of the Merger
Under
the
terms of the Merger Agreement the Company will acquire all of the issued
membership units of United, a Florida limited liability company, through a
reverse merger acquisition involving United and United Subsidiary
Corp.
The
Merger is structured such that United will become a wholly-owned subsidiary
of
the Company. If the stockholders of the Company approve the transaction
contemplated by the Merger Agreement, FMG and United will merge pursuant to
a
merger transaction summarized as follows:
(i)
FMG
will
create a transitory merger subsidiary, United Subsidiary Corp., and will merge
such subsidiary with and into United, with United surviving; and
(ii)
United
will, as a result, become wholly-owned by FMG.
Merger
Consideration
United’s
members will receive consideration of up to $100,000,000 consisting
of:
(i)
$25,000,000
in cash;
(ii)
8,750,000
shares of FMG common stock, par value $.0001 per share (assuming an $8.00 per
share value); and
(iii)
up
to
$5,000,000 of additional consideration will be paid to the members of United
in
the event certain net income targets are met by United, as set forth more
particularly herein. Under the terms of the Company’s amended and restated
certificate of incorporation, the Company may proceed with the Merger and
consequent merger notwithstanding holders of up to 1,419,614 shares of Company
common stock initially purchased in the IPO electing to convert their shares
of
common stock to cash and not participate in the Merger.
Closing
of Merger Agreement
Subject
to the provisions of the Merger Agreement, the closing of the Merger will
take
place no later than the date that is the earlier of (A) six months from filing
of this registration statement or (B) November 2, 2008, after all of the
conditions described in the section below entitled “Conditions to Closing the
Merger” have been satisfied, unless the Company and United agree to another
time. In the event the Merger Agreement is not consummated for any reason,
we
have no obligation to pay any termination fees to United.
As
stated
in our final prospectus for our IPO as filed with the SEC on October 4, 2007,
we
will liquidate promptly after cessation of our corporate existence on October
4,
2009 if we have not consummated an acquisition or other business combination
by
such date. Pursuant to the terms of the Merger Agreement, we will have
sufficient time to close on the Merger.
Conditions
to Closing the Merger
The
obligation of FMG to close on the Merger is contingent upon:
(i)
the
accuracy in all material respects on the date of the Merger Agreement and
the
Closing Date of all of United’s representations and warranties, when considered
both collectively and individually;
(ii)
United’s
performance in all material respects of all covenants and obligations required
to be performed by the Closing Date (as more fully described below in “Covenants
of the Parties”);
(iii)
a
majority of the Company’s stockholders must vote in favor of approving the
Merger;
(iv)
not
more than 29.99% of the shares of the common stock issued in the Company’s
IPO vote against the Merger and demand conversion of their stock into
cash;
(v)
stockholder
approval of the First and Second Amendment Proposals;
(vi)
the
Securities and Exchange Commission has declared effective the registration
statement and prospectus which form a part of this proxy
statement;
(vii)
no
governmental authority has enacted, issued, promulgated, enforced or entered
any
law or order that is in effect and has the effect of making the Merger illegal
or otherwise preventing or prohibiting consummation of the
Merger;
(viii)
the
officers are, and the Board of Directors of FMG following the Merger is
constituted, as set forth as the Board of Directors recommends, as fully
described herein; and
(ix)
the
consent of not less than 66% of the membership units of United to the Merger
and
no more than ten percent (10%) of the outstanding membership units of United
shall constitute dissenting membership units under Florida
law.
Conditions
(i), (ii) and (viii), as well as the Third Amendment Proposal, are waivable
by
the Company.
United’s
obligation to close on the Merger is contingent upon:
(i)
the
accuracy in all material respects on the date of the Merger Agreement and the
Closing Date of all of FMG’s representations and warranties;
(ii)
FMG’s
performance in all material respects of all covenants and obligations required
to be performed by the Closing Date (as more fully described below in “Covenants
of the Parties”);
(iii)
a
majority of the Company’s stockholders must vote in favor of approving the
Merger;
(iv)
not
more than 29.99% of the shares of the common stock issued in the Company’s
IPO vote against the Merger and demand conversion of their stock into
cash;
(v)
stockholder
approval of the First and Second Amendment Proposals;
(vi)
the
Securities and Exchange Commission has declared effective the registration
statement and prospectus which form a part of this proxy
statement;
(vii)
no
governmental authority has enacted, issued, promulgated, enforced or entered
any
law or order that is in effect and has the effect of making the Merger illegal
or otherwise preventing or prohibiting consummation of the Merger;
and
(viii)
the
officers and the Board of Directors of FMG following the Merger is constituted
as set forth as the Board of Directors recommends, as fully described
herein.
Conditions
(i), (ii) and (viii), as well as the Third Amendment Proposal, are waivable
by
United.
Representations
and Warranties
The
Merger Agreement contains a number of representations that each of the Company,
United Subsidiary and United have made to each other. These representations
and
warranties include but are not limited to the following: (i) Due
organization and proper qualification; (ii) Clear title to the Membership
units of United; (iii) No ownership of stock in other entities;
(iv) The due and valid authorization, execution, delivery and
enforceability of the Merger Agreement and other instruments contemplated
thereby against all parties; (v) The absence of conflicts or violations by
any party under their respective organizational documents, applicable laws
and
certain agreements; (vi) The valid receipt of all consents and approvals;
(vii) Capitalization is as has been previously disclosed; (viii) The
books and records previously provided are materially complete and accurate;
(ix) Valid title to properties and the lack of encumbrances on properties
or assets; (x) Enumeration of liabilities and guarantees;
(xi) Existence of any regulatory matters; (xii) Absence of certain
changes or events; (xiii) The status of current legal proceedings, if any;
(xiv) A complete list of material contracts; (xv) Confirmation of its
employees and a statement that its labor relations are strong; (xvi) Valid
ownership or license of intellectual property; and (xvii) Absence of
liability for brokerage, finders’ fees or agents’ commission as a result of the
Merger Agreement.
Materiality
and Material Adverse Effect
Certain
of the representations and warranties are qualified by materiality or Material
Adverse Effect. For the purposes of the Merger Agreement, Material Adverse
Effect means any occurrence, state of facts, change, event, effect or
circumstance that, individually or in the aggregate, has, or would reasonably
be
expected to have, a material adverse effect on the assets, liabilities,
business, results of operations or financial condition of the Company or United,
other than any occurrence, state of facts, change, event, effect or circumstance
to the extent resulting from (i) political instability, acts of terrorism or
war, changes in national, international or world affairs, or other calamity
or
crisis, including without limitation as a result of changes in the international
or domestic markets but only to the extent such events are deemed to have a
direct impact on the existing operations of the Company or United and its future
operating prospects, (ii) any change affecting the United States economy
generally or the economy of any region in which the Company or United conducts
business that is material to the business of such entity but only to the extent
such events are deemed to have a direct impact on the existing operations of
the
Company or United and its future operating prospects, (iii) the announcement
of
the execution of this Agreement, or the pendency of the consummation of the
Merger, (iv) any change in GAAP or interpretation thereof after the date hereof,
or (v) the execution and performance of or compliance with this Agreement
.
Covenants
of the Parties
Each
of
the Company, United Subsidiary and United have agreed to use their commercially
reasonable best efforts to promptly take all necessary actions to effect the
Merger. United has agreed to afford the Company full and free access to United’s
books, records and contracts.
United
and the Company also covenanted to consult with one another on any material
operational matter relating to either entity’s, and to consult with and obtain
the permission of the other party before causing United or the Company to assume
any additional obligations or liabilities outside the normal course of its
business.
In
the
event United enters into any reinsurance agreement or a new lease for
its office space, FMG may object to the terms in any of such
agreements and if, after negotiations by the parties, they are are
unable to resolve FMG’s objections, FMG may terminate the Merger
Agreement.
United
acknowledged and agreed it will not have at any time prior to the closing of
the
Merger Agreement any claim against the funds held in the Company’s trust account
and has waived any claims United may have against the trust account at any
time
prior to the closing.
Director
Nominees
Under
the
Merger Agreement, United has the right to nominate, and the Company has agreed
to cause the appointment and election of, three members of the Board of
Directors of FMG. In addition, two of our current board members will
resign.
Indemnification
Provisions
From
the
date of the Merger Agreement through the date of consummation of the Merger,
each of FMG and United agree to indemnify and hold harmless the other (including
subsidiaries, affiliates, successors, assigns, and their respective officers,
directors, employees and agents) from and against any liabilities, claims
(including claims by third parties), demands, judgments, losses, costs, damages
or expenses whatsoever (including reasonable attorneys’, consultants’ and other
professional fees and disbursements of every kind, nature and description)
that
the indemnified party may sustain, suffer or incur and that result from, arise
out of or relate to (i) any breach by the other of any of its representations,
warranties, covenants or agreements contained in the Merger Agreement, and/
or
(ii) any fraud committed by or the willful breach of the Merger Agreement by
the
other party.
The
parties’ rights to indemnification are subject to the following
limitations:
(i) The
maximum aggregate amount of damages that may be recovered shall not exceed
$1,000,000.
(ii) Any
claim for indemnification hereunder may not be pursued and is hereby irrevocably
waived upon and after the date of consummation of the Merger.
(iii) United
and its members may only seek indemnification against FMG and FMG and United
Subsidiary may only seek indemnification against United. The parties irrevocably
waive in perpetuity any and all claims for indemnification against the officers,
directors and affiliated entities of the other party, as well as any and all
claims for indemnification against the trust fund and all other entities
controlled by FMG or its officers and directors, on the one hand, or by United
or its officers and directors, on the other hand.
Structure
and Effective Time of Merger
As
part
of the Merger, and pursuant to the Merger Agreement, FMG and United will engage
in a series of procedural steps as outlined below pursuant to which United
will
become a wholly-owned subsidiary of FMG and the current members of United will
become stockholders of FMG. Although the following steps are explained in
sequence, they are anticipated to be accomplished prior to or concurrently
with
the consummation of the Merger.
·
FMG
will
form a transitory merger company that will be incorporated in the United States
as a domestic corporation;
·
United,
United Subsidiary and the Company will enter into a merger agreement whereby
United Subsidiary will merge with and into United, with United being the
surviving entity;
·
As
part
of the Merger consideration to be paid pursuant to the Merger Agreement, FMG
will issue 8,750,000 shares of registered common stock in exchange for United’s
outstanding membership units, which are held by the United members;
·
Upon
the
consummation of the Merger, the former members of United will exchange their
securities of United for securities of FMG and FMG will receive the membership
units of United so exchanged, thereby making United a wholly-owned subsidiary
of
FMG and making the former members of United stockholders of FMG;
and
The
effective time of the Merger will occur concurrently with the consummation
of
the Merger by filing a certificate of merger or similar document with the
Secretary of State of the State of Florida.
Merger
Consideration
Pursuant
to the Merger Agreement, the outstanding membership units of United will be
exchanged for the right to receive cash and shares of common stock of
FMG.
Certificate
of Incorporation; By-laws
The
Certificate of Incorporation and By-laws of the Company in effect immediately
prior to the Merger will be the Certificate of Incorporation and By-laws of
the
Company after the Merger after giving effect to the First, Second and Third
Amendment Proposals. The Articles of Organization of United prior to the Merger
will be the Articles of Organization of United after the Merger, although
certain provisions contained therein may be amended to account for United’s new
status as a wholly-owned subsidiary of United Insurance Holdings Corp. The
operating agreement of United following the Merger is attached as an exhibit
to
the Merger Agreement.
Procedure
for Receiving Merger Consideration
Exchange
Agent.
As
of the
effective time of the Merger, FMG will deposit with Continental Stock
Transfer & Trust Company, or the Exchange Agent, for the benefit of the
United members, the shares of common stock issuable in exchange for United’s
membership units. At the time of such deposit, United will irrevocably instruct
the Exchange Agent to transfer United’s membership units to the
Company.
Exchange
Procedures.
Upon
surrender of United’s membership units for exchange to the Exchange Agent,
together with such letter of transmittal, duly completed and validly executed,
and such other documents as may reasonably be required by the Exchange Agent,
such member will be entitled to receive in exchange therefor his, her or its
pro
rata potion of Company common stock together with his, her or its pro rata
portion of the $25,000,000 cash portion of the consideration payable to United’s
members.
Distributions
with Respect to Unexchanged Membership Units.
No
dividends or other distributions declared or made with respect to shares of
FMG
common stock with a record date after the effective time of the Merger will
be
paid to the holder of any non surrendered membership units, if any. Subject
to
the effect of applicable escheat or similar laws, following surrender of any
membership units there will be paid to the holder of United membership units,
shares of FMG common stock issued in exchange therefor, without interest,
(i) at the time of such surrender, the amount of dividends or other
distributions with a record date after the effective time of the Merger
theretofore paid with respect to such whole shares of FMG common stock or
warrants and (ii) at the appropriate payment date, the amount of dividends
or other distributions with a record date after the effective time of the
Merger.
Fractional
Shares.
No
fractional shares of FMG common stock will be issued in the Merger. Each Member
who exchanges membership units pursuant to the Merger who would otherwise have
been entitled to receive a fraction of a share of FMG common stock shall
receive, in lieu thereof, cash (without interest) in an amount equal to the
product of (i) such fractional part of a share of FMG common stock multiplied
by
(ii) the closing price for a share of FMG common stock on the over the counter
bulletin board on the date of the effective time of the Merger.
No
Liability.
None
of
the Exchange Agent, the surviving entity or any party to the Merger Agreement
will be liable to a holder of United’s membership units for any amount properly
paid to a public official pursuant to any applicable abandoned property, escheat
or similar law.
Lost,
Stolen or Destroyed Company Securities.
In
the
event any of United’s membership units have been lost, stolen or destroyed, the
Exchange Agent will issue in exchange for such lost, stolen or destroyed
membership units, upon the making of an affidavit and indemnity of that fact
by
the holder thereof in a form reasonably acceptable to the Exchange Agent, the
required number of shares of FMG common stock; provided, however, that FMG
may,
in its reasonably commercial discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed membership
units to deliver a bond in such sum as it may reasonably direct against any
claim that may be made against FMG or the Exchange Agent with respect to such
membership units alleged to have been lost, stolen or destroyed.
TAX
CONSIDERATIONS
Material
United States Federal Income Tax Consequences of the
Merger
The
following describes the material United States federal income tax considerations
of the Merger that are generally applicable to the holders of United membership
units and the holders of shares of FMG common stock. This discussion is based
on
the Internal Revenue Code of 1986, as amended (referred to as the Code),
existing, temporary, and proposed Treasury regulations thereunder, current
administrative rulings and judicial decisions, all as currently in effect and
all of which are subject to change (possibly with retroactive effect) and to
differing interpretations. This discussion applies only to holders of United
membership units and shares of FMG common stock who hold such membership units
and shares as capital assets within the meaning of Section 1221 of the Code.
Further, this discussion does not address all aspects of United States federal
taxation that may be relevant to a particular holder of United membership units
or FMG common stock in light of such holder’s personal circumstances or to
holders subject to special treatment under the United States federal income
tax
laws, including:
·
|
banks
or other financial institutions;
|
·
|
entities
treated as pass-through entities for United States federal income
tax
purposes and investors in such
entities;
|
·
|
tax-exempt
organizations;
|
·
|
dealers
in securities or currencies;
|
·
|
traders
in securities that elect to use a mark to market method of
accounting;
|
·
|
persons
that hold United membership units or FMG common stock as part of
a
straddle, hedge, constructive sale or conversion
transaction;
|
·
|
persons
who are subject to alternative minimum
tax;
|
·
|
persons
who are not citizens or residents of the United
States;
|
·
|
United
States persons that have a functional currency other than the United
States dollar; or
|
·
|
holders
who acquired their shares of FMG common stock or their United membership
units through the exercise of an employee stock or unit option or
otherwise as compensation.
|
This
discussion is also limited to holders of United membership units or shares
of
FMG common stock who are United States persons. For purposes of this discussion,
the term “United States person” means:
·
|
an
individual citizen or resident of the United
States;
|
·
|
a
corporation (or an entity treated as a corporation for United States
federal income tax purposes) created or organized in or under the
laws of
the United States, any state thereof or the District of
Columbia;
|
·
|
an
estate, the income of which is subject to United States federal income
tax
regardless of its source; or
|
·
|
a
trust that (x) is subject to the supervision of a court within the
United
States and the control of one or more United States persons or (y)
has a
valid election in effect under applicable Treasury Regulations to
be
treated as a United States person.
|
In
addition, this discussion does not address any state, local or foreign tax
consequences of the Merger.
EACH
HOLDER OF UNITED MEMBERSHIP UNITS AND OF SHARES OF FMG COMMON STOCK IS URGED
TO
CONSULT ITS OWN TAX ADVISOR AS TO THE UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER, AS WELL AS THE EFFECTS OF STATE, LOCAL, FOREIGN
AND
OTHER TAX LAWS, IN LIGHT OF THE PARTICULAR CIRCUMSTANCES OF SUCH
HOLDER.
Tax
Consequences of the Merger to Holders of United Membership
Units.
As
a
consequence of the Merger, holders of United membership units who receive cash
and shares of FMG common stock pursuant to the Merger generally will recognize
capital gain or loss as a result of the Merger, measured by the difference,
if
any, between the value of the merger consideration received per membership
unit
and the holder’s adjusted tax basis in that membership unit. Any holder of
United membership units who exercises dissenter’s and appraisal rights pursuant
to the Merger and receives cash in exchange for such holder’s membership units
in United generally will recognize gain or loss measured by the difference
between the amount of cash received and the adjusted tax basis of such holder’s
United membership units exchanged therefor. If a United Member who receives
cash
in exchange for the Member’s membership units actually or constructively owns
FMG common stock after the Merger (as the result of prior actual or constructive
ownership of FMG common stock or otherwise), all or a portion of the cash
received by the holder of United membership units may be taxed as a dividend
pursuant to Section 302 of the Internal Revenue Code, in which case the holder
may have dividend income up to the amount of the cash received. In such cases,
holders should consult their tax advisors to determine the amount and character
of the income recognized in connection with the Merger.
The
capital gain or loss recognized by holders of United membership units as
described above will constitute long-term capital gain or loss if the holder
held such membership units for more than one year as of the effective time
of
the Merger. Long-term capital gains of noncorporate taxpayers generally are
taxable at a maximum federal income tax rate of 15%. Capital gains of corporate
holders generally are taxable at the regular tax rates applicable to
corporations. The deductibility of capital losses may be subject to
limitations.
A
holder
of United membership units who receives shares of FMG common stock pursuant
to
the Merger will have an aggregate tax basis in the FMG common stock received
in
the Merger equal to its fair market value at the time of the closing of the
Merger, and the holding period for the shares of FMG common stock would begin
the day after the closing of the Merger.
Tax
Consequences of the Merger to FMG Stockholders.
No
gain
or loss will be recognized by the stockholders of FMG pursuant to the Merger
who
do not exchange their shares of FMG common stock pursuant to the Merger,
continue to own such shares of FMG and do not exercise their conversion rights.
Stockholders of FMG who exercise their conversion rights and effect a
termination of their interest in FMG will generally be required to recognize
gain or loss upon the exchange of that stockholder’s shares of FMG common stock
for cash. Such gain or loss will be measured by the difference between the
amount of cash received and the tax basis of that stockholder’s shares of FMG
common stock. This gain or loss will generally be capital gain or capital loss
and that capital gain or loss and will be a long-term capital gain or loss
if
the holding period for the shares of FMG common stock is more than one year.
There are limitations on the extent to which stockholders may deduct capital
losses from ordinary income. If an FMG stockholder who receives cash in exchange
for all of the stockholder’s shares of FMG stock constructively or otherwise
owns FMG common stock after the conversion, all or a portion of the cash
received by the stockholder may be taxed as a dividend pursuant to Section
302
of the Internal Revenue Code, and those stockholders should consult their tax
advisors to determine the amount and character of the income recognized in
connection with the Merger.
Tax
Consequences of the Merger Generally to FMG and
United.
No
gain
or loss will be recognized by FMG or United as a result of the
Merger.
Backup
Withholding and Information Reporting.
Payments
of cash to a holder of United membership units as a result of an exercise of
dissenter’s rights and payments of cash to a holder of FMG common stock as a
result of an exercise of conversion rights may, under certain circumstances,
be
subject to information reporting and backup withholding at a rate of 28% of
the
cash payable to the holder, unless the holder provides proof of an applicable
exemption satisfactory to FMG and the exchange agent or furnishes its taxpayer
identification number, and otherwise complies with all applicable requirements
of the backup withholding rules. Any such holder that does not provide its
correct taxpayer identification number may also be subject to penalties imposed
by the Internal Revenue Service. Any amounts withheld from payments to a holder
under the backup withholding rules are not additional tax and will be allowed
as
a refund or credit against the holder’s United States federal income tax
liability, provided the required information is furnished to the Internal
Revenue Service.
IRS
Circular 230 Notice: To ensure compliance with requirements imposed by the
Internal Revenue Service in Circular 230, you are hereby informed that (i)
any
discussion of federal income tax issues in this proxy statement/prospectus
is
not intended or written to be relied upon, and cannot be relied upon, by any
taxpayer for the purpose of avoiding penalties that may be imposed on such
taxpayer under the Code; (ii) any such discussion is included herein in
connection with the promotion or marketing (within the meaning of Circular
230)
of the transactions or matters addressed herein; and (iii) you should seek
advice based on your particular circumstances from an independent tax
advisor.
THE
PRECEDING DISCUSSION IS A SUMMARY OF THE MATERIAL UNITED STATES FEDERAL INCOME
TAX CONSEQUENCES OF THE MERGER AND DOES NOT PURPORT TO BE A COMPLETE ANALYSIS
OR
DISCUSSION OF ALL POTENTIAL TAX CONSEQUENCES RELEVANT THERETO. EACH HOLDER
OF
UNITED MEMBERSHIP UNITS AND SHARES OF FMG COMMON STOCK IS URGED TO CONSULT
A TAX
ADVISOR WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE TRANSACTIONS
CONTEMPLATED BY THE MERGER AGREEMENT TO HIM, HER OR IT, INCLUDING TAX RETURN
REPORTING REQUIREMENTS, THE APPLICABILITY AND EFFECT OF STATE, LOCAL, FOREIGN
AND OTHER TAX LAWS, AS WELL AS ANY PROPOSED TAX LAW
CHANGES.
OTHER
MATTERS
Satisfaction
of 80% requirement
We
represented in the prospectus relating to our IPO that the business acquired
by
us in our initial business combination would have a fair market value equal
to
at least 80% of our net assets at the time of the transaction, including the
funds held in the trust account. Based on a financial analysis by our Board
of
Directors in evaluating and approving the Merger, our Board of Directors has
determined the Merger meets this requirement.
The
terms of the Merger were determined based upon arms-length negotiations between
the Company and United, with whom we had no prior dealings. Under the
circumstances, our Board of Directors believes that the total consideration
for
the Merger appropriately reflects the fair market value of United. In light
of
the financial background and experience of members of our management and Board
of Directors, our Board also believes it is qualified to determine whether
the
Merger meets this requirement.
Regulatory
Matters
The
Company does not expect the Merger will be subject to any state or federal
regulatory requirements other than approval of the Florida OIR, filings under
applicable securities laws, the laws of the State of Florida relating to mergers
and acquisitions and the effectiveness of the registration statement of which
this proxy statement/prospectus is part. The Company intends to comply with
all
such requirements. We do not believe, in connection with the completion of
the
Merger, any consent, approval, authorization or permit of, or filing with or
notification to, any acquisition control authority will be required in any
jurisdiction.
Consequences
if Merger Proposal is Not Approved
If
the Merger Proposal is not approved by the stockholders, the Company will not
purchase the membership units of United. In such event, management of the
Company may not have the time, resources or capital available to find a suitable
business combination partner before: (i) the proceeds in the trust account
are liquidated to holders of shares purchased in the Company’s IPO and
(ii) the Company’s corporate existence ceases by operation of law, in
accordance with the Company’s amended and restated certificate of incorporation
and pursuant to stockholder approval. Management believes, however, it will
consummate a business combination with another suitable merger partner by
October 4, 2009 in the event the Merger Proposal is not approved by our
stockholders.
If
a liquidation were to occur by October 4, 2009, the Company estimates
approximately $850,000 in interest, less applicable federal and state income
and
franchise taxes, would accrue on the amounts that are held in trust through
such
date. This amount, along with the Company’s IPO proceeds held in trust, less any
liabilities not indemnified by certain members of the Company’s Board and not
waived by the Company’s creditors, would be distributed to the holders of the
4,733,625 shares of common stock purchased in the Company’s IPO. The Company
currently estimates there would be approximately $385,000 in Delaware franchise
tax, federal and state income tax claims which are not indemnified and not
waived by such taxing authorities. Thus, the Company estimates that the total
amount available for distribution upon liquidation would be approximately
$38,100,000 or $8.05 per share (before taking into account disbursements for
working capital).
Separately,
the Company estimates the liquidation process would cost approximately $50,000
and that the Company would be indemnified for such costs by the Company’s
sponsor or certain of the Company’s executive officers. We do not believe there
would be any claims or liabilities against which the Company’s sponsor or
certain of the Company’s executive officers have agreed to indemnify the trust
account in the event of such liquidation. In the event such persons indemnifying
the Company are unable to satisfy their indemnification obligation or in the
event there are subsequent claims such as subsequent non-vendor claims for
which
such persons have no indemnification obligation, the amount ultimately
distributed to stockholders may be reduced even further. However, the Company
currently has no basis to believe there will be any such liabilities or to
provide an estimate of any such liabilities. The only cost of liquidation the
Company is aware of that would not be indemnified against by the Company’s
sponsor or such officers and directors is the cost of any associated
litigation.
Required
Vote
The
approval of the Merger Proposal will require the affirmative vote of a majority
of the shares of the common stock issued in the Company’s IPO that vote on this
proposal at the Special Meeting. A total of 4,733,625 shares were issued in
our
IPO. In addition, notwithstanding the approval of a majority, if the holders
of
1,419,615 or more shares of common stock issued in the Company’s IPO, an amount
equal to 29.99% of the total number of shares issued in the IPO, vote
against the Merger Agreement and demand conversion of their shares into a pro
rata portion of the trust account, then the Company will not be able to
consummate the Merger. Each of the Company’s stockholders that holds shares of
common stock issued in the Company’s IPO or purchased following such offering in
the open market has the right, assuming such stockholder votes against the
Merger Proposal, to simultaneously demand the Company convert such stockholder’s
shares into cash equal to a pro rata portion of the trust account in which
a
substantial portion of the net proceeds of the Company’s IPO is deposited. These
shares will be converted into cash only if the Merger is consummated and the
stockholder requesting conversion holds such shares until the date the Merger
is
consummated.
Abstentions
and Broker Non-Votes
If
your broker holds your shares in its name and you do not give the broker voting
instructions, under the rules of FINRA, your broker may not vote your shares
on
the proposal to approve the Merger. If you do not give your broker voting
instructions and the broker does not vote your shares, this is referred to
as a
“broker non-vote.” Abstentions and broker non-votes are counted for purposes of
determining the presence of a quorum.
As
long as a quorum is established at the Special Meeting, if you return your
proxy
card without an indication of how you desire to vote, it: (i) will have the
same effect as a vote in favor of the Merger Proposal and will not have the
effect of converting your shares into a pro rata portion of the trust account
(in order for a stockholder to convert his or her shares, he or she must cast
an
affirmative vote against the Merger Proposal and make an affirmative election
on
the proxy card to convert such shares of common stock and the Merger must be
consummated); (ii) will have the same effect as a vote in favor of the
First Amendment Proposal; (iii) will have the same effect as a vote in
favor of the Second Amendment Proposal; (iv) will have the same effect as a
vote in favor of the Third Amendment Proposal; (v) will have no effect on
the Director Proposal; and (vi) will have the same effect as a vote in
favor of the Adjournment Proposal.
Since
the Merger Proposal requires only a majority of the Company shares issued in
the
IPO that cast a vote at the Special Meeting, abstentions or broker non-votes
will not count towards such number. This has the effect of making it easier
for
the Company to obtain a vote in favor of the Merger Proposal as opposed to
some
of the Company’s other proposals or as opposed to the vote generally required
under the Delaware General Corporation Law, namely a majority of the shares
issued and outstanding. Furthermore, in connection with the vote required for
the Merger Proposal, the founding stockholders of the Company have agreed to
vote the shares of common stock owned or acquired by them prior to the IPO
in
accordance with the majority of the Company’s shares issued in the IPO. Any
shares acquired in or following the IPO will be voted in favor of the Merger
Proposal.
If
you hold your shares in street name you can obtain physical delivery of your
shares into your name, and then vote the shares yourself. In order to obtain
shares directly into your name, you must contact your brokerage firm
representative. Brokerage firms may assess a fee for your conversion; the amount
of such fee varies from firm to firm.
Dissenters’
Rights
Under
Delaware law, our stockholders are not entitled to dissenters’ rights for their
shares in connection with the Merger.
Accounting
Treatment
The
Merger will be accounted for as a “reverse merger” and recapitalization since
the members of United will own a majority of the Company’s common stock and
effectively control the Company immediately following the completion of the
Merger. United will be deemed to be the accounting acquirer in the transaction
and, consequently, the transaction is treated as a recapitalization of United.
Accordingly, the assets and liabilities and the historical operations that
are
reflected in the financial statements will be those of United and will be
recorded at the historical cost basis of United. Our assets, liabilities and
results of operations will be consolidated with the assets, liabilities and
results of operations of United after consummation of the Merger.
Recommendation
The
foregoing discussion of the information and factors considered by the Company
Board of Directors is not meant to be exhaustive, but includes the material
information and factors considered by the Company Board of Directors. After
careful consideration, the Company’s Board of Directors has determined
unanimously that the Merger Proposal is fair to, and in the best interests
of,
the Company and its stockholders.
THE
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THE STOCKHOLDERS VOTE “FOR” THE MERGER
PROPOSAL
PROPOSAL 2
THE
FIRST AMENDMENT PROPOSAL
General
Pursuant
to the Merger Agreement, we will (i) amend Article Third to remove the
limitations on the Company’s powers in the event a business combination is not
consummated by the Company prior to October 4, 2009, (ii) amend Article
Fifth to remove the reference to October 4, 2009 as the date the Company’s
existence terminates and make the Company’s existence perpetual, and
(iii) amend Article Sixth to remove the preamble and sections A, B, C,
D and E of Article Sixth of the Company’s amended and restated certificate of
incorporation and to redesignate section F of Article Sixth as Article
Sixth upon consummation of the Merger. If the Merger Proposal is not approved,
the amendments to Article Third, Fifth and Sixth will not be presented at the
Special Meeting.
In
the judgment of our Board of Directors, the amendments to Articles Third, Fifth
and Sixth are desirable, as Articles Third, Fifth and sections A, B, C, D
and E of Article Sixth relate to the operation of the Company as a blank check
company prior to the consummation of a business combination. Such provisions
will not be applicable upon consummation of the Merger.
The
approval of the amendment to Article Third, amendment to Article Fifth and
the
amendment to Article Sixth will require the affirmative vote of the holders
of a
majority of the outstanding shares of Company common stock on the record
date.
OUR
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS OUR STOCKHOLDERS VOTE ``FOR” THE
APPROVAL OF THE ARTICLE THIRD AMENDMENT, ARTICLE FIFTH AMENDMENT AND ARTICLE
SIXTH AMENDMENT.
The
Company proposes to amend its amended and restated certificate of incorporation
to remove those provisions of the Company’s amended and restated certificate of
incorporation that will no longer be operative upon consummation of the Merger
(which constitutes a business combination for purposes of the Company’s amended
and restated certificate of incorporation), but which were applicable at the
time of the Company’s formation as a blank check company. Specifically, the
Company proposes to (i) amend Article Third to remove the limitations on
the Company’s powers in the event a business combination is not consummated by
the Company prior to October 4, 2009, (ii) amend Article Fifth to remove
the reference to October 4, 2009 as the date the Company’s existence terminates
and make the Company’s existence perpetual and (iii) amend Article Sixth to
remove the preamble and sections A, B, C, D and E of Article Sixth of the
Company’s amended and restated certificate of incorporation and to redesignate
section F of Article Sixth as Article Sixth upon consummation of the
Merger.
Article
Third of the Company’s amended and restated certificate of incorporation
currently reads as follows:
THIRD:
The purpose of the Corporation is to engage in any lawful act or activity for
which corporations may be organized under the Delaware General Corporation
Law,
as amended from time to time (the “DGCL”). In addition to the powers and
privileges conferred upon the Corporation by law and those incidental thereto,
the Corporation shall possess and may exercise all the powers and privileges
which are necessary or convenient to the conduct, promotion or attainment of
the
business or purposes of the Corporation; provided, however, that in the event
a
Business Combination (as defined below) is not consummated prior to the
Termination Date (as defined below), then the purposes of the Corporation shall
automatically, with no action required by the Board of Directors or the
stockholders, on the Termination Date be limited to effecting and implementing
the dissolution and liquidation of the Corporation and the taking of any other
actions expressly required to be taken herein on or after the Termination Date
and the Corporation’s powers shall thereupon be limited to those set forth in
Section 278 of the DGCL and as otherwise may be necessary to implement the
limited purposes of the Corporation as provided herein. This Article Third
may
not be amended without the affirmative vote of at least 95% of the IPO Shares
(as defined below).
If
this proposal is approved by the stockholders, Article Third will read in its
entirety as follows:
THIRD:
The purpose of the Corporation is to engage in any lawful act or activity for
which corporations may be organized under the Delaware General Corporation
Law,
as amended from time to time (the “DGCL”).
Article
Fifth of the Company’s amended and restated certificate of incorporation
currently reads as follows:
FIFTH:
The Corporation’s existence shall terminate on October 4, 2009 (the “Termination
Date”). This provision may only be amended in connection with, and such
amendment shall become effective upon, the consummation of a Business
Combination. A proposal to so amend this section shall be submitted to
stockholders in connection with any proposed Business Combination pursuant
to
Article Sixth below. This Article Fifth may not be amended without the
affirmative vote of at least 95% of the IPO Shares unless such amendment is
in
connection with, and becomes effective upon, the consummation of a Business
Combination.
If
this proposal is approved by the stockholders, Article Fifth will read in its
entirety as follows:
FIFTH:
The Corporation shall have perpetual existence.
Article
Sixth of the Company’s amended and restated certificate of incorporation
currently reads as follows:
SIXTH:
The following provisions (A) through (F) shall apply during the period
commencing upon the filing of this Amended and Restated Certificate of
Incorporation and terminating upon the earlier to occur of: (i) the consummation
of Business Combination or (ii) the Termination Date and may not be amended
prior thereto without the affirmative vote of at least 95% of the IPO Shares
unless such amendment is in connection with, and becomes effective upon, the
consummation of a Business Combination. A “Business Combination” shall mean the
merger, capital stock exchange, asset acquisition or other similar business
combination between the Corporation and one or more operating businesses in
the
education industry having, collectively, a fair market value (as calculated
in
accordance with the requirements set forth below) of at least 80% of the amount
in the Trust Account (less the deferred underwriting discount and commissions
and taxes payable) at the time of such transaction.
For
purposes of this Article Sixth, the fair market value of an acquisition proposed
for a Business Combination shall be determined by the Board of Directors based
upon financial standards generally accepted by the financial community, such
as
actual and potential sales, earnings and cash flow and book value. If the Board
of Directors of the Corporation is not able to independently determine the
fair
market value of the merger partner , the Corporation shall obtain an opinion
with regard to such fair market value from an unaffiliated, independent
investment banking firm that is a member of the National Association of
Securities Dealers, Inc. Notwithstanding the foregoing, if the Corporation
pursues a Business Combination with any company that is a portfolio company
of,
or otherwise affiliated with, or has received financial investment from, any
of
the private equity firms with which the Corporation’s existing stockholders,
executive officers or directors are affiliated, the Corporation shall obtain
an
opinion from an independent investment banking firm that such a Business
Combination is fair to the Corporation’s stockholders from a financial point of
view.
A. Immediately
after the Corporation’s initial public offering (the “IPO”), the amount of the
net offering proceeds received by the Corporation in the IPO (including the
proceeds of any exercise of the underwriter’s over-allotment option) specified
in the Corporation’s registration statement on Form S-1 filed with the
Securities and Exchange Commission (the “Registration Statement”) shall be
deposited and thereafter held in a trust account established by the Corporation
(the “Trust Account”). Neither the Corporation nor any officer, director or
employee of the Corporation shall disburse any of the proceeds held in the
Trust
Account until the earlier of (i) a Business Combination or (ii) the Termination
Date, in each case in accordance with the terms of the investment management
trust agreement governing the Trust Account; provided, however, that (x) a
portion of the interest earned on the Trust Account as described in the
Registration Statement may be released to the Corporation to cover operating
expenses, and (y) the Corporation shall be entitled to withdraw such amounts
from the Trust Account as would be required to pay taxes on the interest earned
on the Trust Account or franchise or other tax obligations of the
Corporation.
B. Prior
to the consummation of any Business Combination, the Corporation shall submit
such Business Combination to its stockholders for approval regardless of whether
the Business Combination is of a type which normally would require such
stockholder approval under the DGCL. In the event a majority of the shares
cast
at the meeting to approve the Business Combination are voted for the approval
of
such Business Combination, the Corporation shall be authorized to consummate
the
Business Combination; provided, however, that the Corporation shall not
consummate any Business Combination if holders of an aggregate of more than
29.99% in interest of the IPO Shares exercise their redemption rights
described in paragraph C below.
C. In
the event that a Business Combination is approved in accordance with the above
paragraph B and is consummated by the Corporation, any stockholder of the
Corporation holding shares of common stock issued in the IPO (the “IPO Shares”)
who voted against the Business Combination may, contemporaneous with such vote,
demand the Corporation redeem his IPO Shares for cash. If so demanded, the
Corporation shall, promptly after consummation of the Business Combination,
redeem, subject to the availability of lawful funds therefor, such shares at
a
per share redemption price equal to the amount held in the Trust Account as
of
two business days prior to the consummation of the Business Combination (net
of
taxes payable), divided by the total number of IPO Shares, which shall in no
event be less than $7.84 per share.
D. The
holders of IPO Shares shall be entitled to receive distributions from the Trust
Account only (i) in the event that the Corporation has not consummated a
Business Combination by the Termination Date or (ii) in the event they demand
redemption of their IPO Shares in accordance with subparagraph C and a Business
Combination is approved in accordance with subparagraph B. The Corporation
shall
pay no liquidating distributions with respect to any shares of capital stock
of
the Corporation other than IPO Shares. In no other circumstances shall a holder
of IPO Shares have any right or interest of any kind in or to the Trust Account.
A holder of securities issued in the private placement concurrently with or
prior to the consummation of the IPO shall not have any right or interest of
any
kind in or to the Trust Account.
E. Unless
and until the Corporation has consummated a Business Combination as permitted
under this Article Sixth, the Corporation may not consummate any other business
combination, whether by merger, capital stock exchange, stock purchase, asset
acquisition or otherwise.
F. The
Board of Directors shall be divided into two classes: Class A and
Class B. The number of directors in each class shall be as nearly equal as
possible. Prior to the IPO, there shall be elected two Class A directors
for a term expiring at the Corporation’s first Annual Meeting of Stockholders
and three Class B directors for a term expiring at the Corporation’s second
Annual Meeting of Stockholders. Commencing at the first Annual Meeting of
Stockholders, and at each annual meeting thereafter, directors elected to
succeed those directors whose terms expire shall be elected for a term of office
to expire at the second succeeding annual meeting of stockholders after their
election. Except as the DGCL may otherwise require, in the interim between
annual meetings of stockholders or special meetings of stockholders called
for
the election of directors and/or the removal of one or more directors and the
filling of any vacancy in that connection, newly created directorships and
any
vacancies in the Board of Directors, including unfilled vacancies resulting
from
the removal of directors for cause, may be filled by the vote of a majority
of
the remaining directors then in office, although less than a quorum (as defined
in the Corporation’s Bylaws), or by the sole remaining director. All directors
shall hold office until the expiration of their respective terms of office
and
until their successors shall have been elected and qualified. A director elected
to fill a vacancy resulting from the death, resignation or removal of a director
shall serve for the remainder of the full term of the director whose death,
resignation or removal shall have created such vacancy and until his successor
shall have been elected and qualified.
If
this proposal is approved by the stockholders, Article Sixth will read in its
entirety as follows:
SIXTH:
The Board of Directors shall be divided into two classes: Class A and
Class B. The number of directors in each class shall be as nearly equal as
possible. Prior to the filing of this Second Amended and Restated Certificate
of
Incorporation, there shall be elected three Class A directors for a term
expiring at the Corporation’s first Annual Meeting of Stockholders and three
Class B directors for a term expiring at the Corporation’s second Annual Meeting
of Stockholders. Commencing at the first Annual Meeting of Stockholders, and
at
each annual meeting thereafter, directors elected to succeed those directors
whose terms expire shall be elected for a term of office to expire at the second
succeeding annual meeting of stockholders after their election. Except as the
DGCL may otherwise require, in the interim between annual meetings of
stockholders or special meetings of stockholders called for the election of
directors and/or the removal of one or more directors and the filling of any
vacancy in that connection, newly created directorships and any vacancies in
the
Board of Directors, including unfilled vacancies resulting from the removal
of
directors for cause, may be filled by the vote of a majority of the remaining
directors then in office, although less than a quorum (as defined in the
Corporation’s Bylaws), or by the sole remaining director. All directors shall
hold office until the expiration of their respective terms of office and until
their successors shall have been elected and qualified. A director elected
to
fill a vacancy resulting from the death, resignation or removal of a director
shall serve for the remainder of the full term of the director whose death,
resignation or removal shall have created such vacancy and until his successor
shall have been elected and qualified.
If
the Merger Proposal is not approved, this proposal will not be presented at
the
Special Meeting. In addition, if the Merger is not subsequently consummated,
the
Company’s Board of Directors will not effect these amendments to the Company’s
amended and restated certificate of incorporation.
In
the judgment of the Company’s Board of Directors, if the Merger is consummated,
the amendments to the Company’s amended and restated certificate of
incorporation to remove those provisions of the Company’s amended and restated
certificate of incorporation that will no longer be operative upon consummation
of the Merger is desirable, among other things, to reflect the fact the Company
would then be an operating business. A copy of the amended and restated
certificate of incorporation as it would be filed if the Merger Proposal and
the
First Amendment Proposal, the Second Amendment Proposal and Third Amendment
Proposal are approved is attached to this proxy statement/prospectus as
Annex B.
Required
Vote
The
approval of the First Amendment Proposal requires the affirmative vote of
holders of at least a majority of the outstanding shares of our common stock.
Abstentions and broker non-votes, as well as failing to vote by not returning
your proxy card, because they are not affirmative votes, will have the same
effect as a vote against this proposal.
Recommendation
THE
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THE STOCKHOLDERS VOTE “FOR” THE
APPROVAL OF THE FIRST AMENDMENT PROPOSAL
Consequence
if the First Amendment Proposal is Not Approved
If
any of
the charter amendment proposals described above are not approved by FMG’s
stockholders, FMG will not amend its amended and restated certificate of
incorporation and the Merger will not be completed.
PROPOSAL 3
THE
SECOND AMENDMENT PROPOSAL
General
We
will revise the preamble to Article Fourth of our amended and restated
certificate of incorporation to increase the authorized number of shares
of
common stock from 20,000,000 to 50,000,000. Currently the Company has authorized
21,000,000 shares, of which 20,000,000 are authorized shares of common stock
and
1,000,000 are authorized shares of preferred stock. To date, 5,917,031
authorized shares of common stock and no shares of preferred stock have been
issued and 6,883,625 shares of common stock are issuable upon the exercise
of
our outstanding warrants and the underwriters’ purchase option. The Merger
Agreement requires the issuance of 8,750,000 shares of Common Stock to the
current members of United.
In
the judgment of our Board of Directors, the Article Fourth amendment is
desirable, as an increase in the authorized number of shares of common stock
is
necessary in order to have a sufficient number of authorized shares of common
stock available for issuance to the members of United as part of the
consideration pursuant to the Merger Agreement and for general corporate
purposes following the Merger, if approved. An increase in the authorized
share
amounts will enable the Company to issue additional shares of stock, which
could
prohibit or delay mergers or other changes of control attempts, and thus
may
discourage attempts to acquire the Company. There are no current plans for
the
proposed
newly
authorized shares other than the issuance in the Merger and the exercise
of
outstanding warrants and the underwriters’ purchase option.
The
approval of the Article Fourth amendment will require the affirmative vote
of
the holders of a majority of the outstanding shares of Company common stock
as
of the record date.
OUR
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT OUR STOCKHOLDERS VOTE ``FOR” THE
APPROVAL OF THE ARTICLE FOURTH AMENDMENT.
The
Company proposes to amend its amended and restated certificate of incorporation
to revise the preamble to Article Fourth to increase the authorized number
of
shares of common stock from 20,000,000 to 50,000,000.
Article
Fourth of the Company’s amended and restated certificate of incorporation
currently reads as follows:
FOURTH:
The total number of shares of all classes of capital stock which the Corporation
shall have authority to issue is 21,000,000, of which 20,000,000 shares shall
be
Common Stock of the par value of $0.0001 per share and 1,000,000 shares shall
be
Preferred Stock of the par value of $0.0001 per share.
A. Preferred
Stock. The Board of Directors is expressly granted authority to issue shares
of
the Preferred Stock, in one or more series, and to fix for each such series
such
voting powers, full or limited, and such designations, preferences and relative,
participating, optional or other special rights and such qualifications,
limitations or restrictions thereof as shall be stated and expressed in the
resolution or resolutions adopted by the Board of Directors providing for the
issue of such series (a “Preferred Stock Designation”) and as may be permitted
by the DGCL. The number of authorized shares of Preferred Stock may be increased
or decreased (but not below the number of shares thereof then outstanding)
by
the affirmative vote of the holders of a majority of the voting power of all
of
the then outstanding shares of the capital stock of the Corporation entitled
to
vote generally in the election of directors, voting together as a single class,
without a separate vote of the holders of the Preferred Stock, or any series
thereof, unless a vote of any such holders is required pursuant to any Preferred
Stock Designation.
B. Common
Stock. Except as otherwise required by law or as otherwise provided in any
Preferred Stock Designation, the holders of the Common Stock shall exclusively
possess all voting power and each share of Common Stock shall have one
vote.
If
this proposal is approved by the stockholders, Article Fourth will read in
its
entirety as follows:
FOURTH:
The total number of shares of all classes of capital stock which the Corporation
shall have authority to issue is 51,000,000, of which 50,000,000 shares shall
be
Common Stock of the par value of $0.0001 per share and 1,000,000 shares shall
be
Preferred Stock of the par value of $0.0001 per share.
A. Preferred
Stock. The Board of Directors is expressly granted authority to issue shares
of
the Preferred Stock, in one or more series, and to fix for each such series
such
voting powers, full or limited, and such designations, preferences and relative,
participating, optional or other special rights and such qualifications,
limitations or restrictions thereof as shall be stated and expressed in the
resolution or resolutions adopted by the Board of Directors providing for the
issue of such series (a “Preferred Stock Designation”) and as may be permitted
by the DGCL. The number of authorized shares of Preferred Stock may be increased
or decreased (but not below the number of shares thereof then outstanding)
by
the affirmative vote of the holders of a majority of the voting power of all
of
the then outstanding shares of the capital stock of the Corporation entitled
to
vote generally in the election of directors, voting together as a single class,
without a separate vote of the holders of the Preferred Stock, or any series
thereof, unless a vote of any such holders is required pursuant to any Preferred
Stock Designation.
B. Common
Stock. Except as otherwise required by law or as otherwise provided in any
Preferred Stock Designation, the holders of the Common Stock shall exclusively
possess all voting power and each share of Common Stock shall have one
vote.
In
the judgment of the Company’s Board of Directors, the amendment to the Company’s
amended and restated certificate of incorporation to increase the amount of
authorized shares of common stock, is desirable, among other things, to reflect
the fact the Company might issue shares in the future. A copy of the amended
and
restated certificate of incorporation as it would be filed if the Merger
Proposal and the First Amendment Proposal, the Second Amendment Proposal and
the
Third Amendment Proposal are approved is attached to this proxy
statement/prospectus as Annex B.
Required
Vote
The
approval of the Second Amendment Proposal requires the affirmative vote of
holders of at least a majority of the outstanding shares of our common stock.
Abstentions and broker non-votes, as well as failing to vote by not returning
your proxy card, because they are not affirmative votes, will have the same
effect as a vote against this proposal.
Recommendation
THE
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THE STOCKHOLDERS VOTE “FOR” THE
APPROVAL OF THE SECOND AMENDMENT PROPOSAL
Consequence
if the Second Amendment Proposal is Not Approved
If
the
charter amendment proposal described above is not approved by FMG’s
stockholders, FMG will not amend its amended and restated certificate of
incorporation and the Merger will not be completed.
PROPOSAL 4
THE
THIRD AMENDMENT PROPOSAL
General
We
will revise Article First of our amended and restated certificate of
incorporation to change the name of the company from FMG Acquisition Corp.
to
United Insurance Holdings Corp.
In
the judgment of our Board of Directors, the Article First amendment is
desirable, as a change in our name more properly reflects who we are and the
business we will be engaged in following the Merger.
The
approval of the Article First amendment will require the affirmative vote of
the
holders of a majority of the outstanding shares of Company common stock as
of
the record date.
OUR
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT OUR STOCKHOLDERS VOTE ``FOR” THE
APPROVAL OF THE ARTICLE FIRST AMENDMENT.
The
Company proposes to amend its amended and restated certificate of incorporation
to revise Article First to change the name of the Company from FMG Acquisition
Corp. to United Insurance Holdings Corp.
Article
First of the Company’s amended and restated certificate of incorporation
currently reads as follows:
FIRST:
The name of the corporation is FMG Acquisition Corp. (the
“Corporation”).
If
this proposal is approved by the stockholders, Article First will read in its
entirety as follows:
FIRST:
The name of the corporation is United Insurance Holdings Corp. (the
“Corporation”).
In
the judgment of the Company’s Board of Directors, the amendment to the Company’s
amended and restated certificate of incorporation to change the name of the
Company is desirable. A copy of the amended and restated certificate of
incorporation as it would be filed if the Merger Proposal and the First
Amendment Proposal, the Second Amendment Proposal and the Third Amendment
Proposal are approved is attached to this proxy statement/prospectus as
Annex B.
Required
Vote
The
approval of the Third Amendment Proposal requires the affirmative vote of
holders of at least a majority of the outstanding shares of our common stock.
Abstentions and broker non-votes, as well as failing to vote by not returning
your proxy card, because they are not affirmative votes, will have the same
effect as a vote against this proposal.
Recommendation
THE
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THE STOCKHOLDERS VOTE “FOR” THE
APPROVAL OF THE THIRD AMENDMENT PROPOSAL
Consequence
if the Third Amendment Proposal is Not Approved
If
the
charter amendment proposal described above is not approved by FMG’s
stockholders, FMG will not amend its amended and restated certificate of
incorporation and the Merger will not be completed.
PROPOSAL 5
DIRECTOR
PROPOSAL
The
Company’s Board of Directors is currently divided into two classes, each of
which generally serves for a term of two years, with only one class of directors
being elected in each year. The term of office of the first class of directors,
consisting of Larry G. Swets, Jr. and James Zuhlke, will expire at our first
annual meeting of stockholders. The term of office of the second class of
directors, consisting of Gordon G. Pratt, Thomas Sargent and David E. Sturgess
will expire at the second annual meeting. The Company’s Board of Directors will
continue to be so classified if the Merger is not approved. One of the closing
conditions to the Merger is the election of three persons to the Board of
Directors of the Company selected by United and, assuming such election, the
resignation of Thomas Sargent and David E. Sturgess from the Board of Directors.
As a result, the following three persons have been nominated as candidates
for
election to the Board of Directors: Gregory C. Branch, Alec L. Poitevint, II
and
Kent G. Whittemore. In the event these three directors are elected at the
Special Meeting, they will hold office for a term expiring at the next annual
meeting of stockholders. Each director serves from the date of his election
until the end of his term and until his successor is elected and
qualified. Two of the directors standing for election pursuant to the
Director Proposal, Kent G. Whittemore abd Alec L. Poitevint, II, are
“independent” directors under the director independence standards of NASDAQ.
Although we are not required to adopt director independence standards, in
order to identify our directors and/or director-nominees who may qualify as
independent directors, we have adopted the director independence standards
of
NASDAQ. We have no independent auditing, nominating or compensation committees
but we expect to establish such committees as soon as practicable after the
consummation of the Merger.
The
election of the foregoing as directors is conditional upon approval of the
Merger. There are not now, nor have there ever been, any other arrangements,
agreements or understandings regarding the selection and nomination of the
Company’s directors. Unless authority is withheld, the proxies solicited by the
Board of Directors will be voted “FOR” the election of these nominees. In case
any of the nominees becomes unavailable for election to the Board of Directors,
an event that is not anticipated, the persons named as proxies, or their
substitutes, will have full discretion and authority to vote or refrain from
voting for any other candidate in accordance with their judgment.
Consequence
if the Director Proposal is Not Approved
If
any
individual set forth above is not elected to serve as a director of the Company,
the Merger will not be completed.
Assuming
the election of the individuals set forth above, the Board of Directors and
management positions of the Company following the Merger will be as
follows:
Name
|
|
Age
|
|
Position
|
Gregory
C. Branch
|
|
62
|
|
Chairman
of the Board
|
Gordon
G. Pratt
|
|
46
|
|
Vice
Chairman
|
Donald
J. Cronin
|
|
54
|
|
President
and Chief Executive Officer
|
Nicholas
W. Griffin
|
|
39
|
|
Chief
Financial Officer
|
Melvin
A. Russell, Jr.
|
|
53
|
|
Chief
Underwriting Officer
|
Alec
L. Poitevint, II
|
|
60
|
|
Director
|
Larry
G. Swets, Jr.
|
|
33
|
|
Director
|
Kent
G. Whittemore
|
|
60
|
|
Director
|
James
R. Zuhlke
|
|
61
|
|
Director
|
Assuming
the Merger Proposal is approved, at the effective time of the Merger, FMG will
wholly own United. Assuming the Merger is consummated, FMG or an affiliate
has
the right to nominate and cause the appointment and election of members to
the
board of managers of United.
Information
about Nominees
Gregory
C. Branch
has been
the Chairman, Chief Executive Officer and a majority unitholder of United since
its inception in 1999. He is also the owner of Branch Properties, Inc. and
has
been its Chairman and owner since 1986, which manufactures fertilizer materials
specializing in equine feeds. Mr. Branch has served as the President of Branch
Properties since 1986. Mr. Branch is also an owner of Seminole Stores, a
family-owned retail outlet for farm and ranch supplies. Seminole Stores
maintains 100 dealers in three states. Mr. Branch graduated from the University
of Florida with a B.S. in Agriculture Economics and served at the rank of
Captain in the U.S. Army. Mr. Branch served as Chairman of Summit Holding
Southeast, Inc.; an insurance holding company that completed its initial public
offering in 1997 and was acquired by Liberty Mutual in 1998. Mr. Branch is
presently Chairman of Sunz Insurance Company, a Florida domiciled provider
of
workers’ compensation insurance and is a Director of Prime Holdings, Inc.; a
private insurance holding company focused on excess and surplus lines products.
Mr. Branch was an underwriting member of Lloyd’s of London from 1986
through 2004.
Gordon
G. Pratt
has
served as our Chairman of the Board of Directors, President and Chief Executive
Officer since our inception. Mr. Pratt is Managing Director of Fund
Management Group and Managing General Partner for Distribution Partners
Investment Capital, L.P., which he co-founded in 1999. Fund Management Group
specializes in managing investments in and providing advice to privately held
insurance related businesses. Fund Management Group (i) manages Distribution
Partners, (ii) makes direct private equity investments, and (iii) consults
with
privately-held companies and their boards of directors. Fund Management
Group/Distribution Partners past and current portfolio companies include:
Bertholon-Rowland Corp.; Calco Holdings Corporation; Distinguished Programs
Holdings; Envoy Health; InsRisk Equity Fund, LP; Kibble & Prentice Holding
Company; Pavlo, Weinberg & Associates; Reliant Pre-Pak, LLC; and Tri-City
Holdings, Inc. Mr. Pratt is Chairman of the Board of Risk Enterprise Management
Limited (national third-party property/casualty administrator), and a former
director of Calco (California retail broker), Bertholon-Rowland (New York
program manager), Kibble & Prentice (Seattle retail broker), and Tri-City
Holdings (national wholesaler).
From
July
of 2004 through April of 2006, concurrently with his duties at Fund Management
Group, Mr. Pratt also was Senior Vice President of Corporate Finance for
Willis Group, the global insurance broker. At Willis he was in charge of the
Group’s acquisitions and divestitures worldwide. Prior to joining Willis in
2004, Mr. Pratt was an owner of Hales & Company, an investment banking
firm serving the insurance industry. While at Hales, he helped to found Hale’s
New York office and launched Distribution Partners in 1999. Before joining
Hales, he was a Senior Vice President, shareholder, and member of the operating
committee of Conning & Company, which for more than 85 years focused on
insurance investment, research, and asset management. At Conning, Mr. Pratt
was involved in all aspects of forming, managing, and investing the Conning
Funds, which at that time totaled more than $430 million of private equity
capital for investment in the insurance industry. He began his career at The
Chase Manhattan Bank, N.A. in 1986. Mr. Pratt graduated with a B.A. in
United States history from Cornell University (1984) and a Master of Management,
Finance and Accounting from Northwestern University (1986).
During
his career, Mr. Pratt has completed dozens of corporate finance advisory
and investment transactions in the insurance industry. He began his career
at
The Chase Manhattan Bank, N.A. in 1986. While at Chase, among other duties,
he
co-invented a structured financial product for mutual insurance companies and
expanded Chase’s efforts in insurance mergers, acquisitions, and merchant
banking. Mr. Pratt’s clients included Kohlberg Kravis Roberts &
Company, and he served as a lead senior debt underwriter for KKR’s purchase of
American Re-Insurance Company in 1992, at the time the largest-ever leveraged
buyout of an insurance company. Later that year he joined Conning & Company,
then a privately-held investment bank, asset manager, and research company
focused on the insurance industry. During his career at Conning, Mr. Pratt
was promoted to Senior Vice President and became a shareholder, private equity
partner, and member of the operating committee. He was involved in all aspects
of forming, managing, and investing the Conning Funds, which at that time
totaled more than $430 million of private equity capital for investment in
the
insurance industry. Mr. Pratt has served on the boards of directors for a
number of insurance businesses including: HealthRight, Inc. (managed care);
Investors Insurance Holding Corp. (excess and surplus lines); Monroe Guaranty
Companies, Inc. (commercial lines); Sagamore Financial Corporation (impaired
risk life); and Stockton Holdings Ltd., (finite risk). In 1999, Mr. Pratt
joined Hales & Company, an investment bank serving insurance and insurance
distribution businesses as a partner and shareholder. He helped to start Hales’s
New York office and launched Distribution Partners Investment Capital, L.P.,
a
private equity fund focused on insurance distribution businesses. In July of
2004, Mr. Pratt left Hales to join Willis Group where he served until April
of 2006.
Donald
J. Cronin
is
President and Chief Executive Officer of United’s wholly owned subsidiaries. Mr.
Cronin joined United in 2001 as Vice President and was named President and
Chief
Executive Officer of United’s subsidiaries in November 2002. Mr. Cronin has 29
years experience in the property and casualty insurance business, most recently
as Vice President of Marketing, Underwriting and Operations of United Agents
Insurance Company of Louisiana. While in Louisiana, Mr. Cronin served on the
advisory board of the School of Insurance at Louisiana State University. He
has
been actively involved with a number of insurance associations throughout his
career.
Nicholas
W. Griffin
is Chief
Financial Officer of United. Mr. Griffin has operated in this capacity with
United since its inception in 1999. Mr. Griffin is responsible for the
management and supervision of all of the finance and accounting activities
for
United’s insurance companies. Mr. Griffin also manages the in-house catastrophe
models, dynamic financial analysis and capital allocation activities for United.
Mr. Griffin received a B.S. in Accounting from the University of Florida, an
M.B.A. from Stetson University and a Juris Doctorate from Stetson College of
Law.
Melvin
A. Russell, Jr.
is
Senior Vice President and Secretary of United. Mr. Russell joined United at
its
inception in 1999. He has 31 years experience in the property and casualty
business, with over 18 years in the Florida insurance market. Much of his time
in the industry has been spent in management; prior to that, he gained valuable
experience doing production underwriting of large, complex commercial accounts
in both Florida and New England for two large multi-line national carriers.
Mr.
Russell has a B.A. in English from Gordon College in Wenham,
Massachusetts.
Alec
L. Poitevint, II
has
served as a Director of United since 2001. He is the Chairman and President
of
Southeastern Minerals, Inc., and its affiliated companies headquartered in
Bainbridge, Georgia. Mr. Poitevint joined Southeastern Minerals, Inc. in 1970.
He currently also serves as Vice-Chairman and Director of First Port City Bank
of Bainbridge. Mr. Poitevint also serves as Chairman of American Feed Industry
Insurance Company and is past Chairman of American Feed Industry Association
and
National Feed Ingredients Association. Mr. Poitevint serves on the Republican
National Committee (RNC) as Committeeman for Georgia and was the RNC Treasurer
from 1997-2001.
Larry
G. Swets, Jr., CFA,
has
served as our Chief Financial Officer, Executive Vice President, Secretary,
Treasurer and a Director since our inception. Since June 2005, Mr. Swets
has served as the Managing Director of Itasca Financial, LLC, an advisory firm
to insurance companies and financial service firms whose clients include the
insurance industry. In addition, Mr. Swets is Managing Director of
InsRisk Partners, LLC, which he founded in early 2007. InsRisk manages private
funds for investment in insurance-focused securities. Mr. Swets also serves
as
Acting Chief Financial Officer of Risk Enterprise Management Limited.
Mr. Swets has been an insurance company executive and advisor, including
serving as Director of Investments and Fixed Income Portfolio Manager for Kemper
Insurance, a diversified mutual property-casualty insurance company, from June
1997 to May 2005. As Director, Mr. Swets oversaw Kemper’s relationships
with banks and outside investment advisors; he also coordinated various
treasury, cash management, and financial analysis functions. He served Kemper
in
evaluating business units, executing corporate transactions and divestitures,
and by developing financial projections and analysis for the company during
its
runoff stage. Mr. Swets began his career in insurance as an intern in the
Kemper Scholar program in 1994. He has taught finance and investments as an
adjunct professor at the College of Business, Valparaiso University.
Mr. Swets holds a Bachelor’s degree from Christ College, Valparaiso
University, Summa Cum Laude (1997) and a Master’s degree in Finance from De Paul
University (1999). Mr. Swets holds the Chartered Financial Analyst
designation and is a member of the CFA Society of Chicago and the CFA
Institute.
Kent
G. Whittemore
has
served as a Director of United Property and Casualty Insurance Company, a wholly
owned subsidiary of United, since 2001. He is the President and a shareholder
of
The Whittemore Law Group, P.A., located in St. Petersburg, Florida, a law firm
he co-founded in 1987. Mr. Whittemore has served as President of both the St.
Petersburg Bar Association and the Tampa Bay Trial Lawyers Association. He
is
also a former director of both the Academy of Florida Trial Lawyers and the
Southern Trial Lawyers Association. He also served on St. Petersburg’s Charter
Review Commission. Mr. Whittemore received a B.S. in Business Administration
from the University of Florida and a Juris Doctorate from Stetson College of
Law
James
R. Zuhlke
has been
a member of our Board of Directors since our inception. Since June 2005, Mr.
Zuhlke has served on the Board of Directors of Southern Eagle Insurance Company,
a Florida based provider of workers compensation insurance. In addition, since
February 2008, Mr. Zuhlke has served as Executive Vice President of Brooke
Capital Corporation. From April 1998 until January 2004, he was President and
Chief Executive Officer of Kingsway America Inc. and a director of its parent
Kingsway Financial Services, Inc., an NYSE listed company specializing in
providing personal and commercial lines of property and casualty insurance
in
the United States and Canada. During his tenure at Kingsway America,
Mr. Zuhlke assisted in the acquisition of six insurance businesses and
managed the integration and assimilation of their operations by strengthening
planning, budgeting, financial reporting, underwriting, and claims handling
disciplines. Under his leadership, Kingsway America reached $1.0 billion in
net
premiums written in five years. In 1976, Mr. Zuhlke started his first
insurance business, Washington International Insurance Company, and served
as
its President and Chief Executive Officer. In 1980, he co-founded insurance
underwriting operations which in 1986 became Intercargo Corporation, a
specialist in U.S. customs bonds and international freight insurance. At
Intercargo, he was President and Chairman of the Board of Directors. Intercargo
became a NASDAQ listed company in 1988 and ultimately was sold to XL Capital
Ltd. in 1998. Mr. Zuhlke holds a Bachelor’s degree (1968) and a Juris
Doctor’s degree (1971) from the University of Wisconsin. He is a member of the
Wisconsin, Illinois and American Bar Associations.
Compliance
with Section 16(a)
Section 16(a)
of the Securities Exchange Act of 1934, as amended, requires our directors
and
executive officers and persons who own more than 10% of a registered class
of
our equity securities, to file with the Securities and Exchange Commission
initial reports of ownership and reports of changes in beneficial ownership
of
common stock and other equity securities of ours. Directors, officers and
greater than 10% stockholders are required by SEC regulations to furnish us
with
all Section 16(a) forms they file.
To
our knowledge, based solely upon our review of the copies of such reports
furnished to us, we believe all of our directors, officers and greater than
10%
stockholders have complied with the applicable Section 16(a) reporting
requirements in a timely fashion.
Board
of Directors and Committees of the Board
Our
Board of Directors had five meetings during the period from our inception on
May
22, 2007 to April 15, 2008 and acted by unanimous written consent two times.
Each member of the Board participated in all Board meetings held during the
period for which he was a director. We have no independent auditing, nominating
or compensation committees but we expect to establish such committees as soon
as
practicable after the consummation of the Merger.
Code
of Conduct and Ethics
We
have adopted a code of ethics that applies to our officers, directors and
employees in accordance with applicable federal securities laws. We have filed
copies of our code of conduct and ethics as an exhibit to the Registration
Statement. These documents may be reviewed by accessing our public filings
at
the SEC’s web site at www.sec.gov. In addition, a copy of the code of ethics
will be provided without charge upon request to us. We intend to disclose any
amendments to or waivers of provisions of our code of ethics in a Current Report
on Form 8-K.
Compensation
Arrangements for Directors
FMG
Acquisition Corp.’s directors do not currently receive any cash compensation for
their service as members of the Board of Directors. Upon consummation of the
Merger, non-employee directors of the Company will receive varying levels of
compensation for their services as directors, including additional amounts
based
on their eligibility as members of the Company’s audit and compensation
committees. The Company anticipates determining director compensation in
accordance with industry practice and standards.
Executive
Compensation
FMG
Acquisition Corp.
No
founding executive officer of the Company has received any cash or non-cash
compensation for services rendered to the Company. Each founding executive
officer has agreed not to take any compensation prior to the consummation of
a
business combination. However, the Company’s executive officers are reimbursed
for any out-of-pocket expenses incurred in connection with activities on the
Company’s behalf such as identifying potential merger partners and performing
due diligence on suitable business combinations. As of March 31, 2008, an
aggregate of $65,162 has been reimbursed to them for such
expenses.
United
Insurance Holdings, L.C.
Summary
Compensation Table
The
following table sets forth compensation information for each of our named
executive officers during the years ended December 31, 2006 and 2007 who will
become executive officers of the combined company following the Merger
including: (i) the dollar value of base salary and bonus earned during each
year; (ii) for awards of stock and awards of options, the dollar amount
recognized for financial statement reporting purposes with respect to each
year
in accordance with Statement of Financial Accounting Standards (“SFAS”) No.
123R, “Share-based Payments” (“SFAS 123(R)”); (iii) the dollar value of earnings
for services pursuant to awards granted during each year under non-equity
incentive plans; (iv) the non-qualified deferred compensation earnings during
each year; (v) all other compensation for each years; and (vi) the dollar value
of total compensation for each year.
Name
and Principal
Position(a)
|
|
Year(b)
|
|
Salary($)(c)
|
|
Bonus($)(d)
|
|
Stock
Awards($)(e)
|
|
|
|
OptionAwards($)(f)
|
|
Non-Equity
Incentive
Plan
Compensation
($)(g)
|
|
Nonqualified
Deferred
Compensation
Earnings
($)(h)
|
|
All
Other
Compensation($)(i)
|
|
|
|
Total
($)(j)
|
|
Donald
J. Cronin
|
|
|
2007
|
|
$
|
254,800
|
|
$
|
70,000
|
|
$
|
88,350
|
|
|
(2
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
12,500
|
|
|
(1
|
)
|
$
|
425,650
|
|
President
and Chief Executive Officer of United’s wholly owned
subsidiaries
|
|
|
2006
|
|
$
|
188,550
|
|
$
|
48,750
|
|
$
|
98,500
|
|
|
(2
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
9,188
|
|
|
(1
|
)
|
$
|
344,988
|
|
Nicholas
W. Griffin
|
|
|
2007
|
|
$
|
204,800
|
|
$
|
50,000
|
|
$
|
58,900
|
|
|
(2
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
10,000
|
|
|
(1
|
)
|
$
|
323,700
|
|
Chief
Financial Officer
|
|
|
2006
|
|
$
|
125,550
|
|
$
|
31,156
|
|
$
|
66,000
|
|
|
(2
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
6,038
|
|
|
(1
|
)
|
$
|
228,744
|
|
(1)
|
Represents
company match under 401(k) plan.
|
(2)
|
Amounts
calculated utilizing the provisions of SFAS 123(R). The assumptions
used
in calculating these amounts are incorporated herein by reference
to Note
14 of United’s 2007 audited consolidated financial statements contained
herein.
|
Reallocation
of Membership Units
United’s
members’ agreement, as amended, provides that the Board may issue up to 4,109
membership units to management and the Chairman of the Board (including
convertible securities to acquire units, but as adjusted for any splits,
dividends, combinations or recapitalizations or similar transactions), 3,323
of
which were available for issuance as of December 31, 2007. Pursuant to this
provision, for services performed, the Board granted 93 membership units
and 197
membership units to Mr. Cronin in 2007 and 2006, respectively. Similarly,
the Board granted 62 membership units and 132 membership units to Mr.
Griffin in 2007 and 2006, respectively. These membership units were reallocated
from outstanding membership units held by all United members, except one,
pursuant to the terms of the members’ agreement
.
Bonus
Awards
Amounts
included in column (d) in the Summary Compensation Table represent amounts
paid
in 2007 to each of United’s named executive officers in accordance with our
employee bonus program. Amounts awarded under the bonus program are a function
of our financial and overall business performance as well as the employee’s
contribution to that performance as determined at the end of each fiscal year
by
our Board of Directors.
401(k)
Profit Sharing Plan
United
adopted a tax-qualified profit sharing 401(k) plan that covers all employees
that have completed 90 days of service, except for nonresident aliens with
no
U.S. source income. Pursuant to the 401(k) plan, participants may elect to
make
pre-tax contributions up to the lesser of 15% of compensation or the statutorily
prescribed annual limit. The 401(k) also provides for employer matching
contributions equal to 100% of the first 5% of compensation deferred into the
plan. Contributions made by employees or by United to the 401(k) plan, and
the
income earned on plan contributions, are not taxable to employees until
withdrawn from the 401(k) plan, and United can deduct the employees’
contributions and its contributions, if any, for the fiscal year in which they
are made.
Outstanding
Equity Awards at Fiscal Year-End
There
were no unexercised equity awards as of December 31, 2007.
Director
Compensation
The
following table sets forth information regarding the compensation received
by
each of our directors who will become directors of the combined company
following the Merger during the year ended December 31, 2007:
Name
(a)
|
|
Fees
Earned or
Paid in
Cash
($)
(b)
|
|
Stock
Awards
($)
(c)
|
|
Option
Awards
($)
(d)
|
|
Non-Equity
Incentive Plan
Compensation
($)
(e)
|
|
Nonqualified
Deferred
Compensation
Earnings
($)
(f)
|
|
All Other
Compensation
($)
(g)
|
|
Total
($)
(h)
|
|
Gregory
C. Branch
|
|
$
|
125,500
|
(1)
|
|
-
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
125,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alec
L. Poitevint
|
|
$
|
25,000
|
(1)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kent G. Whittemore
|
|
$
|
24,250
|
(1)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
24,250
|
|
|
(1)
|
Mr.
Branch was paid $120,000 for serving as Chairman of the Board and
Chief
Executive Officer for the fiscal year ended December 31, 2007. Each
of the
other two directors set forth above received a retainer of $20,000
for
serving as board members. In addition, all three directors received
a fee
for each meeting attended in person or by phone, plus reimbursement
of
expenses.
|
|
(2)
|
Pursuant
to United’s members agreement, as amended, the Chairman of the Board, Mr.
Branch, received an option to purchase 5,454 membership units at
a total
exercise price of $400,000. On January 1, 2007, Mr. Branch, exercised
this
option and purchased such membership units. There was no compensation
cost
to United in connection with this award in accordance with FAS
123(R).
|
|
(3)
|
United’s
members agreement, as amended, provides that its Board of Managers
has the
discretion to grant to the Chairman of the Board an award of additional
membership units or an option to purchase additional membership units
in
an amount, if granted, that shall be (1) no greater than the aggregate
amount of membership units granted or, if option grants, issuable
upon the
exercise of options granted to all of United’s other officers and
managers, but (2) no less than the largest amount of membership units
granted or, if option grants, issuable upon the exercise of options
granted to any single United officer or manager. Any such grant of
membership units or any option award granted pursuant to the
foregoing provision shall be on the same terms and conditions as
the
awards granted to other officers and managers, provided that the
Chairman
shall have twelve months from the date the officers and managers
exercise their option awards to exercise his option award.
On January 1, 2007, United granted to the Chairman of the Board,
Mr.
Branch, an option to purchase 258 membership units, an amount equal
to the aggregate number of membership units granted by United to
its other
officers and managers, at an exercise price of $242 per unit. Mr.
Branch
exercised the entire option. There was no compensation cost to United
in
connection with this award in accordance with FAS 123(R). The completion
of the Merger will result in the termination of any option provisions
contained in the United members agreement, as amended. Any unexercised
options held by the Chairman at the time of the Merger must be waived
as a
condition to closing the
Merger.
|
Benchmarking
of Cash and Equity Compensation
The
Company believes it is important when making compensation-related decisions
to
be informed as to current practices of similarly situated publicly held
companies in the insurance industry. The Company expects the compensation
committee will stay apprised of the cash and equity compensation practices
of
publicly held companies in the insurance industry through the review of such
companies’ public reports and through other resources. It is expected any
companies chosen for inclusion in any benchmarking group would have business
characteristics comparable to the Company, including revenues, financial growth
metrics, stage of development, employee headcount and market capitalization.
While benchmarking may not always be appropriate as a stand-alone tool for
setting compensation due to the aspects of the Company post-acquisition business
and objectives that may be unique to the Company, the Company generally believes
gathering this information will be an important part of its compensation-related
decision-making process.
Compensation
Components
Base
Salary.
Generally,
the Company, working with the compensation committee, anticipates setting
executive base salaries at levels comparable with those of executives in similar
positions and with similar responsibilities at comparable companies. The Company
will seek to maintain base salary amounts at or near the industry norms while
avoiding paying amounts in excess of what the Company believes is necessary
to
motivate executives to meet corporate goals. It is anticipated base salaries
will generally be reviewed annually, subject to terms of employment agreements,
and that the compensation committee and board will seek to adjust base salary
amounts to realign such salaries with industry norms after taking into account
individual responsibilities, performance and experience.
Annual
Bonuses.
The
Company intends to design and utilize cash incentive bonuses for executives
to
focus them on achieving key operational and financial objectives within a yearly
time horizon. Near the beginning of each year, the board, upon the
recommendation of the compensation committee and subject to any applicable
employment agreements, will determine performance parameters for appropriate
executives. At the end of each year, the board and compensation committee will
determine the level of achievement for each corporate goal.
The
Company will structure cash incentive bonus compensation so that it is taxable
to its employees at the time it becomes available to them. At this time, it
is
not anticipated that any executive officer’s annual cash compensation will
exceed $1 million, and the Company has accordingly not made any plans to
qualify for any compensation deductions under Section 162(m) of the
Internal Revenue Code.
Equity
Awards.
The
Company also may use stock options and other stock-based awards to reward
long-term performance. The Company believes providing a meaningful portion
of
its executives’ total compensation package in stock options and other
stock-based awards will align the incentives of its executives with the
interests of the Company’s stockholders and with the Company’s long-term
success. The compensation committee and board will develop their equity award
determinations based on their judgments as to whether the complete compensation
packages provided to the Company’s executives, including prior equity awards,
are sufficient to retain, motivate and adequately award the
executives.
Other
Compensation.
The
Company will establish and maintain various employee benefit plans, including
medical, dental, life insurance and 401(k) plans. These plans will be available
to all salaried employees and will not discriminate in favor of executive
officers. The Company may extend other perquisites to its executives that are
not available to our employees generally.
Certain
Relationships and Related Party Transactions of FMG
On
May
22, 2007, we issued 1,125,000 shares of our common stock to certain affiliates
listed below for an aggregate amount of $25,000 in cash, at a purchase price
of
approximately $0.022 per share.
Name
|
|
Number
of Shares
|
|
Relationship
to Us
|
|
|
|
|
|
FMG
Investors LLC
|
|
1,045,000
|
|
Sponsor.
Gordon Pratt and Larry G. Swets, Jr. are the managing members of
FMG
Investors LLC.
|
Thomas
D. Sargent
|
|
20,000
|
|
Director
|
David
E. Sturgess
|
|
20,000
|
|
Director
|
James
R. Zuhlke
|
|
20,000
|
|
Director
|
John
Petry
|
|
20,000
|
|
Special
Advisor
|
Effective
August 13, 2007, our Board of Directors authorized a forward stock split in
the
form of a stock dividend of 0.15 shares of common stock for each outstanding
share of common stock, effectively lowering the purchase price to approximately
$0.019 per share.
Upon
consummation of the IPO, the Company’s initial stockholders, who owned 100% of
the Company’s issued and outstanding common stock prior to the IPO, forfeited a
pro-rata portion of their shares of common stock (an aggregate of 110,344 shares
of common stock) as a result of the underwriters’ election not to exercise the
balance of their over-allotment option; effectively raising the purchase price
to approximately $0.021 per share. Such ownership interests were adjusted upon
consummation of the IPO to reflect their aggregate ownership of 20% of the
Company’s issued and outstanding common stock (an aggregate of 1,183,406 shares
of common stock). Because of this ownership block, these stockholders may be
able to effectively influence the outcome of all matters requiring approval
by
our stockholders, including the election of directors and approval of
significant corporate transactions other than approval of a business
combination.
Our
sponsor, prior to our IPO, purchased in a private placement transaction pursuant
to Regulation D under the Securities Act, a total of 1,250,000 warrants
from us at a price of $1.00 per warrant. These warrants will not be sold or
transferred by the purchaser who initially purchases these warrants until the
completion of our initial business combination. The $1,250,000 purchase price
of
the sponsor warrants have been added to the proceeds of the IPO being held
in
the trust account pending our completion of a business combination. If we do
not
complete one or more business combinations, the $1,250,000 purchase price of
the
sponsor warrants will become part of the liquidation amount distributed to
our
public stockholders from our trust account and the sponsor warrants will become
worthless.
The
holders of a majority of all of (i) the shares of common stock owned or
held by the founding stockholders and (ii) the shares of common stock
issuable upon exercise of the sponsor warrants will be entitled to make up
to
two demands that we register these securities pursuant to an agreement signed
prior to the effective date of the registration statement. Such holders may
elect to exercise these registration rights at any time commencing on or after
the date on which these securities are released from escrow. In addition, these
stockholders have certain “piggy-back” registration rights with respect to
registration statements filed subsequent to the date on which these securities
are released from escrow. We will bear the expenses incurred in connection
with
the filing of any such registration statements.
Because
the sponsor warrants sold in the Regulation D private placement were
originally issued pursuant to an exemption from registration requirements under
the federal securities laws, the holders of these warrants will be able to
exercise their warrants even if, at the time of exercise, a prospectus relating
to the common stock issuable upon exercise of such warrants is not current.
Our
founder securities will become freely tradable only after they are
registered.
Our
officers and directors lent an aggregate of $100,000 to us as of the effective
date of the registration statement to cover expenses related to the IPO, such
as
SEC registration fees, NASD registration fees, listing fees and legal and
accounting fees and expenses. The loan has been repaid without interest from
the
proceeds of the IPO not placed in trust.
We
will reimburse our officers and directors, subject to board approval, for any
reasonable out-of-pocket business expenses incurred by them in connection with
certain activities on our behalf such as identifying and investigating possible
merger partners and business combinations. There is no limit on the amount
of
out-of-pocket expenses reimbursable by us, which will be reviewed only by our
board or a court of competent jurisdiction if such reimbursement is challenged.
Accountable out-of-pocket expenses incurred by our officers and directors will
not be repaid out of proceeds held in trust until these proceeds are released
to
us upon the completion of a business combination, provided there are sufficient
funds available for reimbursement after such consummation.
Other
than the reimbursable out-of-pocket expenses payable to our officers and
directors, no compensation or fees of any kind, including finders, consulting
fees or other similar compensation, will be paid to any of our founding
stockholders, officers or directors who owned our common stock prior to this
offering, or to any of their respective affiliates prior to or with respect
to a
business combination.
Our
founding stockholders will not receive reimbursement for any out-of-pocket
expenses incurred by them to the extent that such expenses exceed the amount
used for working capital purposes unless the business combination is consummated
and there are sufficient funds available for reimbursement after such
consummation. The financial interest of such persons could influence their
motivation in selecting a merger partner and thus, there may be a conflict
of
interest when determining whether a particular business combination is in the
stockholders’ best interest.
After
the consummation of a business combination, if any, to the extent our management
remains as officers of the resulting business, some of our officers and
directors may enter into employment agreements, the terms of which shall be
negotiated and which we expect to be comparable to employment agreements with
other similarly-situated companies in the insurance industry. Further, after
the
consummation of a business combination, if any, to the extent our directors
remain as directors of the resulting business, we anticipate they will receive
compensation comparable to directors at other similarly-situated companies
in
the insurance industry.
All
ongoing and future transactions between us and any of our officers and directors
or their respective affiliates, including loans by our officers and directors,
will be on terms believed by us to be no less favorable than are available
from
unaffiliated third parties. Such transactions or loans, including any
forgiveness of loans, will require prior approval by a majority of our
disinterested “independent” directors or the members of our board who do not
have an interest in the transaction, in either case who had access, at our
expense, to our attorneys or independent legal counsel. We will not enter into
any such transaction unless our disinterested “independent” directors determine
that the terms of such transaction are no less favorable to us than those that
would be available to us with respect to such a transaction from unaffiliated
third parties.
Certain
Relationships and Related Party Transactions of United
The
following is a summary of transactions, and series of related transactions,
since January 1, 2006 to which United has been a participant, in which the
amount involved exceeded the lesser of $120,000 or one percent of the average
of
United ’ s total assets at year end for the last two completed fiscal
years and in which any of United’s executive officers, directors,
beneficial holders of more than 5% of its membership units or the immediate
family members of such officers, directors, and beneficial holders had or will
have a direct or indirect material interest, other than compensation
arrangements which are described under the section of this proxy
statement/prospectus entitled “
United
Executive and DirectorCompensation
”
and
compensation to our officers and directors for service as such.
Mark
Berset, a member of United’s Board of Managers and a holder of United membership
units and Linda Berset, a holder of United membership units, own insurance
agencies that have agency contracts with, and write business on behalf of,
UPCIC. Mr. and Mrs. Berset are the sole owners of these insurance agencies.
The
amount of premium revenues to United from insurance policies written by these
agencies for the fiscal years ended December 31, 2006 and 2007 were
approximately $7.9 million and $9.2 million, respectively. Mr. and Mrs.
Berset received commissions and board fees of approximately $0.6 million
and
$0.8 million for the fiscal years ended December 31, 2006 and 2007,
respectively, which amounts include $12,500 and $30,000 paid to Mr. Berset
in
fiscal 2006 and 2007, respectively, as compensation for serving on United’s
board of managers.
United
and Columbus Bank and Trust Company (“CB&T”) entered into a Loan Agreement
dated February 8, 2007 in which CB&T loaned $33 million to United (the “Loan
Agreement”). CB&T is an affiliate of Synovus Financial Corporation
(“Synovus”), which is the beneficial owner of 17% of United’s outstanding
membership units. The related promissory note bears interest at an annual
rate
of 400 basis points above the 30- Day LIBOR, which fluctuates when money
rates
change, with all interest and principal due by February 20, 2010. Pursuant
to the Loan Agreement, United made payments totaling approximately $9.2 million
in principal and interest of $2.3 million during the year ended December
31,
2007. In addition to the indebtedness under the Loan Agreement, United maintains
deposit account arrangements and bank accounts with Synovus and its affiliates.
On March 13, 2008, United entered into an amendment to the CB&T Loan
Agreement which eliminated the “excess cash flow” provision of the loan. In
addition, the minimum balance in the investment accounts at CB&T was
increased from $10 million to $13 million with no future payments
into investment accounts required. The interest rate was decreased from 400
to 300 basis points above LIBOR. The amended Loan Agreement also
provides for the potential return of up to $3 million of escrow funds in
the
event there is no material storm activity as of November 2008.
On
May
27, 2007, United entered into a modification to the CB&T agreement which
allowed United to utilize the $13 million that was currently held in escrow
as a
principle reduction to the term loan. The modification also eliminated the
requirement to have any funds held in escrow.
United
has entered into an Investment Mangement Agreement with Synovus Trust Company,
N.A. ( “ Synovus ” ), whereby Synovus provides discretionary investment
management services for the investment accounts of United’s subsidiaries. The
agreement was effective October 8, 2003, and remains in effect until terminated
by either party. Synovus Financial Corporation, Synovus ’ parent, owned 17.2% of
United at December 31, 2007 and 18% at December 31, 2006, respectively. United’s
subsidiaries incurred combined fees under rhe agreement of $96,000, $115,000
and
$97,000 for the years ended December 31, 2007, 2006 and 2005,
respectively.
United
believes the terms obtained or consideration it paid or received, as applicable,
in connection with the transactions described above was comparable to terms
available or the amounts that would be paid or received, as applicable, in
arm’s-length transactions. United does not currently have a formal policy with
respect to transactions with related persons.
Required
Vote
The
election of each nominee for director requires the affirmative vote of the
holders of a plurality of the shares of common stock cast in the election of
directors. Three directors have been nominated by the Board of Directors to
serve as Directors. The Board of Directors recommends that Messrs. Greg C.
Branch, Alec L. Poitevint, II and Kent G. Whittemore be elected to serve as
directors of the Company following consummation of the Merger (Director
Proposal). Proxies received by the Company will be voted
FOR
the
election of these three Directors, unless marked to the contrary. A stockholder
who desires to withhold voting of the proxy for all or one or more of the
nominees may so indicate on the proxy.
Recommendation
OUR
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS OUR STOCKHOLDERS VOTE “FOR” THE
ELECTION OF MESSRS. GREGORY C. BRANCH, ALEC POITEVINT, II AND KENT G.
WHITTEMORE AS CLASS B DIRECTORS (DIRECTOR
PROPOSAL)
PROPOSAL 6
THE
ADJOURNMENT PROPOSAL
The
adjournment proposal allows the Company’s Board of Directors to submit a
proposal to adjourn the Special Meeting to a later date or dates, if necessary,
to permit further solicitation of proxies in the event, based on the tabulated
votes, there are not sufficient votes at the time of the Special Meeting to
approve the Merger.
Prior
to the record date for this Special Meeting, the officers, directors or
affiliates of the Company may purchase outstanding securities of the Company
in
open market transactions and the shares so acquired would be voted in favor
of
the Merger.
In
the event an adjournment proposal is presented at the Special Meeting and
approved by the stockholders, the officers, directors or affiliates of the
Company may, during such adjournment period, make investor presentations
telephonically and/or in person to investors who have indicated their intent
to
vote against the Merger Proposal. Such investor presentations would be
informational only, and would be filed publicly on Current Report on
Form 8-K prior to or concurrently with presentation to any third party. The
Company will not conduct any such activities in violation of applicable federal
securities laws, rules or regulations.
Consequences
if Adjournment Proposal is not Approved
If
an adjournment proposal is presented at the Special Meeting and is not approved
by the stockholders, the Company’s Board of Directors may not be able to adjourn
the Special Meeting to a later date in the event, based on the tabulated votes,
there are not sufficient votes at the time of the Special Meeting to approve
the
consummation of Merger. In such event, the Company will be required to liquidate
assuming it is not able to consummate another business combination by October
4,
2009.
Required
Vote
Adoption
of the adjournment proposal requires the affirmative vote of a majority of
the
issued and outstanding shares of the Company’s common stock voting in person or
by proxy at the meeting. If the Merger Proposal is approved and fewer than
29.99% of the stockholders exercise their conversion rights, then there would
be
no need for the adjournment proposal.
Recommendation
OUR
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS OUR STOCKHOLDERS VOTE “FOR” THE
APPROVAL OF AN ADJOURNMENT PROPOSAL
UNITED
MEMBER APPROVAL
The
managers and officers of United, presently, together with their affiliates,
own
an aggregate of approximately 59% of United’s outstanding membership units, all
of which are entitled to vote on the Merger. Approval of the Merger Proposal
will require the affirmative vote of not less than 66% of all membership units
outstanding, which means United needs only an additional 7% of the aggregate
outstanding membership units in order to approve the Merger, provided that
the
current managers and officers of United vote to approve the Merger
Proposal.
United
is
not soliciting proxies for approval of the Merger at this time, however, in
accordance with Florida law, United does intend to solicit written consents
from
its members in favor of the Merger and the Merger Agreement.
Under
Florida Statute 608.4352 of the Florida Limited Liability Company Act (the
“FLLCA”), the members of United will be entitled to dissent from the Merger and
obtain cash payment for the fair value of their membership units instead of
the
consideration provided for in the Merger Proposal. United will send notice
pursuant to Florida Statute 608.4354 to its members who are entitled to
appraisal rights when United solicits its members’ consent to the Merger
Proposal. Pursuant to Florida Statute 608.4355, a member who is entitled to
and who wishes to assert appraisal rights: (a) must deliver to a
manager or managing member of United within 20 days after receiving the notice
pursuant to Florida Statute 608.4354(3), written notice of such person's intent
to demand payment if the proposed Merger is effectuated, and (b) must not vote,
or cause or permit to be voted, any membership interests in favor of the Merger.
If the proposed Merger is effectuated, United will deliver a written appraisal
notice and form to all members who satisfied the requirements of Florida Statute
608.4355.
If
the
Merger is completed, a holder of record of United membership units on the date
of making a demand for appraisal, will be entitled to either accept payment
from
United equaling United’s estimated fair value for the membership units, or have
the membership units appraised by a Florida court under Florida Statute
608.43585. To be eligible to receive this payment, however, a United member
must:
·
be a
member on the record date established by United’s Board;
·
continue
to hold the membership units through the time of the Merger; and
·
strictly
comply with the procedures set forth under Florida Statute
608.4357.
This
summary does not constitute any legal or other advise, nor does it constitute
a
recommendation that United members exercise their right to appraisal under
Florida Statute 608.4352. The following summary is not a complete statement
of
the members’ appraisal rights under the FLLCA, and is qualified in its entirety
by reference to Florida Statute 608.4352 and the other appraisal statutes under
the FLLCA. The statutory right of appraisal granted by the FLLCA requires strict
compliance with the procedures in Florida Statute 608.4357. Failure to follow
any of these procedures may result in a termination or waiver of dissenters’
rights under the FLLCA.
INFORMATION
ABOUT THE INSURANCE INDUSTRY
Nature
of the Insurance Industry
Factors
affecting the sectors of the insurance industry in which United operates may
subject the Company to significant fluctuations in operating results. These
factors include competition, catastrophe losses and general economic conditions
including interest rate changes, as well as legislative initiatives, the
regulatory environment, the frequency of litigation, the size of judgments,
severe weather conditions, climate changes or cycles, the role of federal or
state government in the insurance market, judicial or other authoritative
interpretations of laws and policies, and the availability and cost of
reinsurance. Specifically, the homeowners' insurance market, which comprises
the
bulk of the Company's current operations, is influenced by many factors,
including state and federal laws, market conditions for homeowners' insurance
and residential plans. Additionally, an economic downturn could result in fewer
home sales and less demand for new homeowners seeking insurance.
Historically,
the financial performance of the property and casualty insurance industry has
tended to fluctuate in cyclical patterns of soft markets followed by hard
markets. Although an individual insurance company's financial performance is
dependent on its own specific business characteristics, the profitability of
most property and casualty insurance companies tends to follow this cyclical
market pattern.
Government
Regulation
Florida
insurance companies are subject to regulation and supervision by the OIR. The
OIR has broad regulatory, supervisory and administrative powers. Such powers
relate, among other things, to the granting and revocation of licenses to
transact business, the licensing of agents (through the Florida Department
of
Financial Services), the standards of solvency to be met and maintained, the
nature of, and limitations on, investments, the approval of policy forms and
rates, the review of reinsurance contracts, the periodic examination of the
affairs of insurance companies, and the form and content of required financial
statements. Such regulation and supervision are primarily for the benefit and
protection of policyholders and not for the benefit of investors.
In
addition, the Florida legislature and the NAIC from time to time consider
proposals that may affect, among other things, regulatory assessments and
reserve requirements. The Company cannot predict the effect that any proposed
or
future legislation or regulatory or administrative initiatives may have on
the
financial condition or operations of the Company. Any action by the OIR could
have a material adverse effect on the Company.
The
Company will become subject to other states' laws and regulations if it
seeks authority to transact business in states other than Florida.
Competition
The
insurance industry is highly competitive and many companies currently write
homeowners' property and casualty insurance. Additionally, the Company and
its
subsidiaries must compete with companies that have greater capital resources
and
longer operating histories. Increased competition from other private insurance
companies as well as Citizens could adversely affect the Company's ability
to do
business profitably. Although the Company's pricing is inevitably influenced
to
some degree by that of its competitors, management of the Company believes
that
it is generally not in the Company's best interest to compete solely on price,
choosing instead to compete on the basis of underwriting criteria, its
distribution network and high quality service to its agents and insureds.
Increased competition could have a material adverse effect on the
Company.
Financial
Stability Rating
Financial
stability ratings are an important factor in establishing the competitive
position of insurance companies and may impact an insurance company's sales.
Demotech, Inc. maintains a letter scale financial stability rating system
ranging from A** (A double prime) to L (licensed by state regulatory
authorities). Demotech, Inc. has assigned UPCIC a financial stability rating
of
A, which is the third highest of six rating levels. According to Demotech,
Inc., A ratings are assigned to insurers that have "exceptional ability to
maintain liquidity of invested assets, quality reinsurance, acceptable financial
leverage and realistic pricing while simultaneously establishing loss and
loss
adjustment expense reserves at reasonable levels." With a financial stability
rating of A, United expects that UPCIC's property insurance policies will
be
acceptable to the secondary mortgage marketplace and mortgage lenders. The
rating of UPCIC is subject to at least annual review by, and may be revised
downward or revoked at the sole discretion of, Demotech,
Inc.
UPCIC's
failure to maintain a commercially acceptable financial stability rating could
have a material adverse effect on United's ability to retain and attract
policyholders and agents. Many of United's competitors have ratings higher
than
that of UPCIC. A downgrade in the financial stability rating of UPCIC could
have
a material adverse impact on its ability to effectively compete with other
insurers with higher ratings. Additionally, a withdrawal of the rating could
cause UPCIC's insurance policies to no longer be acceptable to the secondary
marketplace and mortgage lenders, which could cause a material adverse effect
of
United's results of operations and financial position.
Demotech,
Inc. bases its ratings on factors that concern policyholders and not upon
factors concerning investor protection. Such ratings are subject to change
and
are not recommendations to buy, sell, or hold securities.
Regulation
Upon
consummation of the Merger, the Company will be subject to the laws
and regulations in Florida and regulations of any other states in which we
seek
to conduct business in the future. The regulations cover all aspects of our
business and are generally designed to protect the interests of insurance
policyholders, as opposed to the interests of shareholders. Such regulations
relate to authorized lines of business, capital and surplus requirements,
allowable rates and forms, investment parameters, underwriting limitations,
transactions with affiliates, dividend limitations, changes in control, market
conduct, maximum amount allowable for premium financing service charges and
a
variety of other financial and non-financial components of our business. Our
failure to comply with certain provisions of applicable insurance laws and
regulations could have a material adverse effect on our business, results of
operations or financial condition. In addition, any changes in such laws and
regulations, including the adoption of consumer initiatives regarding rates
charged for coverage, could materially and adversely affect our operations
or
our ability to expand.
A
recent
example of such consumer initiatives may be found with Florida’s property
insurers’ operating under a new emergency rule which require existing premium
rates as of January 25, 2007, to remain in effect until a rate filing reflecting
the provisions as provided in Florida’s newly enacted property insurance
legislation. The legislation, among other things, provided low cost
reinsurance to member insurance companies, accelerated rate filings to reflect
the reduced reinsurance costs and expanded the role of Citizens in the market
place. Other provisions contained in the emergency rule prevent non-renewals
and
cancellation (except for material misrepresentation and non-payment of premium)
and new restrictions on coverage are prohibited. We are aware of the continued
financial challenges that face the State of Florida in connection with the
current consumer initiatives. The consumer initiatives stem from the
catastrophic hurricanes during 2004 and 2005. The financial challenges have
affected our business, results of operations and financial condition in the
past
and there can be no assurance they will not affect business, results of
operations and financial condition in the future. We are unaware of any other
jurisdictions with similar consumer initiatives that could have a material
adverse effect on our business, results of operations or financial
condition.
Most
states have also enacted laws which restrict an insurer’s underwriting
discretion, such as the ability to terminate policies, terminate agents or
reject insurance coverage applications, and many state regulators have the
power
to reduce, or to disallow increases, in premium rates. These laws may adversely
affect the ability of an insurer to earn a profit on its underwriting
operations.
Most
states also have insurance laws requiring that rate schedules and other
information be filed with the state's insurance regulatory authority, either
directly or through a rating organization with which the insurer is affiliated.
The regulatory authority may disapprove a rate filing if it finds that the
rates
are inadequate, excessive or unfairly discriminatory. Rates, which are not
necessarily uniform for all insurers, vary by class of business, hazard covered,
and size of risk. Certain states have recently adopted laws or are considering
proposed legislation which, among other things, limit the ability of insurance
companies to effect rate increases or to cancel, reduce or non-renew insurance
coverage with respect to existing policies, particularly personal automobile
insurance. As discussed above, the recent consumer initiatives with Florida’s
property insurers’ demonstrate the state’s ability to adopt such laws. Also, the
Florida legislature may adopt additional laws of this type in the future, which
may adversely affect the Company's business.
Most
states require licensure or regulatory approval prior to the marketing of new
insurance products. Typically, licensure review is comprehensive and includes
a
review of a company’s business plan, solvency, reinsurance, character of its
officers and directors, rates, forms and other financial and non-financial
aspects of a company. The regulatory authorities may prohibit entry into a
new
market by not granting a license or by withholding approval.
All
insurance companies must file quarterly and annual statements with certain
regulatory agencies and are subject to regular and special examinations by
those
agencies.
Restrictions
in Payments of Dividends by Domestic Insurance Companies
Under
Florida law, a domestic insurer may not pay any dividend or distribute cash
or
other property to its shareholders except out of that part of its available
and
accumulated capital surplus funds which is derived from realized net operating
profits on its business and net realized capital gains. A Florida domestic
insurer may not make dividend payments or distributions to shareholders without
prior approval of the Florida OIR if the dividend or distribution would exceed
the larger of (i) the lesser of (a) 10.0% of its capital surplus or (b) net
income, not including realized capital gains, plus a two-year carryforward,
(ii)
10.0% of capital surplus with dividends payable constrained to unassigned funds
minus 25% of unrealized capital gains or (iii) the lesser of (a) 10.0% of
capital surplus or (b) net investment income plus a three-year carryforward
with
dividends payable constrained to unassigned funds minus 25.0% of unrealized
capital gains.
Alternatively,
a Florida domestic insurer may pay a dividend or distribution without the prior
written approval of the Florida OIR (i) if the dividend is equal to or less
than
the greater of (a) 10.0% of the insurer’s capital surplus as regards
policyholders derived from realized net operating profits on its business and
net realized capital gains or (b) the insurer’s entire net operating profits and
realized net capital gains derived during the immediately preceding calendar
year, (ii) the insurer will have policy holder capital surplus equal to or
exceeding 115.0% of the minimum required statutory capital surplus after the
dividend or distribution, (iii) the insurer files a notice of the dividend
or
distribution with the Florida OIR at least ten business days prior to the
dividend payment or distribution and (iv) the notice includes a certification
by
an officer of the insurer attesting that, after the payment of the dividend
or
distribution, the insurer will have at least 115% of required statutory capital
surplus as to policyholders. Except as provided above, a Florida domiciled
insurer may only pay a dividend or make a distribution (i) subject to prior
approval by the Florida OIR or (ii) 30 days after the Florida OIR has received
notice of such dividend or distribution and has not disapproved it within such
time.
While
the
non-insurance company subsidiaries (managing general agencies and other
affiliates) are not subject directly to the dividend and other distribution
limitations, insurance holding company regulations govern the amount that any
affiliate within the holding company system may charge any of the insurance
companies for service (e.g., management fees and commissions).
NAIC
Risk Based Capital Requirements
To
enhance the regulation of insurer solvency, the NAIC established risk-based
capital requirements for insurance companies that are designed to assess capital
adequacy and to raise the level of protection that statutory surplus provides
for policy holders. These requirements measure three major areas of risk facing
property and casualty insurers: (i) underwriting risks, which encompass the
risk
of adverse loss developments and inadequate pricing; (ii) declines in asset
values arising from credit risk; and (iii) other business risks from
investments. Insurers having less statutory surplus than required will be
subject to varying degrees of regulatory action, depending on the level of
capital inadequacy. The Florida OIR, which follows these requirements, could
require UPCIC to cease operations in the event they fail to maintain the
required statutory capital.
Insurance
Holding Company Regulation
Following
consummation of the Merger, we will be subject to laws governing insurance
holding companies in Florida. These laws, among other things, (i) require us
to
file periodic information with the Florida OIR, including information concerning
our capital structure, ownership, financial condition and general business
operations, (ii) regulate certain transactions between us and our affiliates,
including the amount of dividends and other distributions and the terms of
surplus notes and (iii) restrict the ability of any one person to acquire
certain levels of our voting securities without prior regulatory approval.
Any
purchaser of 5% or more of the outstanding shares of our Common Stock could
be
presumed to have acquired control of the Company unless the Florida OIR, upon
application, determines otherwise.
Underwriting
and Marketing Restrictions
During
the past several years, various regulatory and legislative bodies have adopted
or proposed new laws or regulations to address the cyclical nature of the
insurance industry, catastrophic events and insurance capacity and pricing.
These regulations include (i) the creation of "market assistance plans" under
which insurers are induced to provide certain coverages, (ii) restrictions
on
the ability of insurers to rescind or otherwise cancel certain policies in
mid-term, (iii) advance notice requirements or limitations imposed for certain
policy non-renewals and (iv) limitations upon or decreases in rates permitted
to
be charged.
Legislation
From
time
to time, new regulations and legislation are proposed to limit damage awards,
to
control plaintiffs' counsel fees, to bring the industry under regulation by
the
Federal government, to control premiums, policy terminations and other policy
terms and to impose new taxes and assessments. It is not possible to predict
whether, in what form or in what jurisdictions, any of these proposals might
be
adopted, or the effect, if any, on us.
During
February 2008 Florida’s House Insurance Committee held a workshop on a proposal
and legislation developed by the Florida Department of Financial Services
regarding a significant reduction of capacity in the FHCF, substantially
increasing members’ co-insurance participation and the reorganization of the
FHCF under the Florida Cabinet. Additionally, the Board of Directors of the
Florida Insurance Guaranty Association held separate meetings to discuss their
continued financial challenges in connection with the insolvency of a particular
insurance company assumed subsequent to the 2005 - 2006 hurricane seasons.
Additional assessments by regulatory agencies are possible though not
quantifiable at this time.
INFORMATION
ABOUT FMG ACQUISITION CORP.
General
We
were incorporated in Delaware on May 22, 2007 as a blank check company formed
specifically as a vehicle to effect a merger, acquisition or similar business
combination with one or more businesses in the insurance industry whose fair
market value is at least equal to 80% of our net assets at the time of such
business combination.
A
registration statement for our IPO was declared effective on October 4, 2007.
On
October 11, 2007, we consummated our IPO of 4,733,625 units. Each unit consists
of one share of common stock and one redeemable common stock purchase warrant.
Each warrant entitles the holder to purchase from us one share of our common
stock at an exercise price of $6.00 per share. Our common stock and warrants
started trading separately as of November 7, 2007.
Gross
proceeds from the sale of units in our IPO and the concurrent private placement
to our founders were approximately $39,119,000. Of this amount, $37,452,930
was
deposited in trust and $143,207 was held outside of the trust. The proceeds
held
outside the trust are available to be used by us, and are being used by us,
to
provide for business, legal and accounting due diligence on prospective
acquisitions and continuing general and administrative expenses. We evaluated
a
number of candidates before moving forward with United. If the Merger is not
consummated, it is possible, though unlikely, we will lack sufficient time
or
resources to continue searching for an alternative merger partner.
Employees
We
have two officers, both of which are also founders and members of our Board
of
Directors. The founders do not receive compensation and are not obligated to
contribute any specific number of hours per week and intend to devote only
as
much time as they deem necessary to our affairs. We do not have any full time
employees who provide administrative support services.
Properties
We
maintain our principal executive offices at Four Forest Park, Second Floor,
Farmington, Connecticut 06032. We currently pay Fund Management Group LLC,
an
affiliate of our sponsor, an aggregate fee of $7,500 per month under a lease
with a 24 month term which commenced October 4, 2007, which includes the
cost of the office space and the cost of other general and administrative
services provided to us by Fund Management Group LLC.
Fund
Management Group LLC is an entity of which Gordon G. Pratt, our President,
Chief
Executive Officer and Chairman and Larry G. Swets, Jr., our Chief Financial
Officer, Secretary, Treasurer and director, are managing members . We consider
our current office space, combined with the other office space otherwise
available to our executive officers, adequate for our current
operations.
Periodic
Reporting and Audited Financial Statements
The
Company has registered its securities under the Securities Exchange Act of
1934,
as amended, and has reporting obligations, including the requirement to file
annual and quarterly reports with the SEC. In accordance with the requirements
of the Securities Exchange Act of 1934, as amended, the Company’s annual reports
will contain financial statements audited and reported on by the Company’s
independent accountants. We have filed a Report on Form 10-K with the SEC
covering our fiscal year ended December 31, 2007.
Legal
Proceedings
To
the knowledge of management, there is no litigation currently pending or
contemplated against us or any of our officers or directors in their capacity
as
such.
Independent
Public Accountants
Rothstein,
Kass & Company, P.C. (“RKCO”) served as our independent certified public
accountants to audit and review our financial statements for the fiscal year
ended December 31, 2007 and quarter ended March 31, 2008
respectively.
A
representative of RKCO will be present at the Special Meeting, will have the
opportunity to make a statement if he or she desires and will be available
to
respond to appropriate questions from stockholders.
During
the period from May 22, 2007 (inception) through March 31, 2008, RKCO was
our
principal accountant. RKCO manages and supervises the audit and audit staff,
and
is exclusively responsible for the opinion rendered in connection with its
examination. The following is a summary of fees paid or to be paid to RKCO
for
services rendered.
Audit
Fees
The
aggregate fees billed by RKCO for professional services rendered for the
audit
and review of our financial statements from the date of our inception
through March 31, 2008, and for services performed in connection with the
Company’s registration statement on Form S-1 filed in 2007, were approximately
$82,600.
Audit-Related
Fees
Other
than the fees described under the caption, “Audit Fees” above, RKCO did not bill
any fees for services rendered to us during the period from May 22, 2007
(inception) through March 31, 2008 for assurance and related services in
connection with the audit or review of our financial
statements.
Tax
Fees
The
aggregate fees billed by RKCO for professional services rendered for the
preparation of tax returns from the date of our inception through March 31,
2008 were approximately $2,400.
All
Other Fees
There
were no fees billed by RKCO for professional services other than audit services
and audit-related services rendered from the date of our inception
through March 31, 2008.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS OF FMG ACQUISITION CORP.
The
following discussion and analysis of our financial condition and results
of
operations should be read in conjunction with our consolidated financial
statements and related notes appearing elsewhere in this Report. This discussion
and analysis contains forward-looking statements that involve risks,
uncertainties and assumptions. The actual results may differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including, but not limited to, those which are not within our
control.
Overview
We
were
formed on May 22, 2007, for the purpose of acquiring, through a merger, capital
stock exchange, asset acquisition or other similar business combination, an
operating business in the insurance industry. Our initial business combination
must be with a business whose fair market value is at least equal to 80% of
our
net assets at the time of such acquisition. We intend to use cash derived from
the proceeds of our IPO and concurrent private placement, our capital stock,
debt or a combination of cash, capital stock and debt, to effect such business
combination. Pursuant to our amended and restated certificate of incorporation,
we have until October 4, 2009 to complete a business combination or we will
be
subject to liquidation.
Significant
financing activities since our inception include the following:
|
·
|
On
May 22, 2007, we issued 1,125,000 shares of our common stock to our
founding stockholders for an aggregate amount of $25,000 in cash,
at a
purchase price of approximately $0.022 per
share.
|
|
·
|
The
Company has received a limited recourse revolving line of credit
totaling
$250,000 made available by FMG Investors LLC. The revolving line
of credit
terminates upon the earlier of the completion of a business combination
or
the cessation of our corporate existence on October 4, 2009. The
revolving
line of credit is non-interest
bearing.
|
|
·
|
On
October 11, 2007, we entered into an agreement with our sponsor for
the
sale of 1,250,000 warrants in a private placement. Each warrant entitles
the holder to purchase from us one share of our common stock on a
cashless
basis. The warrants were sold at a price of $1.00 per warrant, generating
net proceeds of $1,250,000.
|
On
October 11, 2007, we consummated our IPO of 4,733,625 Units, including 233,625
Units subject to the over-allotment option. Each unit consists of one share
of
common stock and one warrant. Each warrant entitles the holder to purchase
from
us one share of our common stock at an exercise price of $6.00. The gross
proceeds from our offering were $39,119,100 (including the over-allotment option
and warrants sold privately). We paid a total of $1,136,070 in underwriting
discounts and commissions, and approximately $386,793 was paid for costs and
expenses related to the offering. After deducting the underwriting discounts
and
commissions and the offering expenses, the total net proceeds to us from the
offering were approximately $37,596,237, of which $37,452,930 was deposited
into
the trust account (or approximately $7.91 per share).
Developments
in Finding a Suitable Business Combination
On
April
2, 2008, the Company entered into an Agreement and Plan of Merger (the “Merger
Agreement”) pursuant to which United Subsidiary has agreed to merge with and
into United, and United has agreed, subject to receipt of the Merger
consideration from FMG, to become a wholly-owned subsidiary of FMG (the
“Merger”). If the stockholders of the Company approve the transactions
contemplated by the Merger Agreement, FMG, through United Subsidiary, which
was
newly incorporated in order to facilitate the Merger contemplated thereby,
will
purchase all of the membership units of United in a series of steps as outlined
below.
FMG
and United will merge pursuant to a merger transaction summarized as
follows:
(i)
FMG will create a transitory merger subsidiary, United Subsidiary Corp., and
will merge such subsidiary with and into United, with United surviving;
and
(ii)
United will, as a result, become wholly-owned by FMG.
United’s
members will receive consideration of up to $100,000,000 consisting
of:
(i)
$25,000,000 in cash;
(ii)
8,750,000 shares of FMG common stock, par value $.0001 per share (assuming
an
$8.00 per share value); and
(iii)
up
to $5,000,000 of additional consideration will be paid to the members of United
in the event certain net income targets are met by United, as set forth more
particularly herein.
In
order
to consummate the Merger, a majority of the shares issued in the IPO voting
at
the meeting (whether in person or by proxy) must vote to approve and adopt
the
Merger Agreement and the transactions contemplated thereby. Also, the Merger
may
still be consummated if 29.99% of such shares vote against the Merger and elect
to convert their shares to cash from the trust account established with the
proceeds of our IPO.
The
Company will hold a Special Meeting of its stockholders to obtain these
approvals. In connection with the Merger, this proxy statement/prospectus
contains important information about the proposed Merger, the First Amendment
Proposal; the Second Amendment Proposal; the Third Amendment Proposal; the
Director Proposal and the Adjournment Proposal.
The
obligations of the Company, United and United Subsidiary to consummate the
Merger are subject to the satisfaction or waiver of the following specified
conditions set forth in the Merger Agreement before completion of the
Merger:
(i)
the
accuracy in all material respects on the date of the Merger Agreement and the
Closing Date of all of United’s representations and warranties;
(ii)
United’s
performance in all material respects of all covenants and obligations required
to be performed by the Closing Date (as more fully described below in “Covenants
of the Parties”);
(iii)
a
majority of the Company’s stockholders must vote in favor of approving the
Merger;
(iv)
not more than 29.99% of the shares of the common stock issued in the
Company’s IPO vote against the Merger and demand conversion of their stock into
cash;
(v)
the Securities and Exchange Commission has declared effective the registration
statement and prospectus which form a part of this proxy statement;
(vi)
no
governmental authority has enacted, issued, promulgated, enforced or entered
any
law or order that is in effect and has the effect of making the Merger illegal
or otherwise preventing or prohibiting consummation of the Merger;
(vii)
the
officers are, and the Board of Directors of FMG following the Merger is
constituted, as set forth as the Board of Directors recommends, as fully
described herein;
(viii)
the
consent of not less than 66% of the membership units of United to the Merger
and
no more than ten percent (10%) of the outstanding membership units of United
shall constitute dissenting membership units under Florida law; and
(ix)
the management of FMG following the Merger is constituted as set forth
below:
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
Gregory
C. Branch
|
|
62
|
|
Chairman
of the Board
|
Gordon
G. Pratt
|
|
46
|
|
Vice
Chairman
|
Donald
J. Cronin
|
|
54
|
|
President
and Chief Executive Officer
|
Nicholas
W. Griffin
|
|
39
|
|
Chief
Financial Officer
|
Melvin
A. Russell, Jr.
|
|
53
|
|
Chief
Underwriting Officer
|
Alec
L. Poitevint, II
|
|
60
|
|
Director
|
Larry
G. Swets, Jr.
|
|
33
|
|
Director
|
Kent
G. Whittemore
|
|
60
|
|
Director
|
James
R. Zuhlke
|
|
61
|
|
Director
|
Conditions
(i), (ii), (vii) and (ix) are waivable by the Company or United, as
applicable.
In
addition, United’s obligation to close on the Merger is also contingent
upon:
(i)
the accuracy in all material respects on the date of the Merger Agreement and
the Closing Date of all of FMG’s representations and
warranties;
(ii)
FMG’s performance in all material respects of all covenants and obligations
required to be performed by the Closing Date (as more fully described below
in
“Covenants of the Parties”);
(iii)
a
majority of the Company’s stockholders must vote in favor of approving the
Merger;
(iv)
not more than 29.99% of the shares of the common stock issued in the
Company’s IPO vote against the Merger and demand conversion of their stock into
cash;
(v)
the Securities and Exchange Commission has declared effective the registration
statement and prospectus which form a part of this proxy statement;
(vi)
no
governmental authority has enacted, issued, promulgated, enforced or entered
any
law or order that is in effect and has the effect of making the Merger illegal
or otherwise preventing or prohibiting consummation of the Merger;
and
(vii)
the management of the Company following the Merger is constituted as set forth
above.
Conditions
(i), (ii) and (vii) are waivable by United.
See
the
description of the Merger Agreement in the section entitled “The Merger
Agreement” beginning on page 51. The Merger Agreement is included as
Annex A to this proxy statement/prospectus. We encourage you to read the
Merger Agreement in its entirety.
Under
the
terms of the Company’s amended and restated certificate of incorporation, the
Company may proceed with the Merger and consequent merger provided that not
more
than 29.99% of the Company’s common stock issued in its IPO vote against the
Merger Proposal and elect to convert such shares to cash. The shares converted,
if any, will reduce on a one for one basis the shares of common stock
outstanding after the Merger, if approved.
Results
of Operations (March 31, 2008)
Net
loss
for the three months ended March 31, 2008 of $253,358 consisted of $419,844
of
general and administrative costs, offset by $166,486 of interest
income.
We
consummated the Offering of 4,733,625 Units on October 11, 2007. Gross
proceeds
received from our Offering were $39,119,100 (including the over-allotment
option
and warrants sold privately). We paid a total of $1,136,070 in underwriting
discounts and commissions, and approximately $386,793 was paid for costs
and
expenses related to the Offering. After deducting the underwriting discounts
and
commissions and the Offering expenses, the total net proceeds to us from
the
Offering were approximately $37,596,237, of which $37,452,930 was deposited
into
the trust account (or approximately $7.92 per share). The remaining proceeds
are
available to be used by us to provide for business, legal and accounting
due
diligence on prospective acquisitions and continuing general and administrative
expenses. We will use substantially all of the net proceeds of this offering
to
acquire a target business, including identifying and evaluating prospective
acquisition candidates, selecting the target business, and structuring,
negotiating and consummating the business combination. To the extent our
capital
stock is used in whole or in part as consideration to effect a business
combination, the proceeds held in the trust fund as well as any other net
proceeds not expended will be used to finance the operations of the target
business. We believe we will have sufficient available funds outside of
the
trust fund to operate through October 4, 2009, assuming that a business
combination is not consummated during that time. We do not believe we will
need
to raise additional funds in order to meet the expenditures required for
operating our business. However, we may need to raise additional funds
through a
private offering of debt or equity securities if such funds are required
to
consummate a business combination that is presented to us. We would only
consummate such a financing simultaneously with the consummation of a business
combination. The proposed Business Combination with United will not require
us
to raise additional funds.
Commencing
on October 11, 2007, and ending upon the acquisition of a target business,
we
began incurring a fee from Fund Management Group LLC, an affiliate of Gordon
G.
Pratt, our chief executive officer, of $7,500 per month for providing us
with
office space and certain general and administrative services. In addition,
Mr.
Pratt advanced $100,000 to us for payment on our behalf of offering expenses.
This amount was repaid following the Offering from the net proceeds of
the
Offering.
Off-Balance
Sheet Arrangements, Commitments, Guarantees and Contractual
Obligations
We
have
issued warrants in conjunction with our IPO and private placement, and have
also
issued incentive warrants. These warrants may be deemed to be equity linked
derivatives and, accordingly, represent off balance sheet arrangements. As
permitted under EITF 00-19, we account for these warrants as stockholders’
equity and not as derivatives.
We
did
not have any long term debt, capital lease obligations, operating lease
obligations, purchase obligations or other long term liabilities. Other than
contractual obligations incurred in the ordinary course of business, we do
not
have any other long-term contractual obligations.
In
connection with our IPO, Pali Capital, Inc., the representative of the
underwriters, has agreed to defer payment of the deferred underwriting discount
and commission of $1,514,760 until completion of a business combination. Until
a
business combination is complete, these funds will remain in the Trust Account.
If the Company does not complete a business combination then the deferred fee
will become part of the funds returned to the Company’s Public Stockholders from
the Trust Account upon its liquidation as part of any plan of dissolution and
distribution approved by the Company’s stockholders.
As
of
March 31, 2008, the Company had approximately $55,042 of cash available
for
general corporate purposes and $37,737,092 of cash and cash equivalents
held in
trust. The cash and cash equivalents held in trust were generated by
the
proceeds from our initial public offering of approximately $37,869,000,
the
proceeds of the sale of founder securities of $1,250,000, and $433,912
of
interest earned on the funds.
The
Company placed $37,452,930 of the net proceeds from the initial public
offering
of our units and sale of founder securities in trust and the remaining
amount
was held outside of the trust. As of March 31, 2008, we believe the Company's
remaining balance of $1,161,245 available for general corporate purposes
will be
sufficient to allow us to operate until October 4, 2009, assuming that
a
business combination is not consummated during that time.
We
intend
to use substantially all of the funds held in trust at March 31, 2008 to
(i) acquire a target business, including identifying and evaluating
prospective acquisition candidates, selecting the target business, and
structuring, negotiating and consummating the business combination,
(ii) pay income taxes and (iii) upon the completion of a business
combination, pay the deferred underwriting fee of $1,514,760. We may
not use all
of the proceeds held in the Trust Account in connection with a Business
Combination, either because the consideration for the Business Combination
is
less than the proceeds in trust or because we finance a portion of the
consideration with capital stock or debt securities that we can issue.
In that
event, the proceeds held in the Trust Account as well as any other net
proceeds
not expended will be used to finance the operations of the target business
or
businesses. The operating businesses we acquire in such Business Combination
must have, individually or collectively, a fair market value equal to
at least
80% of the balance in the Trust Account (excluding deferred underwriter's
fee of
$1,514,760) at the time of such acquisition. If we consummate multiple
Business
Combinations that collectively have a fair market value of at least 80%
of our
net assets, then we would require that such transactions be consummated
simultaneously.
If
we are
unable to consummate a business combination by October 4, 2009, we will
be required to liquidate. If we are required to liquidate, the per
share liquidation amount may be less than the initial per unit Offering
price
because of the underwriting commissions and expenses related to our Offering,
the cost of our liquidation, and because of the value of the warrants
in the per
unit offering price. Additionally, if third parties make claims against
us, the
Offering proceeds held in the Trust Account could be subject to those
claims,
resulting in a further reduction to the per share liquidation price.
Under
Delaware law, our stockholders who have received distributions from us
may be
held liable for claims by third parties to the extent such claims are
not been
paid by us. Furthermore, our warrants will expire worthless if we liquidate
before the completion of a Business Combination.
In
connection with our Offering, Pali Capital Inc. has agreed to defer payment
of the remaining four percent (4%) of the gross proceeds ($1,514,760)
until
completion of a Business Combination. Until a Business Combination is
complete,
these funds will remain in the Trust Account. If the Company does not
complete a
Business Combination then the 4% deferred fee will become part of the
funds
returned to the Company's Public Stockholders from the Trust Account
upon our
liquidation.
Other
than contractual obligations incurred in the ordinary course of business,
we do
not have any other long-term contractual obligations.
Critical
Accounting Policies and Accounting Estimates
The
preparation of financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts
of
assets and liabilities, disclosure of contingent assets and liabilities at
the
date of the financial statements, and revenues and expenses during the periods
reported. Actual results could materially differ from those
estimates.
INFORMATION
ABOUT UNITED INSURANCE HOLDINGS, L.C.
Overview
United
Insurance Holdings, L.C. is a property and casualty insurance holding company
formed as a Florida limited liability company in 1999 to capitalize on
legislation designed to attract capital to the Florida homeowners insurance
market. United Insurance Holdings, L.C. and its subsidiaries (collectively
referred to herein as “United”) offer primarily homeowners and dwelling fire
insurance policies in Florida as well as flood coverage and an insurance program
tailored to meet the needs of auto service professionals. United’s premium
revenues have increased from $7.0 million in 1999 to $85.4 million in 2007,
a
compound annual growth rate of 36.7 %. United has been profitable in each of
the
past nine years.
In
the
wake of the destruction caused by Hurricane Andrew in 1992, Florida legislators
created a hurricane catastrophe system designed to mitigate losses to the
Florida insurance industry and prevent a mass exodus of insurers from the
state.
This system includes (1) the Florida Hurricane Catastrophe Fund (“FHCF”), a
reinsurance-like entity managed by the Florida State Board of Administration;
(2) a homeowners policy form created by the Insurance Services Office (“ISO”) ,
which contains high hurricane deductibles tied to a percentage of the dwelling
coverage; and (3) Citizens Property Insurance Corporation (“Citizens,” formerly
known as the Florida Residential Property and Casualty Joint Underwriting
Association), a state-sponsored insurer of last resort. Citizens was designed
to
provide temporary homeowners insurance coverage to individuals in Florida
who
could not obtain such coverage from private insurers. Contrary to legislative
intent, Citizens became a major provider of homeowners insurance coverage
to
residents of Florida. This result prompted the Florida legislature to implement
a depopulation program designed to provide incentive to private insurance
companies to assume or “take-out” policies from Citizens in order to reduce the
state’s liability exposure.
Shortly
after its inception in 1999, United began operations by assuming more than
10,000 policies from Citizens. Soon after these initial take-outs from Citizens,
United began to appoint independent agents to write policies as well (which
United calls voluntary policies). United has not assumed any policies from
Citizens since 2005. In an effort to diversify its source of business, during
the past few years, United has focused on increasing its business from voluntary
policies. Beginning in 2004 some of the large national insurance companies
announced their full or partial withdrawal from the Florida homeowners insurance
market. As of December 31, 2007, approximately 68% of United’s policies in force
were voluntary and approximately 32% of United’s policies in force were assumed
from Citizens. United’s fiscal year ended December 31, 2007, represented the
best year in United’s history in terms of total revenues and net income, which
were $112.6 million and $39.6 million, respectively. As of December 31, 2007,
United also had 62,637 policyholders, total assets of $242.4 million and
stockholders’ equity of $46.1 million.
United’s
Holding Company Structure
We
formed
United Insurance Holdings, L.C. to be a holding company for our subsidiaries,
UPCIC, UIM, and Skyway Claims Services, L.C. (“SCS”). UPCIC and UIM were formed
in Florida in 1999. UPCIC is the subsidiary through which United provides
insurance policies. UIM serves as the managing general agent responsible
for
managing United’s independent agents and for policy administration. SCS was
formed in 2004 to provide claims adjusting services. United believes that
its
holding company structure will provide flexibility to expand its products
and
services in the future.
United’s
Product Lines
United
offers standardized policies, priced in accordance with geographic rating
territories approved by the Florida OIR. The standard policy includes a
“hurricane deductible” provision of 2% of the insured value. United specializes
in providing homeowners and dwelling fire insurance policies, but also offers
policies that exclude coverage for wind damages. United’s dwelling fire product
line includes a range of standardized policies with differing amounts of
coverage. The homeowner’s product line includes coverage options for standard
single-family homeowners, tenants (renters), and for condominium unit
owners.
In
August
2005, United introduced its first commercial line product, a packaged policy
called e-Z Pac Insurance, which serves auto-service professionals. This product
is focused on small service stations, body shops, and repair shops. It does
not
cover new or used car dealers. United believes the program is conservatively
underwritten and priced. Wind exposures are monitored on a county-wide basis;
additionally, we limit exposures on a one-mile radius basis via a
geographic-coding process.
In
addition to the homeowners, dwelling fire and commercial lines of business,
United provides flood insurance through the National Flood Insurance Program
(“NFIP”). United retains no risk of loss, but earns a commission for the
issuance of the policies.
Marketing
and Distribution
United
recruits, trains and licenses the full-service insurance agents that distribute
United’s products. Typically, the full-service agency is small to medium in size
and represents several companies for both personal and commercial line
products.
United
depends upon its agents to produce new business, to provide customer service,
and to be selective underwriters in their screening of risks for United’s
insurance companies to consider underwriting. The network of independent agents
also serves as an important source of information about the needs of the
communities served by United.
Agents
are compensated primarily through a fixed-base commission, but may also have
the
opportunity for profit sharing, depending on the agent’s aggregate premiums
earned and loss experience. Profit sharing opportunities are for an agent’s
entire book of business with United and not specifically for any individual
policy. United does not have any marketing services agreements, placement
services agreements, or similar arrangements. The agents are monitored and
supported by United’s marketing representatives. These United representatives
also have principal responsibility for recruiting and training new
agents.
United
manages its agents through periodic business reviews (with underwriter and
marketing participation) and establishment of benchmarks/goals for premium
volume and profitability. In recent years, United has terminated a number of
underperforming agents.
United
also appoints more than 2,000 limited-service insurance agents that only service
the policies assumed from Citizens. These limited-service agents are an
outgrowth of the Consumer Choice amendment passed by the Florida legislature
in
2003. The statute allows consumers to remain with Citizens if their agent cannot
or will not contract with the carrier taking out the policy and the insured
wishes to remain with the agent. If the agent contracts with the new carrier,
the insured is obligated to have the policy removed to the take-out carrier.
United believes its large network of limited appointment agents is valuable
in quickly and effectively completing take-out transactions.
Policy
Administration
United
is
committed to providing the highest possible level of service to the insurance
agents that distribute and service its products. United uses third-party
administrators (“TPAs”) to manage information systems as well as the many
aspects of policy processing. This allows United to obtain the most up-to-date
technology at a reasonable cost and to achieve economies of scale without
incurring significant fixed overhead expenses.
In
addition to integrated policy underwriting, billing, collection and reporting,
the TPA employs Internet-based systems for the on-line submission of
applications and underwriting of policies. These systems are designed to offer
efficient and rapid turnaround for policy issuance, allow the agent to submit
periodic changes required by its customer through the internet, and are very
popular with United’s agency distribution partners.
United
recently contracted with Computer Sciences Corporation (“CSC”), the nation’s
leading provider of business process outsourcing services to the property
and
casualty industry, to take over all of the services currently performed by
United’s existing TPA. United’s management believes that CSC provides a superior
level of resources and is more capable of supporting United’s future growth
objectives.
Underwriting
As
required by the Florida OIR, United’s catastrophic reinsurance requirements and
related costs are based on a 100-year probable maximum loss (“PML”). United
analyzes its PML on a regular basis using catastrophe modeling software.
United’s underwriting policies and procedures seek to minimize its risk of loss
while maximizing its premium through the optimization of geographic exposure
and
the diversification of the portfolio with respect to PML. Using output from
the
software, United strategically analyzes every policy by zip code to accomplish
the optimization process.
The
effectiveness of United’s strategy can be seen in its loss experience. Except
for losses incurred from Hurricane Wilma, United’s hurricane losses in 2004 and
2005 developed below modeled expectations. United currently writes policies
in virtually every county in the state with the exception of Pasco, Hernando
and
Citrus counties, where sinkhole losses are an increased risk.
United
writes twelve-month policies only. Based on the historical business practices
of
United, new business and assumptions of blocks of policies are made evenly
throughout the year. Therefore, there is no clear month in which most of the
renewals occur. Rates for homeowners insurance policies are heavily regulated
in
the State of Florida. As such, United is limited in its ability to increase
rates without prior approval from the OIR. Homeowners rates are based on a
percentage of the insured’s property value and vary across 108 rating
territories. United maintains rates in territories where it does not currently
write policies, as required by law.
Claims
and Claim Reserves
United
maintains a claims staff that processes approximately 30%-35% of all
non-catastrophe claims. In addition to the in-house staff, United maintains
strategic relationships with several third-party claims administrators and
a
claims call center. Currently, United is under contract with a third-party
claims administrator for the processing of all of its catastrophe claims. United
believes this relationship is effective in assuring adequate catastrophe service
as evidenced by the handling of over 30,000 claims in 2004 and 2005
.
United’s
homeowners’ policies provide both structure and contents coverage for a broad
range of exposures. The policies also provide liability coverage limited to
$100,000, $300,000 or $500,000.
United’s
historical non-catastrophe (“non-CAT”) gross loss ratios, including losses
incurred but not reported (“IBNR”), are presented in the table
below:
Period Ended
|
|
Non-CAT Loss and
LAE
|
|
Gross Earned
Premium
|
|
Loss Ratio
|
|
(Dollars
in thousands)
|
|
12/31/2007
|
|
$
|
25,604
|
|
$
|
151,684
|
|
|
16.9
|
%
|
12/31/2006
|
|
|
34,566
|
|
|
139,588
|
|
|
24.8
|
%
|
12/31/2005
|
|
|
46,420
|
|
|
119,345
|
|
|
38.9
|
%
|
According
to OIR, the 2007 industry average non-CAT gross loss ratio was
24.3%.
United’s
non-CAT loss ratio is currently better than industry average. United actively
employs corrective measures, loss mitigation and disciplined underwriting to
maintain its loss ratio objectives. For example, in January 2003, United
declined to offer renewals to 18,000 unprofitable policies, terminated a small
number of poor-performing agents and continued to focus on achieving appropriate
rate increases. In 2006, United reduced its exposure to sinkhole losses, the
primary cause of the higher losses that occurred in 2005.
In
addition to the measures described above, United also takes instrumental steps
to mitigate losses such as inspection of all new risks, portfolio credit risk
analysis, individual agency management and rehabilitative actions as needed,
and
monitoring rate adequacy.
The
following table summarizes United’s claims and reserves including loss
adjustment expense (“LAE”) for the past six years:
Claims
and Reserves
(Dollars
in thousands)
|
|
12/31/07
|
|
12/31/06
|
|
12/31/05
|
|
12/31/04
|
|
12/31/03
|
|
12/31/02
|
|
Non-catastrophe
claims data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims
opened during period
|
|
|
2,239
|
|
|
2,514
|
|
|
3,223
|
|
|
2,176
|
|
|
1,781
|
|
|
1,918
|
|
Claims
closed during period
|
|
|
2,363
|
|
|
2,856
|
|
|
3,003
|
|
|
1,706
|
|
|
1,782
|
|
|
1,784
|
|
Open
claims at end of period
|
|
|
539
|
|
|
663
|
|
|
1,005
|
|
|
785
|
|
|
315
|
|
|
316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
and LAE incurred
|
|
$
|
27,281
|
|
$
|
35,472
|
|
$
|
46,736
|
|
$
|
22,506
|
|
$
|
9,948
|
|
$
|
11,252
|
|
Loss
and LAE ceded
|
|
|
(1,677
|
)
|
|
(906
|
)
|
|
(316
|
)
|
|
(598
|
)
|
|
(49
|
)
|
|
(14
|
)
|
Net
loss and LAE incurred
|
|
$
|
25,604
|
|
$
|
34,566
|
|
$
|
46,420
|
|
$
|
21,908
|
|
$
|
9,899
|
|
$
|
11,238
|
|
Total
claims payments
|
|
$
|
28,745
|
|
$
|
31,362
|
|
$
|
35,405
|
|
$
|
17,722
|
|
$
|
10,869
|
|
$
|
8,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catastrophe
claims data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims
opened during period
|
|
|
329
|
|
|
2,881
|
|
|
20,506
|
|
|
6,566
|
|
|
-
|
|
|
3
|
|
Claims
closed during period
|
|
|
1,556
|
|
|
16,225
|
|
|
8,228
|
|
|
3,726
|
|
|
2
|
|
|
18
|
|
Open
claims at end of period
|
|
|
547
|
|
|
1,774
|
|
|
15,118
|
|
|
2,840
|
|
|
-
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
and LAE incurred
|
|
$
|
10,256
|
|
$
|
115,215
|
|
$
|
255,229
|
|
$
|
91,686
|
|
$
|
-
|
|
$
|
-
|
|
Loss
and LAE ceded
|
|
|
(10,198
|
)
|
|
(114,424
|
)
|
|
(240,032
|
)
|
|
(71,582
|
)
|
|
-
|
|
|
-
|
|
Net
loss and LAE incurred
|
|
$
|
58
|
|
$
|
791
|
|
$
|
15,197
|
|
$
|
20,104
|
|
$
|
-
|
|
$
|
-
|
|
Total
claims payments
|
|
$
|
30,198
|
|
$
|
236,099
|
|
$
|
105,696
|
|
$
|
87,566
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net loss and LAE incurred
|
|
$
|
25,662
|
|
$
|
35,357
|
|
$
|
61,617
|
|
$
|
42,012
|
|
$
|
9,899
|
|
$
|
11,238
|
|
Total
claims payments
|
|
$
|
58,943
|
|
$
|
267,461
|
|
$
|
141,101
|
|
$
|
105,288
|
|
$
|
10,869
|
|
$
|
8,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Case
|
|
$
|
13,887
|
|
$
|
12,609
|
|
$
|
91,707
|
|
$
|
6,047
|
|
$
|
2,491
|
|
$
|
2,913
|
|
IBNR
|
|
|
22,118
|
|
|
44,566
|
|
|
82,510
|
|
|
6,500
|
|
|
1,100
|
|
|
1,600
|
|
Ceded
|
|
|
(14,446
|
)
|
|
(33,441
|
)
|
|
(153,769
|
)
|
|
(4,099
|
)
|
|
-
|
|
|
-
|
|
Total
Reserves
|
|
$
|
21,559
|
|
$
|
23,734
|
|
$
|
20,448
|
|
$
|
8,448
|
|
$
|
3,591
|
|
$
|
4,513
|
|
United’s
independent actuary performs quarterly loss reviews to assist management in
determining the reasonableness of the loss reserves.
The
following table presents the liability for unpaid losses and LAE for the years
ended December 31, 1999 through 2007 and does not distinguish between
catastrophic and non-catastrophic events. The top line of the table shows the
estimated net liabilities for unpaid losses and LAE at the balance sheet date
for each of the periods indicated. These figures represent the estimated amount
of unpaid losses and LAE for claims arising in all prior years that were unpaid
at the balance sheet date, including losses that had been incurred but not
yet
reported. The portion of the table labeled "Cumulative paid as of" shows the
net
cumulative payments for losses and LAE made in succeeding years for losses
incurred prior to the balance sheet date. The lower portion of the table shows
the re-estimated amount of the previously recorded liability based on experience
as of the end of each succeeding year.
|
|
Years
Ended December 31,
|
|
|
|
(Dollars
in thousands)
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
2000
|
|
1999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
sheet liability
|
|
$
|
21,559
|
|
$
|
23,734
|
|
$
|
20,448
|
|
$
|
8,448
|
|
$
|
3,591
|
|
$
|
4,513
|
|
$
|
2,078
|
|
$
|
1,249
|
|
$
|
1,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
paid as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One
year later
|
|
|
|
|
|
9,047
|
|
|
12,872
|
|
|
10,962
|
|
|
4,549
|
|
|
4,530
|
|
|
1,707
|
|
|
767
|
|
|
366
|
|
Two
years later
|
|
|
|
|
|
|
|
|
14,363
|
|
|
13,871
|
|
|
6,097
|
|
|
6,065
|
|
|
2,065
|
|
|
963
|
|
|
393
|
|
Three
years later
|
|
|
|
|
|
|
|
|
|
|
|
14,868
|
|
|
6,594
|
|
|
6,779
|
|
|
2,258
|
|
|
1,081
|
|
|
503
|
|
Four
years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,382
|
|
|
7,185
|
|
|
2,260
|
|
|
1,197
|
|
|
564
|
|
Five
years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,967
|
|
|
2,250
|
|
|
1,197
|
|
|
668
|
|
Six
years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,067
|
|
|
1,197
|
|
|
668
|
|
Seven
years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,041
|
|
|
668
|
|
Eight
years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Re-estimated
net liability as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End
of year
|
|
$
|
21,559
|
|
$
|
23,734
|
|
$
|
20,448
|
|
$
|
8,448
|
|
$
|
3,591
|
|
$
|
4,513
|
|
$
|
2,078
|
|
$
|
1,249
|
|
$
|
1,716
|
|
One
year later
|
|
|
|
|
|
17,652
|
|
|
18,802
|
|
|
12,989
|
|
|
6,061
|
|
|
5,252
|
|
|
2,315
|
|
|
888
|
|
|
378
|
|
Two
years later
|
|
|
|
|
|
|
|
|
17,675
|
|
|
15,260
|
|
|
6,358
|
|
|
6,523
|
|
|
2,279
|
|
|
1,112
|
|
|
443
|
|
Three
years later
|
|
|
|
|
|
|
|
|
|
|
|
15,586
|
|
|
7,051
|
|
|
6,981
|
|
|
2,378
|
|
|
1,192
|
|
|
541
|
|
Four
years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,561
|
|
|
7,438
|
|
|
2,260
|
|
|
1,257
|
|
|
667
|
|
Five
years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,066
|
|
|
2,259
|
|
|
1,197
|
|
|
688
|
|
Six
years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,068
|
|
|
1,198
|
|
|
668
|
|
Seven
years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,041
|
|
|
668
|
|
Eight
years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
redundancy (deficiency)
|
$
|
6,082
|
|
$
|
2,773
|
|
$
|
(7,138
|
)
|
$
|
(2,970
|
)
|
$
|
(2,553
|
)
|
$
|
10
|
|
$
|
208
|
|
$
|
1,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
redundancy (deficiency) as a % of reserves originally
established
|
|
|
|
|
|
25.6
|
%
|
|
13.6
|
%
|
|
-84.5
|
%
|
|
-82.8
|
%
|
|
-56.6
|
%
|
|
0.5
|
%
|
|
16.7
|
%
|
|
63.2
|
%
|
The
cumulative redundancy or deficiency represents the aggregate change in the
estimates over all prior years. A deficiency indicates that the latest estimate
of the liability for losses and LAE is higher than the liability that was
originally estimated and a redundancy indicates that such estimate is lower.
It
is important to note that the table above presents a run-off of balance sheet
liability for the periods indicated rather than accident or policy loss
development for those periods. Therefore, each amount in the table includes
the
cumulative effects of changes in liability for all prior periods. Conditions
and
trends that have affected liabilities in the past may not necessarily occur
in
the future.
Management
of Exposure to Catastrophic Losses
United
is
exposed to potentially numerous insured losses arising out of single or multiple
occurrences of events such as natural catastrophes. As with all property and
casualty insurers, United expects to and will incur some losses related to
catastrophes and will price its policies accordingly. United’s exposure to
catastrophic losses arises principally out of hurricanes and windstorms. Through
the use of standard industry modeling techniques that are susceptible to change,
United manages its exposure to such losses on an ongoing basis from an
underwriting perspective. United also attempts to protect itself against
the risk of catastrophic loss by obtaining reinsurance coverage as of the
beginning of hurricane season (June 1) each year. United secures reinsurance
coverage to an amount approximating its 100-year projected maximum loss (“PML”).
United’s catastrophe reinsurance program consists of excess of loss reinsurance
for multiple catastrophic events. However, there is no guarantee United will
have sufficient reinsurance to cover multiple storms in the future or be able
to
obtain such reinsurance in a timely or cost-effective manner. In addition,
United is responsible for losses related to catastrophic events with incurred
losses in excess of coverage provided by United’s reinsurance program, such as
losses in excess of approximately its 100-year PML.
Reliance
on Third Parties and Reinsurers
United
is
dependent upon third parties to perform certain functions including, but not
limited to, provide reinsurance. UPCIC also relies on reinsurers to limit
the amount of risk retained under its policies and to increase its ability
to
write additional risks. United’s intention is to limit its exposure and
therefore protect its capital, even in the event of catastrophic occurrences,
through reinsurance agreements. For the 2007 hurricane season, United’s
reinsurance agreements transferred the risk of loss in excess of approximately
$16.5 million up to approximately $400 million for both the first and second
loss events. These amounts may change in the future. There is no assurance
United will be able to obtain reinsurance at these levels in the future, which
could have a material adverse effect to United should a catastrophic event
occur.
Reinsurance
The
property and casualty reinsurance industry is subject to the same market
conditions as the direct property and casualty insurance market, and there
can
be no assurance that reinsurance will be available to United to the same extent
and at the same cost as currently in place. Future increases in catastrophe
reinsurance costs are possible and could adversely affect United's results.
Reinsurance does not legally discharge an insurer from its primary liability
for
the full amount of the risks it insures, although it does make the reinsurer
liable to the primary insurer. Therefore, United is subject to credit risk
with
respect to its reinsurers. Management evaluates the financial condition of
its
reinsurers and monitors concentrations of credit risk arising from similar
geographic regions, activities or economic characteristics of the reinsurers
to
minimize its exposure to such risk. A reinsurer’s insolvency or inability to
make payments under a reinsurance treaty could have a material adverse effect
on
the financial condition and profitability of United. In addition, while ceding
premiums to reinsurers reduces United’s risk of exposure in the event of
catastrophic losses, it also reduces United’s potential for greater profits
should no catastrophic events occur.
|
|
As
of December 31, 2007
|
|
Reinsurance Carrier
|
|
AM Best
Rating
|
|
Total
Recoverable
|
|
Ceded Balances
Payable
|
|
Net
Recoverable
|
|
Letters of
Credit
|
|
Net Unsecured
Recoverable
|
|
ACE
Tempest Reinsurance Ltd
|
|
|
A+
|
|
$
|
879
|
|
$
|
244
|
|
$
|
635
|
|
$
|
45
|
|
$
|
590
|
|
Alea
North America Insurance Company
|
|
|
NR-4
|
|
|
63
|
|
|
—
|
|
|
63
|
|
|
—
|
|
|
63
|
|
Amlin
Bermuda Ltd
|
|
|
A
|
|
|
1,253
|
|
|
822
|
|
|
431
|
|
|
—
|
|
|
431
|
|
AXA
Re
|
|
|
A-
|
|
|
282
|
|
|
229
|
|
|
53
|
|
|
—
|
|
|
53
|
|
Catlin
Insurance Company Ltd
|
|
|
A
|
|
|
173
|
|
|
—
|
|
|
173
|
|
|
16
|
|
|
157
|
|
Everest
Re
|
|
|
A+
|
|
|
1,179
|
|
|
775
|
|
|
404
|
|
|
—
|
|
|
404
|
|
Flagstone
Re
|
|
|
A-
|
|
|
589
|
|
|
387
|
|
|
202
|
|
|
—
|
|
|
202
|
|
Florida
Hurricane Catastrophe Fund
|
|
|
—
|
|
|
17,660
|
|
|
—
|
|
|
17,660
|
|
|
—
|
|
|
17,660
|
|
Harco
National Insurance Group
|
|
|
A-
|
|
|
2,936
|
|
|
1,320
|
|
|
1,616
|
|
|
—
|
|
|
1,616
|
|
Hiscox
Insurance Co Ltd
|
|
|
A-
|
|
|
253
|
|
|
166
|
|
|
87
|
|
|
—
|
|
|
87
|
|
Lloyd's
Syndicates
|
|
|
A
s
|
|
|
11,490
|
|
|
4,865
|
|
|
6,625
|
|
|
—
|
|
|
6,625
|
|
Markel
International
|
|
|
A
|
|
|
184
|
|
|
124
|
|
|
60
|
|
|
—
|
|
|
60
|
|
Montpelier
Reinsurance Ltd
|
|
|
A-
|
|
|
2,140
|
|
|
1,162
|
|
|
978
|
|
|
35
|
|
|
943
|
|
National
Flood Insurance Program
|
|
|
—
|
|
|
2,739
|
|
|
—
|
|
|
2,739
|
|
|
—
|
|
|
2,739
|
|
New
Castle Reinsurance Co Ltd
|
|
|
A-
|
|
|
702
|
|
|
453
|
|
|
249
|
|
|
—
|
|
|
249
|
|
Odyssey
America Reinsurance
|
|
|
A
|
|
|
141
|
|
|
—
|
|
|
141
|
|
|
—
|
|
|
141
|
|
Omega
Specialty Insurance Co Ltd
|
|
|
A-
|
|
|
294
|
|
|
194
|
|
|
100
|
|
|
—
|
|
|
100
|
|
WR
Berkley Europe Ltd
|
|
|
A
|
|
|
204
|
|
|
111
|
|
|
93
|
|
|
64
|
|
|
29
|
|
Total
|
|
|
|
|
$
|
43,161
|
|
$
|
10,852
|
|
$
|
32,309
|
|
$
|
160
|
|
$
|
32,149
|
|
The
$17,660 shown in the table above relates to amounts due to United from the
Florida Hurricane Catastrophe fund for payments made by United relating to
paid
claims from storms in 2004 and 2005. United submitted these claims to the
Florida Catastrophe fund and was fully reimbursed before the end of the first
quarter of 2008. United does not have any credit risk related to the amounts
due
from the FHCF as claims submitted are generally remitted to United within 7
business days.
Ratings
and Regulation
United’s
subsidiary, UPCIC, is regulated by the OIR. As an authorized insurer, with
such
designations as are required to issue new policies and assume policies from
Citizens, UPCIC must comply with the state’s rate approval process and other
rules. UPCIC must submit audited financial statements to the OIR and is subject
to periodic audits and examinations conducted by OIR personnel. The most recent
examination conducted by the OIR was completed in September 2005 and produced
no
material adverse findings.
The
OIR
regulates and limits dividends paid by UPCIC. The OIR also must approve any
changes to the long-term management agreement between UPCIC and UIM, which
presently provides for monthly management fees. UPCIC is required by the OIR
guidelines to maintain adequate statutory capital and surplus such that net
written premiums to surplus do not exceed the ratio of 4:1. As of December
31,
2006 and 2007, net written premium to surplus was 1.48 and 1.38, respectively.
UPCIC has remained in compliance with the NAIC Risk-Based Capital (“RBC”)
requirements since inception; its RBC ratio for the years 2006 and 2007 was
276%
and 232%, respectively.
Investments
United’s
investment strategy is to maximize total rate of return after federal income
taxes while maintaining liquidity and attempting to minimize risk. Insurance
company investments must comply with applicable state insurance regulations
that
prescribe the type, quality and concentrations of investments. In accordance
with these regulations, United’s current investment policy limits investment in
non-investment grade fixed-maturity securities (including high-yield bonds),
and
limits total investments in preferred stock, common stock and mortgage notes
receivable.
United’s
investment policy is reviewed and approved by the Investment Committee of its
Board of Managers on a regular basis. As of December 31, 2007,
approximately 90% of United’s investments were in fixed-income securities, which
are considered to be available for sale, and short-term investments. United
does
not use any swaps, options, futures or forward contracts to hedge or enhance
its
investment portfolio. United’s cash and investment portfolio totaled $170.6
million as of December 31, 2007.
The
following table summarizes, by type, United’s investments as of December 31,
2007 and 2006:
|
|
As
of December 31, 2007
|
|
As
of December 31, 2006
|
|
|
|
Carrying
Amount
|
|
%
of Total
|
|
Carrying
Amount
|
|
%
of Total
|
|
|
|
(Dollars
in thousands)
|
|
Fixed
maturities, at market:
|
|
|
|
|
|
|
|
|
|
U.S.
government agencies and authorities
|
|
$
|
68,904
|
|
|
61.3
|
%
|
$
|
44,392
|
|
|
41.5
|
%
|
Corporate
securities
|
|
|
38,506
|
|
|
34.2
|
%
|
|
46,300
|
|
|
43.2
|
%
|
Total
fixed maturities
|
|
|
107,410
|
|
|
95.5
|
%
|
|
90,692
|
|
|
84.7
|
%
|
Equity
securities, at market
|
|
|
5,072
|
|
|
4.5
|
%
|
|
16,385
|
|
|
15.3
|
%
|
Total
fixed and equity securities
|
|
$
|
112,482
|
|
|
100.0
|
%
|
$
|
107,077
|
|
|
100.0
|
%
|
Legislative
Initiatives
The
State
of Florida operates Citizens to provide insurance to Florida homeowners and
businesses. In May 2007, the State of Florida passed legislation that freezes
property insurance rates for Citizens customers at December 2006 levels through
December 31, 2008, and permits insurance customers to opt into Citizens when
the
price of a privately-offered insurance policy is 15% more than the Citizens
rate, compared to the previous opt-in threshold of 25%. These initiatives,
together with any future initiatives that seek to further relax eligibility
requirements or reduce premium rates for Citizens customers, could adversely
affect the ability of UPCIC to grow and successfully operate. In addition,
the
Florida legislature in 2007 expanded the capacity of the FHCF, with the intent
of reducing the cost of reinsurance otherwise purchased by residential property
insurers. If the expanded FHCF coverage expires or if the law providing for
the
expanded coverage is otherwise modified, the cost of UPCIC's reinsurance program
may increase, which could affect UPCIC's profitability until such time as UPCIC
can obtain approval of appropriate rate changes. State and federal legislation
relating to insurance is affected by a number of political and economic factors
beyond the control of UPCIC and United. The Florida legislature and the NAIC
from time to time consider proposals that may affect, among other things,
regulatory assessments and reserve requirements. United cannot predict the
effect that any proposed or future federal or state legislation or initiatives
may have on the financial condition or operations of United or United's ability
to expand its business.
Competition
The
insurance industry is highly competitive and, except for certain regulatory
considerations, there are relatively few barriers to entry. United competes
with
large national insurance providers, smaller regional providers and Florida
domestic property and casualty companies. National and regional companies
that
compete with United in the homeowners’ market include Allstate Floridian
Insurance Company, State Farm Florida Insurance Company, and Nationwide
Insurance Company of Florida. Our primary domestic competitors include Universal
Property & Casualty, Universal Insurance Company of North America, and
Olympus Insurance Group. Finally, due to legislation passed by the Florida
legislature in 2007, Citizens is authorized to compete with private insurers,
such as United. Some of these competitors have greater capital resources
and
longer operating histories than United. Increased competition from other
private
insurance companies as well as Citizens could adversely affect United's ability
to do business profitably.
United
competes primarily on the basis of customer service, coverage offered, claims
handling, price, agent commission and perceived financial strength. Many
of our
competitors have higher ratings, more capital, greater resources and additional
access to capital than we have. They may offer a wider range of products
and
services than we do and may cover larger geographic markets. It is possible
that
new entrants to our markets may arise and create additional competition leading
to potentially lower prices and higher limits offered. Although United's
pricing
is influenced to some degree by that of its competitors, management of United
believes that it is generally not in United’s best interest to compete solely on
price. United chooses instead to compete on the basis of underwriting criteria,
its distribution network and high quality service to its agents and insureds.
United believes that it competes favorably in these areas.
Financial
Stability Rating
Financial
stability ratings are an important factor in establishing the competitive
position of insurance companies and may impact an insurance company’s sales.
Demotech, Inc. maintains a letter scale financial stability rating system
ranging from A** (A double prime) to L (licensed by state regulatory
authorities). Demotech, Inc. has assigned UPCIC a financial stability rating
of
A, which is the third highest of six rating levels. According to Demotech,
Inc., A ratings are assigned to insurers that have “Exceptional ability to
maintain liquidity of invested assets, quality reinsurance, acceptable financial
leverage and realistic pricing while simultaneously establishing loss and
loss
adjustment expense reserves at reasonable levels.” With a financial stability
rating of A, United expects that UPCIC’s property insurance policies will be
acceptable to the secondary mortgage marketplace and mortgage lenders. The
rating of UPCIC is subject to at least annual review by, and may be revised
downward or revoked at the sole discretion of, Demotech,
Inc.
UPCIC’s
failure to maintain a commercially acceptable financial stability rating could
have a material adverse effect on United’s ability to retain and attract
policyholders and agents. Many of United’s competitors have ratings higher than
that of UPCIC. A downgrade in the financial stability rating of UPCIC could
have
a material adverse impact on its ability to effectively compete with other
insurers with higher ratings. Additionally, a withdrawal of the rating could
cause UPCIC’s insurance policies to no longer be acceptable to the secondary
marketplace and mortgage lenders, which could cause a material adverse effect
of
United’s results of operations and financial position.
Demotech,
Inc. bases its ratings on factors that concern policyholders and not upon
factors concerning investor protection. Such ratings are subject to change
and
are not recommendations to buy, sell or hold securities.
Employees
As
of
March 2008, United had twenty-eight employees, all of which are full-time
employees, including three executive officers. United is not a party to any
collective bargaining agreement and has not experienced any work stoppages
or
strikes as a result of labor disputes. United considers relations with its
employees to be satisfactory.
Facilities
United
leases over 8,000 square feet of office space in St. Petersburg, Florida at
an
average cost of approximately $21 per square foot. The current lease for the
office space expires in September 2008, and United is actively searching for
approximately 15,000 square feet of office space in St. Petersburg, Florida
in a
similar price range. United does not own any real estate.
Legal
Proceedings
United
is
subject to routine legal proceedings in the ordinary course of business. United
believes the ultimate resolution of these matters will not have a material
adverse effect on its business, financial condition or results of
operations.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS OF UNITED INSURANCE HOLDINGS, L.C.
The
following discussion and analysis of our financial condition and results
of
operations should be read in conjunction with our consolidated audited financial
statements and accompanying notes which appear elsewhere in this
Form S-4/A.
OVERVIEW
United
is
an insurance holding company that, through its wholly-owned
subsidiaries UIM, UPCIC and SCS controls substantially all aspects of the
insurance underwriting, distribution and claims process. In Florida, United
is
authorized to underwrite, through UPCIC, homeowners’ and dwelling fire property
and casualty insurance, as well as a packaged commercial-lines product which
serves auto-service professionals. United internally manages and adjusts
all
claims from its policyholders and outsources its on-site claims appraisal
process and policy administration process, but retain the accounting,
collections and disbursement processes.
UIM
acts
as UPCIC’s exclusive managing general agent (“MGA”). UIM currently provides all
underwriting, policy administration, marketing, accounting and financial
services to UPCIC. UIM generates revenue through policy fee income and other
administrative fees from the marketing of UPCIC’s products through United’s
distribution network.
United’s
business, results of operations and financial condition are subject to
fluctuations due to a variety of factors. Abnormally high severity or frequency
of claims in any period could have a material adverse effect on its business,
results of operations and financial condition. Also, if its estimated
liabilities for unpaid losses and loss adjustment expenses (“LAE”) are less than
actual losses and LAE, they will be required to increase reserves with a
corresponding reduction in net income in the period in which the deficiency
is
identified.
CRITICAL
ACCOUNTING POLICIES
The
preparation of financial statements in conformity with generally accepted
accounting principles (“GAAP”) requires management to make estimates and
assumptions about future events that affect the amounts reported in the
financial statements and accompanying notes.
To
recognize liabilities for unpaid losses, United establishes reserves as
liabilities on its balance sheet. United’s reserves are estimates of the amounts
needed to pay reported and unreported losses and loss adjustment expenses
(“LAE”).
Therefore,
the determination of estimates requires the exercise of judgment.
United
reviews its established reserves on a monthly basis and adjusts them if
necessary.
The
most
significant accounting estimate inherent in the preparation of United’s
financial statements includes estimates associated with management’s evaluation
of the determination of liability for unpaid loss and LAE. The amount of the
reserve for loss and LAE for each of the years ended December 31, 2007 and
2006
are as follows:
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Balance
at January 1
|
|
$
|
57,175
|
|
$
|
174,217
|
|
Less
reinsurance recoverables
|
|
|
33,441
|
|
|
153,769
|
|
Net
balance at January 1
|
|
$
|
23,734
|
|
$
|
20,448
|
|
|
|
|
|
|
|
|
|
Incurred
related to:
|
|
|
|
|
|
|
|
Current
year
|
|
$
|
31,466
|
|
$
|
36,095
|
|
Prior
years
|
|
|
(5,804
|
)
|
|
(738
|
)
|
Total
incurred
|
|
$
|
25,662
|
|
$
|
35,357
|
|
|
|
|
|
|
|
|
|
Paid
related to:
|
|
|
|
|
|
|
|
Current
year
|
|
$
|
18,511
|
|
$
|
18,291
|
|
Prior
years
|
|
|
9,326
|
|
|
13,780
|
|
Total
paid
|
|
$
|
27,837
|
|
$
|
32,071
|
|
|
|
|
|
|
|
|
|
Net
balance at year-end
|
|
$
|
21,559
|
|
$
|
23,734
|
|
Plus
reinsurance recoverables
|
|
|
14,446
|
|
|
33,441
|
|
Balance
at year-end
|
|
$
|
36,005
|
|
$
|
57,175
|
|
Liabilities
for unpaid losses and LAE are comprised of case reserves and incurred but
not
reported (“IBNR”) reserves.
When
a
claim is reported, United’s claims personnel establish a case reserve which
calculates the initial estimated loss and LAE for the reported claim. The
amount
of the reserve is primarily based upon an evaluation of the type of claim
involved, the circumstances surrounding each claim and the policy provisions
relating to the loss. The estimate reflects informed judgment of the claims
personnel based on general insurance reserving practices and on the experience
and knowledge of the claims person. During the loss adjustment period, these
estimates are revised as deemed necessary by United’s claims department based on
subsequent developments and periodic review of the claims.
In
accordance with prudent industry practice, United also maintains reserves
for
IBNR. In setting IBNR reserves, United utilizes an independent actuary who
provides United with an estimate for its total reserves which are determined
in
accordance with generally accepted actuarial techniques and are based on
United’s historical information and experience. On a quarterly basis,
United’s independent actuary estimates the ultimate loss and LAE
payments United will make for losses in a particular accident year. IBNR
reserves are calculated by taking United’s ultimate loss and LAE and deducting
actual loss and LAE payments and case reserves from United’s ultimate loss and
LAE. United reviews and adjusts its IBNR reserves on a monthly
basis.
When
reviewing reserves, United analyzes historical data and estimates the impact
of
various loss development factors, such as United’s historical loss experience
and that of the industry, claims frequency and severity trends, United’s
business mix, United’s claims processing procedures, legislative enactments,
judicial decisions, legal developments in imposition of damages, and changes
and
trends in general economic conditions, including inflation. A change in any
of
these factors from the assumptions implicit in United’s estimates can cause its
actual loss experience to be better or worse than its reserves, and the
difference can be material. There is no precise method, however, for evaluating
the impact of any specific factor on the adequacy of its reserves, because
the
development of United’s reserves is affected by multiple
factors.
Management
determines United’s loss and LAE reserves based upon the analysis of the
independent actuary. A reasonable estimate is derived by selecting a point
estimate within a range of indications as calculated by United’s independent
actuary using generally accepted actuarial techniques. The key assumption
in
most actuarial analysis is that past patterns of frequency and severity will
repeat in the future, unless a significant change in factors described above
takes place. For each accident year, United’s independent actuary estimates the
ultimate losses incurred. United’s total reserves are the difference between the
ultimate losses incurred and the cumulative loss and loss adjustment payments
made to date. To determine United’s ultimate losses the independent actuary
calculates a range of indications and selects a point estimation using such
actuarial techniques as:
|
·
|
Incurred
Loss Development –
Ultimate
losses are estimated based on the historical development patterns
of
incurred losses by accident year.
The strength of this model is its
ease of use and comparability to industry benchmarks while its
weakness is
the potential for volatility in the calculated factors as well
as an
element of subjectivity in the selected factors. The volatility
can arise
from a number of factors such as inflation, changes in underwriting
criteria and geographic concentration.
|
|
|
|
|
·
|
Paid
Loss Development –
Ultimate
losses are estimated based on the historical development patterns
of paid
losses by accident year.
The strengths and weaknesses of this model
are identical to the Incurred Loss Development model as indicated
above.
|
|
·
|
Incurred
Bornhuetter-Ferguson Severity Method – Ultimate losses are estimated as
the sum of cumulative incurred losses and estimated losses incurred
but
not reported (“IBNR”). IBNR losses are estimated based on expected average
severity, estimated ultimate claim counts and the historical development
patterns on incurred losses. Historical loss severities are adjusted to
current levels using severity on-level factors which include a provision
for the notable change in average claim costs between accident years
2003
and 2004.
|
|
·
|
Incurred
Bornhuetter-Ferguson Loss Ratio Method – Ultimate losses are estimated as
the sum of cumulative incurred losses and estimated IBNR losses.
IBNR
losses are estimated based on on-level earned premium, expected loss
ratios and the historical development patterns of incurred
losses.
|
|
·
|
Paid
Bornhuetter-Ferguson Loss Ratio Method – Ultimate losses are estimated as
the sum of cumulative paid losses and estimated IBNR losses. Unpaid
losses
are estimated based on on-level earned premium, expected loss ratios
and
the historical development of paid
losses.
|
|
·
|
Expected
Loss Method – Ultimate losses are estimated as the product of earned
premiums and expected loss ratios.
|
The
various Bornhuetter-Ferguson methods are generally more stable than the incurred
and paid development methods, but this relative strength comes at the cost
of
less responsiveness to real changes in loss experience.
United
has evaluated the effect on its insurance subsidiary’s loss and LAE reserves and
its Members’ equity in the event of reasonably likely changes in the variables
considered in establishing loss and LAE reserves. The selected range does
not
necessarily indicate what could be the potential best or worst case or the
most
likely scenario. The following table sets forth the effect on United’s insurance
subsidiary’s loss and LAE reserves and its Members’ equity in the event of
reasonably likely changes in the variables considered in establishing loss
and
LAE reserves:
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
|
2006
|
|
|
|
Change in loss and
|
|
Adjusted loss and
|
|
Percentage
|
|
Adjusted loss and
|
|
Percentage
|
|
LAE reservers, net of
|
|
LAE reserves, net
|
|
change in
|
|
LAE reserves, net
|
|
change in
|
|
reinsurance
|
|
of reinsurance
|
|
equity (1)
|
|
of reinsurance
|
|
equity (1)
|
|
-10.0%
|
|
|
19,403
|
|
|
2.90
|
%
|
|
21,361
|
|
|
6.10
|
%
|
-7.5%
|
|
|
19,942
|
|
|
2.17
|
%
|
|
21,954
|
|
|
4.58
|
%
|
-5.0%
|
|
|
20,481
|
|
|
1.45
|
%
|
|
22,547
|
|
|
3.05
|
%
|
-2.5%
|
|
|
21,020
|
|
|
0.72
|
%
|
|
23,141
|
|
|
1.53
|
%
|
Base
|
|
|
21,559
|
|
|
0.00
|
%
|
|
23,734
|
|
|
0.00
|
%
|
2.5%
|
|
|
22,098
|
|
|
-0.72
|
%
|
|
24,327
|
|
|
-1.53
|
%
|
5.0%
|
|
|
22,637
|
|
|
-1.45
|
%
|
|
24,921
|
|
|
-3.05
|
%
|
7.5%
|
|
|
23,176
|
|
|
-2.17
|
%
|
|
25,514
|
|
|
-4.58
|
%
|
10.0%
|
|
|
23,715
|
|
|
-2.90
|
%
|
|
26,107
|
|
|
-6.10
|
%
|
In
2007,
United reduced its reserves by $5,800 from prior years primarily due to payments
on prior years case reserves that were lower than originally expected and
due to
favorable loss development related to homeowners’ claims relative to the loss
and LAE expectations that were established as of December 31, 2006. As discussed
above, United reviews and adjusts its reserves monthly based on its analysis
of
trends related to claims payments, loss and LAE, legislative enactments,
judicial decisions, geographic concentrations and changing economic conditions
including inflation.
Accounting
for loss contingencies pursuant to Statement of Financial Accounting Standards
(“SFAS”) No.5,
Accounting
for Contingencies
,
involves the existence of a condition, situation or set of circumstances
involving uncertainty as to possible loss that will ultimately be resolved
when
one or more future event(s) occur or fail to occur. Additionally, accounting
for
a loss contingency requires management to assess each event as probable,
reasonably possible or remote. Probable is defined as the future event or events
are likely to occur. Reasonably possible is defined as the chance of the future
event or events occurring is more than remote but less than probable, while
remote is defined as the chance of the future event or events occurring is
slight. An estimated loss in connection with a loss contingency shall be
recorded by a charge to current operations if both of the following conditions
are met: (i) the amount can be reasonably estimated; and (ii) the information
available prior to issuance of the financial statements indicates that it is
probable that a liability has been incurred at the date of the financial
statements. It is implicit in this condition that it is probable one or more
future events will occur confirming the fact of the loss or incurrence of a
liability.
United
is
required to review the terms of each of its reinsurance contracts to ensure
they
comply with SFAS No. 113,
Accounting
and Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts
. The
statement establishes the conditions required for a contract with a reinsurer
to
be accounted for as reinsurance and prescribes accounting and reporting
standards for those contracts. Contracts that do not result in the reasonable
possibility that the reinsurer may realize a significant loss from the insurance
risk assumed generally do not meet the conditions for reinsurance accounting
and
must be accounted for as deposits. SFAS No. 113 also requires United to disclose
the nature, purpose and effect of reinsurance transactions, including the
premium amounts associated with reinsurance assumed and ceded. It also requires
disclosure of concentrations of credit risk associated with reinsurance
receivables and prepaid reinsurance premiums.
Please
see Note 2 of the notes to United’s 2007 audited consolidated financial
statements for additional information regarding significant accounting policies
and practices.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
June
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, Accounting
for
Uncertainty in Income Taxes
(“FIN
48”) which clarifies the accounting for income tax reserves and contingencies
recognized in an enterprise’s financial statements in accordance with SFAS No.
109,
Accounting
for Income Taxes
. This
Interpretation also provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure, and transition. This
Interpretation is effective for fiscal years beginning after December 15, 2006.
There was no material impact on the consolidated financial statements
related to the adoption of FIN 48.
In
February 2006, FASB issued SFAS No. 155,
Accounting
for Certain Hybrid Financial Instruments
. This
accounting standard permits fair value re-measurement for any hybrid financial
instrument containing an embedded derivative that otherwise would require
bifurcation; clarifies which interest-only strips and principal-only strips
are
not subject to the requirements of SFAS No. 133; establishes a requirement
to
evaluate interests in securitized financial assets to identify them as
freestanding derivatives or as hybrid financial instruments containing an
embedded derivative requiring bifurcation; clarifies that concentrations of
credit risk in the form of subordination are not embedded derivatives; and
amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose
entity from holding a derivative financial instrument pertaining to a beneficial
interest other than another derivative financial instrument. SFAS No. 155 is
effective for all financial instruments acquired or issued after the beginning
of an entity’s first fiscal year beginning after September 15, 2006. There was
no material impact on the consolidated financial statements with respect to
the
adoption of SFAS No. 155.
In
September 2006, the FASB issued SFAS No. 157,
Fair
Value Measurements
, which
defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. The provisions of SFAS No.
157 are effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. In
February 2008, the FASB issued FASB Staff Position No. 157-2
Effective
Date of FASB Statement No. 157
, which
permits the deferral of the effective date of SFAS No. 157 to fiscal years
beginning after November 15, 2008 for all nonfinancial assets and liabilities,
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis. United plans to utilize the deferral for
non-financial assets and liabilities. The adoption of SFAS No. 157 is not
expected to have a material effect on the Company’s results of operation or
financial position.
In
September 2006, FASB issued SFAS No. 158,
Employers’
Accounting for Defined Benefit Pension and Other Postretirement
Plans
. This
statement requires an employer to recognize the overfunded or underfunded status
of a single-employer defined benefit postretirement plan as an asset or
liability in its statement of financial position and to recognize changes in
the
funded status in the year in which the changes occur through comprehensive
income. SFAS No. 158 became effective for years ending after December 15, 2006.
United has no defined benefit or postretirement plans, so there was no impact
on
its consolidated financial statements with respect to the adoption of SFAS
No.
158.
In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin (“SAB”) No. 108 to address diversity in practice in quantifying
financial statement misstatements. SAB 108 requires that registrants quantify
the impact on the current year’s financial statements of correcting all
misstatements, including the carryover and reversing effects of prior years’
misstatements, as well as the effects of errors arising in the current year.
SAB
108 is effective as of the first fiscal year ending after November 15, 2006,
allowing a one-time transitional cumulative effect adjustment to retained
earnings as of January 1, 2006, for errors that were not previously deemed
material, but are material under the guidance in SAB No. 108. There was no
material impact on United’s consolidated financial statements with respect to
the adoption of SAB No. 108.
In
March
2006, FASB issued SFAS No. 156,
Accounting
for Servicing of Financial Assets—an amendment of FASB Statement No.
140
. SFAS
156 requires the recognition of a servicing asset or servicing liability under
certain circumstances when an obligation to service a financial asset by
entering into a servicing contract. It also requires all separately recognized
servicing assets and servicing liabilities to be initially measured at fair
value utilizing the amortization method or fair market value method. SFAS 156
became effective at the beginning of the first fiscal year that begins after
September 15, 2006. FASB 156 did not have a material impact on United’s
consolidated financial statements.
In
November 2005, the FASB released FASB Staff Position Nos. FAS 115-1 and FAS
124-1,
The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments
(“FSP
115-1”), which effectively replaces Emerging Issues Task Force (“EITF”) Issue
No. 03-1. FSP 115-1 contains a three-step model for evaluating impairments
and
carries forward the disclosure requirements in EITF Issue No. 03-1 pertaining
to
securities in an unrealized loss position is considered impaired; an evaluation
is made to determine whether the impairment is other-than-temporary; and, if
an
impairment is considered other-than-temporary, a realized loss is recognized
to
write the security’s cost or amortized cost basis down to fair value. FSP 115-1
references existing other-than-temporary impairment guidance for determining
when impairment is other-than-temporary and clarifies that subsequent to the
recognition of other-than-temporary impairment loss for debt securities, an
investor shall account for the security using the constant effective yield
method. FSP 115-1 is effective for reporting periods beginning after December
15, 2005, with earlier application permitted. There was no material impact
on
United’s consolidated financial statements with respect to the adoption of FSP
115-1.
In
September 2005, the AICPA issued Statement of Position (“SOP”) 05-1,
Accounting
by Insurance Enterprises for Deferred Acquisition Costs in connection with
Modifications or Exchanges of Insurance Contracts
(“SOP
05-1”). This statement provides guidance to insurance entities that incur
deferred acquisition costs on internal replacements of insurance and investment
contracts other than those specifically described in SFAS No. 97,
Accounting
and Reporting by Insurance Enterprises for Certain Long-Duration Contracts
and
for Realized Gains and Losses from the Sale of Investments.
SOP 05-1
defines internal replacements as modifications in product benefits, features,
rights, or coverage that occur by the exchange of a contract for a new contract,
or by amendment, endorsement, or rider to a contract, or by the election of
a
feature or coverage with a contract. The accounting treatment for such
replacements depends on whether, under the provisions of the SOP, the
replacement contract is considered substantially changed from the replaced
contract. A substantial change would be treated as the extinguishment of the
replaced contract, and all unamortized deferred acquisition costs, unearned
revenue liabilities, and deferred sales inducement assets from the replaced
contract would no longer be deferred in connection with the replacement
contract. A replacement contract that is substantially unchanged should be
accounted for as a continuation of the original contract. SOP 05-1 became
effective for internal replacements occurring in fiscal years beginning after
December 15, 2006. There was no material impact on United’s consolidated
financial statements with respect to the adoption of SOP 05-1.
In
December 2004, the FASB issued SFAS No. 123,
Share-Based
Payments (revised 2004)
(“SFAS
No. 123R”). This statement eliminates the option to apply the intrinsic value
measurement provisions of Accounting Principles Board (“APB”) Opinion No. 25 to
stock compensation awards issued to employees. Rather, SFAS No. 123R requires
companies to measure the cost of employee services received in exchange for
an
award of equity instruments based on the grant date fair value of the award.
The
resulting cost will be recognized over the period during which an employee
is
required to provide services in exchange for the award - the requisite service
period (usually the vesting period). SFAS No. 123R also requires companies
to
measure the cost of employee services received in exchange for employee stock
purchase plan awards. SFAS No. 123R became effective during the fiscal quarter
beginning January 1, 2006. United does not have any share-based payments as
of
December 31, 2007 or 2006, so there was no impact on its consolidated financial
statements related to SFAS No. 123R.
In
May
2005, the FASB issued SFAS No. 154,
Accounting
Changes and Error Corrections-a replacement of APB Opinion No. 20 and FASB
Statement No. 3
(“SFAS
154”). This Statement replaces APB Opinion No. 20,
Accounting
Changes
, and
SFAS No. 3,
Reporting
Accounting Changes in Interim Financial Statements
, and
changes the requirements for the accounting for and reporting of a change in
accounting principle. This Statement applies to all voluntary changes in
accounting principle, as well as to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed.
APB
Opinion No. 20 previously required that most voluntary changes in accounting
principle be recognized by including in net income of the period of the change
the cumulative effect of changing to the new accounting principle. This
Statement requires retrospective application to prior periods’ financial
statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. When it is impracticable to determine the period-specific effects of
an
accounting change on one or more individual prior periods presented, this
Statement requires that the new accounting principle be applied to the balances
of assets and liabilities as of the beginning of the earliest period for which
retrospective application is practicable and that a corresponding adjustment
be
made to the opening balance of retained earnings (or other appropriate
components of equity or net assets in the statement of financial position)
for
that period rather than being reported in an income statement. When it is
impracticable to determine the cumulative effect of applying a change in
accounting principle to all prior periods, this Statement requires that the
new
accounting principle be applied as if it were adopted prospectively from the
earliest date practicable. This Statement became effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005. The adoption of SFAS 154 did not have a significant effect on United’s
financial statements.
In
February 2007, the FASB issued SFAS No. 159
The
Fair Value Option for Financial Assets and Financial Liabilities— Including an
Amendment of SFAS No. 115
(“SFAS No. 159”), which permits an entity to measure many financial assets
and financial liabilities at fair value that are not currently required to
be
measured at fair value. Entities that elect the fair value option will report
unrealized gains and losses in earnings at each subsequent reporting date.
The
fair value option may be elected on an instrument-by-instrument basis, with
a
few exceptions. SFAS No. 159 amends previous guidance to extend the use of
the fair value option to available-for-sale and held-to-maturity securities.
SFAS No. 159 also establishes presentation and disclosure requirements to
help financial statement users understand the effect of the election. This
Statement is effective as of the beginning of an entity’s first fiscal year that
begins after November 15, 2007. United does not expect to apply the fair value
option to any existing financial assets or liabilities as of January 1, 2008.
Consequently, the adoption of SFAS No. 159 is expected to have no material
impact on United’s financial position or results of operations.
In
December 2007, the FASB issued SFAS No. 141(R),
Business
Combinations
(“SFAS No. 141(R)”). This standard establishes principles and
requirements for how the entity that acquires a business recognizes and measures
in its financial statements the identifiable assets acquired, the liabilities
assumed, and any noncontrolling interest in the entity acquired.
SFAS No. 141(R) also provides guidance for recognizing and measuring
the goodwill acquired in the business combination and determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. The guidance
will
become effective as of the beginning of United’s fiscal year beginning after
December 15, 2008. United is currently evaluating the impact that the
adoption of SFAS No. 141(R) will have on its consolidated financial
condition or results of operations.
In
December 2007, the FASB issued SFAS No. 160,
Noncontrolling
Interests in Consolidated Financial Statements-an amendment of ARB
No. 51
(“SFAS No. 160”). This standard establishes accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. The guidance will become effective as of the
beginning of United’s fiscal year beginning after December 15, 2008. United
is currently evaluating the impact the adoption of SFAS No. 160 will
have on its consolidated financial condition or results of
operations.
ANALYSIS
OF FINANCIAL CONDITION (December 31, 2007 as Compared to December 31,
2006)
Total
Investments
SFAS
No.
115,
Accounting
for Certain Investments in Debt and Equity Securities
(“SFAS
No. 115”), addresses accounting and reporting for (a) investments in equity
securities that have readily determinable fair values and (b) all investments
in
debt securities. SFAS No. 115 requires that these securities be classified
into
one of three categories: held-to-maturity, trading or
available-for-sale.
Investments
classified as held-to-maturity include debt securities wherein United’s intent
and ability are to hold the investment until maturity. Held-to-maturity
investments are carried at amortized cost. Investments classified as trading
securities include debt and equity securities bought and held primarily for
the
sale in the near term. Trading securities are carried at fair value, with
unrealized holding gains and losses included in the results of current period
operations. Investments classified as available-for-sale include debt and equity
securities that are not classified as held-to-maturity or trading investments.
Available-for-sale securities are carried at fair value with unrealized holding
gains and losses excluded from earnings and reported as a separate component
of
members’ equity, namely “Other Comprehensive Income (Loss)”.
Total
Investments decreased $17.2 million, or 13.1%, to $113.8 million as of December
31, 2007, as compared to $131 million as of December 31, 2006. The decrease
is
primarily a result of the maturation of certificates of deposit.
The
fixed
maturities and the equity securities that are available for sale and carried
at
fair value represent 98.9% of total investments as of December 31, 2007, as
compared to 81.8% as of December 31, 2006.
Below
is
a summary of net realized gains and (losses) at December 31, 2007 and 2006
by
category:
|
|
Years Ended December 31,
|
|
|
|
Gains (Losses)
|
|
Gains (Losses)
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Fixed
income securities
|
|
$
|
4
|
|
$
|
11
|
|
Equity
securities
|
|
|
1,231
|
|
|
834
|
|
Total
realized gains
|
|
|
1,235
|
|
|
845
|
|
|
|
|
|
|
|
|
|
Fixed
income securities
|
|
|
(70
|
)
|
|
(178
|
)
|
Equity
securities
|
|
|
(843
|
)
|
|
(556
|
)
|
Total
realized losses
|
|
|
(913
|
)
|
|
(734
|
)
|
|
|
|
|
|
|
|
|
Net
realized gains on investments
|
|
$
|
322
|
|
$
|
111
|
|
Pursuant
to SFAS No. 115, United records unrealized gains and losses, net of estimated
income taxes, as Other Comprehensive Income in members’ equity. Management
periodically reviews the individual investments that comprise United’s portfolio
to determine whether a decline in the fair market value of those securities
below its amortized cost is other-than-temporary. Factors used in such
consideration include, but are not limited to, the extent to which amortized
cost exceeds the fair market value, the length of time over which amortized
cost
has exceeded the fair market value, the financial condition and near-term
prospects of the issuer, the timeliness and completeness of expected dividends,
principle and interest payments, ratings from nationally recognized statistical
rating organizations such as Standard and Poor’s and Moody’s and United’s
ability and intent to keep the investment for a period sufficient to allow
for
an anticipated recovery in market value.
The
investments held at December 31, 2007 and 2006 were comprised mainly of United
States government and agency bonds as well as municipal bonds which are viewed
by United as conservative and less risky holdings, though sensitive to interest
rate changes. There is a smaller concentration of corporate bonds predominantly
held in the financial and conglomerate industries. The equity holdings are
in
preferred and common stocks.
United
has determined that all of its securities are in good standing and that none
reflect an impairment that qualifies as other than temporary per SFAS No.
115.
Cash
and Cash Equivalents
Cash
and
cash equivalents, which include cash and money market accounts, increased $10.7
million, or 23.2%, to $56.9 million as of December 31, 2007, as compared to
$46.2 million as of December 31, 2006. The increase in cash as of December
31,
2007 was due to the maturation of certificates of deposit. During 2007 operating
and investing activities provided $15.0 and $18.2 million in cash
respectively.
Prepaid
Reinsurance Premiums
Prepaid
reinsurance premiums decreased $7.9 million, or 23.1%, to $26.3 million as
of
December 31, 2007, as compared to $34.2 million as of December 31, 2006. The
decrease in ceded written premiums due to lower reinsurance costs was the cause
of the decrease in prepaid reinsurance premiums.
Premiums
Receivable, Net
Premiums
receivable, net decreased $0.1 million, or 1.0%, to $10.0 million as of December
31, 2007, as compared to $10.1 million as of December 31, 2006. The decrease
is
due to a $0.1 million increase in uncollectible premiums reserve.
Reinsurance
Recoverable, Net
Reinsurance
recoverable, net, decreased to $16.8 million as of December 31, 2007, as
compared to $38.5 million as of December 31, 2006. The lack of catastrophic
storms in 2006 and 2007 led to fewer claims for which United needed to recover
losses from its reinsurers.
United
has not made, nor does it anticipate making, material changes to its reinsurance
strategy that would have a material, adverse effect on its financial position,
results of operations or cash flows. United continues to follow the same
reinsurance strategy it has followed since its inception and management does
not
plan on making material changes to its reinsurance strategy in the foreseeable
future.
United
does not have any limitations on its ability to cede losses to its reinsurers
which is inconsistent with historical results. For further discussion of
changes
in Reinsurance recoverable, net, see Note 6 – Reinsurance in the notes to
United’s 2007 audited consolidated financial statement.
Deferred
Policy Acquisition Costs
Deferred
policy acquisition costs increased $0.3 million, or 4.2%, to $7.5 million as
of
December 31, 2007, as compared to $7.2 million as of December 31, 2006. This
increase is due to differences in the timing of payments and the recognition
of
acquisition expenses as it relates to commission.
Deferred
Income Taxes, Net
The
net
deferred income tax asset decreased $2.1 million, or 30.9%, to $4.7 million
as
of December 31, 2007, as compared to $6.8 million as of December 31, 2006.
This
decrease is due to a combination of decreases in deferred tax assets from
unearned premiums and reinsurance provisions and increases in deferred tax
liabilities primarily from unrealized gains which are treated differently for
tax and reporting purposes.
Income
Taxes Receivable
Income
taxes receivable decreased to zero as of December 31, 2007, as compared to
$0.4
million as of December 31, 2006. The change is due to tax payment patterns
in
connection with United’s tax liabilities at the insurance
subsidiary.
Other
Assets
Other
assets increased $4.8 million to $6.3 million as of December 31, 2007, as
compared to $1.5 million as of December 31, 2006. Major components of other
assets are as follows:
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
$
|
2,808
|
|
$
|
14
|
|
Accrued
investment income
|
|
|
1,385
|
|
|
1,255
|
|
Interest
receivable
|
|
|
1,249
|
|
|
129
|
|
Prepaid
expenses
|
|
|
625
|
|
|
-
|
|
Other
receivables
|
|
|
110
|
|
|
10
|
|
Notes
receivable from officers
|
|
|
100
|
|
|
100
|
|
Total
other assets
|
|
$
|
6,277
|
|
$
|
1,508
|
|
Unpaid
Losses and Loss Adjustment Expenses
Gross
unpaid losses and LAE decreased $21.2 million, or 37.1%, to $36.0 million as
of
December 31, 2007, as compared to $57.2 million as of December 31, 2006. The
decrease in unpaid losses and LAE is a result of a $22 million reduction in
IBNR
reserves due to favorable development of claims related to the hurricanes of
2004 and 2005.
Factors
that affect unpaid losses and LAE include the estimates made on a claim-by-claim
basis known as “case reserves” coupled with bulk estimates known as IBNR.
Periodic estimates by management of the ultimate costs required to settle all
claim files are based on United’s analysis of historical data and estimations of
the impact of numerous factors such as (i) per claim information; (ii) company
and industry historical loss experience; (iii) legislative enactments, judicial
decisions, legal developments in the awarding of damages, and changes in
political attitudes; and (iv) trends in general economic conditions, including
the effects of inflation. Management revises its estimates based on the results
of its analysis. This process assumes that past experience, adjusted for the
effects of current developments and anticipated trends, is an appropriate basis
for estimating the ultimate settlement of all claims. There is no precise method
for subsequently evaluating the impact of any specific factor on the adequacy
of
the reserves, because the eventual redundancy or deficiency is affected by
multiple factors.
Unearned
Premiums
Unearned
premiums decreased $6.6 million, or 8.3%, to $73.1 million as of December 31,
2007, as compared to $79.7 million as of December 31, 2006. The decrease was
due
to a corresponding decrease in written premium during 2007.
Reinsurance
Payable
Reinsurance
premiums payable decreased $16.9 million, or 60.8%, to $10.9 million as of
December 31, 2007, as compared to $27.8 million as of December 31, 2006. The
decrease was mainly the result of a $15.3 million decrease in ceded written
premium.
Accrued
Distribution Payable
Accrued
distribution payable increased $1.0 million, or 12.2% to $9.2 million as of
December 31, 2007 compared to $8.2 million as of December 31, 2006. The increase
in the accrued distribution payable resulted from an increase in the income
of
UIM and SCS. Since both UIM and SCS are limited liability companies, their
income flows through, untaxed, to their owners and the owners incur the tax
on
that income. Cash distributions are made each year to allow each member to
pay
any federal income taxes which may be owed by them.
Advance
Premium
Advance
premium remained constant at $2.4 million as of December 31, 2007 and 2006.
Advanced premium represents monies received on policies not yet in force as
of
December 31, 2007.
Accounts
Payable and Accrued Expenses
Accounts
payable and accrued expenses decreased $11.3 million, or 44.8%, to $13.9 million
as of December 31, 2007 as compared to $25.2 million as of December 31, 2006.
This decrease is due to a decrease in premium refunds payable and claim
disbursements payable of $9.4 million, as well as United’s cash management
efforts and timing of payments with trade vendors.
Shares
Subject To Mandatory Redemption
Shares
subject to mandatory redemption increased $1.7 million or 188.9% to $2.6 million
as of December 31, 2007 as compared to $0.9 million as of December 31, 2006.
The
increase resulted from an increase in the valuation of the redeemable put option
related to York Enhanced Strategies Fund, LLC’s (“York”) ownership interest in
the Company.
Federal
and State Income Tax Payable
Federal
and state income tax payable increased to $2.3 million as of December 31, 2007,
as compared to zero as of December 31, 2006. The change is due to tax payment
patterns in connection with United’s tax liabilities at the insurance
subsidiary.
Long-Term
Debt
Long-term
debt decreased $5.8 million, or 11.7%, to $43.8 million as of December 31,
2007,
as compared to $49.6 million as of December 31, 2006. During 2007, United
retired its note payable to York utilizing proceeds from a refinancing with
Columbus Bank and Trust (“CB&T”). The decrease in long-term debt resulted
from principal payments made during the year on the new note payable to
CB&T.
RESULTS
OF OPERATIONS (Year Ended December 31, 2007 Compared to Year Ended December
31,
2006)
Gross
Premiums Written
Gross
premiums written decreased $3.8 million, or 2.6%, to $145.1 million for the
year
ended December 31, 2007, as compared to $148.9 million for the year ended
December 31, 2006.
Though
United wrote a substantial amount of new policies during calendar year 2007,
its
policies in force for the year ended December 31, 2007 were equivalent to
the
policies in force for the year ended December 31, 2006. The lack of policy
growth and related decrease in gross written premium is attributable to several
factors. Specifically, the Florida Office of Insurance Regulation (“OIR”)
approved an average 55% rate increase for United that became effective in
September 2006. In addition, the Florida legislature passed a bill in early
2007
that froze the rates that Citizens Property Insurance Corporation (“Citizens”),
Florida’s state-run insurer, was permitted to charge. Also, several new
competitors entered the marketplace in 2007. Management believes many of
these
new companies are offering rates which are inadequate to support their
operations in the long term. A normal and expected result of the aforementioned
factors was a lower than average retention of United’s existing policies. As of
December 31, 2007, policy retention levels have improved by more than 20%
from
the lows noted earlier in the year.
Another
factor that impacts gross written premium is the policies that the State
of
Florida implemented starting in 2006 to improve the ability of residential
structures to withstand hurricane force winds. New construction must meet
stronger building codes, and existing homes are eligible for premium credits
through an inspection program that allows homeowners to determine how their
homes may be upgraded to mitigate storm damage. A portion of insureds, primarily
with newly constructed homes, are likely to qualify for insurance premium
discounts as new homes are built and some existing homes are retrofitted.
According to the State of Florida, these wind miligation credits result from
homes' reduced vulnerability to hurricane losses which United takes into
account
in its underwriting and profitability models, but ultimately reduces the
average
premium per policy when compared to prior years.
Gross
Premiums Ceded
Gross
premiums ceded decreased to $58.5 million for the year ended December 31,
2007,
as compared to $78 million for the year ended December 31, 2006. United’s
reinsurance premiums resulting from its contracts with private reinsurance
companies are based mainly on the total insured value (“TIV”) and the projected
maximum loss (“PML”) of the underlying reinsured policies. Those premiums are
also based on the amount of coverage the private reinsurance contracts
must
offer related to the portion of potential catastrophe losses not covered
by
United’s contract with the Florida Hurricane Catastrophe Fund (“FHCF”). The
decrease in gross premiums ceded resulted from a lower TIV and PML in the
current year compared to the prior year, as well as from an increase in
the
coverage provided by the FHCF contract over the prior year’s FHCF contract. For
further discussion please see Note 6 of the notes to United’s 2007
audited consolidated financial statements titled
“Reinsurance”.
Decrease
(Increase) in Net Unearned Premiums
Net
unearned premiums increased $1.2 million for the year ended December 31, 2007,
as compared to a decrease of $2.7 million for the year ended December 31, 2006.
The change was primarily due to a decrease in gross written homeowners and
dwelling fire insurance premiums during 2007.
Net
Premiums Earned
Net
premiums earned increased $11.8 million, or 16.0%, to $85.4 million for the
year
ended December 31, 2007, as compared to $73.6 million for the year ended
December 31, 2006. United’s reduced reinsurance costs (ceded premium) were the
main cause of the increase in net premiums earned.
Commissions
and Fees
Commissions
and other fees remained constant at $2.4 million for the year ended December
31,
2007 as compared to the year ended December 31, 2006.
Net
Investment Income
Net
investment income increased $1.9 million, or 32.2%, to $7.8 million for the
year
ended December 31, 2007, as compared to $5.9 million for the year ended December
31, 2006. The increase in net investment income resulted from an increase in
the
amount invested in the fixed-income portion of United’s portfolio, resulting in
higher interest income.
Net
Realized Investment Gains
Net
realized investment gains increased $0.2 million, or 200.0%, to $0.3 million
for
the year ended December 31, 2007, as compared to $0.1 million for the year
ended
December 31, 2006. The table captioned “Total Investments” depicts the gains
(losses) by investment category.
Policy
Assumption Bonus
Policy
Assumption Bonus, which includes interest income earned on the bonus amounts,
increased to $13.6 million for the year ended December 31, 2007, as compared
to
zero for 2006. Since United must meet certain requirements to collect the bonus
from policy assumptions made from Citizens, such as offering the assumed
policies for renewal for three years, United recognizes the policy assumption
bonus when the cash is collected. United recognized $12.3 million of the bonus
plus $1.3 million of associated interest during 2007, which was the first year
United was eligible to collect any of the bonus, resulting in the increase
over
the prior year.
United
has Citizens takeout policies from 2005 that will meet the criteria for revenue
recognition for policy assumption bonus income in the amount of approximately
$6.4 million during 2008. There are currently no additional takeout policies
that will earn income after 2008. There can be no assurance that Citizens
will
offer any additional policies for take out agreements in the future under
conditions that would be favorable for United to take on the underwriting
risk
for these policies.
Other
Income
Other
Income increased $2.8 million, or 700%, to $3.2 million for the year ended
December 31, 2007, as compared to $0.4 million for the year ended December
31,
2006. All Florida insurers, including UPCIC, are subject to assessments by
the
Florida Insurance Guaranty Association (“FIGA”) and Citizens. Florida law allows
assessed insurers to recoup the assessments from their policyholders. For
GAAP
purposes, United recognizes these assessments as expenses when they are paid
to
FIGA or Citizens, and when it collects the assessments from policyholders,
it
recognizes income. United’s collections of assessments increased by $2.8 million
in 2007 mainly because it was assessed approximately $5 million in 2006 versus
$.2 million in 2005.
The
amount of assessments that are incurred from the Florida Insurance Guaranty
Association (“FIGA”) can vary on a year to year basis, but are capped at 2.0% of
United’s gross written premium. Moreover, even if assessments and recoupments do
offset each other, they may not offset each other in the same fiscal period
due
to the ultimate timing of the assessments and recoupments.
Loss
and LAE
Loss
and
LAE, United’s most significant expense, represent actual payments made and
changes in estimated future payments to be made to or on behalf of United
policyholders, including expenses required to settle claims and losses. United
revises its estimates based on the results of analysis of estimated future
payments to be made. This process assumes that past experience, adjusted for
the
effects of current developments and anticipated trends, is an appropriate basis
for predicting future events.
Insurable
events during 2007 and 2006 were more normal in nature as compared to 2005
and
2004; there were no catastrophic weather events such as the well-publicized
series of hurricanes that occurred in Florida during 2004 and 2005.
Loss
and
LAE decreased by $9.7 million, or 27.4%, to $25.7 million for the year ended
December 31, 2007, as compared to $35.4 million for the year ended December
31,
2006. The decrease is attributable to disciplined underwriting with a focus
on
attritional losses and agency management. For example, United orders inspections
on 100% of its new business policies to ensure it uses complete and accurate
data in the underwriting process. Furthermore, business-mapping services are
used to automatically populate critical property details used in the
underwriting process. United uses this information not only for rating purposes,
but to also ensure it does not have unacceptable concentrations in any one
particular geographic area.
As
with most Florida companies, United’s reinsurance requirements and costs
are based on the 100-year probable maximum loss (“PML”). United analyzes its PML
on a regular basis through the use of licensed catastrophe-modeling software.
Its underwriting policies and procedures seek to minimize risk of loss while
maximizing premium through the optimization of geographic exposure and the
diversification of the portfolio with respect to its PML. The continued focus
on
disciplined underwriting and procedures to optimize its geographic exposure
has
been demonstrated to lower loss and LAE expenses and therefore, United believes,
these procedures will continue to benefit United’s operating results in future
periods.
The
largest factor that can impact our loss and LAE expenses are catastrophes.
Catastrophes
can be caused by various natural events, including hurricanes, windstorms,
earthquakes, hail, severe winter weather and fires.
Catastrophes
can also be man made, such as
terrorist
attacks
or
consequences
of war
or political instability. Catastrophes are an inherent risk of the
property-liability insurance business, especially in the State of Florida
which
may contribute to material year-to-year fluctuations in United’s results of
operations and financial position.
There
are
inherent difficulties in estimating
risks
that impact the estimation of ultimate costs for catastrophes.
These
difficulties also affect United’s ability to estimate reserves for catastrophes.
For
example, the estimation of reserves related to hurricanes can be affected
by the
inability to access portions of the impacted areas, the complexity of factors
contributing to the losses, the legal and regulatory uncertainties and the
nature of the information available to establish the reserves.
Complex
factors include, but are not limited to
,
determining whether damage was caused by flooding versus wind; evaluating
general liability and pollution exposures; estimating additional living
expenses; the impact of demand surge; infrastructure disruption; fraud; the
effect of mold damage; business interruption costs; and reinsurance
collectibility.
The
timing of a catastrophe's occurrence, such as at or near the end of a reporting
period, can also affect the information available to
United
in
estimating reserves for that reporting period.
The
estimates related to catastrophes are adjusted as actual claims emerge and
additional information becomes available.
Because
of the inherent uncertainty in estimating reserves for catastrophes, United
cannot be sure that its ultimate losses and loss adjustment expenses will
not
exceed its reserves. If and to the extent that its reserves are inadequate,
United will be required to increase its reserves for losses and loss adjustment
expenses and incur a charge to earnings in the period during which its reserves
are increased, which could materially and adversely affect our financial
condition and results of operations.
In
addition to catastrophes, the accumulation of losses from smaller
weather-related events in a fiscal quarter or year could materially and
adversely impact United’s results of operations in those periods.
While
management believes its underwriting strategies as well as its reinsurance
program limit the severity of future losses, United continues to be exposed
to
catastrophic losses that may exceed the limits of the reinsurance
program.
United
continues to revise its estimates of the ultimate financial impact of past
storms. The revisions to its estimates are based on its analysis of subsequent
information received regarding various factors, including: (i) per claim
information; (ii) company and industry historical loss experience; (iii)
legislative enactments, judicial decisions, legal developments in the awarding
of damages, and (iv) trends in general economic conditions, including the
effects of inflation. Management revises its estimates based on the results
of
its analysis. This process assumes that past experience, adjusted for the
effects of current developments and anticipated trends, is an appropriate
basis
for estimating the ultimate settlement of all claims. There is no precise
method
for subsequently evaluating the impact of any specific factor on the adequacy
of
the reserves, because the eventual redundancy or deficiency is affected by
multiple factors. United has received an actuary’s opinion as to the adequacy of
the reserves.
Net
losses during the year ended December 31, 2007 from the hurricanes of 2004
and
2005 were less than $0.1 million compared to $0.8 million for the year ended
December 31, 2006.
For
further discussion, see Note 7 in the notes to United’s 2007 audited
consolidated financial statements.
Policy
Acquisition Costs
Policy
acquisition costs increased $1.8 million, or 11.6%, to $17.3 million for year
ended December 31, 2007, as compared to $15.5 million for the year ended
December 31, 2006. Policy acquisition costs consists of agents’ commissions,
policy administration fees and premium taxes, less commissions earned on
reinsurance ceded and policy fees earned. The increase in policy
acquisition costs is primarily attributable to a $2.9 million increase in
agents’ commissions to $14.9 million in 2007 compared to $12.0 million in
2006.
Operating
and Underwriting Expenses
Operating
and underwriting expenses decreased $0.6 million, or 6.2%, to $9.1 million
for
the year ended December 31, 2007, as compared to $9.7 million for the year
ended
December 31, 2006. The decrease mainly resulted from a $1.8 million decrease
in
assessment expense to $3.2 million for the year ended December 31, 2007 as
compared to $5.0 million for the year ended December 31, 2006. As noted above
in
the discussion of Other Income, assessments levied by Citizens and FIGA are
recorded as expense when paid. The decrease in assessment expense was offset
by
miscellaneous increases in other Operating and Underwriting Expense categories
that were individually insignificant.
Salaries
and Wages
Salaries
and wages increased $0.5 million, or 21.7%, to $2.8 million for the year ended
December 31, 2007, as compared to $2.3 million for the year ended December
31,
2006. Our decision to add personnel to our staff caused the increase in Salaries
and Wages. We believe the amount of Salaries and Wages is consistent with our
policy of hiring and retaining top-quality personnel and increasing our premium
production.
General
and Administrative Expenses
General
and Administrative Expenses increased $0.9 million or 75% to $2.1 million for
the year ended December 31, 2007 as compared to $1.2 million for the year ended
December 31, 2006. Increases of $0.3 million of actuarial services, $0.2 million
of legal fees and $0.4 million of other general and administrative expenses
caused the increase in General and Administrative Expenses.
If
the
Merger is consummated, United will incur additional compliance costs as a
result
of being a public company that were not incurred in prior years. Specifically,
but not exclusively, United will incur compliance costs to document and test
its
internal control procedures in order to satisfy the requirements of Section
404
of the Sarbanes-Oxley Act of 2002.
Interest
Expense
Interest
expense increased $2.7 million, or 54.0%, to $7.7 million for the year ended
December 31, 2007, as compared to $5.0 million for the year ended December
31,
2006. The change is primarily attributed to our refinancing of our note payable
to York during 2007, which accelerated the amortization of the participation
fee
and original issue discount related to the York note.
Provision
(Benefit) for Income Tax
The
provision for income tax increased $12.3 million to $8.3 million for the
year
ended December 31, 2007, as compared to income tax benefit of ($4.0) million
for
the year ended December 31, 2006. The change in income tax year over year
is
attributable to the profitability of the insurance subsidiary. The effective
income tax rate for the insurance subsidiary was 37.6% for the year ended
December 31, 2007, as compared to an income tax benefit for the year ended
December 31, 2006. For further discussion, see Note 9 to United’s 2007
audited consolidated financial statements.
Net
Income
As
a
result of the foregoing, United’s net income for the year ended December 31,
2007 was $39.6 million, compared to net income of $17.2 million for the year
ended December 31, 2006.
RESULTS
OF OPERATIONS (Year Ended December 31, 2006 Compared to Year Ended December
31,
2005)
Gross
Premiums Written
Gross
premiums written increased $7.1 million, or 5.0%, to $148.9 million for the
year
ended December 31, 2006, as compared to $141.8 million for the comparable period
in 2005. The increase in gross premiums written is primarily due to United’s
rate increase of 55% for the homeowners line that was made effective by the
OIR
on September 2, 2006.
Gross
Premiums Ceded
Gross
premiums ceded increased $25.3 million, or 48.0%, to $78.0 million for the
year
ended December 31, 2006, as compared to $52.7 million for the year ended
December 31, 2005. Due to the eight hurricanes that hit Florida during 2004
and
2005, United’s reinsurance cost significantly increased, causing the
corresponding increase in gross premiums ceded.
Decrease
(Increase) Net Unearned Premiums
Net
unearned premiums decreased $2.7 million for the year ended December 31, 2006,
as compared to increasing by $13.5 million for the year ended December 31,
2005.
These changes reflected our continued growth in written premium in 2006 due
to
the homeowner line rate increase.
Commissions
and Fees
Commissions
and other fees increased $0.7 million, or 41.2%, to $2.4 million for the year
ended December 31, 2006, as compared to $1.7 million for the year ended December
31, 2005. United had more policies in force during 2006 than during 2005,
causing an increase in the MGA’s policy fee income. Additionally, the garage
line of business, which was started in September 2005, was in operation for
the
entirety of 2006; therefore, the commissions received on the portion United
cedes to its reinsurers increased over 2005.
Net
Investment Income
Net
Investment Income increased $2.9 million, or 96.7%, to $5.9 million for the
year
ended December 31, 2006, as compared to $3.0 million for the year ended December
31, 2005. The increase is primarily a result of the additional amounts of
invested assets including a 72.4% increase in fixed-maturity investments to
$90.7 million at December 31, 2006 compared to $52.6 million at December 31,
2005.
Net
Realized Investment Gains
Net
realized investment gains remained constant for the year ended December 31,
2006
as compared to the year ended December 31, 2005. The table below reflects the
gains and losses by investment category:
|
|
Years Ended December 31,
|
|
|
|
Gains (Losses)
|
|
Gains (Losses)
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Fixed
income securities
|
|
$
|
11
|
|
$
|
1
|
|
Equity
securities
|
|
|
834
|
|
|
628
|
|
Total
realized gains
|
|
|
845
|
|
|
629
|
|
|
|
|
|
|
|
|
|
Fixed
income securities
|
|
|
(178
|
)
|
|
(132
|
)
|
Equity
securities
|
|
|
(556
|
)
|
|
(412
|
)
|
Total
realized losses
|
|
|
(734
|
)
|
|
(544
|
)
|
|
|
|
|
|
|
|
|
Net
realized gains on investments
|
|
$
|
111
|
|
$
|
85
|
|
Other
Income
Other
Income increased by $0.3 million, or 300%, to $0.4 million for the year ended
December 31, 2006, as compared to $0.1 million for the year ended December
31,
2005. Major components of other income for the year ended December 31, 2006
are
$0.2 million of commissions earned on the flood policies written by United
and
$0.2 million of assessments collected from policyholders. These components
are
compared to $0.1 million of commissions on flood policies written during the
year ended December 31, 2005.
Loss
and LAE
Loss
and
LAE decreased by $26.2 million, or 42.5%, to $35.4 million for the year ended
December 31, 2006, as compared to $61.6 million as of December 31, 2005. The
decrease is due primarily to the fact that no storms occurred in 2006, and
2005
was affected by United’s retained losses related to the four hurricanes that
occurred in 2005 and the four hurricanes that occurred in 2004.
Management
continues to revise its estimates of the ultimate financial impact of these
storms. The revisions to its estimates are based on its analysis of subsequent
information they receive regarding various factors, including: (i) per claim
information; (ii) United and industry historical loss experience; (iii)
legislative enactments, judicial decisions, legal developments in the awarding
of damages, and changes in political attitudes; and (iv) trends in general
economic conditions, including the effects of inflation. Management revises
its
estimates based on the results of its analysis. This process assumes that past
experience, adjusted for the effects of current developments and anticipated
trends, is an appropriate basis for estimating the ultimate settlement of all
claims. There is no precise method for subsequently evaluating the impact of
any
specific factor on the adequacy of the reserves, because the eventual redundancy
or deficiency is affected by multiple factors.
Net
losses in 2006 resulting from the 2004 and 2005 hurricanes were $0.8 million.
For further discussion, see Note 7 to United’s 2007 audited consolidated
financial statements.
Policy
Acquisition Costs
Policy
acquisition costs increased $2.5 million, or 19.2%, to $15.5 million for year
ended December 31, 2006, as compared to $13.0 million for the year ended
December 31, 2005. Policy acquisition costs consists of agents’ commissions,
policy administration fees and premium taxes, less commissions earned on
reinsurance ceded and policy fees earned.
The
increase in policy acquisition costs is primarily attributable to an increase
in
agents’ commissions of $3.8 million to $12.0 million in 2006 compared to $8.2
million in 2005. Agents’ commissions rose due to higher premiums and a greater
concentration of voluntary business which pays a higher commission rate than
assumed business. The rise in agents’ commissions was offset slightly by a $1.5
million reduction in ceding commission expense to $0.8 million in 2006 compared
to $2.3 million in 2005. Ceding commission expense decreased in 2006 because
United assumed no policies during the year.
Operating
and Underwriting Expenses
Operating
and underwriting expenses increased $5.7 million, or 142.5%, to $9.7 million
for
the year ended December 31, 2006, as compared to $4.0 million for the year
ended
December 31, 2005. The increase is primarily due to assessments, which increased
$4.8 million, to $5.0 million for the year ended December 31, 2006, as compared
to $0.2 million for the year ended December 31, 2005. The assessments were
levied by Citizens and FIGA to cover shortfalls resulting from the 2004 and
2005
hurricane seasons.
Salaries
and Wages
Salaries
and wages increased $0.5 million, or 27.8%, to $2.3 million for the year ended
December 31, 2006, as compared to $1.8 million for the year ended December
31,
2005. Management believes the increase in salaries and wages was due to the
labor costs directly correlated to increased written premium as well as rising
cost of living and related benefits cost. Management further believes that
salaries and wages are consistent with retaining quality management and
employees.
General
and Administrative Expenses
General
and administrative expenses decreased $0.2 million or 14.3% to $1.2 million
for
the year ended December 31, 2006, as compared to $1.4 million for the year
ended
December 31, 2005 due to a reduction in miscellaneous other general and
administrative expenses categories that were individually
insignificant.
Interest
Expense
Interest
expense increased by $4.7 million to $5.0 million for the year ended December
31, 2006, as compared to $0.3 million as of December 31, 2005. The increase
in
interest expense is attributed to the increase in notes payable during 2006
as a
result of the execution of the $20 million note payable to the SBA in October
2006 and the $20 million note payable to York in September
2006.
Net
Income
As
a
result of the foregoing, United’s net income for the year ended December 31,
2006 was $17.2 million, as compared to net income of $1.2 million for the year
ended December 31, 2005.
LIQUIDITY
AND CAPITAL RESOURCES
The
primary sources of cash flow in our insurance subsidiary are gross premiums
written, loss reimbursements by our reinsurers, investment income, and
proceeds from the sale or maturity of investments. Funds are used by the
insurance subsidiary for ceded premium payments to reinsurers, loss and LAE
payments, other underwriting expenses, purchases of investments and fee payments
to UIM. UIM’s primary sources of cash are commission and managing general agent
fee income. UIM’s primary uses of cash are policy acquisition costs, commissions
to producers, interest, and general and administrative
expenses.
Our
reconciliation of net income to net cash provided from operations is generally
influenced by the collection of premiums in advance of paid losses, the timing
of reinsurance, issuing company settlements and the timing of our loss
payments.
For
the
year ended December 31, 2007, operations provided net operating cash flow of
$15.0 million, as compared to $14.5 million for year ended December 31,
2006.
For
the
year ended December 31, 2007, operations generated $76.1 million of gross cash
flow, primarily due to a $21.7 million decrease in amounts due from reinsurers,
a $2.1 million decrease in deferred tax assets, and a $7.8 million decrease
in
prepaid reinsurance premiums.
For
the
year ended December 31, 2007, operations used $61.1 million of gross cash flow
primarily due to a $21.2 million decrease in United paying losses and LAE,
a
$6.6 million decrease in unearned premiums, a $17.0 million decrease in
reinsurance paid and a reduction in reinsurance costs, a $11.3 million decrease
in accounts payable and accrued expenses and a $4.7 million increase in other
assets.
Subject
to catastrophic occurrences, net operating cash flow is currently expected
to be
positive in both the short-term and the reasonably foreseeable
future.
For
the
year ended December 31, 2007, net investing activities provided $18.2 million,
as compared to using $55.6 million for the year ended December 31, 2006. Our
available-for-sale investment portfolio is highly liquid as it consists entirely
of readily marketable securities. For the year ended December 31, 2007,
investing activities generated $68.1 million from the sale of available-for-sale
investments and the change in unrealized holding gain, and used $49.8 million
for the purchase of available-for-sale investments.
For
the
year ended December 31, 2007, net financing activities used $22.6 million,
as
compared to providing $39.4 million for the year ended December 31, 2006. For
the year ended December 31, 2007, the sources of cash in connection with
financing activities included $33.0 million from the CB&T loan. The
uses of cash in connection with financing activities included $39.5 million
for
the repayment of borrowings and $18.3 million for distributions to
owners.
For
the
year ended December 31, 2007, the outstanding balance on the note payable
to
CB&T, a related party, was $23.8 million. Interest accrues at a rate equal
to the 30-day LIBOR index plus 400 basis points. As of December 31, 2007,
the
interest rate was 9.8%. The note requires monthly principal payments of $0.9
million in addition to monthly interest payments. Furthermore, the CB&T note
requires that all “excess cash flow”, as permitted by applicable law, be
deposited in an investment account at CB&T. As of December 31, 2007 the
balance in that account was $19.0 million. The CB&T loan is also secured by
members’ interests, all tangible and intangible assets of United and UIM,
accounts, accounts receivable, furniture, furnishings and equipment and all
deposits. The Security Agreement associated with the CB&T note states that
if an event of default occurs under the CB&T loan, the bank may, at its
option, cause the acceleration of the CB&T loan (which shall become
immediately due and payable); take possession of the collateral; and have
the
right to assign, sell, lease, or otherwise dispose of and deliver all or
any
part of the collateral, to satisfy our obligations under this agreement.
The
original balance of this note was $33.0 million and was used to repay the
York
note and to pay off an unrelated, secured line of credit with CB&T. The
remaining proceeds were used to qualify for a matching funds program from
the
SBA. On March 13, 2008 we entered into an amendment to the CB&T loan
agreement which eliminated the “excess cash flow” provision of the loan. In
addition, the minimum balance in the investment accounts at CB&T was
increased from $10 million to $13 million with no future payments into escrow
accounts required. The interest rate was decreased from 400 to 300 basis
points
above LIBOR. The agreement also provides for the potential return of up to
$3
million of escrow funds if there is no material storm activity as of November
2008. On May 27, 2008, United entered into a modification to the CB&T
agreement which allowed United to utilize the $13 million that was currently
held in escrow as a principle reduction to the term loan. The modification
also
eliminated the requirement to have any funds held in escrow.
For
the
year ended December 31, 2007, the outstanding balance on the unsecured note
to
the SBA was $20 million. The term of the note is 20 years, with quarterly
payments that began on October 1, 2006. Interest only payments are required
for
the first three years. As of December 31, 2007, the interest rate was
4.58%.
On
September 10, 2006, United entered into a loan agreement with York in the amount
of $20.0 million. In connection with the transaction, York received a 4.75%
equity ownership interest in United, with a Put option on that ownership
interest. The put provides York with an option to sell its entire interest
back
to United at any time (i) between September 15, 2009 and September 15, 2010,
or
(ii) between September 15, 2011 and September 15, 2012 (“Exercise Period”) at a
purchase price of two times the consolidated book value of United at the end
of
the fiscal quarter immediately preceding the put date and has no floor or
ceiling as to the amount to be paid.
United’s
loan agreements contain certain covenants, including the maintenance of minimum
specified financial ratios and balances. United was in compliance with the
terms
of the CB&T covenants at December 31, 2007. An event of default will occur
under the SBA note if UPCIC: (1) defaults in the payment of the surplus note;
(2) fails to meet at least a 2:1 ratio of net premium to surplus (“Minimum
Writing Ratio”) by December 31, 2007; (3) fails to submit quarterly filings to
the OIR; (4) fails to maintain at least $50 million of surplus during the
term
of the note, except for certain situations; (5) misuses proceeds of the note;
(6) makes any misrepresentations in the application for the program; or (7)
pays
any dividend when principal or interest payments are past due under the note.
As
of December 31, 2007, UPCIC was in compliance with each of the aforementioned
loan covenants except for the writing ratio covenant.
Under
the
terms of the SBA note, UPCIC was required, among other things, to (1) increase
its writing ratio for two consecutive quarters prior to December 31, 2007,
(2)
reach a 2:1 ratio of net written premium to surplus (the “Minimum Writing
Ratio”) by December 31, 2007, and (3) maintain the 2:1 Minimum Writing Ratio
after it is obtained. The terms of the SBA note provide for the following
increases in interest rate for failure to comply with the Minimum Writing
Ratio:
(1)
25
basis
points if the resulting writing ratio is between 1.5:1 and 2:1 and (2) 450
basis
points if the writing ratio is below 1.5:1.
In
addition, if the Minimum Writing Ratio remains below 1.5:1 for three consecutive
quarters following December 31, 2007, UPCIC must repay a portion of the SBA
loan
so that the Minimum Writing Ratio will be attained for the following fiscal
quarter. UPCIC’s ratio of net written premium to surplus was 1.4:1 for the year
ended December 31, 2007 and 1.1:1 for the quarter ended March 31, 2008. As
a
result, the SBA increased United Insurance’s interest rate on the SBA loan from
the stated rate of interest by 450 basis points to 8.6% for the quarter ended
March 31, 2008. UPCIC’s interest rate for the second quarter will be 450 basis
points above the stated rate because its Minimum Writing Ratio was below
1.5:1
at the end of March, 2008. United’s management expects that UPCIC’s ratio of net
written premium to surplus will be at least 1.5:1 at June 30, 2008, and,
as a
result, UPCIC will incur an interest rage charge of 25 basis points above
the
stated rate of interest for the third quarter of 2008.
The
SBA
note provides that the SBA may, among other things, declare its loan immediately
due and payable for all defaults existing under the SBA note. In addition,
the
CB&T loan agreement provides that CB&T may elect to exercise its
remedies described above for events of default under any loan agreements
affecting United or its properties. If either lender elects to pursue these
default remedies it would reduce UPCIC’s surplus and adversely affect United’s
liquidity; however, United does not anticipate that the exercise of such
remedies would have a material adverse effect on its business prospects or
ability to execute its business plan.
United
maintains sufficient liquidity to pay claims, operating expenses and other
obligations. United held $56.9 million and $46.2 million of cash and cash
equivalents at December 31, 2007 and 2006, respectively. United monitors its
expected claims payment needs and maintain a sufficient portion of its invested
assets in cash and cash equivalents to enable it to fund its claims payments
without having to sell longer-duration investments. Cash and cash equivalents
at
December 31, 2007 and 2006 also includes funds sufficient to distribute cash
to
members on an annual basis to pay federal income tax which may be owed by
members due to the income attributable to them as members of United. As
necessary, United adjusts its holdings of short-term investments and cash and
cash equivalents to provide sufficient liquidity to respond to changes in the
anticipated pattern of claims payments.
GAAP
differs in some respects from reporting practices prescribed or permitted by
the
OIR. To retain its certificate of authority, the Florida insurance laws and
regulations require that UPCIC maintain capital and surplus equal to the
statutory minimum capital and surplus requirement defined in the Florida
Insurance Code as the greater of 10% of the insurer’s total liabilities or $4
million. UPCIC’s statutory capital surplus was $51.7 million at December 31,
2007 and exceeded the minimum capital and surplus requirements. UPCIC is also
required to adhere to prescribed premium-to-capital surplus ratios, with which
United was in compliance as of December 31, 2007.
A
Florida
domestic insurer may not make dividend payments or distributions to shareholders
without prior approval of the OIR if the dividend or distribution would exceed
the larger of (i) the lesser of (a) 10 percent of capital surplus or (b) net
income, not including realized capital gains, plus a two-year carry-forward,
(ii) 10 percent of capital surplus with dividends payable constrained to
unassigned funds minus 25 percent of unrealized capital gains or (iii) the
lesser of (a) 10 percent of capital surplus or (b) net investment income plus
a
three-year carry-forward with dividends payable constrained to unassigned funds
minus 25 percent of unrealized capital gains. Alternatively, a Florida domestic
insurer may pay a dividend or distribution without the prior written approval
of
the OIR (i) if the dividend is equal to or less than the greater of (a) 10
percent of the insurer's capital surplus as regards policyholders derived from
realized net operating profits on its business and net realized capital gains
or
(b) the insurer's entire net operating profits and realized net capital gains
derived during the immediate preceding calendar year, (ii) the insurer will
have
policyholder capital surplus equal to or exceeding 115 percent of the minimum
required statutory capital surplus after the dividend or distribution, (iii)
the
insurer files a notice of the dividend or distribution with the OIR at least
ten
business days prior to the dividend payment or distribution and (iv) the notice
includes a certification by an officer of the insurer attesting that, after
the
payment of the dividend or distribution, the insurer will have at least 115
percent of required statutory capital surplus as to policyholders. Except as
provided above, a Florida domestic insurer may only pay a dividend or make
a
distribution (i) subject to prior approval by the OIR or (ii) 30 days after
the
OIR has received notice of such dividend or distribution and has not disapproved
it within such time. UPCIC has not paid any dividends or distributed any cash
or
other property to shareholders.
To
enhance the regulation of insurer solvency, the NAIC established risk-based
capital requirements for insurance companies that are designed to assess capital
adequacy and to raise the level of protection that statutory surplus provides
for policyholders. These requirements measure three major areas of risk facing
property and casualty insurers: (i) underwriting risks, which encompass the
risk
of adverse loss developments and inadequate pricing; (ii) declines in asset
values arising from credit risk; and (iii) other business risks from
investments. Insurers having less statutory surplus than required will be
subject to varying degrees of regulatory action, depending on the level of
capital inadequacy. The OIR, which follows these requirements, could require
the
Company to cease operations in the event they fail to maintain the required
statutory capital. UPCIC is in compliance with the risk-based capital
requirement at December 31, 2007 and 2006.
After
receiving proper approval from the OIR, and to increase the surplus in UPCIC
for
the purpose of further ensuring stability for policyholders, UPCIC issued a
subordinated surplus debenture (“Debenture”) to United in December 2004 in the
amount of $4.0 million. The Debenture bore interest payable to United in the
amount of 7% payable annually. A second Debenture was issued in May 2005 in
the
amount of $5.0 million and a third Debenture was issued in October 2005 in
the
amount of $3.0 million. As of December 31, 2006, UPCIC had a balance outstanding
under the Debentures to United of $12.0 million. The Debentures were repaid
in
full as of December 31, 2007 after receiving proper approval from the
OIR.
United
believes its current capital resources, together with cash flow from operations,
will be sufficient to meet currently anticipated working capital requirements.
There can be no assurances, however, that such will be the case.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF
UNITED INSURANCE HOLDINGS, L.C.
(MARCH
31, 2008)
The
following discussion and analysis of our financial condition and results
of
operations should be read in conjunction with the Consolidated Financial
Statements and related notes. The discussion and analysis contains
forward-looking statements that involve risks, uncertainties, and assumptions.
The actual results may differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including, but
not
limited to, those which are not within our control. This Management’s Discussion
and Analysis of Financial Condition and Results of Operations should be
read in
conjunction with United’s Management’s Discussion and Analysis of Financial
Condition and Results of Operations for the year ended December 31, 2007
contained within this Form S-4/A.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
March
2008, the FASB issued SFAS No. 161, “Disclosures About Derivative
Instruments and Hedging Activities - an amendment of FASB Statement
No. 133” (“SFAS No. 161”).
SFAS
No. 161 will require a more detailed discussion of how an entity uses
derivative instruments and hedging activities and how such derivative
instruments and related hedged items affect the entity’s financial position,
financial performance and cash flows. Among other things, the expanded
disclosures will also require presentation of the fair values of derivative
instruments and their gains and losses in tabular format and enhanced liquidity
disclosures, including discussion of credit-risk-related derivative features.
SFAS
No.161 is effective for fiscal years beginning after November 15,
2008. United has determined that the adoption of SFAS No. 161
will have no impact on the financial statements.
ANALYSIS
OF FINANCIAL CONDITION (March 31, 2008 as Compared to December 31,
2007)
Total
Investments
Total
Investments increased $8.5 million, or 7.5%, to $122.3 million at March
31,
2008, as compared to $113.8 million as of December 31, 2007. The increase
is
primarily a result of the investment in certificates of deposit of $10.0
million
during the first quarter of 2008 and the Prime investment of $1.0 million
that
was converted to a receivable prior to March 31, 2008.
The
fixed
maturities and the equity securities that are available for sale and carried
at
fair value represent 91.6% of total investments as of March 31, 2008, as
compared to 98.9% as of December 31, 2007.
Below
is
a summary of net realized losses for the three months ended March 31, 2008
and
2007 by category:
|
|
Three
Months Ended March 31,
|
|
|
|
Gains
(Losses)
|
|
Gains
(Losses)
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Fixed
income securities
|
|
$
|
-
|
|
$
|
-
|
|
Equity
securities
|
|
|
-
|
|
|
1
|
|
Total
realized gains
|
|
|
-
|
|
|
1
|
|
|
|
|
|
|
|
|
|
Fixed
income securities
|
|
|
-
|
|
|
-
|
|
Equity
securities
|
|
|
(157
|
)
|
|
(8
|
)
|
Total
realized losses
|
|
|
(157
|
)
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
Net
realized losses on investments
|
|
$
|
(157
|
)
|
$
|
(7
|
)
|
The
investments held at March 31, 2008 and December 31, 2007 were comprised
mainly
of United States government and agency bonds as well as municipal bonds
which
are viewed by United as conservative and less risky holdings, though sensitive
to interest rate changes. There is a smaller concentration of corporate
bonds
predominantly held in the financial and conglomerate industries. The equity
holdings are in preferred and common stocks.
United
has determined that all of its securities are in good standing and that
none
reflect an impairment that qualifies as other than temporary per SFAS No.
115.
Cash
and Cash Equivalents
Cash
and
cash equivalents, which include cash and money market accounts, decreased
$8.6
million, or 15.1%, to $48.3 million at March 31, 2008, compared to $56.9
million
at December 31, 2007. The decrease in cash was primarily due to the investment
of $10.0 million in a certificate of deposit with a maturity greater
than 90
days and therefore classified as other investments.
At
March
31, 2008, United had an escrow account at CB&T, a related party, in the
amount of $13.1 million. Please see Note 7 and Note 10 to United’s interim
consolidated financial statements for more information regarding this
escrow
account.
For the quarter ended March 31, 2008, operating activities
provided $1.3 million and investing and financing activities used ($7.2)
and
($2.7) million in cash, respectively.
Prepaid
Reinsurance Premiums
Prepaid
reinsurance premiums decreased $13.5 million, or 51.3%, to $12.8 million
at
March 31, 2008, compared to $26.3 million at December 31, 2007. The decrease
is
due to normal amortization of prepaid reinsurance premiums. The remaining
$12.8
million at March 31, 2008 will be amortized prior to the new contract
period which begins in June.
Reinsurance
Recoverable, Net
Reinsurance
recoverable, net decreased to $16.2 million at March 31, 2008, from $16.8
million at December 31, 2007. The decrease resulted from our continued
settlement of the few remaining claims related to the hurricanes of 2004
and
2005 and collecting from the reinsurers the reimbursements of claims paid
on
those settled claims. Assuming that no more catastrophic weather events
occur,
United expects this general reduction in our reinsurance recoverable, net
to
continue until the recoverable is zero.
Deferred
Policy Acquisition Costs
Deferred
policy acquisition costs decreased $0.6 million, or 8.0%, to $6.9 million
at
March 31, 2008, compared to $7.5 million at December 31, 2007. This decrease
is
primarily due to the decrease in deferred commissions earned by agents
on gross
written premium which decreased by $8.3 million in the first quarter of
2008
compared to the same period in 2007.
Deferred
Income Taxes, Net
The
net
deferred income tax asset decreased $0.7 million, or 14.9%, to $4.0 million
at
March 31, 2008, compared to $4.7 million at December 31, 2007. This decrease
is
due to a combination of a $0.5 million increase in deferred tax assets
from
unearned premiums, a $0.2 million decrease in deferred tax assets that
were
individually insignificant and a $1.0 million increase in deferred tax
liabilities primarily from unrealized gains which are treated differently
for
tax and reporting purposes.
Other
Assets
Other
assets increased $2.4 million to $8.7 million at March 31, 2008, compared
to
$6.3 million at December 31, 2007. Major components of other assets are
as
follows:
|
|
March
31,
|
|
December
31,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Reinsurance
deposits
|
|
$
|
4,181
|
|
$
|
2,808
|
|
Interest
receivable
|
|
|
1,611
|
|
|
1,249
|
|
Accrued
investment income
|
|
|
1,256
|
|
|
1,385
|
|
Notes
receivable
|
|
|
1,133
|
|
|
-
|
|
Prepaid
expenses
|
|
|
438
|
|
|
625
|
|
Other
receivables
|
|
|
84
|
|
|
110
|
|
Notes
receivable from officers
|
|
|
-
|
|
|
100
|
|
Total
other assets
|
|
$
|
8,703
|
|
$
|
6,277
|
|
Unpaid
Losses and Loss Adjustment Expenses
Gross
unpaid losses and LAE decreased $3.9 million, or 10.8%, to $32.1 million
as of
March 31, 2008, as compared to $36.0 million as of December 31, 2007. The
decrease in unpaid losses and LAE was primarily due to a decrease in IBNR
reserves as a result of lower claims related to hurricanes due to the lack
of
storm activity in 2006 and 2007. United expects this trend to continue
as long
as there are no catastrophic storms for the remainder of the year.
Factors
that affect unpaid losses and LAE include the estimates made on a claim-by-claim
basis known as “case reserves” coupled with bulk estimates known as IBNR.
Periodic estimates by management of the ultimate costs required to settle
all
claim files are based on United’s analysis of historical data and estimations of
the impact of numerous factors such as (i) per claim information; (ii)
company
and industry historical loss experience; (iii) legislative enactments,
judicial
decisions, legal developments in the awarding of damages, and changes in
political attitudes; and (iv) trends in general economic conditions, including
the effects of inflation. Management revises its estimates based on the
results
of its analysis. This process assumes that past experience, adjusted for
the
effects of current developments and anticipated trends, is an appropriate
basis
for estimating the ultimate settlement of all claims. There is no precise
method
for subsequently evaluating the impact of any specific factor on the adequacy
of
the reserves, because the eventual redundancy or deficiency is affected
by
multiple factors.
Unearned
Premiums
Unearned
premiums decreased $6.5 million, or 8.9%, to $66.6 million at March 31,
2008,
compared to $73.1 million at December 31, 2007. The decrease was due to
a
corresponding decrease in written premium during the first three months
of
2008.
Reinsurance
Payable
Reinsurance
premiums payable decreased $10.9 million, or 100%, to zero at March 31,
2008,
compared to $10.9 million at December 31, 2007 primarily due to a large
reinsurance premium payment made during the first quarter of 2008.
Accrued
Distribution Payable
Accrued
distribution payable increased $2.1 million, or 22.8% to $11.3 million
at March
31, 2008 compared to $9.2 million at December 31, 2007. The increase in
the
accrued distribution payable resulted from an increase in the income of
UIM and
SCS. Since both UIM and SCS are limited liability companies, their income
flows
through, untaxed, to their owners and the owners incur the tax on that
income.
Cash distributions are made each year to allow each member to pay any federal
income taxes which may be owed by them.
Advance
Premium
Advance
premium, which represents monies received on policies not yet in force,
increased $0.7 million, or 29.2% to $3.1 million at March 31, 2008 compared
to
$2.4 million at December 31, 2007 primarily due to the fact that United
wrote
$11.6 million of new premium in March 2008 compared to $9.8 million of
new
premium in December 2007.
Accounts
Payable and Accrued Expenses
Accounts
payable and accrued expenses decreased $1.0 million, or 7.2%, to $12.9
million
at March 31, 2008 compared to $13.9 million as of December 31, 2007. This
decrease is due to a decrease in premium refunds payable and claim disbursements
payable of $0.8 million, as well as United’s cash management efforts and timing
of payments with trade vendors.
Federal
and State Income Tax Payable
Federal
and state income tax payable decreased $0.7 million or 30.4% to $1.6 million
at
March 31, 2008, compared to $2.3 million at December 31, 2007. The change
is due
to tax payment patterns in connection with United’s tax liabilities at the
insurance subsidiary.
Long-Term
Debt
Long-term
debt decreased $2.7 million, or 6.2%, to $41.1 million at March 31, 2008,
compared to $43.8 million at December 31, 2007. The decrease in long-term
debt
resulted from normal principal payments remitted to CB&T during the first
quarter.
RESULTS
OF OPERATIONS (Three Months Ended March 31, 2008 Compared to Three Months
Ended
March 31, 2007)
Gross
Premiums Written
Gross
premiums written decreased $8.3 million, or 22.2%, to $29.1 million for
the
three months ended March 31, 2008, compared to $37.4 million for the three
months ended March 31, 2007.
The
number of policies in force at March 31, 2008 compared to March 31, 2007
was
essentially the same. The lack of policy growth and related decrease
in gross
written premium is attributable to several factors. Specifically, there
was a
shift in the location of the mix of policies out of the Tri-County area
and into
other locations in Florida that have lower average written premium.
The
Tri-County area is defined as Broward, Dade and Palm Beach counties.
In
addition, in the fourth quarter of 2007, the OIR implemented new wind
mitigation
credits to be applied to all companies that also reduced the average
premium
during the three months ended March 31, 2008 compared to the prior year.
These
factors combined to decrease the average premium rate per policy from
$2,537 in
dollars at March 31, 2007 compared $2,107 in dollars at March 31,
2008.
Gross
Premiums Ceded
Gross
premiums ceded increased by $0.9 million to $1.4 million for the three
months
ended March 31, 2008, compared to $0.5 million for the three months ended
March
31, 2007. The amounts ceded to reinsurers related to the garage program
and
flood policies increased as a result of increased writings in both
programs. United believes that gross catastrophe premiums ceded will
remain at or near current level, in future periods, absent a catastrophic
weather event.
(Increase)
in Net Unearned Premiums
Net
unearned premiums increased $7.1 million for the three months ended March
31,
2008, compared to an increase of $17.4 million for the three months ended
March
31, 2007. The change was primarily due to a decrease in gross written homeowners
premiums during the three months ended March 31, 2008 compared to the same
period in 2007.
Net
Premiums Earned
Net
premiums earned increased $1.1 million, or 5.6%, to $20.6 million for the
three
months ended March 31, 2008, compared to $19.5 million for the three months
ended March 31, 2007. The increase in net premiums earned is due to the
increases and decreases in gross written premium, gross ceded premiums,
and net
unearned premiums as discussed above.
Net
Investment Income
Net
investment income decreased $0.2 million, or 11.1%, to $1.6 million for
the
three months ended March 31, 2008, compared to $1.8 million for the three
months
ended March 31, 2007. The decrease in net investment income resulted primarily
from a decrease in the investment yield of the fixed income portion of
the
portfolio to 5.24% from 5.44%.
Net
Realized Investment Losses
Net
realized investment losses increased to $0.2 million, for the three months
ended
March 31, 2008, compared to zero for the three months ended March 31, 2007.
The
table captioned “Total Investments” depicts the gains (losses) by investment
category.
Policy
Assumption Bonus
Policy
assumption bonus, which includes interest income earned on the bonus amounts,
decreased to $2.9 million for the three months ended March 31, 2008, as
compared
to $6.7 million for the same period in 2007. The decrease is due to the
number
of policies and related premium that earned a bonus from Citizens of
approximately 9,000 in 2008 as compared to approximately 21,000 in 2007.
Since
United must meet certain requirements to collect the bonus from policy
assumptions made from Citizens, such as offering the assumed policies for
renewal for three years, United recognizes the policy assumption bonus
when the
cash is collected.
For
the
remainder of 2008, United expects to recognize an additional $3.8 million
of
policy assumption bonus plus accrued interest.
Loss
and LAE
Loss
and
LAE, United’s most significant expense, represent actual payments made and
changes in estimated future payments to be made to or on behalf of United
policyholders, including expenses required to settle claims and losses.
United
revises its estimates based on the results of analysis of estimated future
payments to be made. This process assumes that past experience, adjusted
for the
effects of current developments and anticipated trends, is an appropriate
basis
for predicting future events.
Insurable
events during the three months ended March 31, 2008 and 2007 continued
to be
more normal in nature as compared to 2005 and 2004; there were no catastrophic
weather events such as the well-publicized series of hurricanes that occurred
in
Florida during 2004 and 2005.
Loss
and
LAE increased by $0.1 million, or 1.4%, to $7.1 million for the three
months
ended March 31, 2008, compared to $7.0 million for the three months ended
March
31, 2007. The increase is primarily attributable to a $0.5 million increase
related to loss adjustment expenses offset by a $0.2 million decrease
related to
lower paid losses and a $0.2 million decrease related to IBNR expenses.
Loss
adjustment expenses increased because United ceded more catastrophic
costs to
reinsurers in the first quarter of 2007 compared to 2008 as United was
closing
claims during 2007. Paid losses and IBNR expenses have decreased because
United
paid more claims related to the 2005 storms in 2007 than in 2008. United
expects
the downward trend related to catastrophic expenses to continue assuming
there
are no additional storms in the current year.
There
were no material changes in the costs related to the 2004 and 2005 storms
during
the three months ended March 31, 2008 compared to the three months ended
March
31, 2007.
Policy
Acquisition Costs
Policy
acquisition costs increased $0.3 million, or 7.5%, to $4.3 million
for three
months ended March 31, 2008, compared to $4.0 million for the three
months ended
March 31, 2007. Policy acquisition costs consists of agents’ commissions, policy
administration fees and premium taxes, less commissions earned on reinsurance
ceded and policy fees earned. The increase in policy acquisition costs is
primarily attributable to increased policy administration fees.
General
and Administrative Expenses
General
and administrative expenses increased $0.6 million or 75% to $1.3 million
for
the three months ended March 31, 2008, compared to $0.7 million for the
three
months ended March 31, 2007. The increase was primarily due to $0.5 million
in
professional fees associated with the proposed merger with FMG.
Interest
Expense
Interest
expense decreased $2.3 million, or 71.9%, to $0.9 million for the three
months
ended March 31, 2008, compared to $3.2 million for the three months ended
March
31, 2007. The change is primarily attributed to our refinancing of our
note
payable to York during the first quarter of 2007, which accelerated the
amortization of the participation fee of $1.1 million and original issue
discount of $0.7 million related to the York note.
The
decrease in interest expense quarter over quarter was partially offset
by a $0.2
million increase in interest expense related to the FSBA note. See Note
5 to
United’s interim consolidated financial statements for more information
regarding interest expense related to the FSBA note.
Provision
for Income Tax
The
provision for income tax decreased $1.8 million to $0.9 million for the
three
months ended March 31, 2008, compared to $2.7 million for the three months
ended
March 31, 2007. The change in income tax is attributable to the profitability
of
the insurance subsidiary which decreased quarter over quarter due to
decreases
in policy assumption bonus and net written premiums as discussed above.
The
effective income tax rate for the insurance subsidiary was 37.1% for
the three
months ended March 31, 2008, compared to 37.6% for the three months ended
March
31, 2007.
Net
Income
As
a
result of the foregoing, United’s net income for the three months ended March
31, 2008 was $9.7 million, compared to net income of $9.8 million for the
three
months ended March 31, 2007.
UNITED
INSURANCE HOLDINGS, LC
(MARCH
31, 2008)
LIQUIDITY
AND CAPITAL RESOURCES
The
primary sources of cash flow in our insurance subsidiary are gross premiums
written, loss reimbursements by our reinsurers, investment income, and
proceeds
from the sale or maturity of investments. Funds are used by the insurance
subsidiary for ceded premium payments to reinsurers, loss and LAE payments,
other underwriting expenses, purchases of investments and fee payments
to UIM.
UIM’s primary sources of cash are policy fees and managing general agent fee
income. UIM’s primary uses of cash are policy acquisition costs, commissions to
producers, interest, and general and administrative expenses.
Our
reconciliation of net income to net cash provided from operations is generally
influenced by the collection of premiums in advance of paid losses, the
timing
of reinsurance, issuing company settlements and the timing of our loss
payments.
For
the
three months ended March 31, 2008, operations provided net operating
cash flow
of $1.3 million, compared to $15.8 million for three months ended March
31,
2007.
For
the
three months ended March 31, 2008, operations generated $16.1 million of
gross
cash flow, primarily due to a $0.6 million decrease in amounts due from
reinsurers, a $0.7 million decrease in premium deposits, a $0.6 million
increase
in deferred acquisition costs, and a $13.5 million decrease in prepaid
reinsurance premiums.
For
the
three months ended March 31, 2008, operations used $24.5 million of gross
cash
flow primarily due to a $3.9 million decrease in United paying losses and
LAE, a
$6.4 million decrease in unearned premiums, a $10.9 million decrease in
reinsurance paid and a reduction in reinsurance costs, a $1.0 million decrease
in accounts payable and accrued expenses, a $0.7 decrease in income taxes,
net,
and a $1.3 million increase in other assets.
Subject
to catastrophic occurrences, net operating cash flow is currently expected
to be
positive in both the short-term and the reasonably foreseeable
future.
For
the
three months ended March 31, 2008, net investing activities used $7.2 million,
as compared to providing $3.8 million for the three months ended March
31, 2007.
Our available-for-sale investment portfolio is highly liquid as it consists
entirely of readily marketable securities. For the three months ended March
31,
2008, investing activities generated $3.3 million from the sale of
available-for-sale investments and used $10.5 million for the purchase
of
available-for-sale investments.
For
the
three months ended March 31, 2008, net financing activities used $2.7 million,
as compared to using $16.5 million for the three months ended March 31,
2007.
For the three months ended March 31, 2008, the uses of cash in connection
with
financing activities included $2.7 million for the repayment of the CB&T
loan.
United
maintains sufficient liquidity to pay claims, operating expenses and other
obligations. United held $48.3 million and $56.9 million of cash and cash
equivalents at March 31, 2008 and December 31, 2007, respectively. United
monitors its expected claims payment needs and maintains a sufficient portion
of
its invested assets in cash and cash equivalents to enable it to fund its
claims
payments without having to sell longer-duration investments. Cash and cash
equivalents at March 31, 2008 and December 31, 2007 included funds sufficient
to
distribute cash to members on an annual basis to pay federal income tax
which
may be owed by members due to the income attributable to them as members
of
United. As necessary, United adjusts its holdings of short-term investments
and
cash and cash equivalents to provide sufficient liquidity to respond to
changes
in the anticipated pattern of claims payments.
GAAP
differs in some respects from reporting practices prescribed or permitted
by the
OIR. To retain its certificate of authority, the Florida insurance laws
and
regulations require that UPCIC maintain capital and surplus equal to the
statutory minimum capital and surplus requirement defined in the Florida
Insurance Code as the greater of 10% of the insurer’s total liabilities or $4
million. UPCIC’s statutory capital surplus was $55.7 million at March 31, 2008,
and exceeded the minimum capital and surplus requirements. UPCIC is also
required to adhere to prescribed premium-to-capital surplus ratios, with
which
United was in compliance as of March 31, 2008.
United
believes its current capital resources, together with cash flow from operations,
will be sufficient to meet currently anticipated working capital requirements.
There can be no assurances, however, that such will be the case.
CONTRACTUAL
OBLIGATIONS
A
summary
of long-term contractual obligations as of December 31, 2007 follows. The
amounts represent estimates of gross undiscounted amounts payable over
time.
|
|
Total
|
|
2008
|
|
2009-2010
|
|
2011-2012
|
|
Thereafter
|
|
Contractual
Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
Losses and LAE
|
|
$
|
36,005
|
|
$
|
29,975
|
|
$
|
5,227
|
|
$
|
693
|
|
$
|
110
|
|
Operating
leases
|
|
|
236
|
|
|
117
|
|
|
74
|
|
|
43
|
|
|
2
|
|
Long-term
debt
|
|
|
43,833
|
|
|
11,000
|
|
|
14,304
|
|
|
2,352
|
|
|
16,177
|
|
Interest
in connection with Long-Term Debt
|
|
|
12,009
|
|
|
2,763
|
|
|
2,598
|
|
|
1,630
|
|
|
5,018
|
|
|
|
$
|
92,083
|
|
$
|
43,855
|
|
$
|
22,203
|
|
$
|
4,718
|
|
$
|
21,307
|
|
The
loss
reserve payments due by period in the table above are based upon the loss and
loss expense reserve estimates as of December 31, 2007 and actuarial estimates
of expected payout patterns by line of business. As a result, our calculation
of
loss reserve payments due by period is subject to the same uncertainties
associated with determining the level of reserves and to the additional
uncertainties arising from the difficulty of predicting when claims (including
claims that have not yet been reported to us) will be paid. The long-term debt
payments were based upon agreements in effect at December 31, 2007. The interest
in connection with long-term debt is calculated using interest rates in effect
at December 31, 2007.
IMPACT
OF INFLATION AND CHANGING PRICES
The
consolidated financial statements and related data presented herein have been
prepared in accordance with GAAP which requires the measurement of financial
position and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money over time due
to
inflation. Our primary assets and liabilities are monetary in nature. As a
result, interest rates have a more significant impact on performance than the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or with the same magnitude as the inflationary effect
on
the cost of paying losses and LAE.
Insurance
premiums are established before we know the amount of loss and LAE and the
extent to which inflation may affect such expenses. Consequently, we attempt
to
anticipate the future impact of inflation when establishing rate levels. While
we attempt to charge adequate premiums, we may be limited in raising premium
levels for competitive and regulatory reasons. Inflation also affects the market
value of our investment portfolio and the investment rate of return. Any future
economic changes which result in prolonged and increasing levels of inflation
could cause increases in the dollar amount of incurred loss and LAE and thereby
materially adversely affect future liability requirements.
SELECTED
QUARTERLY FINANCIAL DATA (Unaudited)
|
|
Year Ended December 31, 2007
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
|
|
(Dollars in thousands)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Net
premiums earned
|
|
$
|
21,277
|
|
$
|
15,254
|
|
$
|
23,181
|
|
$
|
25,646
|
|
Other
revenue
|
|
|
9,347
|
|
|
7,350
|
|
|
4,433
|
|
|
6,113
|
|
Total
revenue
|
|
|
30,624
|
|
|
22,604
|
|
|
27,614
|
|
|
31,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses
and LAE
|
|
|
7,025
|
|
|
4,041
|
|
|
7,611
|
|
|
6,985
|
|
Other
expenses
|
|
|
11,913
|
|
|
7,574
|
|
|
8,803
|
|
|
10,710
|
|
Total
expenses
|
|
|
18,938
|
|
|
11,615
|
|
|
16,414
|
|
|
17,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
11,686
|
|
|
10,989
|
|
|
11,200
|
|
|
14,064
|
|
Provision
for income tax
|
|
|
1,119
|
|
|
(518
|
)
|
|
1,198
|
|
|
6,498
|
|
Net
income
|
|
$
|
10,567
|
|
$
|
11,507
|
|
$
|
10,002
|
|
$
|
7,566
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
First Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
|
|
(Dollars in thousands)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Net
premiums earned
|
|
$
|
19,842
|
|
$
|
17,313
|
|
$
|
19,248
|
|
$
|
17,227
|
|
Other
revenue
|
|
|
1,797
|
|
|
2,245
|
|
|
1,703
|
|
|
3,077
|
|
Total
revenue
|
|
|
21,639
|
|
|
19,558
|
|
|
20,951
|
|
|
20,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses
and LAE
|
|
|
9,492
|
|
|
11,191
|
|
|
8,791
|
|
|
5,883
|
|
Other
expenses
|
|
|
6,915
|
|
|
6,444
|
|
|
8,062
|
|
|
12,480
|
|
Total
expenses
|
|
|
16,407
|
|
|
17,635
|
|
|
16,853
|
|
|
18,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
5,232
|
|
|
1,923
|
|
|
4,098
|
|
|
1,941
|
|
Provision
for income tax
|
|
|
(1,592
|
)
|
|
(585
|
)
|
|
(1,247
|
)
|
|
(591
|
)
|
Net
income
|
|
$
|
6,824
|
|
$
|
2,508
|
|
$
|
5,345
|
|
$
|
2,532
|
|
OFF
BALANCE SHEET TRANSACTIONS
For
the
years ended December 31, 2007 and 2006, there were no off balance sheet
transactions.
CHANGE
IN ACCOUNTANTS
In
fiscal
2008, United elected to change its accounting firm and replaced Thomas Howell
Ferguson P.A. as its independent accountants. The decision to change accounting
firms was approved by United’s board of managers. There were no reportable
events and no disagreements with Thomas Howell Ferguson P.A. on any matters
of
accounting principles or practices, financial statement disclosure or auditing
scope and procedures which, if not resolved to the satisfaction of Thomas
Howell
Ferguson, P.A. would have caused Thomas Howell Ferguson P.A. to make reference
to the matter in their report in the initial registration statement. Our
current
independent registered public accounting firm is DeMeo, Young, McGrath,
CPA.
UNAUDITED
PRO FORMA COMBINED
FINANCIAL
INFORMATION AS OF MARCH 31, 2008 AND DECEMBER 31,
2007
The
following unaudited pro forma condensed combined balance sheet combines
FMG's historical balance sheet and that of United as of March 31, 2008 and
December 31, 2007, giving effect to the transactions described in the
acquisition agreement as if they had occurred on March 31, 2008 and December
31,
2007. The following unaudited pro forma condensed combined statements of
operations combine FMG’s historical statements of operations for the three
months ended March 31, 2008 and for the period from May 22, 2007 (date of
inception) to December 31, 2007 with those of United for the three months
ended March 31, 2008 and for the year ended December 31, 2007, giving
effect to the acquisition as if it had occurred on January 1, 2007 (or
inception for FMG).
The
acquisition will be accounted for as a “reverse merger” and recapitalization
since the stockholders of United will own at least 59.6% of the outstanding
shares of the common stock immediately following the completion of the
acquisition, will have its current officers assuming all corporate offices
of
the continuing entity, including chief executive officer, chief operating
officer and all other day-to-day operating positions. Accordingly, United will
be deemed to be the accounting acquirer in the transaction and, consequently,
the transaction is treated as a recapitalization of United. The assets and
liabilities and the historical operations that will be reflected in the FMG
financial statements after consummation of the acquisition will be those of
United and will be recorded at the historical cost basis of United. FMG’s
assets, liabilities and results of operations will be consolidated with the
assets, liabilities and results of operations of United upon consummation of
the
acquisition.
The
pro
forma adjustments give effect to events that are directly attributable to the
transactions discussed below that have a continuing impact on the operations
of
FMG and are based on available data and certain assumptions that management
believes are factually supportable.
The
unaudited pro forma condensed combined financial statements described above
should be read in conjunction with FMG’s historical financial statements and
those of United and the related notes thereto. The pro forma adjustments are
preliminary and the unaudited pro forma information is not necessarily
indicative of the financial position or results of operations that may have
actually occurred had the acquisition taken place on the dates noted, or of
continuing entity’s future financial position or operating results.
Consummation
of the acquisition is conditioned upon, among other things, the FMG stockholders
adopting and approving the acquisition agreement. If FMG stockholders
owning more than 29.99% of FMG common stock sold in the IPO vote
against the acquisition and exercise their right to convert their shares
of FMG
common stock issued in the IPO into a pro rata portion of the funds held
in the
trust account, then the acquisition cannot be consummated. Consequently,
up to
1,419,614 shares of FMG common stock, representing 29.99% of the Public Shares
are subject to possible conversion in this manner. This would represent an
aggregate maximum conversion liability of approximately $11.2 million as
of March 31, 2008.
The
following unaudited pro forma financial statements have been prepared using
two
different assumptions with respect to the number of outstanding shares of FMG
stock immediately following the acquisition, as follows:
|
|
assuming
no conversions—this presentation assumes that no stockholders of FMG seek
to convert their shares into a pro rata share of the trust account;
and
|
|
|
assuming
maximum conversions—this presentation assumes stockholders of FMG owning
29.99% of the stock sold in FMG’s initial public offering seek
conversion.
|
In
the
case of both assumptions, the data is based on (a) information and
projections currently available to the parties, including the estimated adjusted
FMG trust value of $37.7 million, and (b) approximately 5.9 million
shares of FMG common stock currently outstanding, resulting in the issuance
to
United at closing of 8.75 million shares, or 59.6% of the after-issued
outstanding shares of the continuing entity.
Unaudited
Pro Forma Condensed Combined Balance Sheet
|
March
31, 2008
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
Approval
|
|
Minimum
Approval
|
|
|
|
FMG
|
|
United
|
|
Pro
Forma Adjustments
|
|
|
|
Pro
Forma Combined
|
|
Pro
Forma Adjustments
|
|
|
|
Pro
Forma Combined
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities
|
|
|
—
|
|
$
|
107,394
|
|
|
—
|
|
|
|
|
$
|
107,394
|
|
|
—
|
|
|
|
|
$
|
107,394
|
|
Equity
securities
|
|
|
—
|
|
|
4,632
|
|
|
—
|
|
|
|
|
|
4,632
|
|
|
—
|
|
|
|
|
|
4,632
|
|
Other
investments
|
|
|
—
|
|
|
10,300
|
|
|
—
|
|
|
|
|
|
10,300
|
|
|
—
|
|
|
|
|
|
10,300
|
|
Total
investments
|
|
|
—
|
|
|
122,326
|
|
|
—
|
|
|
|
|
|
122,326
|
|
|
—
|
|
|
|
|
|
122,326
|
|
Cash
and cash equivalents
|
|
|
55
|
|
|
48,296
|
|
|
37,737
|
|
|
(a
|
)
|
|
59,519
|
|
|
(11,232
|
)
|
|
(c
|
)
|
|
48,238
|
|
|
|
|
—
|
|
|
—
|
|
|
(1,515
|
)
|
|
(b
|
)
|
|
—
|
|
|
—
|
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
(25,000
|
)
|
|
(d
|
)
|
|
—
|
|
|
—
|
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
(117
|
)
|
|
(f
|
)
|
|
—
|
|
|
(49
|
)
|
|
(f
|
)
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
63
|
|
|
(f
|
)
|
|
—
|
|
|
—
|
|
|
|
|
|
—
|
|
Cash
held in Trust Account
|
|
|
37,737
|
|
|
—
|
|
|
(37,737
|
)
|
|
(a
|
)
|
|
—
|
|
|
—
|
|
|
|
|
|
—
|
|
Premiums
receivable, net
|
|
|
—
|
|
|
9,996
|
|
|
—
|
|
|
|
|
|
9,996
|
|
|
—
|
|
|
|
|
|
9,996
|
|
Reinsurance
recoverable, net
|
|
|
—
|
|
|
14,871
|
|
|
—
|
|
|
|
|
|
14,871
|
|
|
—
|
|
|
|
|
|
14,871
|
|
Prepaid
reinsurance premiums
|
|
|
—
|
|
|
12,819
|
|
|
—
|
|
|
|
|
|
12,819
|
|
|
—
|
|
|
|
|
|
12,819
|
|
Deferred
policy acquisition costs
|
|
|
—
|
|
|
6,946
|
|
|
—
|
|
|
|
|
|
6,946
|
|
|
—
|
|
|
|
|
|
6,946
|
|
Property
and equipment, net
|
|
|
—
|
|
|
100
|
|
|
—
|
|
|
|
|
|
100
|
|
|
—
|
|
|
|
|
|
100
|
|
Deferred
income taxes asset, net
|
|
|
32
|
|
|
4,034
|
|
|
—
|
|
|
|
|
|
4,066
|
|
|
—
|
|
|
|
|
|
4,066
|
|
Prepaid
expenses and other assets
|
|
|
42
|
|
|
10,084
|
|
|
—
|
|
|
|
|
|
10,126
|
|
|
—
|
|
|
|
|
|
10,126
|
|
Total
assets
|
|
$
|
37,866
|
|
$
|
229,472
|
|
$
|
(26,569
|
)
|
|
|
|
$
|
240,769
|
|
$
|
(11,281
|
)
|
|
|
|
$
|
229,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
losses and loss adjustment expenses
|
|
|
—
|
|
$
|
32,127
|
|
|
—
|
|
|
|
|
$
|
32,127
|
|
|
—
|
|
|
|
|
$
|
32,127
|
|
Unearned
premiums
|
|
|
—
|
|
|
66,618
|
|
|
—
|
|
|
|
|
|
66,618
|
|
|
—
|
|
|
|
|
|
66,618
|
|
Reinsurance
payable
|
|
|
—
|
|
|
69
|
|
|
—
|
|
|
|
|
|
69
|
|
|
—
|
|
|
|
|
|
69
|
|
Accrued
distribution payable
|
|
|
—
|
|
|
11,266
|
|
|
—
|
|
|
|
|
|
11,266
|
|
|
—
|
|
|
|
|
|
11,266
|
|
Advanced
premium
|
|
|
—
|
|
|
3,145
|
|
|
—
|
|
|
|
|
|
3,145
|
|
|
—
|
|
|
|
|
|
3,145
|
|
Accounts
payable and accrued expenses
|
|
|
416
|
|
|
12,886
|
|
|
—
|
|
|
|
|
|
1,912
|
|
|
—
|
|
|
|
|
|
1,912
|
|
|
|
|
—
|
|
|
—
|
|
|
(11,390
|
)
|
|
(h
|
)
|
|
—
|
|
|
—
|
|
|
|
|
|
—
|
|
Shares
subject to mandatory redemption
|
|
|
—
|
|
|
2,564
|
|
|
(2,564
|
)
|
|
(e
|
)
|
|
—
|
|
|
—
|
|
|
|
|
|
—
|
|
Federal
and state income tax payable
|
|
|
—
|
|
|
1,612
|
|
|
(20
|
)
|
|
(g
|
)
|
|
3,946
|
|
|
(18
|
)
|
|
(g
|
)
|
|
3,928
|
|
|
|
|
—
|
|
|
—
|
|
|
2,354
|
|
|
(h
|
)
|
|
—
|
|
|
—
|
|
|
|
|
|
—
|
|
Other
liabilities
|
|
|
—
|
|
|
2,642
|
|
|
—
|
|
|
|
|
|
2,642
|
|
|
—
|
|
|
|
|
|
2,642
|
|
Long-term
debt
|
|
|
—
|
|
|
41,083
|
|
|
—
|
|
|
|
|
|
41,083
|
|
|
—
|
|
|
|
|
|
41,083
|
|
Deferred
underwriters' fee
|
|
|
1,515
|
|
|
—
|
|
|
(1,515
|
)
|
|
(b
|
)
|
|
—
|
|
|
—
|
|
|
|
|
|
—
|
|
|
|
|
1,931
|
|
|
174,012
|
|
|
(13,135
|
)
|
|
|
|
|
162,808
|
|
|
(18
|
)
|
|
|
|
|
162,790
|
|
Common
stock, subject to possible redemption
|
|
|
11,232
|
|
|
—
|
|
|
(11,232
|
)
|
|
(c
|
)
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
Stockholders'
equity (deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
|
|
|
1
|
|
|
—
|
|
|
|
|
|
1
|
|
Member's
certificate of interest
|
|
|
—
|
|
|
7,527
|
|
|
(7,527
|
)
|
|
(d
|
)
|
|
—
|
|
|
—
|
|
|
|
|
|
—
|
|
Additional
paid-in-capital
|
|
|
24,874
|
|
|
—
|
|
|
11,232
|
|
|
(c
|
)
|
|
21,025
|
|
|
(11,232
|
)
|
|
(c
|
)
|
|
9,793
|
|
|
|
|
—
|
|
|
—
|
|
|
(17,645
|
)
|
|
(d
|
)
|
|
—
|
|
|
—
|
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
2,564
|
|
|
(e
|
)
|
|
—
|
|
|
—
|
|
|
|
|
|
—
|
|
Accumulated
other comprehensive income
|
|
|
—
|
|
|
2,414
|
|
|
—
|
|
|
|
|
|
2,414
|
|
|
—
|
|
|
|
|
|
2,414
|
|
Retained
earnings (accumulated deficit)
|
|
|
(172
|
)
|
|
45,519
|
|
|
172
|
|
|
(d
|
)
|
|
54,521
|
|
|
—
|
|
|
|
|
|
54,490
|
|
|
|
|
—
|
|
|
—
|
|
|
11,390
|
|
|
(h
|
)
|
|
—
|
|
|
—
|
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
(2,388
|
)
|
|
(i
|
)
|
|
—
|
|
|
(31
|
)
|
|
(i
|
)
|
|
—
|
|
Total
stockholders' equity (deficit)
|
|
|
24,703
|
|
|
55,460
|
|
|
(2,202
|
)
|
|
|
|
|
77,961
|
|
|
(11,263
|
)
|
|
|
|
|
66,698
|
|
Total
liabilities and stockholders' equity (deficit)
|
|
$
|
37,866
|
|
$
|
229,472
|
|
$
|
(26,569
|
)
|
|
|
|
$
|
240,769
|
|
$
|
(11,281
|
)
|
|
|
|
$
|
229,488
|
|
|
Quarter
Ended March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
Approval
|
|
Minimum
Approval
|
|
|
|
FMG
|
|
United
|
|
Pro
Forma Adjustments
|
|
|
|
Pro
Forma Combined
|
|
Pro
Forma Adjustments
|
|
|
|
Pro
Forma Combined
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earned premiums
|
|
|
—
|
|
$
|
20,635
|
|
|
—
|
|
|
|
|
$
|
20,635
|
|
|
—
|
|
|
|
|
$
|
20,635
|
|
Policy
assumption bonus
|
|
|
—
|
|
|
2,912
|
|
|
—
|
|
|
|
|
|
2,912
|
|
|
—
|
|
|
|
|
|
2,912
|
|
Other
revenue
|
|
|
—
|
|
|
1,044
|
|
|
—
|
|
|
|
|
|
1,044
|
|
|
—
|
|
|
|
|
|
1,044
|
|
Total
revenue
|
|
|
—
|
|
|
24,591
|
|
|
—
|
|
|
|
|
|
24,591
|
|
|
—
|
|
|
|
|
|
24,591
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses
and loss adjustment expenses
|
|
|
—
|
|
|
7,131
|
|
|
—
|
|
|
|
|
|
7,131
|
|
|
—
|
|
|
|
|
|
7,131
|
|
Policy
acquisition costs
|
|
|
—
|
|
|
4,318
|
|
|
—
|
|
|
|
|
|
4,318
|
|
|
—
|
|
|
|
|
|
4,318
|
|
Operating
and underwriting expenses
|
|
|
—
|
|
|
1,542
|
|
|
—
|
|
|
|
|
|
1,542
|
|
|
—
|
|
|
|
|
|
1,542
|
|
Salaries
and wages
|
|
|
—
|
|
|
708
|
|
|
—
|
|
|
|
|
|
708
|
|
|
—
|
|
|
|
|
|
708
|
|
General
and administrative expenses
|
|
|
357
|
|
|
1,337
|
|
|
—
|
|
|
|
|
|
1,694
|
|
|
—
|
|
|
|
|
|
1,694
|
|
Total
operating expenses
|
|
|
357
|
|
|
15,036
|
|
|
—
|
|
|
|
|
|
15,393
|
|
|
—
|
|
|
|
|
|
15,393
|
|
Income
(loss) from operations
|
|
|
(357
|
)
|
|
9,555
|
|
|
—
|
|
|
|
|
|
9,198
|
|
|
—
|
|
|
|
|
|
9,198
|
|
Interest
income
|
|
|
166
|
|
|
1,833
|
|
|
(117
|
)
|
|
(f
|
)
|
|
1,945
|
|
|
(49
|
)
|
|
(f
|
)
|
|
1,896
|
|
|
|
|
—
|
|
|
—
|
|
|
63
|
|
|
(f
|
)
|
|
—
|
|
|
—
|
|
|
|
|
|
—
|
|
Interest
expense
|
|
|
—
|
|
|
(865
|
)
|
|
|
|
|
|
|
|
(865
|
)
|
|
—
|
|
|
|
|
|
(865
|
)
|
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
|
—
|
|
Income
(loss) before taxes
|
|
|
(191
|
)
|
|
10,523
|
|
|
(54
|
)
|
|
|
|
|
10,278
|
|
|
(49
|
)
|
|
|
|
|
10,229
|
|
Income
tax provision
|
|
|
63
|
|
|
856
|
|
|
(20
|
)
|
|
(g
|
)
|
|
3,253
|
|
|
(18
|
)
|
|
(g
|
)
|
|
3,235
|
|
|
|
|
—
|
|
|
—
|
|
|
2,354
|
|
|
(h
|
)
|
|
—
|
|
|
—
|
|
|
|
|
|
—
|
|
Net
income (loss)
|
|
$
|
(254
|
)
|
$
|
9,667
|
|
$
|
(2,388
|
)
|
|
|
|
$
|
7,025
|
|
$
|
(31
|
)
|
|
|
|
$
|
6,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
5,917,031
|
|
|
8,750,000
|
|
|
|
|
|
|
|
|
14,667,031
|
|
|
|
|
|
|
|
|
13,247,417
|
|
Diluted
|
|
|
5,917,031
|
|
|
8,750,000
|
|
|
|
|
|
|
|
|
14,667,031
|
|
|
|
|
|
|
|
|
13,247,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.04
|
)
|
$
|
1.10
|
|
|
|
|
|
|
|
$
|
0.48
|
|
|
|
|
|
|
|
$
|
0.53
|
|
Diluted
|
|
$
|
(0.04
|
)
|
$
|
1.10
|
|
|
|
|
|
|
|
$
|
0.48
|
|
|
|
|
|
|
|
$
|
0.53
|
|
Unaudited
Pro Forma Condensed Combined Balance Sheet
December
31, 2007
(in
thousands)
|
|
|
|
|
|
Maximum Approval
|
|
Minimum Approval
|
|
|
|
FMG
|
|
United
|
|
Pro Forma
Adjustments
|
|
Pro Forma
Combined
|
|
Pro Forma
Adjustments
|
|
Pro Forma
Combined
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities
|
|
|
—
|
|
$
|
107,410
|
|
|
—
|
|
$
|
107,410
|
|
|
—
|
|
$
|
107,410
|
|
Equity
securities
|
|
|
—
|
|
|
5,072
|
|
|
—
|
|
|
5,072
|
|
|
—
|
|
|
5,072
|
|
Other
investments
|
|
|
—
|
|
|
1,300
|
|
|
—
|
|
|
1,300
|
|
|
—
|
|
|
1,300
|
|
Total
investments
|
|
|
—
|
|
|
113,782
|
|
|
—
|
|
|
113,782
|
|
|
—
|
|
|
113,782
|
|
Cash
and cash equivalents
|
|
|
71
|
|
|
56,852
|
|
|
37,721
|
(a)
|
|
68,126
|
|
|
(11,232
|
)
(c
)
|
|
56,815
|
|
|
|
|
—
|
|
|
—
|
|
|
(1,515
|
)
(b
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
(25,000
|
)
(d
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
(189
|
)
(f
)
|
|
—
|
|
|
(79
|
)
(f
)
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
186
|
(f)
|
|
—
|
|
|
—
|
|
|
—
|
|
Cash
held in Trust Account
|
|
|
37,721
|
|
|
—
|
|
|
(37,721
|
)
(a
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Premiums
receivable, net
|
|
|
—
|
|
|
9,966
|
|
|
—
|
|
|
9,966
|
|
|
—
|
|
|
9,966
|
|
Reinsurance
recoverable, net
|
|
|
—
|
|
|
16,816
|
|
|
—
|
|
|
16,816
|
|
|
—
|
|
|
16,816
|
|
Prepaid
reinsurance premiums
|
|
|
—
|
|
|
26,345
|
|
|
—
|
|
|
26,345
|
|
|
—
|
|
|
26,345
|
|
Deferred
policy acquisition costs
|
|
|
—
|
|
|
7,547
|
|
|
—
|
|
|
7,547
|
|
|
—
|
|
|
7,547
|
|
Property
and equipment, net
|
|
|
—
|
|
|
108
|
|
|
—
|
|
|
108
|
|
|
—
|
|
|
108
|
|
Deferred
income taxes asset, net
|
|
|
32
|
|
|
4,733
|
|
|
—
|
|
|
4,765
|
|
|
—
|
|
|
4,765
|
|
Prepaid
expenses and other assets
|
|
|
54
|
|
|
6,277
|
|
|
—
|
|
|
6,331
|
|
|
—
|
|
|
6,331
|
|
Total
assets
|
|
$
|
37,878
|
|
$
|
242,426
|
|
$
|
(26,518
|
)
|
$
|
253,786
|
|
$
|
(11,311
|
)
|
$
|
242,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
losses and loss adjustment expenses
|
|
|
—
|
|
$
|
36,005
|
|
|
—
|
|
$
|
36,005
|
|
|
—
|
|
$
|
36,005
|
|
Unearned
premiums
|
|
|
—
|
|
|
73,051
|
|
|
—
|
|
|
73,051
|
|
|
—
|
|
|
73,051
|
|
Reinsurance
payable
|
|
|
—
|
|
|
10,852
|
|
|
—
|
|
|
10,852
|
|
|
—
|
|
|
10,852
|
|
Accrued
distribution payable
|
|
|
—
|
|
|
9,227
|
|
|
—
|
|
|
9,227
|
|
|
—
|
|
|
9,227
|
|
Advanced
premium
|
|
|
—
|
|
|
2,396
|
|
|
—
|
|
|
2,396
|
|
|
—
|
|
|
2,396
|
|
Accounts
payable and accrued expenses
|
|
|
174
|
|
|
13,858
|
|
|
—
|
|
|
4,681
|
|
|
—
|
|
|
4,681
|
|
|
|
|
—
|
|
|
—
|
|
|
(9,351
|
)
(h
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Shares
subject to mandatory redemption
|
|
|
—
|
|
|
939
|
|
|
(939
|
)
(e
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Federal
and state income tax payable
|
|
|
—
|
|
|
2,303
|
|
|
(1
|
)
(g)
|
|
12,485
|
|
|
(30
|
)
(g
)
|
|
12,455
|
|
|
|
|
—
|
|
|
—
|
|
|
10,183
|
(h)
|
|
—
|
|
|
—
|
|
|
—
|
|
Other
liabilities
|
|
|
—
|
|
|
2,238
|
|
|
—
|
|
|
2,238
|
|
|
—
|
|
|
2,238
|
|
Long-term
debt
|
|
|
—
|
|
|
43,833
|
|
|
—
|
|
|
43,833
|
|
|
—
|
|
|
43,833
|
|
Deferred
underwriters' fee
|
|
|
1,515
|
|
|
—
|
|
|
(1,515
|
)
(b
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
1,689
|
|
|
194,702
|
|
|
(1,623
|
)
|
|
194,768
|
|
|
(30
|
)
|
|
194,738
|
|
Common
stock, subject to possible redemption
|
|
|
11,232
|
|
|
—
|
|
|
(11,232
|
)
(c
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Stockholders'
equity (deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Member's
certificate of interest
|
|
|
—
|
|
|
7,464
|
|
|
(7,464
|
)
(d
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Additional
paid-in-capital
|
|
|
24,874
|
|
|
—
|
|
|
11,232
|
(c)
|
|
18,652
|
|
|
(11,232
|
)
(c
)
|
|
7,420
|
|
|
|
|
—
|
|
|
—
|
|
|
(17,454
|
)
(d
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
715
|
(e)
|
|
—
|
|
|
—
|
|
|
—
|
|
Accumulated
other comprehensive income
|
|
|
—
|
|
|
744
|
|
|
—
|
|
|
744
|
|
|
—
|
|
|
744
|
|
Retained
earnings (accumulated deficit)
|
|
|
82
|
|
|
37,891
|
|
|
(82
|
)
(d)
|
|
39,621
|
|
|
—
|
|
|
39,572
|
|
|
|
|
—
|
|
|
—
|
|
|
939
|
(e)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
9,351
|
(h)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
10,185
|
|
|
—
|
|
|
(49
|
)
(i
)
|
|
—
|
|
Total
stockholders' equity (deficit)
|
|
|
24,957
|
|
|
46,099
|
|
|
(13,663
|
)
|
|
59,018
|
|
|
(11,281
|
)
|
|
47,737
|
|
Total
liabilities and stockholders' equity (deficit)
|
|
$
|
37,878
|
|
$
|
242,426
|
|
$
|
(26,518
|
)
|
$
|
253,786
|
|
$
|
(11,311
|
)
|
$
|
242,475
|
|
See
notes
to the unaudited pro forma condensed combined financial statements.
Year
Ended December 31, 2007
(in
thousands, except share and per share data)
|
|
|
|
|
|
Maximum Approval
|
|
Minimum Approval
|
|
|
|
FMG
|
|
United
|
|
Pro
Forma
Adjustments
|
|
Pro
Forma
Combined
|
|
Pro
Forma
Adjustments
|
|
Pro
Forma
Combined
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earned premiums
|
|
|
—
|
|
$
|
85,358
|
|
|
—
|
|
$
|
85,358
|
|
|
—
|
|
$
|
85,358
|
|
Policy
assumption bonus
|
|
|
—
|
|
|
13,556
|
|
|
—
|
|
|
13,556
|
|
|
—
|
|
|
13,556
|
|
Other
revenue
|
|
|
—
|
|
|
6,099
|
|
|
—
|
|
|
6,099
|
|
|
—
|
|
|
6,099
|
|
Total revenue
|
|
|
—
|
|
|
105,013
|
|
|
—
|
|
|
105,013
|
|
|
—
|
|
|
105,013
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses
and loss adjustment expenses
|
|
|
—
|
|
|
25,662
|
|
|
—
|
|
|
25,662
|
|
|
—
|
|
|
25,662
|
|
Policy
acquisition costs
|
|
|
—
|
|
|
17,316
|
|
|
—
|
|
|
17,316
|
|
|
—
|
|
|
17,316
|
|
Operating
and underwriting expenses
|
|
|
—
|
|
|
9,110
|
|
|
—
|
|
|
9,110
|
|
|
—
|
|
|
9,110
|
|
Salaries
and wages
|
|
|
—
|
|
|
2,792
|
|
|
—
|
|
|
2,792
|
|
|
—
|
|
|
2,792
|
|
General
and administrative expenses
|
|
|
114
|
|
|
2,078
|
|
|
—
|
|
|
2,192
|
|
|
—
|
|
|
2,192
|
|
Total operating expenses
|
|
|
114
|
|
|
56,958
|
|
|
—
|
|
|
57,072
|
|
|
—
|
|
|
57,072
|
|
Income
(loss) from operations
|
|
|
(114
|
)
|
|
48,055
|
|
|
—
|
|
|
47,941
|
|
|
—
|
|
|
47,941
|
|
Interest
income
|
|
|
268
|
|
|
7,588
|
|
|
(189
|
)
(f
)
|
|
7,853
|
|
|
(79
|
)
(f
)
|
|
7,774
|
|
|
|
|
—
|
|
|
—
|
|
|
186
|
(f)
|
|
—
|
|
|
—
|
|
|
—
|
|
Interest
expense
|
|
|
—
|
|
|
(5,364
|
)
|
|
|
|
|
(5,364
|
)
|
|
—
|
|
|
(5,364
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before taxes
|
|
|
154
|
|
|
50,279
|
|
|
(3
|
)
|
|
50,430
|
|
|
(79
|
)
|
|
50,351
|
|
Income
tax provision
|
|
|
72
|
|
|
8,297
|
|
|
(1
|
)(g)
|
|
18,551
|
|
|
(30
|
)
(g
)
|
|
18,521
|
|
|
|
|
—
|
|
|
—
|
|
|
10,183
|
(h)
|
|
—
|
|
|
—
|
|
|
—
|
|
Net
income (loss)
|
|
$
|
82
|
|
$
|
41,982
|
|
$
|
(10,185
|
)
|
$
|
31,879
|
|
$
|
(49
|
)
|
$
|
31,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,879,226
|
|
|
8,750,000
|
|
|
|
|
|
11,629,226
|
|
|
|
|
|
11,310,299
|
|
Diluted
|
|
|
3,258,383
|
|
|
8,750,000
|
|
|
|
|
|
12,008,383
|
|
|
|
|
|
11,689,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.03
|
|
$
|
4.80
|
|
|
|
|
$
|
2.74
|
|
|
|
|
$
|
2.81
|
|
Diluted
|
|
$
|
0.03
|
|
$
|
4.80
|
|
|
|
|
$
|
2.65
|
|
|
|
|
$
|
2.72
|
|
See
notes
to the unaudited pro forma condensed combined financial statements.
NOTES
TO UNAUDITED PRO FORMA CONDENSED
COMBINED
FINANCIAL STATEMENTS
1.
|
Description
of Transaction and Basis of
Presentation
|
On
April 2, 2008, the Company entered into an Agreement and Plan of Merger pursuant
to which United Subsidiary (a wholly owned subsidiary of FMG) has agreed to
merge with and into United, and United has agreed, subject to receipt of the
Merger consideration from FMG, to become a wholly-owned subsidiary of FMG.
If
the stockholders of the Company approve the transactions contemplated by the
Merger Agreement, FMG, through United Subsidiary, which was newly incorporated
in order to facilitate the Merger contemplated thereby, will purchase all of
the
membership interests of United in a series of steps as outlined
below.
FMG
and United will merge pursuant to a merger transaction summarized as
follows:
(i)
|
FMG
will create a transitory merger subsidiary, United Subsidiary Corp.,
and
will merge such subsidiary with and into United, with United surviving;
and
|
(ii)
|
United
will, as a result, become wholly-owned by
FMG.
|
United’s
members will receive consideration of up to $100.0 million consisting
of:
(i)
|
$25.0
million in cash;
|
(ii)
|
8.75
million shares of FMG common stock, par value $.0001 per share (assuming
an $8.00 per share value); and
|
(iii)
|
up
to $5.0 million of additional consideration will be paid to the members
of
United in the event certain net income targets are met by the continuing
entity
|
The
adoption of the merger agreement and the transactions contemplated by the
merger
agreement by the FMG stockholders will require the affirmative vote of (a)
a
majority of the shares of FMG common stock issued in FMG’s initial public
offering actually voting upon the merger and (b) a majority of the shares
of FMG
common stock issued and outstanding as of the Record Date. However, FMG will
not
be able to complete the merger if the holders of more than 29.99% of the
shares
of common stock issued in FMG’s initial public offering vote against the merger
and demand that FMG convert their shares into a pro rata portion of the trust
account. The unaudited pro forma condensed combined financial statements
assume
that 100.0% of the outstanding shares of FMG’s common stock on the record date
vote affirmatively, and there are no conversions. A second presentation of
the
unaudited pro forma condensed combined financial statements assumes that
70.01%
of the outstanding shares of FMG’s common stock on the record date vote
affirmatively, and there are 29.99% conversions.
Descriptions
of the adjustments included in the unaudited pro forma balance sheet and
statements of operations are as follows:
|
(a)
|
Reflects
the release of FMG’s cash held in trust (including the amount held in the
trust account representing the deferred portion of the underwriters’ fee),
inclusive of any interest earned on such pro rata share (net of taxes
payable) and the transfer of the balance to cash and cash equivalents
at
the completion of the business
combination.
|
|
(b)
|
Gives
effect to the payment to the underwriters of FMG’s initial public offering
of deferred underwriters’ fees upon completion of the
merger.
|
|
(c)
|
Reflects
the adjustment of common stock subject to conversion as a result
of this
transaction. As shown in the balance sheet reflecting the maximum
approval
scenario, this adjustment reflects the reclassification of the conversion
value of the FMG common stock subject to conversion to additional
paid-in
capital related to conversion shares. As shown in the balance sheet
reflecting the minimum approval scenario, this adjustment reflects
the
cash payout of the conversion value to FMG’s common stockholders who voted
against the merger and properly exercised their conversion rights
with
respect to 29.99% of the FMG common stock sold in the initial public
offering.
|
|
(d)
|
Reflects
the payment of $25 million and issuance of 8,750,000 shares of FMG
common
stock in exchange for the Membership interests of United, and the
reclassification of FMG’s net monetary assets to additional paid-in
capital under the reverse acquisition application of the equity
recapitalization method of accounting, where as United is treated
as the
accounting acquirer.
|
|
(e)
|
Reflects
that the United membership interests subject to a Put Agreement dated
September 20, 2006, which will be cancelled and shall cease to exist
upon
the consummation of the Merger.
|
|
(f)
|
Adjustment
of interest income:
|
|
|
i.
|
Maximum
approval – reduction of interest income related to the payment of
approximately $26.5 million (including underwriting fees) to the
prior
shareholders of United Subsidiary Corp., plus an increase in interest
income related to the assumption that the remaining $11.2 million
would
have been invested in a CD earning approximately
4%.
|
|
|
ii.
|
Minimum
approval – reduction of interest income due to the additional redemption
of 29.99% of the outstanding shares or approximately $11.2
million.
|
|
(g)
|
Adjust
income taxes due to pro forma income adjustments based on the statutory
tax rate.
|
|
(h)
|
Recognize
the additional tax expense related to income from the LLC subsidiaries
and
eliminate the accrual of tax distributions to members for the payment
of
taxes.
|
|
|
|
|
(i)
|
Reflects
the income statement effect of the proforma
adjustments.
|
3.
|
Additional
contingent consideration
|
The
merger agreement contains a contingent payment of $5.0 million if certain net
income targets are met by the continuing entity. Had the contingency been met,
the additional consideration would be reflected in the pro forma financial
statements by a reduction of cash and a reduction of additional paid-in capital
by the amount paid.
DIRECTORS
AND MANAGEMENT OF FMG ACQUISITION CORP.
FOLLOWING
THE MERGER
Following
the Merger, it is anticipated that the directors and executive officers of
the
Company will be the individuals indicated below.
Name
|
Age
|
Position
|
|
|
|
Gregory
C. Branch
|
62
|
Chairman
of the Board
|
Gordon
G. Pratt
|
46
|
Vice
Chairman
|
Donald
J. Cronin
|
54
|
President
and Chief Executive Officer
|
Nicholas
W. Griffin
|
39
|
Chief
Financial Officer
|
Melvin
A. Russell, Jr.
|
53
|
Chief
Underwriting Officer
|
Alec
L. Poitevint, II
|
60
|
Director
|
Larry
G. Swets, Jr.
|
33
|
Director
|
Kent
G. Whittemore
|
60
|
Director
|
James
R. Zuhlke
|
61
|
Director
|
Information
about Directors and Officers
For
the biographies of Messrs. Gregory C. Branch, Gordon G. Pratt, Donald J.
Cronin, Nicholas W. Griffin, Melvin A. Russell, Jr., Alec L. Poitevint, II,
Kent
G. Whittemore, Larry G. Swets, Jr. and James R. Zuhlke, see the section entitled
“Director Proposal.”
Other
than their respective relationships with the Company, none of these individuals
has been a principal of or affiliated with a public company or blank check
company that executed a business plan similar to our business plan, and none
of
these individuals is currently affiliated with such an entity.
Following
the Merger, the officers and employee directors will devote their full time
and
attention to the ongoing operations of the Company and the non-employee
directors will devote such time as is necessary and required to satisfy their
duties as a director of a public company.
Board
of Directors and Committees of the Board
Following
the Merger, our Board of Directors will consist of six members, and it is
anticipated three of them will be considered “independent” under the
director independence standards of NASDAQ.
We
do not currently have a Compensation Committee, Nominating Committee or Audit
Committee, but we expect to establish such committees as soon as practicable
after the consummation of the Merger. Compensation for all other officers,
if
any, will be determined, or recommended to the Board for determination by a
majority of the independent directors on our Board of Directors. None of our
officers currently receive compensation. We do not expect to pay any
compensation to any of our officers until the consummation of the
Merger.
Code
of Conduct and Ethics
We
have adopted a code of ethics that applies to our officers, directors and
employees in accordance with applicable federal securities laws. We have filed
copies of our code of conduct and ethics as an exhibit to the Registration
Statement. These documents may be reviewed by accessing our public filings
at
the SEC’s web site at www.sec.gov. In addition, a copy of the code of ethics
will be provided without charge upon request to us. We intend to disclose any
amendments to or waivers of certain provisions of our code of ethics in a
Current Report on Form 8-K.
Director
Compensation
It
is anticipated that at or prior to the closing of the Merger, the compensation
to be paid to members of the Board of Directors of the Company will be
established and such compensation will be reasonable and customary for the
industry.
Executive
Compensation
None
of FMG Acquisition Corp.’s executive officers or directors has received any cash
compensation for services rendered to FMG.
CURRENT
DIRECTORS AND MANAGEMENT OF UNITED SUBSIDIARY CORP.
As
of the date of this proxy statement/prospectus, United Subsidiary Corp. has
two
officers and directors, as identified below:
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
Gordon
G. Pratt
|
|
46
|
|
Chairman,
President and Chief Executive Officer
|
Larry
G. Swets, Jr.
|
|
33
|
|
Chief
Financial Officer, Executive Vice President, Secretary, Treasurer
and
Director
|
None
of its officers or directors have received any compensation from United
Subsidiary Corp., which was recently incorporated for the purpose of acquiring
United. United Subsidiary is affiliated with the Company in order to incorporate
United Subsidiary, a single share of United Subsidiary common stock was issued
to Gordon G. Pratt, the Company’s Chairman, President and Chief Executive
Officer. Upon consummation of the Merger, Mr. Pratt will surrender to
United Subsidiary the initial share and such share shall be cancelled by United
Subsidiary.
BENEFICIAL
OWNERSHIP OF SECURITIES
The
following table sets forth information as of June 12, 2008, based on information
obtained from the persons named below, with respect to the beneficial ownership
of shares of FMG Acquisition Corp.’s common stock by: (i) each person known
by us to be the owner of more than 5% of our outstanding shares of FMG
Acquisition Corp.’s common stock, (ii) each director, and (iii) all
officers and directors as a group. Except as indicated in the footnotes to
the
table, the persons named in the table have sole voting and investment power
with
respect to all shares of common stock shown as beneficially owned by
them.
|
|
Common
Stock
|
|
|
|
Number of Shares (2)
|
|
Percentage of Common
Stock
|
|
Name and
Address of Beneficial Owners(1)
|
|
|
|
|
|
|
|
|
|
|
|
FMG
Investors LLC(3)
|
|
|
1,099,266
|
|
|
18.57
|
%
|
Gordon
G. Pratt, Chairman, Chief Executive Officer and President
|
|
|
1,099,266
|
(3)
|
|
18.57
|
%
|
Larry
G. Swets, Jr., Chief Financial Officer, Secretary, Treasurer, Executive
Vice President
|
|
|
1,099,266
|
(3)
|
|
18.57
|
%
|
Thomas
D. Sargent, Director
|
|
|
21,035
|
|
|
0.36
|
%
|
David
E. Sturgess, Director(4)
|
|
|
21,035
|
|
|
0.36
|
%
|
James
R. Zuhlke, Director
|
|
|
21,035
|
|
|
0.36
|
%
|
HBK
Investments L.P.(5)
|
|
|
547,250
|
|
|
9.2
|
%
|
Brian
Taylor (6)
|
|
|
437,500
|
|
|
7.4
|
%
|
Bulldog
Investors(7)
|
|
|
1,282,167
|
|
|
21.67
|
%
|
Millenco
LLC(8)
|
|
|
189,375
|
|
|
3.2
|
%
|
D.B.
Zwirn Special Opportunities Fund, L.P.(9)
|
|
|
178,500
|
|
|
3.02
|
%
|
D.B.
Zwirn Special Opportunities Fund, Ltd. (9)
|
|
|
246,500
|
|
|
4.17
|
%
|
D.B.
Zwirn & Co., L.P. (9)
|
|
|
425,000
|
|
|
7.18
|
%
|
DBZ
GP, LLC(9)
|
|
|
425,000
|
|
|
7.18
|
%
|
Zwirn
Holdings, LLC(9)
|
|
|
350,000
|
|
|
5.92
|
%
|
Daniel
B. Zwirn(9)
|
|
|
350,000
|
|
|
5.92
|
%
|
Weiss
Asset Management, LLC(10)
|
|
|
255,002
|
|
|
4.3
|
%
|
Weiss
Capital, LLC(10)
|
|
|
130,435
|
|
|
2.2
|
%
|
Andrew
M. Weiss, Ph.D.(10)
|
|
|
385,437
|
|
|
6.5
|
%
|
|
|
|
|
|
|
|
|
All
Directors and Officers as a Group (5 persons)
|
|
|
1,162,371
|
|
|
19.64
|
%
|
(1)
|
Unless
otherwise indicated, the business address of each of the stockholders
is
Four Forest Park, Second Floor, Farmington, Connecticut
06032.
|
|
|
(2)
|
Unless
otherwise indicated, all ownership is direct beneficial
ownership.
|
|
|
(3)
|
Each
of Messrs. Pratt and Swets are the managing members of our sponsor,
FMG Investors LLC, and may be deemed to each beneficially own the
1,099,266 shares owned by FMG Investors LLC.
|
|
|
(4)
|
The
business address of David E. Sturgess is c/o Updike, Kelly & Spellacy,
P.C., One State Street, Hartford, Connecticut
06103.
|
(5)
|
Based
on information contained in a Statement on Schedule 13G filed by
HBK
Investments L.P., HBK Services LLC, HBK Partners II L.P., HBK Management
LLC and HBK Master Fund L.P. on February 12, 2008. The address
of all such
reporting parties is 300 Crescent Court, Suite 700, Dallas, Texas
75201.
HBK Investments L.P. has delegated discretion to vote and dispose
of the
Securities to HBK Services LLC (“Services”). Services may, from time to
time, delegate discretion to vote and dispose of certain of the
Securities
to HBK New York LLC, a Delaware limited liability company, HBK
Virginia
LLC, a Delaware limited liability company, HBK Europe Management
LLP, a
limited liability partnership organized under the laws of the United
Kingdom, and/or HBK Hong Kong Ltd., a corporation organized under
the laws
of Hong Kong (collectively, the “Subadvisors”). Each of Services and the
Subadvisors is under common control with HBK Investments L.P. The
Subadvisors expressly declare that the filing of the statement
on Schedule
13G shall not be construed as an admission that they are, for the
purpose
of Section 13(d) or 13(g), beneficial owners of the Securities.
Jamiel A.
Akhtar, Richard L. Booth, David C. Haley, Lawrence H. Lebowitz,
and
William E. Rose are each managing members (collectively, the “Members”) of
HBK Management LLC. The Members expressly declare that the filing
of the
statement on Schedule 13G shall not be construed as an admission
that they
are, for the purpose of Section 13(d) or 13(g), beneficial owners
of the
Securities.
|
(6)
|
Based
on information contained in a Statement on Schedule 13D filed by
Brian
Taylor, Pine River Capital Management L.P. and Nisswa Master Fund
Ltd. on
October 12, 2007. All reporting parties have shared voting and dispositive
power over such securities. The address of all such reporting parties
is
800 Nicollet Mall, Suite 2850, Minneapolis, MN 55402.
|
|
|
(7)
|
Based
on information contained in a Statement on Schedule 13D filed by
Bulldog
Investors, Phillip Goldstein and Andrew Dakos on February 13, 2008.
All
reporting parties have shared voting and dispositive power over such
securities. The address of all such reporting parties is Park 80
West,
Plaza Two, Saddle Brook, NJ 07663.
|
|
|
(8)
|
Based
on information contained in a Statement on Schedule 13G filed by
Millenco
LLC, Millenium Management LLC and Israel A. Englander on December
11,
2007. All reporting parties have shared voting and dispositive power
over
such securities. The address of all such reporting parties is 666
Fifth
Avenue, New York, NY 10103.
|
|
|
(9)
|
Based
on information contained in a Statement on Schedule 13G/A filed by
D.B.
Zwirn & Co., L.P., DBZ GP, LLC, D.B. Zwirn Special Opportunities Fund,
L.P. and D.B. Zwirn Special Opportunities Fund, Ltd. on January 25,
2008.
D.B. Zwirn & Co., L.P., DBZ GP, LLC, Zwirn Holdings, LLC, and Daniel
B. Zwirn may each be deemed the beneficial owner of (i) 178,500 shares
of
common stock owned by D.B. Zwirn Opportunities Fund, L.P. and (ii)
246,500
shares of common stock owned by D.B. Zwirn Special Opportunities
Fund,
Ltd. (each entity referred to in (i) through (ii) is herein referred
to as
a "Fund" and, collectively, as the "Funds"). D.B. Zwirn & Co., L.P. is
the manager of the Funds, and consequently has voting control and
investment discretion over the shares of common stock held by the
Fund.
Daniel B. Zwirn is the managing member of and thereby controls Zwirn
Holdings, LLC, which in turn is the managing member of and thereby
controls DBZ GP, LLC, which in turn is the general partner of and
thereby
controls D.B. Zwirn & Co., L.P. The foregoing should not be construed
in and of itself as an admission by any Reporting Person as to beneficial
ownership of shares of common stock owned by another Reporting Person.
In
addition, each of D.B. Zwirn & Co., L.P., DBZ GP, LLC, Zwirn Holdings,
LLC and Daniel B. Zwirn disclaims beneficial ownership of the shares
of
common stock held by the Funds.
|
|
|
(10)
|
Based
on information contained in a Statement on Schedule 13G filed by
Weiss
Asset Management, LLC, Weiss Capital, LLC and Andrew M. Weiss, Ph.D.
on
March 24, 2008. Shares reported for Weiss Asset Management, LLC include
shares beneficially owned by a private investment partnership of
which
Weiss Asset Management, LLC is the sole general partner. Shares reported
for Weiss Capital, LLC include shares beneficially owned by a private
investment corporation of which Weiss Capital is the sole investment
manager. Shares reported for Andrew Weiss include shares beneficially
owned by a private investment partnership of which Weiss Asset Management
is the sole general partner and which may be deemed to be controlled
by
Mr. Weiss, who is the Managing Member of Weiss Asset Management,
and also
includes shares held by a private investment corporation which may
be
deemed to be controlled by Dr. Weiss, who is the managing member
of Weiss
Capital, the Investment Manager of such private investment corporation.
Dr. Weiss disclaims beneficial ownership of the shares reported herein
as
beneficially owned by him except to the extent of his pecuniary interest
therein. Weiss Asset Management, Weiss Capital, and Dr. Weiss have
a
business address of 29 Commonwealth Avenue, 10th Floor, Boston,
Massachusetts 02116.
|
Beneficial
Ownership following the Merger:
Solely
for illustrative purposes, the following table is designed to set forth
information regarding the beneficial ownership of FMG Acquisition Corp. common
stock of each person who is anticipated to own greater than 5% of FMG’s
outstanding common stock and each person who will act in the capacity of officer
or director following the Merger, based on the following
assumptions:
•
|
the
current ownership of the entities and individuals identified above
remains
unchanged;
|
•
|
does
not reflect the result of any Company warrant exercises;
and
|
•
|
The
columns reflecting the beneficial ownership after consummation of
the
Merger assumes the issuance of all 8,750,000
shares.
|
|
|
Common
Stock
|
|
|
|
Number of Shares (2)
|
|
Percentage
of
Common Stock
|
|
Name
and Address of Beneficial Owners(1)
|
|
|
|
|
|
|
|
|
|
|
|
Gregory
C. Branch, Chairman of the Board
|
|
|
1,492,225
|
(3)
|
|
10.17
|
%
|
FMG
Investors LLC(4)
|
|
|
1,099,266
|
|
|
7.49
|
%
|
Gordon
G. Pratt, Chairman, Chief Executive Officer and President
|
|
|
1,099,266
|
(4)
|
|
7.49
|
%
|
Larry
G. Swets, Jr., Chief Financial Officer, Secretary, Treasurer, Executive
Vice President
|
|
|
1,099,266
|
(4)
|
|
7.49
|
%
|
Donald
J. Cronin, President and Chief Executive Officer
|
|
|
77,263
|
|
|
0.53
|
%
|
Nicholas
W. Griffin, Chief Financial Officer
|
|
|
44,888
|
|
|
0.31
|
%
|
Melvin
A. Russell, Jr., Chief Underwriting Officer
|
|
|
46,463
|
|
|
0.32
|
%
|
Alec
L. Poitevint, II, Director
|
|
|
344,225
|
(5)
|
|
2.35
|
%
|
Kent
G. Whittemore, Director
|
|
|
212,013
|
(6)
|
|
1.45
|
%
|
James
R. Zuhlke, Director
|
|
|
21,035
|
|
|
0.14
|
%
|
HBK
Investments L.P.(7)
|
|
|
547,250
|
|
|
3.73
|
%
|
Brian
Taylor (8)
|
|
|
437,500
|
|
|
2.98
|
%
|
Bulldog
Investors(9)
|
|
|
1,282,167
|
|
|
8.74
|
%
|
Millenco
LLC(10)
|
|
|
189,375
|
|
|
1.29
|
%
|
D.B.
Zwirn Special Opportunities Fund, L.P.(11)
|
|
|
178,500
|
|
|
1.22
|
%
|
D.B.
Zwirn Special Opportunities Fund, Ltd. (11)
|
|
|
246,500
|
|
|
1.68
|
%
|
D.B.
Zwirn & Co., L.P. (11)
|
|
|
425,000
|
|
|
2.90
|
%
|
DBZ
GP, LLC(11)
|
|
|
425,000
|
|
|
2.90
|
%
|
Zwirn
Holdings, LLC(11)
|
|
|
350,000
|
|
|
2.39
|
%
|
Daniel
B. Zwirn(11)
|
|
|
350,000
|
|
|
2.39
|
%
|
Weiss
Asset Management, LLC(12)
|
|
|
255,002
|
|
|
1.74
|
%
|
Weiss
Capital, LLC(12)
|
|
|
130,435
|
|
|
0.89
|
%
|
Andrew
M. Weiss, Ph.D.(12)
|
|
|
385,437
|
|
|
2.63
|
%
|
|
|
|
|
|
|
|
|
All
Directors and Officers as a Group (9 persons)
|
|
|
3,337,376
|
|
|
22.75
|
%
|
(1)
|
Unless
otherwise indicated, the business address of each of the stockholders
is
Four Forest Park, Second Floor, Farmington, Connecticut
06032.
|
|
|
(2)
|
Unless
otherwise indicated, all ownership is direct beneficial
ownership.
|
|
|
(3)
|
Includes
116,200 shares to be held by Greg Branch Family LP, voting and
investment power over which will be held by Mr. Branch, and
245,875 shares held by O.C. Branch Trust, voting power over
which will be held by Mr. Branch.
|
|
|
(4)
|
Each
of Messrs. Pratt and Swets are the managing members of our sponsor,
FMG Investors LLC, and may be deemed to each beneficially own the
1,099,266 shares owned by FMG Investors
LLC.
|
(5)
|
Includes
344,225 shares held by Mineral Associates, Inc., voting and investment
power over which is held by Mr. Poitevint.
|
|
|
(6)
|
Shares to
be held jointly by Kent G. and Kathy Whittemore.
|
|
|
(7)
|
Based
on information contained in a Statement on Schedule 13G filed
by HBK
Investments L.P., HBK Services LLC, HBK Partners II L.P., HBK
Management
LLC and HBK Master Fund L.P. on February 12, 2008. The address
of all such
reporting parties is 300 Crescent Court, Suite 700, Dallas, Texas
75201.
HBK Investments L.P. has delegated discretion to vote and dispose
of the
Securities to HBK Services LLC (“Services”). Services may, from time to
time, delegate discretion to vote and dispose of certain of the
Securities
to HBK New York LLC, a Delaware limited liability company, HBK
Virginia
LLC, a Delaware limited liability company, HBK Europe Management
LLP, a
limited liability partnership organized under the laws of the
United
Kingdom, and/or HBK Hong Kong Ltd., a corporation organized under
the laws
of Hong Kong (collectively, the “Subadvisors”). Each of Services and the
Subadvisors is under common control with HBK Investments L.P.
The
Subadvisors expressly declare that the filing of the statement
on Schedule
13G shall not be construed as an admission that they are, for
the purpose
of Section 13(d) or 13(g), beneficial owners of the Securities.
Jamiel A.
Akhtar, Richard L. Booth, David C. Haley, Lawrence H. Lebowitz,
and
William E. Rose are each managing members (collectively, the
“Members”) of
HBK Management LLC. The Members expressly declare that the filing
of the
statement on Schedule 13G shall not be construed as an admission
that they
are, for the purpose of Section 13(d) or 13(g), beneficial owners
of the
Securities.
|
|
|
(8)
|
Based
on information contained in a Statement on Schedule 13D filed by
Brian
Taylor, Pine River Capital Management L.P. and Nisswa Master Fund
Ltd. on
October 12, 2007. All reporting parties have shared voting and
dispositive
power over such securities. The address of all such reporting parties
is
800 Nicollet Mall, Suite 2850, Minneapolis, MN 55402.
|
|
|
(9)
|
Based
on information contained in a Statement on Schedule 13D filed by
Bulldog
Investors, Phillip Goldstein and Andrew Dakos on February 13, 2008.
All
reporting parties have shared voting and dispositive power over
such
securities. The address of all such reporting parties is Park 80
West,
Plaza Two, Saddle Brook, NJ 07663.
|
|
|
(10)
|
Based
on information contained in a Statement on Schedule 13G filed by
Millenco
LLC, Millenium Management LLC and Israel A. Englander on December
11,
2007. All reporting parties have shared voting and dispositive
power over
such securities. The address of all such reporting parties is 666
Fifth
Avenue, New York, NY 10103.
|
|
|
(11)
|
Based
on information contained in a Statement on Schedule 13G/A filed
by D.B.
Zwirn & Co., L.P., DBZ GP, LLC, D.B. Zwirn Special Opportunities Fund,
L.P. and D.B. Zwirn Special Opportunities Fund, Ltd. on January
25, 2008.
D.B. Zwirn & Co., L.P., DBZ GP, LLC, Zwirn Holdings, LLC, and Daniel
B. Zwirn may each be deemed the beneficial owner of (i) 178,500
shares of
common stock owned by D.B. Zwirn Opportunities Fund, L.P. and (ii)
246,500
shares of common stock owned by D.B. Zwirn Special Opportunities
Fund,
Ltd. (each entity referred to in (i) through (ii) is herein referred
to as
a "Fund" and, collectively, as the "Funds"). D.B. Zwirn & Co., L.P. is
the manager of the Funds, and consequently has voting control and
investment discretion over the shares of common stock held by the
Fund.
Daniel B. Zwirn is the managing member of and thereby controls
Zwirn
Holdings, LLC, which in turn is the managing member of and thereby
controls DBZ GP, LLC, which in turn is the general partner of and
thereby
controls D.B. Zwirn & Co., L.P. The foregoing should not be construed
in and of itself as an admission by any Reporting Person as to
beneficial
ownership of shares of common stock owned by another Reporting
Person. In
addition, each of D.B. Zwirn & Co., L.P., DBZ GP, LLC, Zwirn Holdings,
LLC and Daniel B. Zwirn disclaims beneficial ownership of the shares
of
common stock held by the Funds.
|
|
|
(12)
|
Based
on information contained in a Statement on Schedule 13G filed by
Weiss
Asset Management, LLC, Weiss Capital, LLC and Andrew M. Weiss,
Ph.D. on
March 24, 2008. Shares reported for Weiss Asset Management, LLC
include
shares beneficially owned by a private investment partnership of
which
Weiss Asset Management, LLC is the sole general partner. Shares
reported
for Weiss Capital, LLC include shares beneficially owned by a private
investment corporation of which Weiss Capital is the sole investment
manager. Shares reported for Andrew Weiss include shares beneficially
owned by a private investment partnership of which Weiss Asset
Management
is the sole general partner and which may be deemed to be controlled
by
Mr. Weiss, who is the Managing Member of Weiss Asset Management,
and also
includes shares held by a private investment corporation which
may be
deemed to be controlled by Dr. Weiss, who is the managing member
of Weiss
Capital, the Investment Manager of such private investment corporation.
Dr. Weiss disclaims beneficial ownership of the shares reported
herein as
beneficially owned by him except to the extent of his pecuniary
interest
therein. Weiss Asset Management, Weiss Capital, and Dr. Weiss have
a
business address of 29 Commonwealth Avenue, 10th Floor, Boston,
Massachusetts 02116.
|
All
of the shares of common stock outstanding prior to the IPO have been placed
in
escrow with Continental Stock Transfer & Trust Company, as escrow
agent, until the earliest of:
•
one year
following the consummation of a business combination; and
•
the
consummation of a liquidation, merger, stock exchange or other similar
transaction which results in all of our stockholders having the right to
exchange their shares of common stock for cash, securities or other property
subsequent to our consummating a business combination.
During
the escrow period, the holders of these shares of common stock will not be
able
to sell or transfer their securities except in certain limited circumstances
(such as transfers to relatives and trusts for estate planning purposes, while
remaining in escrow), but will retain all other rights as our stockholders,
including, without limitation, the right to vote their shares of common stock
and the right to receive cash dividends, if declared. If dividends are declared
and payable in shares of common stock, such dividends will also be placed in
escrow. If we are unable to effect a business combination and liquidate, none
of
our founding stockholders will receive any portion of the liquidation proceeds
with respect to common stock owned by them prior to October 4, 2007, including
the common stock underlying the sponsor warrants.
PRICE
RANGE OF SECURITIES AND DIVIDENDS
FMG
Acquisition Corp.
Our
Units, Common Stock and Warrants are each traded on the Over-the-Counter
Bulletin Board under the symbols FMGQU, FMGQ and FMGQW, respectively. Our Units
commenced public trading on October 4, 2007 and our Common Stock and Warrants
commenced public trading on November 7, 2007.
The
table
below sets forth, for the calendar quarter indicated, the high and low bid
prices of our units, common stock and warrants as reported on the
Over-the-Counter Bulletin Board. The over-the-counter market quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may
not
necessarily reflect actual transactions.
|
|
Over-the-Counter
Bulletin Board
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units
|
|
Common
Stock
|
|
Warrants
|
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth
Quarter 2007*
|
|
$
|
8.00
|
|
$
|
7.90
|
|
$
|
7.30
|
|
$
|
7.15
|
|
$
|
0.70
|
|
$
|
0.70
|
|
First
Quarter 2008
|
|
|
7.93
|
|
|
7.62
|
|
|
7.25
|
|
|
7.12
|
|
|
0.70
|
|
|
0.35
|
|
*
For the
period October 4 through end of the quarter
United
Historical
market price information regarding United membership units is not provided
because there is no public market for United membership units.
United
Dividend Policy
Historically,
due to United’s status as a limited liability company, it has distributed
annually to its members at least an amount equal to approximately 40% of the
prior year's taxable income. During fiscal year 2006, United made distributions
of approximately $1.6 million related to income taxable to its members for
2005.
During the year ended December 31, 2007, United made distributions of
approximately $8.7 million relating to income taxable to its members in 2006,
as
well as a $10 million distribution representing a return of capital. Also during
its 2007 fiscal year, United accrued $9.3 million for distributions relating
to
income taxable to its members for fiscal year 2007, but did not make these
distributions until April of 2008. United made additional distributions of
$2
million in April of 2008 representing a return of capital. United intends to
accrue and declare additional dividends in 2008 consisting of estimated taxes
payable by its members related to its 2008 taxable income, which will be paid
prior to completion of the Merger.
United’s
credit facility with Columbus Bank & Trust limits United’s ability to
declare and pay dividends to an amount that is no more than 50% of the amounts
represented by its net income for a fiscal year less the amount of distributions
made for taxes. This credit facility also contains provisions that may
effectively limit the amount of dividends United can pay to its members. For
instance, under the terms of United’s loan agreement with Columbus Bank &
Trust, United must meet certain financial ratios and other financial
requirements. These ratios and other requirements are calculated using United’s
financial information that takes into account dividends paid to our members.
Therefore, in determining whether United can pay dividends, or the amount of
dividends that may be paid, United will have to observe the limits described
above and consider whether the payment of such dividends will allow it to
maintain the ratios and other financial requirements in its loan
agreement.
Holders
of United Membership units
There
are
currently 62 holders of United membership units.
Dividends
Upon Completion of the Merger
Following
completion of the Merger, we will consider whether or not to institute a
dividend policy. We may also choose to reinvest any earnings back into the
combined company. The combined company also expects that any loan or credit
facilities it enters into may limit its ability to pay dividends.
DESCRIPTION
OF FMG ACQUISITION CORP. SECURITIES
General
Our
amended and restated certificate of incorporation authorizes the issuance of
up
to 20,000,000 shares of common stock, par value $0.0001 per share, and 1,000,000
shares of preferred stock, par value $0.0001 per share. As of the date hereof,
5,917,031 shares of common stock are outstanding. No shares of preferred stock
are currently outstanding.
Units
Each
unit
consists of one share of common stock and one warrant. Each warrant entitles
the
holder to purchase one share of common stock. Even though the component parts
of
the units may be broken apart and traded separately, the units will continue
to
be listed as a separate security, and any securityholder of our common stock
and
warrants may elect to combine them together and trade them as a unit.
Securityholders will have the ability to trade our securities as units until
such time as the warrants expire or are redeemed.
Common
Stock
Common
stockholders of record are entitled to one vote for each share held on all
matters to be voted on by stockholders. In connection with the stockholder
vote
required to approve any business combination, all of our officers, directors
and
special advisors have agreed to vote all shares of common stock owned by them
prior to this offering in the same manner as a majority of the public
stockholders who vote at the special or annual meeting called for the purpose
of
approving a business combination. Our insiders have also agreed that if they
acquire shares of common stock in or following the IPO, they will vote such
acquired shares of common stock in favor of a business combination.
In
accordance with Article Sixth of our amended and restated certificate of
incorporation, we will proceed with the business combination only if a majority
of the shares of common stock voted by the public stockholders are voted in
favor of the business combination and public stockholders owning less than
30%
of the shares of common stock sold in the IPO both exercise their conversion
rights and vote against the business combination. For purposes of seeking
approval of the majority of the shares of common stock voted by the public
stockholders, non-votes will have no effect on the approval of a business
combination once a quorum is obtained.
Our
Board
of Directors is divided into two classes, each of which will generally serve
for
a term of two years with only one class of directors being elected in each
year.
There is no cumulative voting with respect to the election of directors, with
the result that the holders of more than 50% of the shares of common stock
eligible to vote for the election of directors can elect all of the
directors.
Our
stockholders are entitled to receive ratable dividends when, as and if declared
by the Board of Directors out of funds legally available therefor. In the event
of a liquidation, dissolution or winding up of the company after a business
combination, our stockholders are entitled, subject to the rights of holders
of
preferred stock, if any, to share ratably in all assets remaining available
for
distribution to them after payment of liabilities and after provision is made
for each class of stock, if any, having preference over the common stock. Our
stockholders have no conversion, preemptive or other subscription rights. There
are no sinking fund or redemption provisions applicable to the common stock,
except that public stockholders have the right to convert their shares of common
stock to cash equal to their pro rata share of the trust account if they vote
against the business combination and the business combination is approved and
completed. Stockholders existing prior to October 4, 2007 are not entitled
to
convert any of their shares of common stock into a pro rata share of the trust
account.
Preferred
Stock
Our
amended and restated certificate of incorporation authorizes the issuance of
1,000,000 shares of blank check preferred stock with such designation, rights
and preferences as may be determined from time to time by our Board of
Directors. Accordingly, our Board of Directors is empowered, without stockholder
approval, to issue preferred stock with dividend, liquidation, conversion,
voting or other rights which could adversely affect the voting power or other
rights of the holders of common stock. However, the underwriting agreement
prohibits us, prior to a business combination, from issuing preferred stock
which participates in any manner in the proceeds of the trust account, or which
votes as a class with the common stock on a business combination. Although
we do
not currently intend to issue any shares of preferred stock, we cannot assure
you we will not do so in the future.
Warrants
There
are
5,983,625 warrants outstanding, exclusive of the warrants underlying Pali
Capital’s purchase option described below. Each warrant entitles the registered
holder to purchase one share of our common stock at a price of $6.00 per share,
subject to adjustment as discussed below, at any time commencing on the later
of:
|
·
|
the
completion of a business combination;
and
|
The
warrants will expire on October 4, 2011 at 5:00 p.m., New York City
time.
We
may
call the warrants for redemption (including any warrants issued upon exercise
of
the unit purchase option) at any time after the warrants become
exercisable:
|
·
|
in
whole and not in part;
|
|
·
|
at
a price of $.01 per warrant;
|
|
·
|
upon
not less than 30 days’ prior written notice of redemption to each warrant
holder; and
|
|
·
|
if,
and only if, the last sale price of the common stock equals or exceeds
$11.50 per share, for any 20 trading days within a 30 trading day
period
ending on the third business day prior to the notice of redemption
to
warrant holders.
|
In
addition, we may not redeem the warrants unless the warrants comprising the
units sold in the offering and the shares of common stock underlying those
warrants are covered by an effective registration statement from the beginning
of the measurement period through the date fixed for the
redemption.
If
we
call the warrants for redemption as described above, our management will have
the option to require any holder that wishes to exercise his, her or its warrant
to do so on a “cashless basis.” If our management takes advantage of this
option, all holders of warrants would pay the exercise price by surrendering
his, her or its warrants for that number of shares of common stock equal to
the
quotient obtained by dividing (x) the product of the number of shares of common
stock underlying the warrants, multiplied by the difference between the exercise
price of the warrants and the “fair market value” (defined below) by (y) the
fair market value. The “fair market value” shall mean the average reported last
sale price of the common stock for the 10 trading days ending on the third
trading day prior to the date on which the notice of redemption is sent to
the
holders of warrants. If our management takes advantage of this option, the
notice of redemption will contain the information necessary to calculate the
number of shares of common stock to be received upon exercise of the warrants,
including the “fair market value” in such case. Requiring a cashless exercise in
this manner will reduce the number of shares to be issued and thereby lessen
the
dilutive effect of a warrant redemption. We believe this feature is an
attractive option to us if we do not need the cash from the exercise of the
warrants after a business combination. If we call our warrants for redemption
and our management does not take advantage of this option, our sponsor would
still be entitled to exercise its insider warrants for cash or on a cashless
basis. We have established these criteria to provide warrant holders with a
reasonable premium to the initial warrant exercise price as well as a degree
of
liquidity to cushion against a negative market reaction, if any, to our
redemption call.
The
exercise price and number of shares of common stock issuable on exercise of
the
warrants may be adjusted in certain circumstances, including in the event of
a
stock dividend, extraordinary dividend or our recapitalization, reorganization,
merger or consolidation. However, the warrants will not be adjusted for
issuances of common stock at a price below their respective exercise
prices.
The
warrants may be exercised upon surrender of the warrant certificate on or prior
to the expiration date at the offices of the warrant agent, with the exercise
form on the reverse side of the warrant certificate completed and executed
as
indicated, accompanied by full payment of the exercise price, by certified
or
official bank check payable to us, for the number of warrants being exercised.
The warrant holders do not have the rights or privileges of holders of common
stock and any voting rights until they exercise their warrants and receive
shares of common stock. After the issuance of shares of common stock upon
exercise of the warrants, each holder will be entitled to one vote for each
share held of record on all matters to be voted on by stockholders.
No
warrants will be exercisable unless at the time of exercise a prospectus
relating to common stock issuable upon exercise of the warrants is current
and
the common stock has been registered or qualified or deemed to be exempt under
the securities laws of the state of residence of the holder of the warrants.
Under the terms of the warrant agreement, we have agreed to use our best efforts
to maintain a current prospectus relating to common stock issuable upon exercise
of the warrants until the expiration of the warrants. If we are unable to
maintain the effectiveness of such registration statement until the expiration
of the warrants, and therefore are unable to deliver registered shares of common
stock, the warrants may become worthless. Such expiration would result in each
holder paying the full unit purchase price solely for the shares of common
stock
underlying the unit. Additionally, the market for the warrants may be limited
if
the prospectus relating to the common stock issuable upon the exercise of the
warrants is not current or if the common stock is not qualified or exempt from
qualification in the jurisdictions in which the holders of the warrants reside.
In no event will the registered holders of a warrant be entitled to receive
a
net-cash settlement, stock, or other consideration in lieu of physical
settlement in shares of our common stock.
No
fractional shares of common stock will be issued upon exercise of the warrants.
If, upon exercise of the warrants, a holder would be entitled to receive a
fractional interest in a share, we will, upon exercise, round up to the nearest
whole number the number of shares of common stock to be issued to the warrant
holder.
Our
sponsor purchased 1,250,000 warrants from us at a price of $1.00 per warrant
prior to the consummation of the offering. The insider warrants have terms
and
provisions substantially similar to the warrants being sold in this offering,
except that (i) such insider warrants will not have a claim to the funds held
in
the trust account, (ii) such insider warrants will be placed in escrow and
not
released before, except in limited circumstances, 90 days from the consummation
of a business combination, (iii) such insider warrants were purchased pursuant
to an exemption from the registration requirements of the Securities Act and
will become freely tradable only after they are registered pursuant to a
registration rights agreement to be signed on or before the date of this
prospectus, (iv) the insider warrants are non-redeemable so long as they are
held by the sponsor or its permitted assigns, and (v) the insider warrants
are
exercisable (a) on a “cashless” basis at any time, if held by our sponsor or its
permitted assigns and (b) in the absence of an effective registration statement
covering the shares of common stock underlying the warrants. The transfer
restriction does not apply to transfers made pursuant to registration or an
exemption that are occasioned by operation of law or for estate planning
purposes, while remaining in escrow. The non-redemption provision does not
apply
to warrants included in units or otherwise purchased in open market
transactions, if any. As part of the negotiations between the representative
of
the underwriters and the sponsor, the sponsor agreed to purchase the warrants
directly from us and not in open market transactions. By making a direct
investment in us, the amount held in the trust account pending a business
combination has been increased. Because the insider warrants were originally
issued pursuant to an exemption from registration requirements under the federal
securities laws, the holders of the insider warrants are able to exercise their
warrants even if, at the time of exercise, a prospectus relating to the common
stock issuable upon exercise of such warrants is not current. As described
above, the holders of public warrants are not able to exercise them unless
we
have a current registration statement covering the shares of common stock
issuable upon their exercise.
Purchase
Option
We
sold
to Pali Capital, Inc., the representative of the underwriters, for $100, an
option to purchase up to a total of 450,000 units at $10.00 per unit. The units
issuable upon exercise of this option are identical to those sold in our
IPO.
Dividends
We
have
not paid any cash dividends on our common stock to date and do not intend to
pay
cash dividends prior to the completion of a business combination. The payment
of
cash dividends in the future will be dependent upon our revenues and earnings,
if any, capital requirements and general financial condition subsequent to
completion of a business combination. The payment of any dividends subsequent
to
a business combination will be within the discretion of our then Board of
Directors. It is the present intention of our Board of Directors to retain
all
earnings, if any, for use in our business operations. Our board is not currently
contemplating and does not anticipate declaring any stock dividends in the
foreseeable future, except if we increase the size of the offering pursuant
to Rule 462(b) under the Securities Act. Further, our ability to declare
dividends may be limited to restrictive covenants if we incur any
indebtedness.
Registration
Rights
The
holders of a majority of (i) the 1,183,406 shares of common stock owned or
held
by the officers, directors and special advisors of FMG; and (ii) the 1,250,000
shares of common stock issuable upon exercise of the 1,250,000 insider warrants
will be entitled to make up to two demands that we register these securities.
Such holders may elect to exercise these registration rights at any time
commencing on or after the date on which these securities are released from
escrow. In addition, these stockholders have certain “piggy-back” registration
rights with respect to registration statements filed subsequent to the date
on
which these securities are released from escrow. We will bear the expenses
incurred in connection with the filing of any such registration
statements.
Although
the purchase option and its underlying securities have been registered on FMG’s
initial registration statement, the option grants holders demand and
“piggy-back” registration rights for periods of five and seven years,
respectively, from October 4, 2007. These rights apply to all of the securities
directly and indirectly issuable upon exercise of the option.
Quotation
of Securities
Our
units, common stock and warrants are quoted on the OTC Bulletin Board under
the
symbols FMGQU, FMGQ and FMGQW, respectively.
Delaware
Anti-Takeover Law
Pursuant
to our amended and restated certificate of incorporation, we have opted out
of
the provisions of Section 203 of the Delaware General Corporation Law regulating
corporate takeovers. This section prevents certain Delaware corporations, under
certain circumstances, from engaging in a “business combination”
with:
|
·
|
a
stockholder who owns 15% or more of our outstanding voting stock
(otherwise known as an “interested
stockholder”);
|
|
·
|
an
affiliate of an interested stockholder;
or
|
|
·
|
an
associate of an interested stockholder, for three years following
the date
that the stockholder became an interested
stockholder.
|
COMPARISON
OF RIGHTS OF FMG STOCKHOLDERS AND UNITED MEMBERS
This
section describes material differences between the rights of holders of FMG’s
capital stock and the rights of holders of United’s membership units. This
summary is not intended to be a complete discussion of FMG’s Amended and
Restated Certificate of Incorporation and Bylaws or United’s Members Agreement,
as amended, and is qualified in its entirety by reference to the applicable
document and applicable Delaware and Florida law.
FMG
is
organized as a corporation under the laws of the State of Delaware whereas
United is organized as a limited liability company under the laws of the State
of Florida. There are several differences between the laws of the two
jurisdictions which may affect the relative rights of a stockholder or member,
as the case may be. Upon completion of the Merger, holders of United membership
units will become holders of FMG’s common stock and their rights will be
governed by Delaware law and FMG’s Second Amended and Restated Certificate of
Incorporation, which will become effective following the consummation of the
Merger, and FMG’s Bylaws. The form of the Second Amended and Restated
Certificate of Incorporation expected to be in effect following the closing
of
the Merger is filed as an exhibit to the registration statement of which this
proxy statement/prospectus is a part. The following discussion summarizes
material differences between the rights of FMG’s stockholders and United’s
members under Delaware and Florida law, as well as the respective certificates
of incorporation, articles of organization and members agreement of FMG and
of
United. Copies of the governing corporate instruments are available without
charge, to any person, including any beneficial owner to whom this document
is
delivered, by following the instructions listed under “
Where
You Can Find More Information.
”
FMG
|
|
United
|
AUTHORIZED
CAPITAL STOCK
|
|
|
|
Authorized
Shares
.
FMG is authorized under its Amended and Restated Certificate of
Incorporation to issue up to 20,000,000 shares of common stock, par
value
$0.0001 per share, and up to 1,000,000 shares of preferred stock,
par
value $0.0001 per share. If the Second Amendment Proposal is approved,
the
Company will be authorized to issue up to 50,000,000 shares of common
stock, par value $0.0001 per share, and up to 1,000,000 shares of
preferred stock, par value $0.0001 per share.
|
|
Membership
Units
.
Per its Articles of Organization and its Members Agreement, United
does
not have an authorized limit on the number of membership units that
it may
issue. As of March 31, 2008, there were 100,000 membership units
issued
and outstanding. There is only the one class of membership
units.
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|
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|
Preferred
Stock
.
FMG’s Amended and Restated Certificate of Incorporation provides that
shares of preferred stock may be issued in one or more series by
FMG’s
board of directors. The FMG board can fix voting powers, full or
limited,
and designations, preferences and relative, participating, optional
or
other special rights and qualifications, limitations or restrictions.
No
shares of preferred stock have been issued.
|
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CLASSIFICATION,
NUMBER AND ELECTION OF DIRECTORS
|
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|
The
FMG board of directors is currently divided into two classes, with
each
class serving a staggered two-year term. The FMG Bylaws currently
in
effect provide that its board of directors will consist of not less
than
one nor more than nine directors, such number to be fixed by a vote
of a
majority of FMG’s entire board of directors from time to
time.
|
|
United’s
members agreement, as amended, provides that its board of managers
will
consist of one or more members, the exact number to be determined
from
time to time by the board of managers. The number of managers currently
serving is six, each of whom serves a one year
term.
|
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|
Delaware
law provides that any vacancy in the board of directors shall be
filled as
the bylaws provide or in the absence of such provision, by the board
of
directors or other governing body. If, at the time of filling of
any
vacancy or newly created directorship, the directors then in office
constitute less than a majority of the authorized number of directors,
the
Delaware Court of Chancery may, upon application of any stockholder
or
stockholders holding at least 10% of the voting stock of the corporation
then outstanding having the right to vote for such directors, order
an
election to be held to fill the vacancy or replace the directors
selected
by the directors then in office.
FMG’s
Second Amended and Restated Certificate of Incorporation and Bylaws
will
provide that any vacancy in the FMG board of directors, including
vacancies resulting from any increase in the authorized number of
directors, may be filled by a vote of the directors then in office,
even
if less than a quorum exists. Any director elected to fill a vacancy
shall
be elected until the next annual meeting of stockholders, and until
his or
her successor has been elected and qualified.
FMG’s
Bylaws currently provide that any director may be removed for cause
by the
affirmative vote of a majority of the entire board. FMG’s bylaws provide
that any director may otherwise be removed, with or without case,
by the
affirmative vote of the holders of a majority of all of the shares
of the
stock of FMG outstanding and entitled to vote for the election of
directors.
|
|
Florida
law provides that a vacancy occurring in United’s board of managers,
including a newly created manager position, may be filled by a majority
of
the remaining board of managers, although less than a quorum, or
by a
plurality of the votes cast at a members meeting. Florida law also
provides that managers may be removed from office with or without
cause by
a vote of members holding a majority of the outstanding membership
units
entitled to vote at an election of managers.
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Under
Delaware law, an amendment to the certificate of incorporation of
a
corporation generally requires the approval of the corporation’s board of
directors and the approval of the holders of a majority of the outstanding
stock entitled to vote upon the proposed amendment (unless a higher
vote
is required by the corporation’s certificate of
incorporation).
|
|
Under
Florida law, an amendment to the articles of organization of a limited
liability company generally requires the approval of the holders
of a
majority of the outstanding membership units entitled to vote upon
the
proposed amendment (unless a higher vote is required by the company’s
members agreement or articles of organization).
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FMG’s
Amended and Restated Certificate of Incorporation may be amended
in
accordance with the general provisions of Delaware law; provided,
however,
that Articles Third, Fifth and Sixth of FMG’s Amended and Restated
Certificate of Incorporation may not be amended without the affirmative
approval of at least 95% of the shares of common stock sold in FMG’s IPO
unless the amendments are submitted for approval in connection with
an
acquisition by FMG, whether by merger, capital stock exchange, asset
or
stock acquisition or other similar type of transaction, of an operating
business having a fair market value of at least 80% of the amount
in the
trust account at the time of the transaction. If the First Amendment
Proposal is approved, the 95% threshold requirement for the approval
of an
amendment will be removed.
|
|
United’s
members’ agreement does not require a higher vote than the Florida
statutory limit, provided however, that no amendment that adversely
affects one particular member may be made without the prior written
consent of such member.
|
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Under
Delaware law, stockholders entitled to vote have the power to adopt,
amend
or repeal bylaws. In addition, a corporation may, in its certificate
of
incorporation, confer this power on the board of directors. The
stockholders always have the power to adopt, amend or repeal the
bylaws,
even though the board of directors may also be delegated the
power.
|
|
United
does not have bylaws as it is governed by its members
agreement.
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FMG’s
Amended and Restated Certificate of Incorporation provides that the
FMG
board of directors, without the assent or vote of FMG stockholders,
may
make, amend or repeal the bylaws, as provided in the bylaws. FMG’s Bylaws
provide that the bylaws may be amended, adopted or repealed by
stockholders entitled to vote thereon at any regular or special meeting
or
by the vote of a majority of the FMG board of directors.
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Under
Delaware law, a corporation may generally indemnify any person who
was
made a party to a proceeding due to his/her service at the request
of the
corporation (other than an action by or in the right of the
corporation):
•
for actions taken in good faith and in a manner the person reasonably
believed to be in, or not opposed to, the best interests of the
corporation; and
•
and with respect to any criminal proceeding, if such person had no
reasonable cause to believe that his/her conduct was
unlawful.
In
addition, Delaware law provides that a corporation may advance to
a
director or officer expenses incurred in defending any action upon
receipt
of an undertaking by the director or officer to repay the amount
advanced
if it is ultimately determined that he or she is not entitled to
indemnification.
|
|
Under
Florida law, a limited liability company may generally indemnify
managers,
members, officers, employees and agents from and against any and
all
claims and demands whatsoever, unless a judgment or other final
adjudication establishes that the actions, or omissions to act, of
such
member, manager, officer, employee or agent were material to the
cause of
action so adjudicated and was:
(i)
a violation of criminal law, unless the member, manager, officer,
employee or agent had no reasonable cause to believe such conduct
was
unlawful;
(ii)
a transaction from which the member, manager, officer, employee or
agent derived an impersonal benefit;
(iii)
in the case of a manager, an unlawful distribution; or
(iv)
willful misconduct or conscious disregard for the best interests
of
the limited liability company.
|
FMG’s
Amended and Restated Certificate of Incorporation provides that FMG,
to
the fullest extent permitted by Section 145 of the Delaware General
Corporation Law, shall indemnify all persons whom it may indemnify
pursuant thereto. Expenses (including attorneys’ fees) incurred by an
officer or director in defending any civil, criminal, administrative,
or
investigative action, suit or proceeding for which such officer or
director may be entitled to indemnification hereunder shall be paid
by FMG
in advance of the final disposition of such action, suit or proceeding
upon receipt of an undertaking by or on behalf of such director or
officer
to repay such amount if it shall ultimately be determined that he
is not
entitled to be indemnified by FMG.
FMG’s
Amended and Restated Certificate of Incorporation provides that no
director of FMG shall be personally liable to FMG or to any stockholder
for monetary damages for breach of fiduciary duty as a director;
provided,
however, that liability of a director shall not be limited or eliminated
(i) for any breach of the director’s duty of loyalty to FMG or its
stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii)
under
Section 174 of the Delaware General Corporation Law, or (iv) for
any
transaction from which the director or officer derived an improper
personal benefit.
FMG’s
Bylaws provide that FMG shall indemnify any person who was or is
made a
party or is threatened to be made a party to any threatened, pending
or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the
right
of the Corporation) by reason of the fact that the person is or was
a
director, officer, employee or agent of the Corporation and that
FMG shall
indemnify any person who was or is a party or is threatened to be
made a
party to any threatened, pending or completed action or suit by or
in the
right of FMG to procure a judgment in its favor by reason of the
fact that
the person is or was a director, officer, employee or agent of
FMG.
|
|
|
SHARES
ELIGIBLE FOR FUTURE SALE
As
of the
date of this proxy statement/prospectus, the Company has 5,917,031 shares of
common stock outstanding. In respect of the equity consideration portion of
the
aggregate purchase price of the membership units of United, FMG will issue
8,750,000 shares to the members of United. As a result of the negotiation of
the
Merger Agreement, FMG has agreed to register for resale the 8,750,000 shares
of
common stock to be issued to United’s members in connection with the Merger. The
cost of such registration, including the costs associated with supplementing
or
amending the resale prospectus, will be borne by FMG. Accordingly, immediately
following the Merger, FMG will have 14,667,031 shares of common stock
outstanding. Of these shares, 13,483,625 shares are freely tradable without
restriction or further registration under the Securities Act, except for any
shares held by an affiliate of FMG within the meaning of Rule 144 under the
Securities Act. All of the remaining 1,183,406 shares are restricted securities
under Rule 144, in that they were issued in private transactions not
involving a public offering. All of these shares have been placed in escrow
and
will not be transferable until one year after the consummation of a business
combination, subject to certain limited exceptions, such as transfers to family
members and trusts for estate planning purposes and upon death, while in each
case remaining subject to the escrow agreement, and will only be released prior
to that date if the Company is forced to liquidate, in which case the shares
would be destroyed.
Of
the 8,750,000 shares of common stock issued to the members of United in respect
of the equity consideration, all of such shares are subject to a ninety-day
lock
up period.
Rule
144
The
SEC
recently adopted amendments to Rule 144 which became effective on February
15,
2008 and apply to securities acquired both before and after that date.
Under
these amendments, a person who has beneficially owned restricted shares
of our
common stock or warrants for at least six months would be entitled to sell
their
securities provided that (i) such person is not deemed to have been one
of our
affiliates at the time of, or at any time during the three months preceding,
a
sale and (ii) we are subject to the Exchange Act periodic reporting requirements
for at least three months before the sale.
Persons
who have beneficially owned restricted shares of our common stock or warrants
for at least six months but who are our affiliates at the time of, or at
any
time during the three months preceding, a sale, would be subject to additional
restrictions, by which such person would be entitled to sell within any
three-month period only a number of securities that does not exceed the
greater
of either of the following:
|
•
|
1%
of the number of shares of common stock then outstanding;
and
|
|
•
|
if
the common stock is listed on a national securities exchange or on
The
NASDAQ Stock Market, the average weekly trading volume of the common
stock
during the four calendar weeks preceding the filing of a notice on
Form
144 with respect to the sale.
|
Sales
under Rule 144 are also limited by manner of sale provisions and notice
requirements and to the availability of current public information about
us.
Sales
Under Rule 144 by Non-Affiliates
Under
Rule 144, a person who is not deemed to have been one of our affiliates at
the
time of or at any time during the three months preceding a sale, and who
has
beneficially owned the restricted stock proposed to be sold for at least
6
months, including the holding period of any prior owner other than an affiliate,
is entitled to sell their common stock without complying with the manner
of sale
and volume limitation or notice provisions of Rule 144. We must be current
in
our public reporting if the non-affiliate is seeking to sell under Rule 144
after holding his ordinary shares between 6 months and one year. After one
year,
non-affiliates do not have to comply with any other Rule 144
requirements.
Restrictions
on the Use of Rule 144 by Shell Companies or Former Shell
Companies
Historically,
the SEC staff has taken the position that Rule 144 is not available for the
resale of securities initially issued by companies that are, or previously
were,
blank check companies like us, to their promoters or affiliates despite
technical compliance with the requirements of Rule 144. The SEC has codified
and
expanded this position in the amendments discussed above by prohibiting the
use
of Rule 144 for resale of securities issued by any shell companies (other
than
business combination related shell companies) or any issuer that has been
at any
time previously a shell company. The SEC has provided an important exception
to
this prohibition, however, if the following conditions are
met:
|
•
|
the
issuer of the securities that was formerly a shell company has ceased
to
be a shell company;
|
|
•
|
the
issuer of the securities is subject to the reporting requirements
of
Section 13 or 15(d) of the Exchange
Act;
|
|
•
|
the
issuer of the securities has filed all Exchange Act reports and material
required to be filed, as applicable, during the preceding 12 months
(or
such shorter period that the issuer was required to file such reports
and
materials), other than Form 8-K reports;
and
|
|
•
|
at
least one year has elapsed from the time that the issuer filed current
Form 10 type information with the SEC reflecting its status as an
entity
that is not a shell company.
|
As
a
result, our initial stockholders and the holders of the insider warrants
will be
able to sell the founder shares and insider warrants pursuant to Rule 144
without registration one year after we have completed our initial business
combination and we have filed current Form 10 type information with the SEC
reflecting our status as an entity that is not a shell
company.
EXPERTS
The
financial statements of FMG Acquisition Corp. as of March 31, 2008 and for
the period from inception (May 22, 2007) to March 31, 2008, appearing
in this prospectus and registration statement have been reviewed by
Rothstein Kass, independent registered public accounting firm, as set forth
in
their report thereon appearing elsewhere herein and are included in reliance
upon such report given on the authority of such firm as experts in accounting
and auditing. The consolidated financial statements of United Insurance
Holdings, L.C. as of December 31, 2007 and 2006, and for the years ended
December 31, 2007, 2006 and 2005 appearing in this prospectus and
registration statement have been audited by De Meo, Young, McGrath, independent
registered public accounting firm, as set forth in their report thereon
appearing elsewhere herein and are included in reliance upon such report
given
on the authority of such firm as experts in accounting and
auditing.
LEGAL
MATTERS
Certain
matters relating to United States, including matters relating to U.S. federal
income tax consequences of the Merger, will be passed upon for us by Ellenoff
Grossman & Schole LLP.
STOCKHOLDER
PROPOSALS AND OTHER MATTERS
Management
of the Company knows of no other matters which may be brought before the
Company’s Special Meeting. If any matter other than the proposed Merger or
related matters should properly come before the Special Meeting, however, the
persons named in the enclosed proxies will vote proxies in accordance with
their
judgment on those matters.
Under
Delaware law, only business stated in the notice of Special Meeting may be
transacted at the Special Meeting.
We
must
receive proposals of stockholders intended to be presented at our next annual
meeting prior to December 31, 2008 to be considered for inclusion in our proxy
statement relating to that meeting. Our board of directors will review any
proposals from eligible stockholders that it receives by that date and will
make
a determination whether any such proposals will be included in our proxy
materials. Any proposal received after December 31, 2008 shall be
considered untimely and shall not be made a part of our proxy
materials.
WHERE
YOU CAN FIND ADDITIONAL INFORMATION
As
allowed by SEC rules, this proxy statement/prospectus does not contain all
of
the information that you can find in the registration statement or the exhibits
to the registration statement. You should refer to the registration statement
and its exhibits for additional information that is not contained in this proxy
statement/prospectus.
The
Company is subject to the informational requirements of the Securities Exchange
Act, and is required to file reports, any proxy statements and other information
with the SEC. Any reports, statements or other information that the Company
files with the SEC, including this proxy statement/prospectus may be inspected
and copied at the public reference facilities maintained by the SEC at
100 F Street, N.E., Room 1580, Washington, D.C. 20549, on
official business days during the hours of 10:00 am to 3:00 pm. Copies of this
material can also be obtained upon written request from the Public Reference
Section of the SEC at its principal office in Washington, D.C. 20549, at
prescribed rates or from the SEC’s website on the Internet at
http://www.sec.gov
, free
of charge. Please call the SEC at 1-800-SEC-0330 for further information on
public reference rooms.
Neither
the Company nor United has authorized anyone to provide you with information
that differs from that contained in this proxy statement/prospectus. You should
not assume the information contained in this proxy statement/prospectus is
accurate as on any date other than the date of the proxy statement/prospectus,
and neither the mailing of this proxy statement/prospectus to FMG Acquisition
Corp. stockholders nor the issuance of FMG shares of common stock in the Merger
shall create any implication to the contrary.
This
proxy statement/prospectus does not constitute an offer to sell, or a
solicitation of an offer to buy, any securities, or the solicitation of a proxy,
in any jurisdiction to or from any person to whom it is not lawful to make
any
such offer or solicitation in such jurisdiction.
FMG
Acquisition Corp.
(a
corporation in the development stage)
Index
to
Financial Statements
Financial
Statements:
|
|
|
|
|
|
Balance
Sheet
|
|
F-2
|
|
|
|
Statement
of Operations
|
|
F-3
|
|
|
|
Statement
of Stockholders’ Equity
|
|
F-4
|
|
|
|
Statement
of Cash Flows
|
|
F-5
|
|
|
|
Notes
to Financial Statements
|
|
F-6 – F-11
|
UNITED
INSURANCE HOLDINGS, L.C. AND SUBSIDIARIES
Report
of Independent Registered Public Accounting Firm
|
F-12
|
|
|
Consolidated
Balance Sheet
|
F-13
|
|
|
Consolidated
Statement of Operations
|
F-14
|
|
|
Consolidated
Statements of Members’ Equity and Comprehensive Income
|
F-15
|
|
|
Consolidated
Statements of Cash Flows
|
F-16
|
|
|
Notes
to Consolidated Financial Statements
|
F-17
- F-39
|
|
|
Financial
Statements Schedules
|
F-40
|
|
|
Consolidated
Balance Sheet as of March 31, 2008 (unaudited) and December 31,
2007
|
F-41
|
|
|
Unaudited
Consolidated Statements of Operations for the Three Months Ended
March 31,
2008 and 2007
|
F-42
|
|
|
Unaudited
Consolidated Statements of Members’ Equity and Comprehensive Income for
the Three Months Ended March 31, 2008
|
F-43
|
|
|
Unaudited
Consolidated Statements of Cash Flows for the Three Months Ended
March 31,
2008 and 2007
|
F-44
|
|
|
Notes
to Consolidated Financial Statements
|
F-45
- F-51
|
|
|
|
(a
corporation in the development stage)
|
|
BALANCE
SHEET
(unaudited)
|
|
|
March
31,
2008
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
Cash
|
|
$
|
55,042
|
|
Prepaid
expenses
|
|
|
42,000
|
|
|
|
|
97,042
|
|
|
|
|
|
|
Other
assets
|
|
|
|
|
Cash
and cash equivalents held in Trust Account
|
|
|
37,737,092
|
|
Deferred
tax asset
|
|
|
32,210
|
|
|
|
|
37,769,302
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
37,866,344
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
Current
liabilities,
accounts payable and accrued
expenses
|
|
$
|
416,008
|
|
|
|
|
|
|
Long-term
liabilities,
deferred underwriters' fee
|
|
|
1,514,760
|
|
|
|
|
|
|
Common
stock, subject to possible redemption,
|
|
|
|
|
1,419,614
shares, at redemption value
|
|
|
11,232,133
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
|
|
Preferred
stock, $.0001 par value; 1,000,000 shares authorized; none
issued
|
|
|
-
|
|
Common
stock, $.0001 par value, authorized 20,000,000 shares;
5,917,031
|
|
|
|
|
shares
issued and outstanding, (including 1,419,614 shares subject
to
|
|
|
|
|
possible
redemption)
|
|
|
602
|
|
Additional
paid-in capital
|
|
|
24,873,742
|
|
Deficit
accumulated during the development stage
|
|
|
(170,901
|
)
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
24,703,443
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
37,866,344
|
|
See
accompanying notes to financial statements.
FMG
ACQUISITION CORP.
|
(a
corporation in the development stage)
|
|
STATEMENTS
OF OPERATIONS
|
(unaudited)
|
|
|
For the
three
months
ended
March 31,
2008
|
|
May 22,
2007
(inception)
to March
31, 2008
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
166,486
|
|
$
|
434,714
|
|
|
|
|
|
|
|
|
|
Operating
costs
|
|
|
356,846
|
|
|
471,112
|
|
Income
Taxes
|
|
|
62,998
|
|
|
134,503
|
|
|
|
|
|
|
|
|
|
Net
(loss)/income
|
|
$
|
(253,358
|
)
|
$
|
(170,901
|
)
|
|
|
|
|
|
|
|
|
Maximum
Number of shares subject to possible redemption:
|
|
|
|
|
|
|
|
Weighted
average number of common shares,
basic
and diluted
|
|
|
1,419,614
|
|
|
1,419,614
|
|
|
|
|
|
|
|
|
|
Net
income per common share
,
for shares subject to
redemption
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Approximate
weighted average number of common
|
|
|
|
|
|
|
|
shares
outstanding (not subject to possible redemption)
|
|
|
|
|
|
|
|
Basic
& Diluted
|
|
|
5,917,031
|
|
|
5,917,031
|
|
|
|
|
|
|
|
|
|
Net
income per common share not subject to possible
redemption,
|
|
|
|
|
|
|
|
Basic
& Diluted
|
|
|
(0.043
|
)
|
|
(0.029
|
)
|
See
accompanying notes to financial statements.
FMG
ACQUISITION CORP.
|
(a
corporation in the development stage)
|
|
STATEMENT
OF STOCKHOLDERS' EQUITY
|
(unaudited)
|
For
the period May 22, 2007 (date of inception) to March 31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Additional
|
|
During
|
|
Total
|
|
|
|
Common
Stock
|
|
Paid-in
|
|
Development
|
|
Stockholders'
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Stage
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares issued to existing shareholders
|
|
|
1,183,406
|
|
$
|
129
|
|
$
|
24,871
|
|
$
|
-
|
|
$
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of warrants
|
|
|
|
|
|
|
|
|
1,250,000
|
|
|
|
|
|
1,250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale
of 4,733,625 units on October 11, 2007 at a price of $8 per
unit, net of
underwriters' discount and offering costs (including 1,419,614
shares
subject to possible redemption)
|
|
|
4,733,625
|
|
|
473
|
|
|
34,830,904
|
|
|
|
|
|
34,831,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock, subject to possible redemption, 1,419,614 shares
|
|
|
|
|
|
|
|
|
(11,232,133
|
)
|
|
|
|
|
(11,232,133
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of options
|
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for period
|
|
|
|
|
|
|
|
|
|
|
|
82,457
|
|
|
82,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
December 31, 2007
|
|
|
5,917,031
|
|
|
602
|
|
|
24,873,742
|
|
|
82,457
|
|
|
24,956,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
(253,358
|
)
|
|
(253,358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, March
31, 2008
|
|
|
5,917,031
|
|
$
|
602
|
|
$
|
24,873,742
|
|
$
|
(170,901
|
)
|
$
|
24,703,443
|
|
See
accompanying notes to financial statements.
|
(a
corporation in the development stage)
|
|
STATEMENTS
OF CASH FLOWS
|
(unaudited)
|
|
|
For
the
three
months
ended
March
31,
2008
|
|
May
22,
2007
(inception)
to
March
31,
2008
|
|
|
|
|
|
|
|
Cash
flows provided by operating activities
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(253,358
|
)
|
$
|
(170,901
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Deferred
income tax (benefit)
|
|
|
-
|
|
|
(32,210
|
)
|
Increase
(decrease) in cash attributable to changes in operating assets
and
liabilities
|
|
|
|
|
|
|
|
Prepaid
expenses
|
|
|
12,074
|
|
|
(42,000
|
)
|
Accounts
payable and accrued expenses
|
|
|
241,665
|
|
|
416,008
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
381
|
|
|
170,897
|
|
|
|
|
|
|
|
|
|
Cash
used in investing activities,
change in restricted cash and cash
equivalents
|
|
|
(16,613
|
)
|
|
(37,737,092
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
Proceeds
from notes payable, stockholders
|
|
|
|
|
|
100,000
|
|
Repayment
of notes payable, stockholders
|
|
|
-
|
|
|
(100,000
|
)
|
Proceeds
from issuance of common stock
|
|
|
-
|
|
|
25,000
|
|
Proceeds
from issurance of warrants
|
|
|
-
|
|
|
1,250,000
|
|
Gross
proceeds from public offering
|
|
|
-
|
|
|
37,869,000
|
|
Payments
for underwriters' discount and offering cost
|
|
|
-
|
|
|
(1,522,863
|
)
|
Proceeds
from issuance of option
|
|
|
-
|
|
|
100
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
-
|
|
|
37,621,237
|
|
|
|
|
|
|
|
|
|
Net
(decrease)/increase in cash
|
|
|
(16,232
|
)
|
|
55,042
|
|
|
|
|
|
|
|
|
|
Cash,
beginning of period
|
|
|
71,274
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Cash,
end of period
|
|
$
|
55,042
|
|
$
|
55,042
|
|
|
|
|
|
|
|
|
|
Supplemental
schedule of non-cash financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual
of deferred underwriters' fees
|
|
$
|
-
|
|
$
|
1,514,760
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure for taxes paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes
paid
|
|
$
|
127,250
|
|
$
|
127,250
|
|
See
accompanying notes to financial statements.
FMG
Acquisition Corp.
(a
corporation in the development stage)
Notes
to Financial Statements
(unaudited)
NOTE
A—BASIS OF PRESENTATION
The
accompanying unaudited condensed financial statements as of March 31, 2008,
and
for the period May 22, 2007 (date of inception) to March, 31 2008, have
been
prepared in accordance with accounting principles generally accepted in
the
United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation
have
been included. Operating results for the interim period presented are not
necessarily indicative of the results to be expected for any other interim
period or for the full year.
NOTE
B—DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS
FMG
Acquisition Corp. (a corporation in the development stage) (“FMG” or the
“Company”) was incorporated in Delaware on May 22, 2007. The Company was formed
to acquire a business operating in or providing services to the insurance
industry through a merger, capital stock exchange, asset acquisition, stock
purchase or other similar business combination. The Company has neither
engaged
in any operations nor generated significant revenue to date. The Company
is
considered to be in the development stage as defined in Statement of Financial
Accounting Standards (SFAS) No. 7, “Accounting and Reporting By Development
Stage Enterprises”, and is subject to the risks associated with activities of
development stage companies. The Company has selected December 31st as
its
fiscal year end.
The
Company’s management has broad discretion with respect to the specific
application of the net proceeds of the public offering of Units (as defined
in
Note D below) (the “Offering”), although substantially all of the net proceeds
of the Offering are intended to be generally applied toward consummating
a
business combination with (or acquisition of) a business operating in or
providing services to the insurance industry (“Business Combination”).
Furthermore, there is no assurance the Company will be able to successfully
effect a Business Combination. Since the closing of the Offering, approximately
99% of the gross proceeds, after payment of certain amounts to the underwriters,
is being held in a trust account (“Trust Account”) and invested in U.S.
“government securities”, defined as any Treasury Bill issued by the United
States government having a maturity of one hundred and eighty (180) days
or less
or any open ended investment company registered under the Investment Company
Act
of 1940 that holds itself out as a money market fund and bears the highest
credit rating issued by a United States nationally recognized rating agency,
until the earlier of (i) the consummation of its Business Combination or
(ii)
the distribution of the Trust Account as described below. The remaining
proceeds, as well as up to $1,200,000 of post tax interest income earned
on the
Trust Account, may be used to pay for business, legal and accounting due
diligence on prospective acquisitions and continuing general and administrative
expenses.
NOTE
B—DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS (CONTINUED)
The
Company will submit any proposed Business Combination for stockholder approval.
In the event 30% or more of the outstanding stock (excluding, for this
purpose,
those shares of common stock issued prior to the Offering) vote against
the
Business Combination and exercise their conversion rights described below,
the
Business Combination will not be consummated. Public stockholders voting
against
a Business Combination will be entitled to convert their stock into a pro
rata
share of the Trust Account (including the additional 4% fee of the gross
proceeds payable to the underwriters upon the Company’s consummation of a
Business Combination), including any interest earned (net of taxes payable
and
the amount distributed to the Company to fund its working capital requirements)
on their pro rata share, if the business combination is approved and
consummated. However, voting against the Business Combination alone will
not
result in an election to exercise a stockholder’s conversion rights. A
stockholder must also affirmatively exercise such conversion rights at
or prior
to the time the Business Combination is voted upon by the stockholders.
All of
the Company’s stockholders prior to the Offering, including all of the directors
and officers of the Company, have agreed to vote all of the shares of common
stock held by them in accordance with the vote of the majority in interest
of
all other stockholders of the Company.
In
the
event the Company does not consummate a Business Combination by October
4, 2009,
the proceeds held in the Trust Account will be distributed to the Company’s
public stockholders, excluding the officers and directors of, and the special
advisor to, the Company to the extent of their stock holdings prior to
the
Offering. In the event of such distribution, it is likely that the per
share
value of the residual assets remaining available for distribution (including
Trust Account assets) will be less than the initial public offering price
per
Unit in the Offering (assuming no value is attributed to the Warrants contained
in the Units to be offered in the Offering discussed in Note
D).
NOTE
C—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Development
Stage Company:
The
Company complies with the reporting requirements of SFAS No. 7, “Accounting and
Reporting by Development Stage Enterprises.”
Net
loss per common share:
The
Company complies with accounting and disclosure requirements of SFAS No.
128,
“Earnings Per Share”. Net loss per common share is computed by dividing net loss
by the weighted average number of common shares outstanding for the period.
Stock
based compensation:
The
Company complies with the accounting and disclosure requirements of SFAS
No.
123R, “Share Based Payments”. The cost of services received in exchange for an
award of equity instruments is to be measured based on the grant-date fair
value
of those instruments.
Concentration
of credit risk:
Financial
instruments that potentially subject the Company to concentrations of credit
risk consist of cash accounts in a financial institution, which at times,
exceeds the Federal depository insurance coverage of $100,000. The Company
has
not experienced losses on these accounts and management believes the Company
is
not exposed to significant risks on such accounts.
Fair
value of financial instruments:
The
fair
value of the Company’s assets and liabilities, which qualify as financial
instruments under SFAS No. 107, “Disclosure About Fair Value of Financial
Instruments,” approximates the carrying amounts presented in the balance
sheet.
Cash
and cash equivalents:
The
Company considers all highly liquid investment instruments purchased with
an
original maturity of three months or less to be cash
equivalents.
NOTE
C—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use
of estimates:
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires the Company’s
management to make estimates and assumptions that affect the reported amounts
of
assets and liabilities and disclosure of contingent assets and liabilities
at
the date of the financial statements and the reported amounts of revenues
and
expenses during the reporting period. Actual results could differ from
those
estimates.
Deferred
offering costs:
The
Company complies with the requirements of the SEC Staff Accounting Bulletin
(SAB) Topic 5A, “Expenses of Offering”. Deferred offering costs consist
principally of legal and underwriting fees incurred through the balance
sheet
date that are related to the Offering and that will be charged to capital
upon
the completion of the Offering or charged to expense if the Offering is
not
completed.
Income
taxes:
The
Company complies with SFAS No. 109, “Accounting for Income Taxes,” which
requires an asset and liability approach to financial accounting and reporting
for income taxes. Deferred income tax assets and liabilities are computed
for
differences between the financial statement and tax bases of assets and
liabilities that will result in future taxable or deductible amounts, based
on
enacted tax laws and rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amount expected to
be
realized.
Effective
May 22, 2007, the Company adopted the provisions of the Financial Accounting
Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”). There
were no unrecognized tax benefits as of March 31, 2008. FIN 48 prescribes
a
recognition threshold and a measurement attribute for the financial statement
recognition and measurement of tax positions taken or expected to be taken
in a
tax return. For those benefits to be recognized, a tax position must be
more-likely-than-not to be sustained upon examination by taxing authorities.
The
Company recognizes accrued interest and penalties related to unrecognized
tax
benefits as income tax expense. No amounts were accrued for the payment
of
interest and penalties at December 31, 2007. There was no change to this
balance
at March 31, 2008. Management is currently unaware of any issues under
review
that could result in significant payments, accruals or material deviations
from
its position. The adoption of the provisions of FIN 48 did not have a material
impact on the Company’s financial position, results of operations and cash
flows.
Recently
issued accounting standards:
In
December 2007, the FASB issued SFAS 160, "Noncontrolling Interests in
Consolidated Financial Statements,"an Amendment of ARB No. 51,
"Consolidated Financial Statements," ("SFAS 160"). SFAS 160 establishes
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. It clarifies that
a noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. This statement is effective as of the beginning of
an entity's first fiscal year that begins after December 15, 2008 with
retrospective application. The Company will adopt SFAS 160 beginning
January 1, 2009 and management is currently evaluating the potential impact
on
the financial statements when implemented.
In
December 2007, the FASB issued SFAS 141(R), "Business Combinations). SFAS
141(R)
provides companies with principles and requirements on how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, liabilities assumed, and any noncontrolling interest in the acquiree
as well as the recognition and measurement of goodwill acquired in a business
combination. SFAS 141(R) also requires certain disclosures to enable users
of
the financial statements to evaluate the nature and financial effects of
the
business combination. Acquisition costs associated with the business combination
will generally be expensed as incurred. SFAS 141(R) is effective for business
combinations occurring in fiscal years beginning after December 15, 2008,
which
will require the Company to adopt these provisions for business combinations
occurring in fiscal 2009 and thereafter. Early adoption of SFAS 141(R)
is not
permitted.
Management
does not believe any other recently issued, but not yet effective, accounting
pronouncements, if currently adopted, would have a material effect on the
Company’s financial statements.
NOTE
D— OFFERING
On
October 11, 2007 the Company sold 4,733,625 units (“Units”) at an offering price
of $8.00 per Unit. Each Unit consists of one share of the Company’s common
stock, $0.0001 par value, and one redeemable common stock purchase warrant
(“Warrant”). Each Warrant will entitle the holder to purchase from the Company
one share of common stock at an exercise price of $6.00 commencing upon
the
completion of a Business Combination with a target business or the distribution
of the Trust Account, and will expire October 4, 2011. The Warrants are
redeemable at a price of $0.01 per Warrant upon 30 days prior notice after
the
Warrants become exercisable, only in the event that the last sale price
of the
common stock is at least $11.50 per share for any 20 trading days within
a 30
trading day period ending on the third business day prior to the date on
which
notice of redemption is given.
Upon
consummation of the Offering, the Company’s initial stockholders (“Initial
Stockholders”), who owned 100% of the Company’s issued and outstanding common
stock prior to the Offering, forfeited a pro-rata portion of their shares
of
common stock (an aggregate of 110,344 shares of common stock) as a result
of the
underwriters’ election not to exercise the balance of a purchase option. Such
ownership interests were adjusted upon consummation of the Offering to
reflect
their aggregate ownership of 20% of the Company’s issued and outstanding common
stock (an aggregate of 1,183,406 shares of common stock).
NOTE
E—RELATED PARTY TRANSACTIONS
The
Company has received a limited recourse revolving line of credit totaling
$250,000 made available by FMG Investors, LLC. The revolving line of credit
terminates upon the earlier of the completion of the Business Combination
or the
cessation of FMG’s corporate existence 24 months from the date of the
Offering
(as
such
borrowings may be used to pay costs, expenses and claims in connection
with any
such dissolution and liquidation). The revolving line of credit is non-interest
bearing.
The
Company presently occupies office space provided by an affiliate of our
Chairman
and Chief Executive Officer. Such affiliate has agreed that, until the
acquisition of a target business by the Company, it will make such office
space,
as well as certain office and secretarial services, available to the Company,
as
may be required by the Company from time to time. The Company has agreed
to pay
such affiliate $7,500 per month for such services.
Certain
of the directors and officers of the Company have agreed to purchase through
FMG
Investors, LLC, in a private placement, 1,250,000 warrants immediately
prior to
the Offering at a price of $1.00 per warrant (an aggregate purchase price
of
approximately $1,250,000) from the Company and not as part of the Offering.
They
have also agreed that these warrants purchased by them will not be sold
or
transferred until 90 days after the completion of a Business Combination.
NOTE
F—COMMITMENTS
The
Company paid an underwriting discount of 3% of the public unit offering
price to
the underwriters at the closing of the Offering, with an additional 4%
fee of
the gross offering proceeds payable upon the Company’s consummation of a
Business Combination.
The
Company has agreed to sell to Pali Capital, Inc, for $100, as additional
compensation, an option to purchase up to a total of 450,000 units at a
per-unit
price of $10.00. The units issuable upon exercise of this option are also
identical to those offered in the Offering. The sale was accounted for
as an
equity transaction.
Accordingly,
there was no net impact on the Company’s financial position or results of
operations, except for the recording of the $100 proceeds from the
sale.
The
Company has determined, based upon a Black-Scholes model, that the fair
value of
the option on the date of sale would be approximately $2.32 per unit, or
$1,044,000 in total, using an expected life of five years, volatility of
34.9%
and a risk-free interest rate of 3.69 %.
NOTE
F—COMMITMENTS (CONTINUED)
In
accordance with Statement of Financial Accounting Standard No. 123R, Share
Based
Payments (SFAS 123R), the cost of services received in exchange for an
award of
equity instruments is to be measured based on the grant-date fair value
of those
instruments. Because the Company does not have a trading history, the Company
needed to estimate the potential volatility of its common stock price,
which
will depend on a number of factors which cannot be ascertained at this
time.
SFAS 123R requires the Company to measure the option based on an appropriate
industry sector index instead of the expected volatility of its share price.
The
volatility calculation of 34.9% is based on the five year average volatility
for
a group of the 20 smallest insurance companies in the Russell 2000 (“Index”).
The Company referred to the Index because management believes that the
average
volatility is a reasonable benchmark to use in estimating the expected
volatility of the Company’s common stock post-business combination. Although an
expected life of five years was taken into account for purposes of assigning
a
fair value to the option, if the Company does not consummate a business
combination within the prescribed time period and liquidates, the option
would
become worthless.
Although
the purchase option and its underlying securities have been registered
under the
registration statement, the purchase option will provide for registration
rights
that will permit the holder of the purchase option to demand that a registration
statement be filed with respect to all or any part of the securities underlying
the purchase option within five years of the completion of the offering.
Further, the holders of the purchase option will be entitled to piggy -
back
registration rights in the event the Company undertakes a subsequent registered
offering within seven years of the completion of the
Offering.
The
Company granted the underwriter a 45-day option to purchase up to 675,000
additional units to cover the over-allotment. The underwriter used 233,625
of
the additional units at the time of closing and did not exercise the balance
of
the option.
NOTE
G—PREFERRED STOCK
The
Company is authorized to issue 1,000,000 shares of preferred stock with
such
designations, voting and other rights and preferences as may be determined
from
time to time by the Board of Directors. As of March 31, 2008, the Company
had
not issued shares of preferred stock. The Company’s certificate of incorporation
prohibits it, prior to a Business Combination, from issuing preferred stock
which participates in the proceeds of the Trust Account or which votes
as a
class with the common stock on a Business Combination.
NOTE
H—SUBSEQUENT EVENTS
On
April
2, 2008, FMG issued a press release with respect to the execution of an
Agreement and Plan of Merger (“Merger Agreement”) with United Insurance
Holdings, L.C., a limited liability company formed in the State of Florida
(“United”) and United Subsidiary Corp., a wholly-owned subsidiary of FMG
(“United Subsidiary”). Pursuant to the Merger Agreement, FMG agreed to purchase
all of the outstanding membership interests of United and United agreed
to merge
with United Subsidiary in a transaction whereby United would be the surviving
entity and a wholly-owned subsidiary of FMG. On the closing date, two of
the
current directors and all of the current officers of FMG will resign and
United
will appoint new officers and three new directors. Upon consummation
of the merger, FMG will change its name to United Insurance Holdings
Corp.
NOTE I —
FAIR VALUE MEASUREMENTS
Effective
January 1, 2008, the Company implemented Statement of Financial Accounting
Standard No. 157,
Fair
Value Measurement
,
or SFAS
157, for its financial assets and liabilities that are re-measured and
reported
at fair value at each reporting period, and non-financial assets and liabilities
that are re-measured and reported at fair value at least annually. In accordance
with the provisions of FSP No. FAS 157-2,
Effective
Date of FASB Statement No. 157,
the
Company has elected to defer implementation of SFAS 157 as it relates to
its
non-financial assets and non-financial liabilities that are recognized
and
disclosed at fair value in the financial statements on a nonrecurring basis
until January 1, 2009. The Company is evaluating the impact, if any, this
standard will have on its non-financial assets and liabilities.
NOTE I —
FAIR VALUE MEASUREMENTS (CONTINUED)
The
adoption of SFAS 157 to the Company’s financial assets and liabilities and
non-financial assets and liabilities that are re-measured and reported
at fair
value at least annually did not have an impact on the Company’s financial
results.
The
following table presents information about the Company’s assets and liabilities
that are measured at fair value on a recurring basis as of March 31, 2008,
and
indicates the fair value hierarchy of the valuation techniques the Company
utilized to determine such fair value. In general, fair values determined
by
Level 1 inputs utilize quoted prices (unadjusted) in active markets for
identical assets or liabilities. Fair values determined by Level 2 inputs
utilize data points that are observable such as quoted prices, interest
rates
and yield curves. Fair values determined by Level 3 inputs are unobservable
data
points for the asset or liability, and includes situations where there
is
little, if any, market activity for the asset or liability (in thousands):
Description
|
|
March 31,
2008
|
|
Quoted Prices in
Active Markets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
55
|
|
$
|
55
|
|
$
|
—
|
|
$
|
—
|
|
Cash
and cash equivalents held in trust
|
|
|
37,737
|
|
|
37,737
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
37,792
|
|
$
|
37,792
|
|
$
|
—
|
|
$
|
—
|
|
The
fair
values of the Company’s cash and cash equivalents held in the Trust Account are
determined through market, observable and corroborated sources.
The
carrying amounts reflected in the consolidated balance sheets for other
current
assets and accrued expenses approximate fair value due to their short-term
maturities.
De
Meo,
Young, McGrath
A
Professional Services Company
SUITE
517
|
SUITE
411
|
2400
EAST COMMERCIAL BOULEVARD
|
2424
NORTH FEDERAL HIGHWAY
|
FORT
LAUDERDALE, FLORIDA 33308
|
BOCA
RATON, FLORIDA 33431
|
(954)
351-9800
|
(561)
447-9800
|
FAX
(954) 938-8683
|
FAX
(561) 391-8856
|
dym@dymco.net
|
boca@dymco.net
|
—————————
|
—————————
|
Anthony
De Meo, CPA*, ABV,PFS
|
Michael
I. Bloom, CPA
|
Robert
E. McGrath, CPA
|
David
B. Price, CPA
|
Roberta
N. Young, CPA
|
—————————
|
|
*
regulated
by the State of Florida
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors and Members
United
Insurance Holdings, LC
We
have
audited the accompanying consolidated balance sheets of United Insurance
Holdings, LC and subsidiaries (the "Company"), a Florida corporation,
as of
December 31, 2007 and 2006 and the related statements of income, changes
in
Members’ equity, and cash flows
for
each
of the years in the three-year period ended December 31, 2007.
These
financial statements are the responsibility of the Company's management.
Our
responsibility is to express an opinion on these financial statements
based on
our audit.
We
conducted our audit in accordance with the standards of the Public
Company
Accounting
Oversight Board (United States). Those standards require that we plan
and
perform the audit to obtain reasonable assurance about whether the
financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the
financial
statements. Our audit included consideration of internal control over
financial
reporting as a basis for designing audit procedures that are appropriate
in the
circumstances but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes assessing
the
accounting principles used and significant estimates made by management,
as well
as evaluating the overall financial statement presentation. We believe
that our
audit provides a reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly,
in all
material respects, the financial position of United Insurance Holdings,
LC and
subsidiaries as of December 31, 2007 and 2006, and the results of its
operations
and its cash flows for each of the years in the three-year period ended
December
31, 2007 in conformity with accounting principles generally accepted
in the
United States of America.
De
Meo,
Young, McGrath, CPA
/s/
DE
MEO, YOUNG, MCGRATH, CPA
Fort
Lauderdale, Florida
May
1,
2008
DYM
MEMBERS
OF
AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS: MANAGEMENT CONSULTING
SERVICES DIVISION; SEC PRACTICE SECTION;
PRIVATE
COMPANIES PRACTICE SECTION; TAX DIVISION ● FLORIDA INSTITUTE OF CERTIFIED PUBLIC
ACCOUNTANTS ● INSTITUTE OF BUSINESS APPRAISERS
United
Holdings, LC and Subsidiaries
CONSOLIDATED
BALANCE SHEETS
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Dollars
in thousands)
|
|
ASSETS
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
Fixed
maturities
|
|
$
|
107,410
|
|
$
|
90,692
|
|
Equity
securities
|
|
|
5,072
|
|
|
16,385
|
|
Other
investments
|
|
|
1,300
|
|
|
23,890
|
|
|
|
|
|
|
|
|
|
Total
investments
|
|
|
113,782
|
|
|
130,967
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
56,852
|
|
|
46,248
|
|
Premiums
receivable, net
|
|
|
9,966
|
|
|
10,140
|
|
Reinsurance
recoverable, net
|
|
|
16,816
|
|
|
38,521
|
|
Prepaid
reinsurance premiums
|
|
|
26,345
|
|
|
34,160
|
|
Deferred
policy acquisition costs
|
|
|
7,547
|
|
|
7,231
|
|
Property
and equipment, net
|
|
|
108
|
|
|
99
|
|
Federal
income tax recoverable
|
|
|
-
|
|
|
354
|
|
Deferred
income taxes asset, net
|
|
|
4,733
|
|
|
6,812
|
|
Prepaid
expenses and other assets
|
|
|
6,277
|
|
|
1,508
|
|
Total
assets
|
|
$
|
242,426
|
|
$
|
276,040
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND MEMBERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
losses and loss adjustment expenses
|
|
$
|
36,005
|
|
$
|
57,175
|
|
Unearned
premiums
|
|
|
73,051
|
|
|
79,684
|
|
Reinsurance
payable
|
|
|
10,852
|
|
|
27,831
|
|
Accrued
distribution payable
|
|
|
9,227
|
|
|
8,157
|
|
Advance
premium
|
|
|
2,396
|
|
|
2,404
|
|
Accounts
payable and accrued expenses
|
|
|
13,858
|
|
|
25,196
|
|
Shares
subject to mandatory redemption
|
|
|
2,564
|
|
|
939
|
|
Federal
and state income tax payable
|
|
|
2,303
|
|
|
-
|
|
Other
liabilities
|
|
|
2,238
|
|
|
901
|
|
Long-term
debt
|
|
|
43,833
|
|
|
49,640
|
|
Total
liabilities
|
|
|
196,327
|
|
|
251,927
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members'
equity:
|
|
|
|
|
|
|
|
Members'
certificates of interest
|
|
|
7,464
|
|
|
6,963
|
|
Retained
earnings
|
|
|
37,891
|
|
|
17,601
|
|
Accumulated
other comprehensive income (loss)
|
|
|
744
|
|
|
(451
|
)
|
Total
members' equity
|
|
|
46,099
|
|
|
24,113
|
|
|
|
|
|
|
|
|
|
Total
liabilities and members' equity
|
|
$
|
242,426
|
|
$
|
276,040
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
|
|
|
United
Holdings, LC and Subsidiaries
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(Dollars
in thousands)
|
|
Revenue:
|
|
|
|
|
|
|
|
Gross
premiums written
|
|
$
|
145,050
|
|
$
|
148,886
|
|
$
|
141,806
|
|
Gross
premiums ceded
|
|
|
(58,511
|
)
|
|
(77,966
|
)
|
|
(52,685
|
)
|
Net
premiums written
|
|
|
86,539
|
|
|
70,920
|
|
|
89,121
|
|
Decrease
(increase) in net unearned premiums
|
|
|
(1,181
|
)
|
|
2,710
|
|
|
(13,457
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
premiums earned
|
|
|
85,358
|
|
|
73,630
|
|
|
75,664
|
|
Net
investment income
|
|
|
7,751
|
|
|
5,917
|
|
|
2,984
|
|
Net
realized investment gains
|
|
|
322
|
|
|
111
|
|
|
85
|
|
Commissions
and fees
|
|
|
2,414
|
|
|
2,399
|
|
|
1,730
|
|
Policy
assumption bonus
|
|
|
13,556
|
|
|
-
|
|
|
-
|
|
Other
income
|
|
|
3,200
|
|
|
395
|
|
|
149
|
|
Total
revenue
|
|
|
112,601
|
|
|
82,452
|
|
|
80,612
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
Losses
and loss adjustment expenses
|
|
|
25,662
|
|
|
35,357
|
|
|
61,617
|
|
Policy
acquisition costs
|
|
|
17,316
|
|
|
15,545
|
|
|
12,982
|
|
Operating
and underwriting expenses
|
|
|
9,110
|
|
|
9,748
|
|
|
3,958
|
|
Salaries
and wages
|
|
|
2,792
|
|
|
2,344
|
|
|
1,771
|
|
General
and administrative expenses
|
|
|
2,078
|
|
|
1,245
|
|
|
1,371
|
|
Interest
|
|
|
7,704
|
|
|
5,019
|
|
|
312
|
|
Total
expenses
|
|
|
64,662
|
|
|
69,258
|
|
|
82,011
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
47,939
|
|
|
13,194
|
|
|
(1,399
|
)
|
Provision
(benefit) for income tax
|
|
|
8,297
|
|
|
(4,014
|
)
|
|
(2,560
|
)
|
Net
income
|
|
$
|
39,642
|
|
$
|
17,208
|
|
$
|
1,161
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
|
|
|
|
United
Holdings, LC and Subsidiaries
CONSOLIDATED
STATEMENTS OF MEMBERS’ EQUITY AND COMPREHENSIVE INCOME
|
|
Years
Ended December 31,
|
|
|
|
Comprehensive
Income
|
|
Members'
Certificates of Interest
|
|
Retained
Earnings
|
|
Accumulated
Other Comprehensive Income (Loss)
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2004
|
|
|
|
|
$
|
6,147
|
|
$
|
9,666
|
|
$
|
(188
|
)
|
$
|
15,625
|
|
Net
Income
|
|
|
1,161
|
|
|
-
|
|
|
1,161
|
|
|
-
|
|
|
1,161
|
|
Increase
in certificates of interest
|
|
|
-
|
|
|
101
|
|
|
-
|
|
|
-
|
|
|
101
|
|
Net
unrealized change in investments, net of tax effect of
$370
|
|
|
(517
|
)
|
|
-
|
|
|
-
|
|
|
(517
|
)
|
|
(517
|
)
|
Distributions
|
|
|
-
|
|
|
-
|
|
|
(1,758
|
)
|
|
-
|
|
|
(1,758
|
)
|
Comprehensive
income
|
|
$
|
644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2005
|
|
|
|
|
|
6,248
|
|
|
9,069
|
|
|
(705
|
)
|
|
14,612
|
|
Net
Income
|
|
|
17,208
|
|
|
-
|
|
|
17,208
|
|
|
-
|
|
|
17,208
|
|
Increase
in certificates of interest
|
|
|
-
|
|
|
715
|
|
|
-
|
|
|
-
|
|
|
715
|
|
Net
unrealized change in investments, net of tax effect of
$154
|
|
|
254
|
|
|
-
|
|
|
-
|
|
|
254
|
|
|
254
|
|
Distributions
|
|
|
-
|
|
|
-
|
|
|
(8,676
|
)
|
|
-
|
|
|
(8,676
|
)
|
Comprehensive
income
|
|
$
|
17,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2006
|
|
|
|
|
|
6,963
|
|
|
17,601
|
|
|
(451
|
)
|
|
24,113
|
|
Net
Income
|
|
|
39,642
|
|
|
-
|
|
|
39,642
|
|
|
-
|
|
|
39,642
|
|
Increase
in certificates of interest
|
|
|
-
|
|
|
501
|
|
|
-
|
|
|
-
|
|
|
501
|
|
Net
unrealized change in investments, net of tax effect of
$755
|
|
|
1,195
|
|
|
-
|
|
|
-
|
|
|
1,195
|
|
|
1,195
|
|
Distributions
|
|
|
-
|
|
|
-
|
|
|
(19,352
|
)
|
|
-
|
|
|
(19,352
|
)
|
Comprehensive
income
|
|
$
|
40,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2007
|
|
|
|
|
$
|
7,464
|
|
$
|
37,891
|
|
$
|
744
|
|
$
|
46,099
|
|
See
accompanying notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
Holdings, LC and Subsidiaries
CONSOLIDATED
STATEMENTS OF CASH FLOW
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(Dollars
in thousands)
|
|
Cash
flow provided by (used in) operating activities:
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
39,642
|
|
$
|
17,208
|
|
$
|
1,161
|
|
Adjustments
to reconcile net income (loss) to net cash provided
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
720
|
|
|
66
|
|
|
22
|
|
Provision
for (recovery of) uncollectible premiums
|
|
|
163
|
|
|
99
|
|
|
(60
|
)
|
Deferred
income taxes, net
|
|
|
2,080
|
|
|
(3,516
|
)
|
|
(2,152
|
)
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Premiums
receivable
|
|
|
11
|
|
|
(5,564
|
)
|
|
(1,878
|
)
|
Reinsurance
recoverable
|
|
|
21,705
|
|
|
127,485
|
|
|
(161,906
|
)
|
Prepaid
reinsurance premiums
|
|
|
7,815
|
|
|
(12,009
|
)
|
|
(9,004
|
)
|
Deferred
acquisition costs
|
|
|
(317
|
)
|
|
303
|
|
|
(1,043
|
)
|
Income
taxes, net
|
|
|
2,657
|
|
|
2,802
|
|
|
(386
|
)
|
Other
assets
|
|
|
(4,680
|
)
|
|
195
|
|
|
678
|
|
Reserve
for loss and LAE
|
|
|
(21,170
|
)
|
|
(117,042
|
)
|
|
161,670
|
|
Unearned
premiums
|
|
|
(6,634
|
)
|
|
9,299
|
|
|
22,461
|
|
Reinsurance
payable
|
|
|
(16,980
|
)
|
|
10,191
|
|
|
7,612
|
|
Premium
deposits
|
|
|
(8
|
)
|
|
(36
|
)
|
|
(332
|
)
|
Accounts
payable and accrued expenses
|
|
|
(11,337
|
)
|
|
(15,899
|
)
|
|
15,424
|
|
Other
liabilities
|
|
|
1,338
|
|
|
891
|
|
|
(1,549
|
)
|
Net
cash provided by (used in) operating activities
|
|
|
15,005
|
|
|
14,473
|
|
|
30,718
|
|
Cash
flow provided by (used in) investing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sales of investments available for sale
|
|
|
66,934
|
|
|
79,988
|
|
|
56,664
|
|
Purchases
of investments available for sale
|
|
|
(49,840
|
)
|
|
(135,786
|
)
|
|
(99,888
|
)
|
Change
in unrealized holding gain/ (loss)
|
|
|
1,194
|
|
|
255
|
|
|
(517
|
)
|
Cost
of property and equipment acquired
|
|
|
(49
|
)
|
|
(43
|
)
|
|
(36
|
)
|
Net
cash provided by (used in) investing activities
|
|
|
18,239
|
|
|
(55,586
|
)
|
|
(43,777
|
)
|
Cash
flow provided by (used in) financing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from borrowings
|
|
|
33,000
|
|
|
40,000
|
|
|
10,000
|
|
Repayments
of borrowings
|
|
|
(39,486
|
)
|
|
—
|
|
|
(2,222
|
)
|
Contributions
by owners
|
|
|
501
|
|
|
—
|
|
|
101
|
|
Distributions
to owners
|
|
|
(18,281
|
)
|
|
(2,167
|
)
|
|
(365
|
)
|
Proceeds
from the issuance of equity
|
|
|
—
|
|
|
597
|
|
|
—
|
|
Shares
subject to mandatory redemption
|
|
|
1,626
|
|
|
939
|
|
|
—
|
|
Net
cash provided by (used in)financing activities
|
|
|
(22,640
|
)
|
|
39,369
|
|
|
7,514
|
|
Increase(decrease)
in cash
|
|
|
10,604
|
|
|
(1,744
|
)
|
|
(5,545
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
46,248
|
|
|
47,992
|
|
|
53,537
|
|
Cash
and cash equivalents at end of period
|
|
$
|
56,852
|
|
$
|
46,248
|
|
$
|
47,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
4,505
|
|
$
|
3,850
|
|
$
|
316
|
|
Income
Taxes paid (refunded)
|
|
|
3,234
|
|
|
(2,724
|
)
|
|
515
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
United
Insurance Holdings, LC and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2007
(Dollars
in thousands)
United
Insurance Holdings, LC (“the Company”, “UIH”, “we”) is a Florida-domiciled,
limited liability company formed in 1999. The Company and its three
wholly-owned
subsidiaries are engaged in the property and casualty insurance business
in the
state of Florida. The Company’s subsidiaries include United Property &
Casualty Insurance Company (“UPCIC”), a property and casualty stock insurance
company; United Insurance Management, LC (“UIM”), (the Managing General Agent
(“MGA”) for UPCIC, that functions as the manager for the insurance subsidiary’s
business), and Skyway Claims Services LC (“Skyway”), which provides claims
adjusting services to UPCIC. We operate under one business segment.
Since
its
formation, UPCIC, a licensed Florida insurer, has actively written
homeowners’
and dwelling fire business throughout the state of Florida. UPCIC writes
business through its vast, independent agency force and writes business
through
an alliance with Allstate Insurance Company. In 1999, 2004 and 2005,
UPCIC
assumed policies from Citizens Property Insurance Corporation (“Citizens”) and
these assumed policies comprise approximately 30% of UPCIC premium.
UPCIC also
writes a flood coverage and a smaller commercial auto line of business
(“Garage”). The Company, through UIM, manages substantially all aspects of the
insurance operations that would include underwriting, policy administration,
collections and disbursements, accounting and claims processes. UIM
contracts
with a third-party administrator (“TPA”) to manage many aspects of policy
processing including billing and policy maintenance.
(2)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(a)
PRINCIPLES OF CONSOLIDATION
The
accompanying consolidated financial statements include the accounts
of the
Company and its subsidiaries. All significant intercompany balances
and
transactions have been eliminated in consolidation.
(b)
CASH AND CASH EQUIVALENTS
Cash
includes demand deposits with financial institutions and cash equivalents
that
are defined as short-term, highly-liquid investments with original
maturities of
three months or less.
UIM
is
required to maintain a cash account with Columbus Bank and Trust Company
(“CB&T”) in connection with its loan agreement that was entered into during
February 2007. This amount is included in cash in the accompanying
consolidated
balance sheet at December 31, 2007.
(c)
INVESTMENTS
Investments
in debt and equity securities are classified as either held-to-maturity,
available-for-sale or trading. We currently classify all securities
as
available-for-sale and report them at fair value, with subsequent changes
in
value reflected as unrealized investment gains and losses credited
or charged
directly to accumulated other comprehensive income included in members’
equity.
A
decline
in the fair value of an available-for-sale security below cost that
is deemed
other than temporary results in a charge to income, resulting in the
establishment of a new cost basis for the security. Dividends and interest
income are recognized when earned. Realized gains and losses are included
in
earnings and are derived using the specific identification method for
determining the cost of securities sold.
The
fair
values of the Company's cash and cash equivalents approximate carrying
values
due to the short-term nature of those instruments.
The
fair
values of debt and equity securities were determined from nationally
quoted
markets.
The
insurance subsidiary is required to maintain a deposit pursuant to
Florida
Statutes to help secure the payment of claims. Cash and cash equivalents
of $300
have been assigned to the Florida Office of Insurance Regulation (“Office”) to
satisfy this requirement. This amount is included in other investments
in the
accompanying consolidated balance sheets at December 31, 2007 and
2006.
Investments
over which the Company does not have control and a majority economic
interest
and therefore do not meet Financial Accounting Standards Board (“FASB”)
Interpretation No. 46R, “Consolidation of Variable Interest Entities-Revised”,
requirements for consolidation are reported on the equity basis of
accounting.
United
Insurance Holdings, LC and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2007
(Dollars
in thousands)
(d)
PREMIUM REVENUE AND PREMIUMS RECEIVABLE
Premiums
are recorded as earned on a daily pro rata basis over the contract
period of the
related policies that are in force. The portion of premiums not earned
at the
end of the year is recorded as unearned premiums.
Premiums
receivable includes amounts due from UPCIC’s insureds for billed premiums. UPCIC
performs a policy-level evaluation to determine the extent the premiums
receivable balance exceeds the unearned premiums balance. Then, this
exposure is
aged to establish an allowance for credit losses based upon prior experience.
Recoveries paid on amounts previously charged off are credited to bad
debt
expense in the period received. As of December 31, 2007 and 2006, the
Company
had recorded an allowance for credit losses of $160 and $70,
respectively.
(e)
DEFERRED POLICY ACQUISITION COSTS
Policy
acquisition costs that vary with, and are directly related to, the
production of
new business are deferred, net of related ceding commissions and unearned
policy
fees, to the extent recoverable and are amortized over the period during
which
the related premiums are earned.
Deferred
acquisition costs primarily represent commissions paid to outside agents
at the
time of policy issuance, net of commissions refunded for cancelled
policies,
policy administration fees paid to a TPA at the time of policy issuance,
and
premium tax. Deferred acquisition costs are recorded net of unearned
policy fees
and unearned ceding commissions. These costs are amortized over the
life of the
related policy in relation to the amount of premiums earned. There
is no
indication that these costs will not be fully recoverable in the near
term.
An
analysis of deferred acquisition costs follows:
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Balance,
beginning of year
|
|
$
|
7,231
|
|
$
|
7,534
|
|
Acquisition
costs deferred
|
|
|
14,957
|
|
|
13,878
|
|
Amortization
expense during year
|
|
|
(14,641
|
)
|
|
(14,181
|
)
|
Balance,
end of year
|
|
$
|
7,547
|
|
$
|
7,231
|
|
(f)
ADVANCE PREMIUM
Advance
premium represents premiums received primarily in connection with homeowner
policies that are not yet effective.
(g)
UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
Loss
and
loss adjustment expense (“LAE”) reserves represent the estimated ultimate net
cost of all unpaid, reported and unreported losses and LAE. The reserves
for
unpaid losses and LAE are estimated using individual case-basis estimates
for
reported losses and actuarial estimates for losses incurred but not
yet
reported. Those estimates are subject to the effects of trends in loss
severity
and frequency. The estimates are continually reviewed and adjusted
as necessary
as experience develops or new information becomes known; such adjustments
are
included in current operations. The ultimate settlement of losses and
LAE may
vary significantly from the estimated amounts included in the consolidated
financial statements.
The
anticipated effect of inflation is implicitly considered when estimating
liabilities for losses and LAE. While anticipated price increases due
to
inflation are considered in estimating the ultimate claim costs, the
increase in
average severities of claims is caused by a number of factors that
vary with the
individual type of policy written. Future average severities are projected
based
on historical trends adjusted for implemented changes in underwriting
standards,
policy provisions, and general economic trends. Those anticipated trends
are
monitored based on actual development and the estimated liabilities
are
modified, if necessary.
United
Insurance Holdings, LC and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2007
(Dollars
in thousands)
Loss
and
LAE reserves are reported gross of reinsurance recoverables for unpaid
losses
and LAE. Losses and LAE ceded through reinsurance are credited against
losses
and LAE incurred. The Company does not discount its loss and LAE reserves
for
financial statement purposes.
There
can
be no assurance that our unpaid losses and LAE will be adequate to
cover actual
losses. If our unpaid losses and LAE prove to be inadequate, we will
be required
to increase the liability with a corresponding reduction in our net
income in
the period in which the deficiency is identified. Future loss experience
substantially in excess of the established unpaid losses and LAE could
have a
material adverse effect on our business, results of operations and
financial
condition.
Accounting
for loss contingencies pursuant to SFAS No.5, “Loss Contingencies”, involves the
existence of a condition, situation or set of circumstances involving
uncertainty as to possible loss that will ultimately be resolved when
one or
more future event(s) occur or fail to occur. Additionally, accounting
for a loss
contingency requires management to assess each event as probable, reasonably
possible or remote. Probable is defined as the future event or events
are likely
to occur. Reasonably possible is defined as the chance of the future
event or
events occurring is more than remote but less than probable, while
remote is
defined as the chance of the future event or events occurring is slight.
An
estimated loss in connection with a loss contingency shall be recorded
by a
charge to current operations if both of the following conditions are
met: First,
the amount can be reasonably estimated; and second, the information
available
prior to issuance of the financial statements indicates that it is
probable that
a liability has been incurred at the date of the financial statements.
It is
implicit in this condition that it is probable that one or more future
events
will occur confirming the fact of the loss or incurrence of a
liability.
(
h)
MANAGING GENERAL AGENT FEES
UIM
provides insurance-related services to UPCIC, including but not limited
to,
policy administration, underwriting and general and administrative
activities.
UPCIC pays UIM 31.5% of gross earned premium as compensation for these
services.
(i)
POLICY FEES
Policy
fees are recognized as income on a pro rata basis as the policy is
earned.
(j)
REINSURANCE
The
accompanying balance sheets reflect reserves for unearned premiums
and reserves
for losses and loss adjustment expenses (“LAE”) gross of reinsurance ceded. The
accompanying statements of operations reflect premiums, losses and
LAE net of
reinsurance ceded.
The
reinsurance contracts allow management to control exposure to potential
losses
arising from large risks and catastrophic events. Amounts recoverable
from
reinsurers are estimated in a manner consistent with the losses and
LAE reserves
associated with the reinsured policies. Reinsurance premiums, losses
and LAE are
accounted for on a basis consistent with that used in accounting
for the
original policies issued or based on the terms of the reinsurance
contracts.
(k)
INCOME TAXES
The
Company and its non-insurance subsidiaries are not taxable entities;
therefore,
no tax liability or tax provision exists for these entities. The insurance
subsidiary files a separate return, is taxable as a C-corporation,
and uses the
asset and liability method of accounting for income taxes. Under the
asset and
liability method, deferred tax assets and liabilities are recognized
for the
estimated future tax consequences attributable to differences between
the
financial statement carrying amounts of existing assets and liabilities
and
their respective tax bases. This method also requires the recognition
of future
tax benefits such as net operating loss carry forwards to the extent
that
realization of such benefits is more likely than not. Deferred tax
assets and
liabilities are measured using enacted tax rates expected to apply
to taxable
income in the years in which those temporary differences are expected
to be
recovered or settled. The effect on deferred tax assets and liabilities
of a
change in tax rates is recognized in the period that includes the enactment
date.
(l)
CONCENTRATION OF CREDIT RISK
Financial
instruments, which potentially subject the Company to concentrations
of credit
risk, consist principally of its holdings of cash and marketable securities.
The
Company's credit risk is managed by primarily investing in high-quality
money
market instruments, securities of the United States government and
its agencies,
and high-quality corporate issuers. At December 31, 2007 and 2006,
the Company
had no significant concentrations of credit risk.
United
Insurance Holdings, LC and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2007
(Dollars
in thousands)
(m)
RECENT ACCOUNTING PRONOUNCEMENTS
In
June
2006, the FASB issued interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (“FIN 48”) which clarifies the accounting for income tax reserves
and contingencies recognized in an enterprise’s financial statements in
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109,
Accounting for Income Taxes. This Interpretation also provides guidance
on
derecognition, classification, interest and penalties, accounting in
interim
periods, disclosure, and transition. This Interpretation is effective
for fiscal
years beginning after December 15, 2006. There was no material impact on
the consolidated financial statements related to the adoption of FIN
48.
In
February 2006, FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments”. This accounting standard permits fair value
re-measurement for any hybrid financial instrument containing an embedded
derivative that otherwise would require bifurcation; clarifies which
interest-only strips and principal-only strips are not subject to the
requirements of SFAS No. 133; establishes a requirement to evaluate
interests in
securitized financial assets to identify them as freestanding derivatives
or as
hybrid financial instruments containing an embedded derivative requiring
bifurcation; clarifies that concentrations of credit risk in the form
of
subordination are not embedded derivatives; and amends SFAS No. 140
to eliminate
the prohibition on a qualifying special-purpose entity from holding
a derivative
financial instrument pertaining to a beneficial interest other than
another
derivative financial instrument. SFAS No. 155 is effective for all
financial
instruments acquired or issued after the beginning of an entity’s first fiscal
year beginning after September 15, 2006. There was no material impact
on our
consolidated financial statements with respect to the adoption of SFAS
No. 155.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, which
defines fair value, establishes a framework for measuring fair value,
and
expands disclosures about fair value measurements. The provisions of
SFAS No.
157 are effective for financial statements issued for fiscal years
beginning
after November 15, 2007, and interim periods within those fiscal years.
In
February 2008, the FASB issued FASB Staff Position No. 157-2 “Effective Date of
FASB Statement No. 157”, which permits the deferral of the effective date of
SFAS No. 157 to fiscal years beginning after November 15, 2008 for
all
nonfinancial assets and liabilities, except those that are recognized
or
disclosed at fair value in the financial statements on a recurring
basis. The
Company plans to utilize the deferral for non-financial assets and
liabilities.
The adoption of SFAS No. 157 is not expected to have a material effect
on the
Company’s results of operation or financial position.
In
September 2006, FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans.” This statement requires an
employer to recognize the overfunded or underfunded status of a single-employer
defined benefit postretirement plan as an asset or liability in its
statement of
financial position and to recognize changes in the funded status in
the year in
which the changes occur through comprehensive income. SFAS No. 158
will become
effective for years ending after December 15, 2006. The Company has
no defined
benefit or postretirement plans, so there was no impact on our consolidated
financial statements with respect to the adoption of SFAS No. 158.
In
September 2006, the Securities and Exchange Commission issued Staff
Accounting
Bulletin (“SAB”) No. 108 to address diversity in practice in quantifying
financial statement misstatements. SAB 108 requires that registrants
quantify
the impact on the current year’s financial statements of correcting all
misstatements, including the carryover and reversing effects of prior
years’
misstatements, as well as the effects of errors arising in the current
year. SAB
108 is effective as of the first fiscal year ending after November
15, 2006,
allowing a one-time transitional cumulative effect adjustment to retained
earnings as of January 1, 2006, for errors that were not previously
deemed
material, but are material under the guidance in SAB No. 108. There
was no
material impact on our consolidated financial statements with respect
to the
adoption of SAB No. 108.
In
March
2006, FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets—an
amendment of FASB Statement No. 140”. SFAS 156 requires the recognition of a
servicing asset or servicing liability under certain circumstances
when an
obligation to service a financial asset by entering into a servicing
contract.
It also requires all separately recognized servicing assets and servicing
liabilities to be initially measured at fair value utilizing the amortization
method or fair market value method . SFAS 156 is effective at the beginning
of
the first fiscal year that begins after September 15, 2006. FASB 156
did not
have a material impact on the Company’s consolidated financial
statements.
In
November 2005, the FASB released FASB Staff Position Nos. FAS 115-1
and FAS
124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application
to
Certain Investments” (“FSP 115-1”), which effectively replaces EITF Issue No.
03-1. FSP 115-1 contains a three-step model for evaluating impairments
and
carries forward the disclosure requirements in EITF Issue No. 03-1
pertaining to
securities in an unrealized loss position is considered impaired; an
evaluation
is made to determine whether the impairment is other-than-temporary;
and, if an
impairment is considered other-than-temporary, a realized loss is recognized
to
write the security’s cost or amortized cost basis down to fair value. FSP 115-1
references existing other-than-temporary impairment guidance for determining
when impairment is other-than-temporary and clarifies that subsequent
to the
recognition of other-than-temporary impairment loss for debt securities,
an
investor shall account for the security using the constant effective
yield
method. FSP 115-1 is effective for reporting periods beginning after
December
15, 2005, with earlier application permitted. There was no material
impact on
our consolidated financial statements with respect to the adoption
of FSP
115-1.
United
Insurance Holdings, LC and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2007
(Dollars
in thousands)
In
September 2005, the AICPA issued Statement of Position 05-1, "Accounting
by
Insurance Enterprises for Deferred Acquisition Costs in connection
with
Modifications or Exchanges of Insurance Contracts" (“SOP 05-1”). This statement
provides guidance to insurance entities that incur deferred acquisition
costs on
internal replacements of insurance and investment contracts other than
those
specifically described in SFAS No. 97,
Accounting
and Reporting by Insurance Enterprises for Certain Long-Duration Contracts
and
for Realized Gains and Losses from the Sale of Investments.
SOP 05-1
defines internal replacements as modifications in product benefits,
features,
rights, or coverage that occur by the exchange of a contract for a
new contract,
or by amendment, endorsement, or rider to a contract, or by the election
of a
feature or coverage with a contract. The accounting treatment for such
replacements depends on whether, under the provisions of the SOP, the
replacement contract is considered substantially changed from the replaced
contract. A substantial change would be treated as the extinguishment
of the
replaced contract, and all unamortized deferred acquisition costs,
unearned
revenue liabilities, and deferred sales inducement assets from the
replaced
contract would no longer be deferred in connection with the replacement
contract. A replacement contract that is substantially unchanged should
be
accounted for as a continuation of the original contract. SOP 05-1
will be
effective for internal replacements occurring in fiscal years beginning
after
December 15, 2006, with earlier adoption encouraged. There was no material
impact on our consolidated financial statements with respect to the
adoption of
SOP 05-1.
In
December 2004, the FASB issued SFAS, No. 123, Share-Based Payments
(revised
2004) (“SFAS No. 123R”). This statement eliminates the option to apply the
intrinsic value measurement provisions of APB No. 25 to stock compensation
awards issued to employees. Rather, SFAS No. 123R requires companies
to measure
the cost of employee services received in exchange for an award of
equity
instruments based on the grant date fair value of the award. That cost
will be
recognized over the period during which an employee is required to
provide
services in exchange for the award - the requisite service period (usually
the
vesting period). SFAS No. 123R will also require companies to measure
the cost
of employee services received in exchange for employee stock purchase
plan
awards. SFAS No. 123R became effective for the fiscal quarter beginning
January
1, 2006. We do not have any share-based payments as of December 31,
2007 or
2006, so there was no impact on our consolidated financial statements
related to
SFAS No. 123R.
In
May
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections-a
replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS 154”). This
Statement replaces APB Opinion No. 20, Accounting Changes, and FASB
Statement
No. 3, Reporting Accounting Changes in Interim Financial Statements,
and changes
the requirements for the accounting for and reporting of a change in
accounting
principle. This Statement applies to all voluntary changes in accounting
principle. It also applies to changes required by an accounting pronouncement
in
the unusual instance that the pronouncement does not include specific
transition
provisions. When a pronouncement includes specific transition provisions,
those
provisions should be followed.
APB
Opinion No. 20 previously required that most voluntary changes in accounting
principle be recognized by including in net income of the period of
the change
the cumulative effect of changing to the new accounting principle.
This
Statement requires retrospective application to prior periods’ financial
statements of changes in accounting principle, unless it is impracticable
to
determine either the period-specific effects or the cumulative effect
of the
change. When it is impracticable to determine the period-specific effects
of an
accounting change on one or more individual prior periods presented,
this
Statement requires that the new accounting principle be applied to
the balances
of assets and liabilities as of the beginning of the earliest period
for which
retrospective application is practicable and that a corresponding adjustment
be
made to the opening balance of retained earnings (or other appropriate
components of equity or net assets in the statement of financial position)
for
that period rather than being reported in an income statement. When
it is
impracticable to determine the cumulative effect of applying a change
in
accounting principle to all prior periods, this Statement requires
that the new
accounting principle be applied as if it were adopted prospectively
from the
earliest date practicable. This Statement was made effective for accounting
changes and corrections of errors made in fiscal years beginning after
December
15, 2005. The adoption of SFAS 154 did not have a significant effect
on our
financial statements.
In
February 2007, the FASB issued SFAS No. 159
“The
Fair Value Option for Financial Assets and Financial Liabilities— Including an
Amendment of SFAS No. 115”
(“SFAS No. 159”), which permits an entity to measure many financial assets
and financial liabilities at fair value that are not currently required
to be
measured at fair value. Entities that elect the fair value option will
report
unrealized gains and losses in earnings at each subsequent reporting
date. The
fair value option may be elected on an instrument-by-instrument basis,
with a
few exceptions. SFAS No. 159 amends previous guidance to extend the use of
the fair value option to available-for-sale and held-to-maturity securities.
SFAS No. 159 also establishes presentation and disclosure requirements to
help financial statement users understand the effect of the election.
This
Statement is effective as of the beginning of an entity’s first fiscal year that
begins after November 15, 2007. The Company does not expect to apply
the fair
value option to any existing financial assets or liabilities as of
January 1,
2008. Consequently, the adoption of SFAS No. 159 is expected to have
no material
impact on our financial position or results of operations.
United
Insurance Holdings, LC and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2007
(Dollars
in thousands)
In
December 2007, the FASB issued SFAS No. 141(R), “Business
Combinations” (“SFAS No. 141(R)”). This standard establishes
principles and requirements for how the acquirer of a business recognizes
and
measures in its financial statements the identifiable assets acquired,
the
liabilities assumed, and any noncontrolling interest in the acquiree.
SFAS No. 141(R) also provides guidance for recognizing and measuring
the goodwill acquired in the business combination and determines what
information to disclose to enable users of the financial statements
to evaluate
the nature and financial effects of the business combination. The guidance
will
become effective as of the beginning of the Company’s fiscal year beginning
after December 15, 2008. The Company is currently evaluating the impact
that the adoption of SFAS No. 141(R) will have on its consolidated
financial condition or results of operations.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated Financial Statements-an amendment of ARB No. 51”
(“SFAS No. 160”). This standard establishes accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. The guidance will become effective
as of the
beginning of the Company’s fiscal year beginning after December 15, 2008.
The Company is currently evaluating the impact that the adoption of
SFAS No. 160 will have on its consolidated financial condition or
results of operations.
(n)
USE OF ESTIMATES
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management
to make
estimates and assumptions that affect the reported amounts of assets
and
liabilities and disclosures of contingent assets and liabilities at
the date of
the financial statements and reported amounts of revenues and expenses
during
the reporting period. Accordingly, actual results could differ from
those
estimates.
Similar
to other property and casualty insurers, our liability for unpaid losses
and
loss adjustment expense, although supported by actuarial projections
and other
data, is ultimately based on management's reasoned expectations of
future
events. Although considerable variability is inherent in these estimates,
we
believe that this liability is reasonable. Estimates are reviewed regularly
and
adjusted as necessary. Such adjustments are reflected in current operations.
In
addition, the realization of our deferred income tax assets is dependent
on
generating sufficient future taxable income. It is reasonably possible
that the
expectations associated with these accounts could change in the near
term and
that the effect of such changes could be material to the Consolidated
Financial
Statements.
(o)
OPERATIONAL RISKS
The
following is a description of the most significant risks facing us
and how we
mitigate those risks:
|
(I)
|
LEGAL/REGULATORY
RISKS—the risk that changes in the regulatory environment in which
an
insurer operates will create additional expenses not anticipated
by the
insurer in pricing its products. That is, regulatory initiatives
designed
to reduce insurer profits, restrict underwriting practices
and risk
classifications, mandate rate reductions and refunds, and
new legal
theories or insurance company insolvencies through guaranty
fund
assessments may create costs for the insurer beyond those
recorded in the
financial statements. We attempt to mitigate this risk by
monitoring
proposed regulatory legislation and by assessing the impact
of new laws.
As we write business only in the state of Florida, we are
more exposed to
this risk than more geographically-balanced
companies.
|
As
of
December 31, 2007 and 2006, the Company and its subsidiaries were in
compliance
with all regulatory requirements.
|
(II)
|
CREDIT
RISK—the risk that financial instruments, which potentially subject
the
Company to concentrations of credit risk, may decline in
value or default,
or the risk that reinsurers to which business is ceded and
from which
receivables are recorded on the balance sheet may not pay.
The Company
minimizes this risk by adhering to a conservative investment
strategy and
entering into reinsurance agreements with financially sound
reinsurers.
The Company maintains deposits, in excess of the federally
insured limits
(“FDIC”). SFAS 105 identifies this situation as a concentration
of credit
risk requiring disclosure, regardless of the degree of risk.
At December
31, 2007, cash at one financial institution exceeded the
$100 FDIC
coverage by $56,752. At December 31, 2006, the amounts that
exceeded the
FDIC coverage at two financial institutions were $4,988 and
$41,057,
respectively. This risk is managed by maintaining all deposits
in high
quality financial institutions.
|
United
Insurance Holdings, LC and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2007
(Dollars
in thousands)
|
(III)
|
INTEREST
RATE RISK—the risk that interest rates will change and cause a decrease
in
the value of an insurer's investments. To the extent that
liabilities come
due more quickly than assets mature, an insurer might have
to sell assets
prior to maturity and potentially recognize a gain or a loss.
This risk is
managed by the monitoring of the investment portfolio by
management, the
investment committee and the Company’s outside investment manager.
|
|
(IV)
|
CATASTROPHIC
EVENT RISK—the risk associated with writing insurance policies covering
losses that result from catastrophes, including hurricanes,
tropical
storms, tornadoes or other weather-related events. We mitigate
our risk of
catastrophic events through the use of reinsurance, forecast-modeling
techniques and the monitoring of concentrations of risk,
all designed to
protect the statutory surplus of the insurance
company.
|
(p)
FAIR VALUE
The
fair
value of our investments is estimated based on prices published by
financial
services or on quotations received from securities dealers and is
reflective of
the interest rate environment that existed as of the close of business
on
December 31, 2007 and 2006. Changes in interest rates subsequent
to December 31,
2007 may affect the fair value of our investments. Refer to Note
3 in the
notes to consolidated financial statements for details.
The
carrying amounts for the following financial instrument categories
approximate
their fair values at December 31, 2007 and 2006 because of their short-term
nature: cash and short-term investments, premiums receivable, reinsurance
receivable and accounts payable and accrued expenses.
(q)
STOCK OPTION PLANS
At
December 31, 2007 and 2006, the Company did not have a stock-based
employee
compensation plan;
however,
the Company’s Board granted membership units to key personnel in 2007 and 2006.
All grants were valued at fair market value in accordance with SFAS
123(R).
Please see Note 14 for additional information.
(r)
PROPERTYAND EQUIPMENT
Property
and equipment are stated at cost less accumulated depreciation and,
for
financial reporting purposes, are depreciated on a straight-line basis
over the
estimated useful lives of the assets, which range from four to five
years.
Maintenance and repair costs are charged to expense as incurred.
(s)
POLICY ASSUMPTION BONUS AGREEMENTS
As
part
of a policy assumption (or “takeout”) agreement with Citizens that expired in
2006, UPCIC receives takeout bonuses from Citizens for policies assumed.
Since
the receipt of these bonuses is contingent upon UPCIC meeting certain
requirements, and since the payment of the bonus closely follows the
completion
of such requirements, the Company does not record the bonus until the
payment is
received from Citizens.
The
following table shows the realized gains (losses) for fixed and equity
securities for the years ended December 31, 2007, 2006 and 2005.
|
|
Years
Ended December 31,
|
|
|
|
Gains
(Losses)
|
|
Fair
Value
|
|
Gains
(Losses)
|
|
Fair
Value
|
|
Gains
(Losses)
|
|
Fair
Value
|
|
|
|
2007
|
|
at
Sale
|
|
2006
|
|
at
Sale
|
|
2005
|
|
at
Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
income securities
|
|
|
4
|
|
|
1,527
|
|
|
11
|
|
|
3,058
|
|
|
1
|
|
|
252
|
|
Equity
securities
|
|
|
1,231
|
|
|
7,043
|
|
|
834
|
|
|
8,361
|
|
|
628
|
|
|
3,354
|
|
Total
realized gains
|
|
|
1,235
|
|
|
8,570
|
|
|
845
|
|
|
11,419
|
|
|
629
|
|
|
3,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
income securities
|
|
|
(70
|
)
|
|
5,258
|
|
|
(178
|
)
|
|
5,940
|
|
|
(132
|
)
|
|
8,189
|
|
Equity
securities
|
|
|
(843
|
)
|
|
4,995
|
|
|
(556
|
)
|
|
4,608
|
|
|
(412
|
)
|
|
1,795
|
|
Total
realized losses
|
|
|
(913
|
)
|
|
10,253
|
|
|
(734
|
)
|
|
10,548
|
|
|
(544
|
)
|
|
9,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
realized gains on investments
|
|
$
|
322
|
|
$
|
18,823
|
|
$
|
111
|
|
$
|
21,967
|
|
$
|
85
|
|
$
|
13,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
Insurance Holdings, LC and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2007
(Dollars
in thousands)
A
summary
of the amortized cost, estimated fair value, gross unrealized gains
and losses
of fixed maturities, equity securities, and other investments at December
31,
2007 and 2006 is as follows:
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Estimated
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
|
|
|
|
|
|
|
Fixed
Maturities - Available for Sale:
|
|
|
|
|
|
|
|
|
|
U.S.
government and agency obligations
|
|
|
66,813
|
|
|
2,095
|
|
|
4
|
|
|
68,904
|
|
Corporate
securities
|
|
|
38,695
|
|
|
217
|
|
|
406
|
|
|
38,506
|
|
Total
fixed maturities
|
|
|
105,508
|
|
|
2,312
|
|
|
410
|
|
|
107,410
|
|
Equity
securities
|
|
|
5,782
|
|
|
21
|
|
|
731
|
|
|
5,072
|
|
Short
term investments
|
|
|
300
|
|
|
-
|
|
|
-
|
|
|
300
|
|
Other
investments
|
|
|
1,000
|
|
|
-
|
|
|
-
|
|
|
1,000
|
|
Total
|
|
$
|
112,590
|
|
$
|
2,333
|
|
$
|
1,141
|
|
$
|
113,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
Maturities - Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government and agency obligations
|
|
|
44,848
|
|
|
25
|
|
|
481
|
|
|
44,392
|
|
Corporate
securities
|
|
|
46,878
|
|
|
29
|
|
|
607
|
|
|
46,300
|
|
Total
fixed maturities
|
|
|
91,726
|
|
|
54
|
|
|
1,088
|
|
|
90,692
|
|
Equity
securities
|
|
|
16,108
|
|
|
409
|
|
|
132
|
|
|
16,385
|
|
Short
term investments
|
|
|
22,890
|
|
|
-
|
|
|
-
|
|
|
22,890
|
|
Other
investments
|
|
|
1,000
|
|
|
-
|
|
|
-
|
|
|
1,000
|
|
Total
|
|
$
|
131,724
|
|
$
|
463
|
|
$
|
1,220
|
|
$
|
130,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
in debt and equity securities are considered available-for-sale securities
and
are carried at market value at December 31, 2007 and 2006.
Unrealized
gains and losses on debt and equity securities are credited or charged
directly
to accumulated other comprehensive income and included in members'
equity.
Realized gains and losses on investments included in the results of
operations
are determined using the specific identification method.
Included
in other investments is an investment of $1,000 in an ‘excess and surplus’ lines
insurance company for which there is no readily available market value.
The
Company has performed an analysis of the fair market value of this
investment at
December 31, 2007 and 2006 and has determined that it approximates
cost of
$1,000.
The
investments held at the end of the year were comprised mainly of high-quality
money market instruments, securities of the United States government
and its
agencies, and securities of high-quality corporate issuers.
Below
is
a summary of fixed maturities at December 31, 2007 and 2006 by contractual
or
expected maturity periods. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
|
|
December
31, 2007
|
|
December
31, 2006
|
|
|
|
Amortized
|
|
Estimated
|
|
Amortized
|
|
Estimated
|
|
|
|
Cost
|
|
Fair
Value
|
|
Cost
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
Due
in one year or less
|
|
|
11,290
|
|
|
11,296
|
|
|
4,024
|
|
|
3,995
|
|
Due
after one year through five years
|
|
|
62,478
|
|
|
63,546
|
|
|
59,045
|
|
|
58,179
|
|
Due
after five years through ten years
|
|
|
31,740
|
|
|
32,568
|
|
|
28,657
|
|
|
28,518
|
|
Due
after ten years
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
|
|
$
|
105,508
|
|
$
|
107,410
|
|
$
|
91,726
|
|
$
|
90,692
|
|
United
Insurance Holdings, LC and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2007
(Dollars
in thousands)
Major
categories of the Company's net investment income are summarized as
follows:
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Fixed
maturities
|
|
|
4,758
|
|
|
2,920
|
|
|
1,673
|
|
Equity
securities
|
|
|
731
|
|
|
402
|
|
|
272
|
|
Cash,
cash equivalents and short term investments
|
|
|
2,262
|
|
|
2,595
|
|
|
1,039
|
|
Total
investment income
|
|
$
|
7,751
|
|
$
|
5,917
|
|
$
|
2,984
|
|
Proceeds
from the sale of investments during 2007, 2006, and 2005, were $66,934,
$79,988,
and $56,664 and gross gains of $1,235, $845, and $629 and gross losses
of $913,
$734 and $544 were realized on those sales, respectively.
A
summary
of realized gains (losses) and unrealized gains (losses) are as
follows:
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Net
realized gains (losses):
|
|
|
|
|
|
|
|
Fixed
maturities
|
|
|
(66
|
)
|
|
(167
|
)
|
|
(131
|
)
|
Equity
securities
|
|
|
388
|
|
|
278
|
|
|
216
|
|
Total
|
|
$
|
322
|
|
$
|
111
|
|
$
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized gains (losses):
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities
|
|
|
1,902
|
|
|
(1,033
|
)
|
|
(1,064
|
)
|
Equity
securities
|
|
|
(710
|
)
|
|
276
|
|
|
(144
|
)
|
Total
|
|
$
|
1,192
|
|
$
|
(757
|
)
|
$
|
(1,208
|
)
|
An
aging
of our unrealized
investment
losses by investment class is as follows:
|
|
Unrealized
|
|
|
|
|
|
|
|
Holdings
|
|
Less
than
|
|
12
months
|
|
|
|
Net
Losses
|
|
12
months
|
|
or
longer
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
|
|
|
|
|
Fixed
Maturities - Available for Sale:
|
|
|
|
|
|
U.S.
government and agency obligations
|
|
|
4
|
|
|
-
|
|
|
4
|
|
Corporate
securities
|
|
|
406
|
|
|
-
|
|
|
406
|
|
Total
fixed maturities
|
|
|
410
|
|
|
-
|
|
|
410
|
|
Equity
securities
|
|
|
731
|
|
|
255
|
|
|
476
|
|
Total
|
|
$
|
1,141
|
|
$
|
255
|
|
$
|
886
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
|
|
|
|
|
|
|
|
|
Fixed
Maturities - Available for Sale:
|
|
|
|
|
|
|
U.S.
government and agency obligations
|
|
|
481
|
|
|
38
|
|
|
443
|
|
Corporate
securities
|
|
|
607
|
|
|
205
|
|
|
402
|
|
Total
fixed maturities
|
|
|
1,088
|
|
|
243
|
|
|
845
|
|
Equity
securities
|
|
|
132
|
|
|
36
|
|
|
96
|
|
Total
|
|
$
|
1,220
|
|
$
|
279
|
|
$
|
941
|
|
|
|
|
|
|
|
|
|
|
|
|
United
Insurance Holdings, LC and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2007
(Dollars
in thousands)
(4)
POLICY ASSUMPTION BONUS AGREEMENTS
As
part
of a policy assumption (or “takeout”) agreement with Citizens that ended in
2006, UPCIC receives takeout bonuses from Citizens for policies assumed
from
multiple assumptions. The bonuses were calculated at 17.5% of the written
premium originally assumed, net of adjustments related to policies
that were not
renewed or retained by the Company. The bonus money due to UPCIC is
on deposit
with an escrow agent, as specified by the terms of the takeout agreement.
To
receive the bonus, UPCIC is required to offer to renew the assumed
policies for
a period of three years at UPCIC’s approved rates and on substantially similar
terms. Approximately three years after the assumption date, the escrow
agent
distributes the bonus funds, with the related investment income thereon,
to
UPCIC. During 2004 and 2005, UPCIC assumed written premiums under the
takeout
agreement totaling $70,386 and $36,338, respectively. During 2007,
UPCIC
recognized takeout bonus of $13,556, which includes $1,238 of investment
income,
from the 2004 takeout period.
(5)
PROPERTY AND EQUIPMENT
Property
and equipment consists of the following:
|
|
As
of December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Furniture,
fixtures and equipment
|
|
$
|
292
|
|
$
|
243
|
|
Leasehold
improvements
|
|
|
37
|
|
|
37
|
|
Property
and equipment, gross
|
|
|
329
|
|
|
280
|
|
Accumulated
depreciation
|
|
|
(221
|
)
|
|
(181
|
)
|
Property
and equipment, net
|
|
$
|
108
|
|
$
|
99
|
|
Depreciation
of property and equipment was $40, $30 and $22 during 2007, 2006, and
2005,
respectively.
(6)
REINSURANCE
We
follow
industry practice of reinsuring a portion of our risks and paying for
that
protection based primarily upon modeled projected maximum losses and
total
insured values of all policies in effect and subject to such reinsurance.
Reinsurance involves an insurance company transferring, or “ceding”, all or a
portion of its exposure on insurance underwritten by it to another
insurer,
known as a reinsurer. The ceding of insurance does not legally discharge
the
insurer from its primary liability for the full amount of the policies.
To the
extent that reinsurers are unable to meet the obligations they assume
under
these reinsurance agreements, the ceding company remains liable for
the insured
loss.
Reinsurance
agreements provide UPCIC with increased capacity to write more and
larger risks
and maintain its exposure to loss within its capital resources. Our
reinsurance
agreements, described below, are designed to coincide with the seasonality
of
Florida’s hurricane season.
In
2007,
2006 and 2005, UPCIC participated in a multi-line property per
risk program. For
2007 and 2006, the contract program provided coverage up to $1,300
in excess of
$1,000 per risk. The maximum recovery on any one loss occurrence,
irrespective
of the number of risks involved, is $1,300. Should a loss recovery
(or series of
loss recoveries) exhaust the coverage provided under the contracts,
one
reinstatement of coverage is included at 100% additional premium.
For 2005, the
contract program provided coverage up to $1,550 in excess of $750
per risk. The
maximum recovery on any one loss occurrence, regardless of the
number of risks
involved, was $3,100. Should a loss recovery (or series of loss
recoveries)
exhaust the coverage provided under the contract, one reinstatement
of coverage
was included at no additional premium.
In
2007,
2006 and 2005, UPCIC participated in a catastrophe excess of loss
program. The
program had two components, one of which was obtained through the
private market
and a component obtained from the Florida Hurricane Catastrophe
Fund (“FHCF”).
In 2007 and 2005, each of the contracts making up the private market
component
included one reinstatement of coverage at no additional premium.
In 2006, each
of the contracts making up the private market component included
one
reinstatement of coverage at 100% additional premium. In 2007 and
2006, the FHCF
limited apportionment layer (or lower layer) included one reinstatement
at no
additional premium; however, the remaining FHCF contracts did not
provide for
reinstatement of coverage in either year. In 2005, the FHCF did
not offer a
lower layer of coverage and did not provide for reinstatement of
coverage.
United
Insurance Holdings, LC and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2007
(Dollars
in thousands)
In
2007,
the entire program provided for reimbursement of up to $374,327 of
qualified
loss and LAE in excess of UPCIC’s retained loss and LAE of $16,500. The first
layer of coverage was obtained from the FHCF and provides for reimbursement
of
up to $10,000 in excess of the first $16,500. The next two layers of
coverage
were obtained from the private market; the first of these two layers
provides
for reimbursement of up to $14,172 in excess of $26,500 and the second
provides
for reimbursement of up to $33,622 in excess of $40,672. The next layer
of
coverage was obtained from both the private market and from the FHCF.
The FHCF
portion provides for reimbursement of up to 90% of $212,539 in excess
of $70,980
while the private portion provides for reimbursement of up to $21,254
in excess
of $70,980. The final layer of coverage was also obtained from both
the private
market and the FHCF. The FHCF portion provides for reimbursement of
up to 90% of
$107,309 and the private portion provides reimbursement up to $10,731
in excess
of $283,519.
In
2006,
the entire program provided for reimbursement of up to $344,460 of
qualified
loss and LAE in excess of UPCIC’s retained loss and LAE of $22,813, which
consists of $10,000 of the first $20,000, 3% of $248,894 in excess
of $83,805,
and the first $5,346 in excess of $332,699. The first layer of coverage
was
obtained from the FHCF and provides for reimbursement of up to $10,000
in excess
of the first $4,800. The next two layers of coverage were obtained
from the
private market; the first of these two layers provides for reimbursement
of up
to $26,000 in excess of $20,000 and the second provides for reimbursement
of up
to $37,805 in excess of $46,000. The next layer of coverage was obtained
from
both the private market and from the FHCF. The FHCF portion provides
for
reimbursement of up to 90% of $248,894 in excess of $83,805 while the
private
portion provides for reimbursement of up to $25,250 in excess of $83,805.
The
final layer of coverage was obtained from the private market and provides
for
reimbursement of up to $21,400 in excess of $338,045.
In
2005,
the entire program provided for reimbursement of up to $412,833
of qualified
loss and LAE in excess of UPCIC’s retained loss and LAE of $7,500. The first two
layers of coverage were obtained from the private market; the
first of these two
layers provided for reimbursement of up to $5,000 in excess
of $7,500 and the
second provided for reimbursement of up to $71,944 in excess
of $12,500. The
next layer of coverage was obtained from both the private market
and from the
FHCF. The FHCF portion provided for reimbursement of up to
90% of $302,424 in
excess of $83,926 while the private portion provided for reimbursement
of up to
$31,613 in excess of $84,444. The final layer of coverage was
obtained from the
private market and provided for reimbursement of $32,095 in
excess of $116,057.
For
the
years ended December 31, 2007, 2006 and 2005, premiums of $34,288,
$51,025 and
$39,380 were ceded under the private excess of loss contracts,
respectively.
Under the FHCF excess of loss contract, premiums of $18,748,
$20,895 and $13,295
were ceded for the year ended December 31, 2007, 2006 and 2005,
respectively.
UPCIC
also participated in a quota share program on our Garage line
of business. For
commercial policies incepting on or after August 1, 2007, the
program provides
50% coverage up to $2,000 per risk and $4,000 per contract
term. For commercial
policies incepting prior to August 1, 2007, the program provides
70% coverage up
to $2,000 per risk and $4,000 per contract term. The reinsurer
allows UPCIC a
commission ranging from 20% to 42.5% based on the loss ratio
of the program.
UPCIC recorded the commission at the minimum for the years
ended December 31,
2007 and 2006 and recorded the commission at the contract’s provisional rate at
32.5% for the year ended December 31, 2005. For the years ended
December 31,
2007, 2006 and 2005, premiums of $2,838, $2,200 and $123 were
ceded under the
quota share Garage program
agreement,
respectively. In August 2005, United started writing insurance
under the Garage
program.
United
Insurance Holdings, LC and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2007
(Dollars
in thousands)
The
impact of reinsurance on the financial statements is as follows:
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Premium
written:
|
|
|
|
|
|
|
|
Direct
|
|
$
|
145,050
|
|
$
|
149,210
|
|
$
|
116,508
|
|
Assumed
|
|
|
-
|
|
|
(324
|
)
|
|
25,298
|
|
Ceded
|
|
|
(58,511
|
)
|
|
(77,966
|
)
|
|
(52,685
|
)
|
Net
premium written
|
|
$
|
86,539
|
|
$
|
70,920
|
|
$
|
89,121
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in unearned premiums:
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
6,634
|
|
$
|
(12,906
|
)
|
$
|
(26,369
|
)
|
Assumed
|
|
|
-
|
|
|
3,607
|
|
|
3,908
|
|
Ceded
|
|
|
(7,815
|
)
|
|
12,009
|
|
|
9,004
|
|
Net
decrease (increase)
|
|
$
|
(1,181
|
)
|
$
|
2,710
|
|
$
|
(13,457
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
earned:
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
151,684
|
|
$
|
136,304
|
|
$
|
90,139
|
|
Assumed
|
|
|
-
|
|
|
3,283
|
|
|
29,206
|
|
Ceded
|
|
|
(66,326
|
)
|
|
(65,957
|
)
|
|
(43,681
|
)
|
Net
premiums earned
|
|
$
|
85,358
|
|
$
|
73,630
|
|
$
|
75,664
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses
and LAE incurred:
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
36,426
|
|
$
|
121,669
|
|
$
|
257,445
|
|
Assumed
|
|
|
1,111
|
|
|
29,365
|
|
|
27,811
|
|
Ceded
|
|
|
(11,875
|
)
|
|
(115,677
|
)
|
|
(223,639
|
)
|
Net
losses and LAE incurred
|
|
$
|
25,662
|
|
$
|
35,357
|
|
$
|
61,617
|
|
|
|
As
of December 31,
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
losses and LAE, net:
|
|
|
|
|
|
|
|
Direct
|
|
$
|
34,035
|
|
$
|
55,655
|
|
|
|
|
Assumed
|
|
|
1,970
|
|
|
1,520
|
|
|
|
|
Ceded
|
|
|
(14,446
|
)
|
|
(33,441
|
)
|
|
|
|
Net
unpaid losses and LAE
|
|
$
|
21,559
|
|
$
|
23,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned
premiums:
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
73,051
|
|
$
|
79,684
|
|
|
|
|
Assumed
|
|
|
-
|
|
|
-
|
|
|
|
|
Ceded
|
|
|
(26,345
|
)
|
|
(34,160
|
)
|
|
|
|
Net
unearned premium
|
|
$
|
46,706
|
|
$
|
45,524
|
|
|
|
|
United
Insurance Holdings, LC and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2007
(Dollars
in thousands)
Reinsurance
recoverable, net at December 31, 2007 and 2006, consist of the
following:
|
|
As
of December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Reinsurance
recoverable on unpaid losses and LAE
|
|
$
|
14,446
|
|
$
|
33,441
|
|
Reinsurance
recoverable on paid losses
|
|
|
2,370
|
|
|
5,080
|
|
Reinsurance
recoverable, net
|
|
$
|
16,816
|
|
$
|
38,521
|
|
|
|
|
|
|
|
|
|
Ceded
losses and LAE incurred have decreased from $223,639 in 2005 to
$115,677 in 2006
and further decreased to $11,875 in 2007 primarily due to the lack
of
catastrophic storms in 2006 and 2007. As a result of that lack
of catastrophic
storm activity, United has not incurred losses and LAE from storms
in 2006 and
2007 that would be eligible for reimbursement from its
reinsurers.
Reinsurance
recoverable on unpaid losses and LAE decreased from $153,769 at
January 1, 2006
to $14,446 at December 31, 2007 primarily due to ongoing collections
of amounts
due to United from its reinsurers from losses sustained during
the storm years
of 2004 and 2005. As discussed above, United did not incur any
losses or LAE
from catastrophic storms during 2006 and 2007; therefore, the reinsurance
receivables primarily decreased due to collections from reinsurers
and no
additional reinsurance receivables were added.
Reinsurance
premiums payable at December 31, 2007 and 2006 were $10,852 and $27,831,
respectively.
In
2007
and 2006, the subsidiary did not commute any reinsurance nor did it
enter into
or engage in any loss portfolio transfer for any lines of business.
(7)
UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
The
liability for unpaid losses and loss adjustment expenses (“LAE”) is determined
on an individual-case basis for all incidents reported. The liability
also
includes amounts for claims incurred but not reported.
Activity
in the liability for unpaid losses and LAE is summarized as
follows:
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Balance
at January 1
|
|
$
|
57,175
|
|
$
|
174,217
|
|
Less
reinsurance recoverables
|
|
|
33,441
|
|
|
153,769
|
|
Net
balance at January 1
|
|
$
|
23,734
|
|
$
|
20,448
|
|
|
|
|
|
|
|
|
|
Incurred
related to:
|
|
|
|
|
|
|
|
Current
year
|
|
$
|
31,466
|
|
$
|
36,095
|
|
Prior
years
|
|
|
(5,804
|
)
|
|
(738
|
)
|
Total
incurred
|
|
$
|
25,662
|
|
$
|
35,357
|
|
|
|
|
|
|
|
|
|
Paid
related to:
|
|
|
|
|
|
|
|
Current
year
|
|
$
|
18,511
|
|
$
|
18,291
|
|
Prior
years
|
|
|
9,326
|
|
|
13,780
|
|
Total
paid
|
|
$
|
27,837
|
|
$
|
32,071
|
|
|
|
|
|
|
|
|
|
Net
balance at year-end
|
|
$
|
21,559
|
|
$
|
23,734
|
|
Plus
reinsurance recoverables
|
|
|
14,446
|
|
|
33,441
|
|
Balance
at year-end
|
|
$
|
36,005
|
|
$
|
57,175
|
|
Based
upon consultations with our independent actuarial consultants and their
statement of opinion on losses and LAE, we believe that the liability
for unpaid
losses and LAE is reasonable to cover all claims and related expenses
which may
arise from incidents reported.
In
2007
and 2006, net incurred losses and LAE attributable to insured events
of prior
years has decreased by approximately $5,804 and $738, respectively,
as a result
of re-estimation of unpaid losses and LAE. These decreases are generally
a
result of ongoing analysis of recent favorable loss development trends.
Original
estimates are decreased or increased as additional information becomes
known
regarding individual claims. There can be no assurance concerning future
adjustments of reserves, positive or negative, for claims through December
31,
2007.
United
Insurance Holdings, LC and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2007
(Dollars
in thousands)
(8)
LONG-TERM DEBT
Long-term
debt consists of the following:
|
|
As
of December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Secured
line of credit payable to CB&T in monthly installments of accrued
interest only through June 16, 2007, at which time the
outstanding balance
becomes due in full. Interest accrues at lender's prime
rate (7.98% at
December 31, 2006). The line was replaced by the secured
note payable in
February 2007.
|
|
$
|
-
|
|
$
|
9,722
|
|
|
|
|
|
|
|
|
|
Unsecured
note payable to York Enhanced Strategies Fund, LLC ("York").
The note was
for a period of 60 months and was due on September 19,
2011. Interest was
allowed to be added to the principal balance for the first
six months.
Interest rate was 15% at December 31, 2006. The note was
paid in full on
February 8, 2007.
|
|
|
-
|
|
|
19,918
|
|
|
|
|
|
|
|
|
|
Unsecured
note payable to the Florida State Board of Administration
("FSBA") by
UPCIC. The term of the note is 20 years with quarterly
payments to begin
October 1, 2006. Interest only payments are required for
the first three
years. The interest rate shall be determined two business
days prior to
the payment date in order to set the rate for the following
quarter.
(4.58% and 4.70% at December 31, 2007 and 2006, respectively).
Any payment
of interest or repayment of principal is subject to approval
by the Office
and may be paid only out of UPCIC's earnings and only if
UPCIC's surplus
exceeds specified levels required by the Office.
|
|
|
20,000
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
Secured
note payable to CB&T in 36 consecutive monthly installments through
February 20, 2010, including interest of 400 basis points
above LIBOR.
Interest rate at December 31, 2007 was 9.8%.
|
|
|
23,833
|
|
|
-
|
|
|
|
$
|
43,833
|
|
$
|
49,640
|
|
As
of
December 31, 2007
the
annual maturities of long-term debt are as follows:
2008
|
|
$
|
11,000
|
|
2009
|
|
|
11,294
|
|
2010
|
|
|
3,010
|
|
2011
|
|
|
1,176
|
|
2012
|
|
|
1,176
|
|
Thereafter
|
|
|
16,177
|
|
|
|
$
|
43,833
|
|
On
September 10, 2006, the Company entered into a loan agreement (“York Note”) with
York Capital (“York”) in the amount of $20,000. In connection with the financing
transaction, York received a 4.75% equity ownership interest (“Ownership”) and
entered a Put Agreement (“Put”) with the Company. The Put provides York with an
option to sell its entire interest back to UIH at any time (i) between
September
15, 2009 and September 15, 2010, and (ii) between September 15, 2011
and
September 15, 2012 (“Exercise Period”) at a purchase price of two times the
consolidated book value of the Company at the end of the fiscal quarter
immediately preceding the put date and has no floor or ceiling as to
the amount
to be paid.
United
Insurance Holdings, LC and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2007
(Dollars
in thousands)
The
Company valued this Ownership at $715 at December 31, 2006. In accordance
with
SFAS No. 150, the recorded value of the Ownership will remain unchanged
and any
revaluation would apply to only the Put. The Company valued the related
redeemable Put at December 31, 2007 and 2006 at $2,564 and $939, respectively.
The Company initially valued the Put by discounting the rights of two
times the
book value at December 31, 2006 by the average required return on equity
as
calculated by a capital asset pricing model driven formula utilizing
historic
geometric and arithmetic mean returns and a management-selected beta
appropriate
for a privately-held company. The Put was revalued at December 31,
2007
utilizing this same methodology. At December 31, 2007 and 2006, the
Put was
discounted from 4.75% of two times the consolidated book value, or
$4,536 and
$2,862, respectively, that represented the amount that would have been
due if
the put was exercisable at year-end. At December 31, 2007 and 2006,
the Company
incurred $1,125 and $375 in participation fees, respectively, and recognized
additional expense related to the Put of $1,606 and $939, respectively.
In
addition, at December 31, 2007 and 2006, the Company had original issue
discount
expense related to the York Note of $679 and $36, respectively.
The
Company refinanced the York Note in February 2007 and entered into
a loan
agreement with CB&T, a related party, (“CB&T loan”) which provided
$33,000 and is secured by the operation of the MGA agreement and related
fees
paid to UIM. The CB&T loan is also secured by members’ interests, all
tangible and intangible assets of UIH and UIM, accounts, accounts receivable,
furniture, furnishings and equipment and all deposits. The security
agreement
states that if an event of default occurs under the CB&T loan, the bank may,
at its option, cause the acceleration of the CB&T loan, which shall become
immediately due and payable, take possession of the collateral, and
have the
right to assign, sell, lease, or otherwise dispose of and deliver all
or any
part of the collateral, to satisfy our obligations under this agreement.
The
proceeds of the loan were used to repay the notes payable to York and
the
secured line of credit payable to CB&T.
The
CB&T loan also requires that all “excess cash flow” as permitted by
applicable law be deposited in an investment account at CB&T. The investment
account at CB&T must also have a minimum balance in the amount of $10,000 by
August 31, 2007 and until the time that the CB&T loan has been paid in full,
such investment account shall have a minimum balance of the lesser
of $10,000 or
the unpaid principal balance of the note. The balance in the investment
account
at CB&T was $18,990 at December 31, 2007. See Note 13 for discussion of
other related party transactions with CB&T and Note 21 for subsequent events
related to this loan.
The
Company's loan agreements contain certain covenants including the maintenance
of
minimum specified financial ratios and balances. We were in compliance
with the
terms of the CB&T covenants at December 31, 2007. An event of default will
occur under the FSBA note if UPCIC: (i) defaults in the payment of
the surplus
note; (ii) fails to meet at least 2:1 ratio of net premium to surplus
(“Minimum
Writing Ratio”) by December 31, 2007; (iii) fails to submit quarterly filings to
the OIR; (iv) fails to maintain at least $50 million of surplus during
the term
of the note, except for certain situations; (v) misuses proceeds of
the note;
(vi) makes any misrepresentations in the application for the program;
or (vii)
pays any dividend when principal or interest payments are past due
under the
note. As of December 31, 2007, UPCIC was in compliance with each of
the
aforementioned loan covenants except for the writing ratio covenant.
If
UPCIC
fails to increase its writing ratio for two consecutive quarters prior
to
December 31, 2007, fails to obtain the 2:1 Minimum Writing Ratio by
December 31,
2007, or drops below the 2:1 Minimum Writing Ratio once it is obtained
for two
consecutive quarters, the interest rate on the surplus note will increase
during
such deficiency by 25 basis points if the resulting writing ratio is
between
1.5:1 and 2:1 and the interest rate will increase by 450 basis points
if the
writing ratio is below 1.5:1
.
Since
the writing ratio at December 31, 2007 was 1.4:1 which is below 1.5:1,
UPCIC’s
interest rate in the first quarter of 2008 will increase by 450 basis
points. In
addition, if UPCIC remains in default, the FSBA may at its sole discretion
due
to the writing deficiency increase the interest rate to the maximum
interest
rate permitted by law, accelerate the repayment of principal and interest,
shorten the term of the note, or call the note and demand full repayment.
Interest
expense for the years ended December 31, 2007, 2006 and 2005, was $7,704,
$5,019
and $312, respectively.
(9)
INCOME TAXES
The
Company and two subsidiaries, UIM and Skyway, are limited liability
companies
and, as such, income is taxed directly to the members. Therefore, the
financial
statements do not include an income tax provision for these entities.
However,
UPCIC files a separate C Corporation 1120PC federal income tax return.
The
income tax provision reflected in these statements is attributable
to UPCIC.
United
Insurance Holdings, LC and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2007
(Dollars
in thousands)
A
summary
of the provision for income tax expense (benefit) is as follows:
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Federal:
|
|
|
|
|
|
|
|
Current
|
|
$
|
6,286
|
|
$
|
(345
|
)
|
$
|
(769
|
)
|
Deferred
|
|
|
1,131
|
|
|
(3,133
|
)
|
|
(1,377
|
)
|
Provision
(benefit) for Federal income tax expense
|
|
|
7,417
|
|
|
(3,478
|
)
|
|
(2,146
|
)
|
State:
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
687
|
|
|
-
|
|
|
-
|
|
Deferred
|
|
|
193
|
|
|
(536
|
)
|
|
(414
|
)
|
Provision
(benefit) for State income tax expense
|
|
|
880
|
|
|
(536
|
)
|
|
(414
|
)
|
Provision
(benefit) for income taxes
|
|
$
|
8,297
|
|
$
|
(4,014
|
)
|
$
|
(2,560
|
)
|
The
actual income tax expense (benefit) differs from the “expected” income tax
expense (benefit) (computed by applying the combined applicable effective
federal and state tax rates to income (loss) before provision for income
tax
expense (benefit) as follows:
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Computed
expected tax (benefit) at federal rate
|
|
$
|
16,299
|
|
$
|
4,794
|
|
$
|
(475
|
)
|
State
tax, net of federal deduction benefit
|
|
|
582
|
|
|
(393
|
)
|
|
(193
|
)
|
Dividend
received deduction
|
|
|
(144
|
)
|
|
(81
|
)
|
|
(51
|
)
|
Income
of limited liability companies
|
|
|
(8,490
|
)
|
|
(8,391
|
)
|
|
(1,282
|
)
|
Other,
net
|
|
|
50
|
|
|
57
|
|
|
(559
|
)
|
Income
tax expense (benefit), as reported
|
|
$
|
8,297
|
|
$
|
(4,014
|
)
|
$
|
(2,560
|
)
|
United
Insurance Holdings, LC and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2007
(Dollars
in thousands)
Deferred
income taxes reflect the net tax effects of temporary differences between
the
carrying amounts of assets and liabilities for financial reporting
purposes and
the amounts used for income tax purposes. Significant components of
our net
deferred tax asset are as follows:
|
|
As
of December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
Unearned
premiums
|
|
$
|
3,391
|
|
$
|
3,988
|
|
Assessments
|
|
|
1,922
|
|
|
1,885
|
|
Loss
reserve discount
|
|
|
566
|
|
|
711
|
|
Unrealized
loss
|
|
|
-
|
|
|
307
|
|
Bad
debt expense
|
|
|
60
|
|
|
164
|
|
Reinsurance
provisions
|
|
|
49
|
|
|
681
|
|
Total
deferred tax assets
|
|
|
5,988
|
|
|
7,736
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
Unrealized
gain
|
|
|
(448
|
)
|
|
-
|
|
Premium
recognition
|
|
|
(411
|
)
|
|
(469
|
)
|
Deferred
acquisitions costs
|
|
|
(390
|
)
|
|
(455
|
)
|
Other
|
|
|
(6
|
)
|
|
-
|
|
Total
deferred tax liabilities
|
|
|
(1,255
|
)
|
|
(924
|
)
|
|
|
|
|
|
|
|
|
Net
deferred tax asset
|
|
$
|
4,733
|
|
$
|
6,812
|
|
In
assessing the net realizable value of deferred tax assets, management
considers
whether it is more likely than not that some portion or all of the
deferred tax
assets will not be realized. The ultimate realization of deferred tax
assets is
dependent upon the generation of future taxable income during the periods
in
which those temporary differences become deductible. Management considers
the
scheduled reversal of deferred tax liabilities, projected future taxable
income
and tax planning strategies in making this assessment. The Company
has no net
operating or capital loss carryforwards available to offset future
taxable
income at December 31, 2007 and 2006.
(10)
REGULATORY REQUIREMENTS AND RESTRICTIONS
Under
Florida law, a domestic insurer may not pay any dividend or distribute
cash or
other property to its shareholders except out of that part of its available
and
accumulated capital surplus funds which is derived from realized net
operating
profits on its business and net realized capital gains. A Florida domestic
insurer may not make dividend payments or distributions to shareholders
without
prior approval of the Florida OIR if the dividend or distribution would
exceed
the larger of (i) the lesser of (a) 10 percent of capital surplus (b)
net
income, not including realized capital gains, plus a two-year carryforward,
(ii)
10 percent of capital surplus with dividends payable constrained to
unassigned
funds minus 25 percent of unrealized capital gains or (iii) the lesser
of (a) 10
percent of capital surplus or (b) net investment income plus a three-year
carryforward with dividends payable constrained to unassigned funds
minus 25
percent of unrealized capital gains. Alternatively, a Florida domestic
insurer
may pay a dividend or distribution without the prior written approval
of the
Florida OIR (i) if the dividend is equal to or less than the greater
of (a) 10
percent of the insurer's capital surplus as regards policyholders derived
from
realized net operating profits on its business and net realized capital
gains or
(b) the insurer's entire net operating profits and realized net capital
gains
derived during the immediate preceding calendar year, (ii) the insurer
will have
policyholder capital surplus equal to or exceeding 115 percent of the
minimum
required statutory capital surplus after the dividend or distribution,
(iii) the
insurer files a notice of the dividend or distribution with the Florida
OIR at
least ten business days prior to the dividend payment or distribution
and (iv)
the notice includes a certification by an officer of the insurer attesting
that,
after the payment of the dividend or distribution, the insurer will
have at
least 115 percent of required statutory capital surplus as to policyholders.
Except as provided above, a Florida domiciled insurer may only pay
a dividend or
make a distribution (i) subject to prior approval by the Florida OIR
or (ii) 30
days after the Florida OIR has received notice of such dividend or
distribution
and has not disapproved it within such time. UPCIC has not paid any
dividends or
distributed any cash or other property to shareholders.
United
Insurance Holdings, LC and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2007
(Dollars
in thousands)
Under
Florida law, eligible investments are subject to the following limitations:
(a)
the cost of investments made by insurers in authorized stock shall
not exceed 15
percent of the insurer’s admitted assets; (b) the cost of such investment in
common stocks shall not exceed 10 percent of the insurer’s admitted assets; (c)
the cost of such investment in stock of any one corporation shall not
exceed 3
percent of the insurer’s admitted assets; and (d) the cost of investments in
bonds, which investments are classified as medium to lower quality
obligations,
shall be limited to (i) no more than 13 percent of an insurer’s admitted assets
and (ii) no more than 5 percent of an insurer’s admitted assets in obligations
that have been given a rating of 4, 5 or 6 by the Securities Valuation
Office
(SVO) of the National Association of Insurance Commissioners (NAIC)
and (iii) no
more than 1.5 percent of an insurer’s admitted assets in obligations that have
been given a rating of 5 or 6 by the SVO of the NAIC and (iv) not more
than 0.5
percent of an insurer’s admitted assets in obligations that have been given a
rating of 6 by the SVO of the NAIC and (v) no more than 10 percent
of an
insurer’s admitted assets, if the investments are in issuers from any one
industry and (vi) no more than 2 percent of an insurer’s admitted assets if the
investment is in any one issuer. UPCIC is in compliance with this covenant
at
December 31, 2007 and 2006.
In
order
to enhance the regulation of insurer solvency, the NAIC established
risk-based
capital requirements for insurance companies that are designed to assess
capital
adequacy and to raise the level of protection that statutory surplus
provides
for policy holders. These requirements measure three major areas of
risk facing
property and casualty insurers: (i) underwriting risks, which encompass
the risk
of adverse loss developments and inadequate pricing; (ii) declines
in asset
values arising from credit risk; and (iii) other business risks from
investments. Insurers having less statutory surplus than required will
be
subject to varying degrees of regulatory action, depending on the level
of
capital inadequacy. The Florida OIR, which follows these requirements,
could
require the Company to cease operations in the event they fail to maintain
the
required statutory capital. UPCIC is in compliance with the risk based
capital
requirement at December 31, 2007 and 2006.
To
increase the surplus in UPCIC for the purpose of further ensuring
stability for
policyholders and approved by the Florida OIR, UIH entered into a
subordinated
surplus debenture agreement (“the Debenture”) with UPCIC in December 2004 in the
amount of $4,000. The Debenture bore interest payable to UIH in the
amount of 7%
payable annually. A second Debenture was issued in May 2005 in the
amount of
$5,000 and a third Debenture was issued in October 2005 in the amount
of $3,000.
As of December 31, 2006, UPCIC had a balance outstanding under the Debentures to
UIH of $12,000. The Debentures were repaid in full after receiving
proper
approval as of December 31, 2007.
The
Company is subject to assessments by a Florida guaranty fund, a residual
market
pool, and a state catastrophe reinsurance pool. The activities of
this fund and
these pools include collecting funds from solvent insurance companies
to cover
losses resulting from the insolvency or rehabilitation of other insurance
companies or deficits generated by Citizens and the Florida Hurricane
Catastrophe Fund (FHCF). The Company’s policy is to recognize its obligation for
guaranty fund, Citizens, and FHCF assessments when the Company has
the
information available to reasonably estimate its liabilities. Guaranty
fund,
Citizens, and FHCF assessments are generally available for recoupment
from
policyholders.
United
is
subject to assessments by Citizens, the Florida Hurricane Catastrophe
Fund
(“FHCF”) and the Florida Insurance Guaranty Association (“FIGA”). Citizens and
the FHCF may levy assessments against all assessable insurers that
write
premiums in the State of Florida to cover operating deficiencies
related to
windstorm catastrophes. FIGA may levy assessments against all assessable
insurers that write premiums in the State of Florida to cover the
claims of
policyholders of insurance companies in the State of Florida that
have become
insolvent.
Assessments
implemented by Citizens are calculated by multiplying the ratio
of United’s
direct written premium on the subject lines of business to the
total direct
written premium on the subject lines of business of all assessable
Florida
insurance companies (“participation ratio”) by Citizens’ total operating deficit
in its High Risk Account. By Florida statute, assessments implemented
by either
the FHCF or FIGA are capped annually at a flat percentage of 1%
for FHCF and 2%
for FIGA multiplied by United’s direct written premium on subject lines of
business.
Under
current regulations, insurers may recoup the amount of their assessments
from
policyholders, or, in some cases, collect the amount of the assessments
from
policyholders as surcharges for the benefit of the assessing entity.
In order to
recoup an assessment, United files for a rate increase which the
OIR immediately
approves. The rate increase is valid for a twelve-month period
following the
approval of the rate increase. Any assessment not recouped during
the first
twelve-month period can be included in a new rate filing with the
OIR, which is
valid for an additional twelve month period.
United
accrues for the guaranty fund and other insurance-related assessments
in
accordance with Statement of Position (“SOP”) 97-3, “Accounting by Insurance and
Other Enterprises for Insurance-Related Assessments”. SOP 97-3 provides guidance
for determining when an entity should recognize a liability for
guaranty fund
and other insurance-related assessments, how to measure that liability
and when
an asset may be recognized for the recovery of such assessments
through premium
tax offsets or policy surcharges. The recoupment of the assessments
is revenue,
and is recorded prospectively as such in the period that the policies
containing
the OIR approved rate increase are accrued. In order to recoup
the assessment,
the State provides United with an immediate rate increase in the
amount of the
assessment. Emergency assessments from Citizens and the
FHCF
are
collected from policyholders as a surcharge and recorded as a liability
until
they are remitted to Citizens or the FHCF.
In
August
2005, Citizens levied a regular assessment against United to recoup
the 2004
Plan Year Deficit incurred in its High Risk Account. United’s participation in
this assessment totaled $180, and it completed the recoupment of
this assessment
in 2006.
In
June
2006, the OIR ordered an emergency FHCF assessment of 1% of direct
written
premiums for policies with effective dates beginning January 1,
2007. The
assessment was levied against the policyholders and not against
United. United
remits the amounts collected to the FHCF on a quarterly basis.
This assessment
was a result of catastrophe losses the State of Florida experienced
in 2004 and
2005.
In
June
2006, FIGA levied an assessment upon its member companies equal
to 2% of net
direct premiums written in the State of Florida for the calendar
year 2005.
United’s participation in this assessment totaled $2,274, and it recouped
$1,879
of this assessment in 2007. United will recoup the remaining $395
in
2008.
In
September 2006, Citizens levied a regular assessment against United
to recoup
the 2005 Plan Year Deficit incurred in its High Risk Account. United’s
participation in this assessment totaled $438, and it recouped
all but $86 of
this assessment in 2007. United will recoup the remaining $86 in
2008.
In
December 2006, FIGA levied an assessment upon its member companies
equal to 2%
of net direct premiums written in the state of Florida for the
calendar year
2005. United’s participation in this assessment totaled $2,274, and it recouped
$926 of this assessment in 2007. United will recoup the remaining
$1,348 in
2008.
In
January 2007, Citizens levied an emergency assessment equal to
1.4% of direct
written premiums on all policies issued on or after July 1, 2007.
United is
currently collecting the assessment from policyholders and remitting
the amounts
to the Citizens on a monthly basis. This assessment was levied
to recoup the
remaining 2005 Plan Year Deficit not recouped with the regular
assessment levied
in September 2006. The deficit was a result of catastrophe losses
the State of
Florida experienced in 2004 and 2005.
In
October 2007, FIGA levied an assessment upon its member companies
equal to 2% of
net direct premiums written in Florida for the calendar year 2006.
United’s
participation in this assessment totaled $3,088. Subsequent to
December 31,
2007, the OIR approved United’s rate increase filing and United has started the
process to recoup this assessment in 2008.
The
Company’s insurance subsidiary’s assets, liabilities and results of operations
have been reported in accordance with accounting principles generally
accepted
in the United States of America (GAAP), which varies from statutory
accounting
practices (SAP) prescribed or permitted by insurance regulatory authorities.
Prescribed statutory accounting practices are found in a variety
of publications
of the NAIC, state laws and regulations, as well as through general
practices.
The principal differences between SAP and GAAP are that under SAP:
(1) certain
assets that are not admitted assets are eliminated from the balance
sheet, (2)
acquisition costs for policies are expensed as incurred, while they
may be
deferred and amortized over the estimated life of the policies under
GAAP, (3)
differences in the computation of deferred income taxes, and (4)
valuation
allowances are established against investments. The Company’s insurance
subsidiary must file with applicable state insurance regulatory authorities
an
“Annual Statement” which reports, among other items, net income (loss) and
stockholders' equity (called “surplus as regards policyholders” in statutory
reporting).
United
Insurance Holdings, LC and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2007
(Dollars
in thousands)
A
reconciliation between the GAAP net income and the statutory net income
(loss)
of the insurance subsidiary is as follows:
|
|
Year
ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Consolidated
GAAP net income
|
|
$
|
39,642
|
|
$
|
17,208
|
|
$
|
1,161
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) due to:
|
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
|
73
|
|
|
1,023
|
|
|
882
|
|
Deferred
income taxes
|
|
|
1,324
|
|
|
(3,671
|
)
|
|
(1,789
|
)
|
Deferred
policy acquisition costs
|
|
|
233
|
|
|
(355
|
)
|
|
(460
|
)
|
Allowance
for doubtful accounts
|
|
|
45
|
|
|
49
|
|
|
286
|
|
Assessments
|
|
|
99
|
|
|
4,830
|
|
|
180
|
|
Premium
|
|
|
(1,497
|
)
|
|
3,588
|
|
|
(1,526
|
)
|
Interest
accrued on takeout bonus income
|
|
|
(1,238
|
)
|
|
-
|
|
|
-
|
|
Other,
net
|
|
|
(123
|
)
|
|
(506
|
)
|
|
145
|
|
Operations
of nonstatutory subsidiaries
|
|
|
(27,070
|
)
|
|
(23,770
|
)
|
|
(3,769
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Statutory
net income (loss)
|
|
$
|
11,488
|
|
$
|
(1,604
|
)
|
$
|
(4,890
|
)
|
A
reconciliation between the GAAP stockholders' equity and surplus as
regards
policyholders is as follows:
|
|
Year
ended December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Consolidated
GAAP members' equity
|
|
$
|
46,099
|
|
$
|
24,113
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) due to:
|
|
|
|
|
|
|
|
Deferred
policy acquisition costs
|
|
|
(3,015
|
)
|
|
(3,248
|
)
|
Deferred
income taxes
|
|
|
(1,451
|
)
|
|
(2,393
|
)
|
Investments
|
|
|
(1,134
|
)
|
|
770
|
|
Nonadmitted
assets
|
|
|
(488
|
)
|
|
(805
|
)
|
Surplus
debentures
|
|
|
20,000
|
|
|
32,000
|
|
Provision
for reinsurance
|
|
|
(2,365
|
)
|
|
(35
|
)
|
Equity
of nonstatutory subsidiaries
|
|
|
(11,500
|
)
|
|
(3,278
|
)
|
Commissions
|
|
|
2,099
|
|
|
2,026
|
|
Allowance
for doubtful accounts
|
|
|
480
|
|
|
435
|
|
Assessments
|
|
|
5,109
|
|
|
5,010
|
|
Premium
|
|
|
(443
|
)
|
|
1,054
|
|
Interest
accrued on takeout bonus income
|
|
|
(1,238
|
)
|
|
-
|
|
Other,
net
|
|
|
(454
|
)
|
|
(334
|
)
|
|
|
|
|
|
|
|
|
Statutory
surplus as regards policyholders
|
|
$
|
51,699
|
|
$
|
55,315
|
|
United
Insurance Holdings, LC and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2007
(Dollars
in thousands)
(11)
COMMITMENTS AND CONTINGENCIES
Our
company and its subsidiaries are exposed to certain commitments and
contingencies as a result of the nature of our business. They can be
summarized
as being either assessment related, insured claim activity, and other
matters
generally arising in the normal course of the insurance business.
We
operate in a regulatory environment where certain entities and organizations
have the authority to require us to participate in assessments. Currently
these
entities and organizations include, but are not limited to FIGA, Citizens,
and
FHCF. See Note 10 for further details on assessments incurred. Because
of the
Company’s participation in assigned risk plans, it may be exposed to losses
that
surpass the capitalization of these facilities and/or to additional
assessments
from these facilities. In addition, while there is availability for
recoupments
from organizations or premium rate increases, they may not offset each
other in
financial statements for the same fiscal period. There is also the
possibility
that policies may not be renewed in subsequent years.
We
are
involved in claims and legal actions arising in the ordinary course
of business.
Revisions to our estimates are based on our analysis of subsequent
information
that we receive regarding various factors, including: (i) per claim
information;
(ii) company and industry historical loss experience; (iii) legislative
enactments, judicial decisions, legal developments in the awarding
of damages,
and (iv) trends in general economic conditions, including the effects
of
inflation. Management revises its estimates based on the results of
its
analysis. This process assumes that past experience, adjusted for the
effects of
current developments and anticipated trends, is an appropriate basis
for
estimating the ultimate settlement of all claims. There is no precise
method for
subsequently evaluating the impact of any specific factor on the adequacy
of the
reserves, because the eventual redundancy or deficiency is affected
by multiple
factors. In the opinion of management, the ultimate disposition of
these matters
will not have a material adverse effect on our consolidated financial
position,
results of operations, or liquidity.
The
company is also subject to changing social, economic, and regulatory
conditions.
Regulatory authorities as well as legislative bodies in the state of
Florida
seek to influence and restrict premium rates, require premium refunds
to
policyholders, restrict the ability of insurers to cancel or non-renew
policies,
require insurers to continue to write new policies or limit their ability
to
write new policies. They can also limit insurers’ ability to change coverage
terms or impose underwriting standards or impose additional regulations
regarding agent and broker compensation. All of these items result
in an
expansion of the overall regulation of insurance products and the insurance
industry. The ultimate changes and effects on the Company’s business, if any,
are uncertain. However, based upon information currently known to management,
the effect of regulation is not considered to have a material adverse
effect on
our consolidated financial statements.
(12)
LEASES
The
Company and its subsidiaries lease office space and office equipment
under
operating leases; the office space lease expires in September 2008
and the
office equipment leases have various expiration dates. Lease expense
amounted to
$123, $103 and $84 for the years ended December 31, 2007, 2006 and
2005,
respectively. At December 31, 2007, minimum future lease payments under
noncancellable operating leases are as follows:
2008
|
|
$
|
117
|
|
2009
|
|
|
37
|
|
2010
|
|
|
37
|
|
2011
|
|
|
37
|
|
2012
|
|
|
6
|
|
Thereafter
|
|
|
2
|
|
Total
|
|
$
|
236
|
|
United
Insurance Holdings, LC and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2007
(Dollars
in thousands)
(13)
RELATED PARTY TRANSACTIONS
The
Company engaged in the following related party transactions:
The
Company paid board fees and commissions for premiums produced during
2007, 2006,
and 2005 to Alpha Insurance, Comegy’s Insurance Corner and San of Tampa Bay
(insurance agencies owned by one of its directors) totaling $773, $600
and $419,
respectively. The commissions paid were determined in accordance with
industry
rates.
The
Company places private reinsurance through Ballantyne, McKean and Sullivan,
Ltd., a broker that employs a director of the Company. The reinsurers
pay
commissions to the broker determined in accordance with industry
rates.
The
Company has entered into an Investment Management agreement with Synovus Trust
Company, N.A. (“Synovus”), whereby Synovus provides discretionary investment
management services for the investment accounts of the Company’s subsidiaries.
The agreement was effective October 8, 2003, and remains in effect
until
terminated by either party. Synovus Financial Corporation, Synovus’ parent,
owned 17.2% of the Company at December 31, 2007 and 18% at December
31, 2006,
respectively. The Company’s subsidiaries incurred combined fees under the
agreement of $96, $115 and $97 for the years ended December 31, 2007,
2006 and
2005, respectively.
During
2007 and 2006, the Company held various secured loan agreements with
Columbus
Bank & Trust (“CB&T”) (Note 21). CB&T is a subsidiary of Synovus
Financial Corporation. The amount outstanding on the note payable executed
in
February 2007 was $23,833 as of December 31, 2007. There was no amount
outstanding on this line as of December 31, 2006. The amount outstanding
on the
line of credit payable at December 31, 2006 was $9,722. Total interest
paid to
CB&T totaled $2,472, $741 and $293 for the years ended December 31, 2007,
2006 and 2005, respectively. The balance in the investment account
at CB&T
was $18,990 at December 31, 2007. The interest rates charged and earned
were
determined in accordance with industry rates.
Effective
June 1, 2007, UPCIC executed a reinsurance agreement with Caymaanz
Insurance
Company (“Caymaanz”) for reinsurance catastrophe coverage of $6,500 for a
premium of $5,525. The rate is consistent with industry rates. In addition,
UIM
purchased redeemable, non-voting preferred stock in Caymaanz for $1,140.
UIM
does not have voting control or a majority economic interest. Through
its
contractual rights, UIM does, however, have control over certain designated
assets; therefore, these assets have been consolidated and are recorded
in other
assets in the consolidated financial statements.
As
of
December 31, 2007 and 2006, we had notes receivable from certain officers
in the
amount of $100. Interest accrues at 3% on an annual basis.
(14)
STOCK COMPENSATION PLANS
At
December 31, 2007, the Company had no stock-based employee compensation
plan;
however, during 2005, 2006 and 2007, the Company’s Board granted membership
units to key personnel. The Company's Member Agreement sets aside a
5% interest,
portions of which can be awarded to employees, managers, officers and
the
Chairman of the Board. The Company performs a valuation based on year-end
earnings and utilizes their judgment to determine the amount each year.
All of
the grants were valued at fair market value in accordance with SFAS
No. 123(R).
For the years ended December 31, 2007 and 2006, the fair market value
of the
membership units awarded was $147 and $165, respectively. The 2005
grant was not
required to be valued at fair market value per SFAS 123(R).
(15)
EMPLOYEE BENEFIT PLAN
The
Company provides a 401(k) plan for substantially all employees of the
Company
and its subsidiaries. The Company matches 100% of the first 5% of employees’
contributions to the plan. The Company's contributions to the plan
on behalf of
the participating employees were $73, $57 and $117 for the years ended
December
31, 2007, 2006 and 2005, respectively.
(16)
ACQUISITIONS
There
were no acquisitions made during the years ended December 31, 2007
and
2006.
United
Insurance Holdings, LC and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2007
(Dollars
in thousands)
(17)
COMPREHENSIVE INCOME (LOSS)
Comprehensive
income (loss) includes unrealized gains and losses; net of the related
income
tax effect, on debt and equity securities classified as available-for-sale,
and
is included as a component of members’ equity.
Comprehensive
income (loss) is as follows:
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Unrealized
holdings gains or losses arising during year
|
|
|
1,950
|
|
|
408
|
|
|
(887
|
)
|
Tax
effect
|
|
|
(755
|
)
|
|
(154
|
)
|
|
370
|
|
Net
unrealized change in investments, net of tax effect
|
|
|
1,195
|
|
|
254
|
|
|
(517
|
)
|
Our
Articles of Incorporation do not authorize the issuance of preferred
stock.
The
Company is a legal entity separate and distinct from its subsidiaries.
As a
holding company, the primary sources of cash needed to meet its obligations
are
distributions, dividends, and other permitted payments from its subsidiaries.
While there are no restrictions on distributions from the Company,
dividends
from UPCIC have certain restrictions (Note 10).
In
accordance with the Company’s Members Agreement, the Company provides cash
distributions to each member on an annual basis in order for each member
to pay
federal income taxes which may be owed by members due to the taxable
income
attributable to them as members of the Company. An additional equity
distribution of $10,000 was made in February 2007. Distributions declared
and
paid in 2007 and 2006 were $520 and $148, respectively. Distributions
to members
of $9,227 and $8,157 were reflected as liabilities as of December 31,
2007 and
2006, respectively.
There
were no discontinued operations during the years ended December 31,
2007 and
2006.
(21)
SUBSEQUENT EVENTS
On
January 21, 2008 UIH executed a letter of intent (“the Letter”) with FMG
Acquisition Corporation (“FMG”) where FMG will acquire a majority holding in UIH
and then merge UIH into FMG. The resulting entity will rename itself
United
Insurance Holdings Corp. (“UIH Corp.”).
The
Letter requires FMG to pay cash of $25,000 and provide 8,750,000 shares
of FMG
common stock valued at $8 per share, at closing. The $95,000 of non-contingent
consideration will be in exchange for an approximate 60% interest in
UIH Corp.
The Letter also contains contingent consideration of up to $5,000 in
cash to be
paid by FMG if UIH Corp. meets certain financial targets in subsequent
events.
The Letter allows the Company to make its regular distribution to members
related to taxes (Note 19) and provides for an additional equity distribution
of
$2,000 to members. In addition, each member of the Board of Managers
will
receive a cash bonus of $50. The transaction will be subject to execution
of a
definitive agreement which will contain various conditions, customary
for
transactions of this type, including regulatory approval of the Office
and an
affirmative vote of FMG shareholders and UIH members.
On
February 29, 2008, the Company sold its investment in Prime Holdings
Insurance
Services, Inc. (“Prime”) back to Prime at a redemption price of $1,133. The
redemption price will be paid by delivery of a promissory note payable
in three
annual installments commencing on May 1, 2008. The promissory note
will bear
interest at 8% per annum beginning May 1, 2008. Interest payments
will be made
with the principal payments due on May 1, 2009 and 2010,
respectively.
United
Insurance Holdings, LC and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2007
(Dollars
in thousands)
On
March
10, 2008, the Company entered into an agreement with Computer Sciences
Corporation, (“CSC”) to provide policy administration services including
processing, billing and policy maintenance. In accordance with the
terms of the
agreement with our current TPA, West Point Underwriters, LLC, (“West Point”) on
March 13, 2008, the Company provided West Point with written notice
of
termination.
On
March
13 2008, we entered into an amendment to the CB&T loan agreement which
eliminated the “excess cash flow” provision of the loan. In addition, the
minimum balance in the investment accounts at CB&T was increased from
$10,000 to $13,000 with no future escrows required. The interest rate
was
decreased from 400 to 300 basis points above LIBOR. The agreement also
provides
for the return of escrow funds if there is no material storm activity
as of
November 2008.
United
Insurance
|
|
|
|
|
|
|
|
Schedule
I - Summary of Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Fair
Value
|
|
Amount
Reflected on Balance Sheet
|
|
|
|
|
|
|
|
|
|
Fixed
Maturities - Available for Sale:
|
|
|
|
|
|
|
|
U.S.
government and agency obligations
|
|
$
|
66,813
|
|
$
|
68,904
|
|
$
|
68,904
|
|
Corporate
securities
|
|
|
38,695
|
|
|
38,506
|
|
|
38,506
|
|
Total
fixed maturities
|
|
|
105,508
|
|
|
107,410
|
|
|
107,410
|
|
Preferred
stock
|
|
|
4,411
|
|
|
3,800
|
|
|
3,800
|
|
Common
stock
|
|
|
1,371
|
|
|
1,272
|
|
|
1,272
|
|
Total
equities
|
|
|
5,782
|
|
|
5,072
|
|
|
5,072
|
|
Short
term investments
|
|
|
300
|
|
|
300
|
|
|
300
|
|
Other
investments
|
|
|
1,000
|
|
|
1,000
|
|
|
1,000
|
|
Total
investments
|
|
$
|
112,590
|
|
$
|
113,782
|
|
$
|
113,782
|
|
United
Insurance Holdings, LC and Subsidiaries
CONSOLIDATED
BALANCE SHEETS
|
|
March
31,
|
|
December
31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Dollars
in thousands)
|
|
|
|
(unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
Investments
at fair value:
|
|
|
|
|
|
|
|
Fixed
maturities
|
|
$
|
107,394
|
|
$
|
107,410
|
|
Equity
securities
|
|
|
4,632
|
|
|
5,072
|
|
Other
investments
|
|
|
10,300
|
|
|
1,300
|
|
|
|
|
|
|
|
|
|
Total
investments
|
|
|
122,326
|
|
|
113,782
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
48,296
|
|
|
56,852
|
|
Premiums
receivable, net
|
|
|
9,996
|
|
|
9,966
|
|
Reinsurance
recoverable, net
|
|
|
16,183
|
|
|
16,816
|
|
Prepaid
reinsurance premiums
|
|
|
12,819
|
|
|
26,345
|
|
Deferred
policy acquisition costs
|
|
|
6,946
|
|
|
7,547
|
|
Property
and equipment, net
|
|
|
100
|
|
|
108
|
|
Deferred
income taxes asset, net
|
|
|
4,034
|
|
|
4,733
|
|
Prepaid
expenses and other assets
|
|
|
8,703
|
|
|
6,277
|
|
Total
assets
|
|
$
|
229,403
|
|
$
|
242,426
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND MEMBERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
losses and loss adjustment expenses
|
|
$
|
32,127
|
|
$
|
36,005
|
|
Unearned
premiums
|
|
|
66,618
|
|
|
73,051
|
|
Reinsurance
payable
|
|
|
—
|
|
|
10,852
|
|
Accrued
distribution payable
|
|
|
11,266
|
|
|
9,227
|
|
Advance
premium
|
|
|
3,145
|
|
|
2,396
|
|
Accounts
payable and accrued expenses
|
|
|
12,886
|
|
|
13,858
|
|
Shares
subject to mandatory redemption
|
|
|
2,564
|
|
|
2,564
|
|
Federal
and state income tax payable
|
|
|
1,612
|
|
|
2,303
|
|
Other
liabilities
|
|
|
2,642
|
|
|
2,238
|
|
Long-term
debt
|
|
|
41,083
|
|
|
43,833
|
|
Total
liabilities
|
|
|
173,943
|
|
|
196,327
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members'
equity:
|
|
|
|
|
|
|
|
Members'
certificates of interest
|
|
|
7,527
|
|
|
7,464
|
|
Retained
earnings
|
|
|
45,519
|
|
|
37,891
|
|
Accumulated
other comprehensive income
|
|
|
2,414
|
|
|
744
|
|
Total
members' equity
|
|
|
55,460
|
|
|
46,099
|
|
|
|
|
|
|
|
|
|
Total
liabilities and members' equity
|
|
$
|
229,403
|
|
$
|
242,426
|
|
See
accompanying notes to consolidated financial
statements.
|
United
Insurance Holdings, LC and Subsidiaries
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
Three months ended March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Dollars
in thousands)
|
|
|
|
(unaudited)
|
|
Revenue:
|
|
|
|
|
|
|
|
Gross
premiums written
|
|
$
|
29,090
|
|
$
|
37,417
|
|
Gross
premiums ceded
|
|
|
(1,362
|
)
|
|
(491
|
)
|
Net
premiums written
|
|
|
27,728
|
|
|
36,926
|
|
Increase
in net unearned premiums
|
|
|
(7,093
|
)
|
|
(17,392
|
)
|
|
|
|
|
|
|
|
|
Net
premiums earned
|
|
|
20,635
|
|
|
19,534
|
|
Net
investment income
|
|
|
1,633
|
|
|
1,771
|
|
Net
realized investment losses
|
|
|
(157
|
)
|
|
(7
|
)
|
Commissions
and fees
|
|
|
647
|
|
|
660
|
|
Policy
assumption bonus
|
|
|
2,912
|
|
|
6,748
|
|
Other
income
|
|
|
754
|
|
|
814
|
|
Total
revenue
|
|
|
26,424
|
|
|
29,520
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
Losses
and loss adjustment expenses
|
|
|
7,131
|
|
|
7,025
|
|
Policy
acquisition costs
|
|
|
4,318
|
|
|
3,989
|
|
Operating
and underwriting expenses
|
|
|
1,442
|
|
|
1,389
|
|
General
and administrative expenses
|
|
|
1,337
|
|
|
666
|
|
Salary
and wages
|
|
|
808
|
|
|
743
|
|
Interest
|
|
|
865
|
|
|
3,243
|
|
Total
expenses
|
|
|
15,901
|
|
|
17,055
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
10,523
|
|
|
12,465
|
|
Provision
for income tax
|
|
|
856
|
|
|
2,709
|
|
Net
income
|
|
$
|
9,667
|
|
$
|
9,756
|
|
See
accompanying notes to consolidated financial
statements.
|
United
Insurance Holdings, LC and Subsidiaries
CONSOLIDATED
STATEMENTS OF MEMBERS’ EQUITY AND COMPREHENSIVE
INCOME
|
|
Comprehensive
Income
|
|
Members'
Certificates of Interest
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehensive
Income
|
|
Total
|
|
|
|
|
|
(Dollars
in thousands)
(unaudited)
|
|
|
|
|
|
Balance
as of December 31, 2007
|
|
|
|
|
$
|
7,464
|
|
$
|
37,891
|
|
$
|
744
|
|
$
|
46,099
|
|
Net
Income
|
|
|
9,667
|
|
|
-
|
|
|
9,667
|
|
|
-
|
|
|
9,667
|
|
Increase
in certificates of interest
|
|
|
-
|
|
|
63
|
|
|
|
|
|
-
|
|
|
63
|
|
Net
unrealized change in investments, net of tax effect of
$1,009
|
|
|
1,670
|
|
|
-
|
|
|
-
|
|
|
1,670
|
|
|
1,670
|
|
Distributions
|
|
|
-
|
|
|
-
|
|
|
(2,039
|
)
|
|
-
|
|
|
(2,039
|
)
|
Comprehensive
income
|
|
$
|
11,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of March 31, 2008
|
|
|
|
|
$
|
7,527
|
|
$
|
45,519
|
|
$
|
2,414
|
|
$
|
55,460
|
|
See
accompanying notes to consolidated financial
statements.
|
United
Insurance Holdings, LC and Subsidiaries
CONSOLIDATED
STATEMENTS OF CASH FLOW
|
|
Three
Months Ended March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Dollars
in thousands)
|
|
|
|
(unaudited)
|
|
Cash
flow provided by operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
9,667
|
|
$
|
9,756
|
|
Adjustments
to reconcile net income to net cash provided
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
168
|
|
|
868
|
|
Realized
loss
|
|
|
157
|
|
|
7
|
|
Provision
for uncollectible premiums
|
|
|
—
|
|
|
163
|
|
Deferred
income taxes, net
|
|
|
(310
|
)
|
|
(1,799
|
)
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Premiums
receivable
|
|
|
(29
|
)
|
|
(1,420
|
)
|
Reinsurance
recoverable
|
|
|
633
|
|
|
10,203
|
|
Prepaid
reinsurance premiums
|
|
|
13,526
|
|
|
17,324
|
|
Deferred
acquisition costs
|
|
|
602
|
|
|
271
|
|
Income
taxes, net
|
|
|
(691
|
)
|
|
4,508
|
|
Other
assets
|
|
|
(1,294
|
)
|
|
(1,868
|
)
|
Reserve
for loss and LAE
|
|
|
(3,878
|
)
|
|
(8,127
|
)
|
Unearned
premiums
|
|
|
(6,433
|
)
|
|
68
|
|
Reinsurance
payable
|
|
|
(10,852
|
)
|
|
(12,894
|
)
|
Premium
deposits
|
|
|
750
|
|
|
1,758
|
|
Accounts
payable and accrued expenses
|
|
|
(971
|
)
|
|
(2,780
|
)
|
Other
liabilities
|
|
|
270
|
|
|
(236
|
)
|
Net
cash provided by operating activities
|
|
|
1,315
|
|
|
15,802
|
|
Cash
flow provided by (used in) investing activities:
|
|
|
|
|
|
|
|
Proceeds
from sales of investments available for sale
|
|
|
3,287
|
|
|
14,300
|
|
Purchases
of investments available for sale
|
|
|
(10,468
|
)
|
|
(10,489
|
)
|
Cost
of property and equipment acquired
|
|
|
(3
|
)
|
|
(5
|
)
|
Net
cash provided by (used in) investing activities
|
|
|
(7,184
|
)
|
|
3,806
|
|
Cash
flow used in financing activities:
|
|
|
|
|
|
|
|
Proceeds
from borrowings
|
|
|
—
|
|
|
33,000
|
|
Repayments
of borrowings
|
|
|
(2,750
|
)
|
|
(31,754
|
)
|
Contributions
by owners
|
|
|
63
|
|
|
501
|
|
Distributions
to owners
|
|
|
—
|
|
|
(18,281
|
)
|
Net
cash used in financing activities
|
|
|
(2,687
|
)
|
|
(16,534
|
)
|
Increase
(decrease) in cash
|
|
|
(8,556
|
)
|
|
3,074
|
|
Cash
and cash equivalents at beginning of period
|
|
|
56,852
|
|
|
46,248
|
|
Cash
and cash equivalents at end of period
|
|
$
|
48,296
|
|
$
|
49,322
|
|
|
|
|
|
|
|
|
|
Supplemental
Cash Flow Information:
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
900
|
|
$
|
3,243
|
|
Income
taxes paid
|
|
|
1,860
|
|
|
-
|
|
See
accompanying notes to consolidated financial
statements.
|
Notes
to Consolidated Financial Statements
(Unaudited)
(Dollars
in thousands)
(1)
ORGANIZATION AND BUSINESS
United
Insurance Holdings, LC (“UIH”, “the Company”, “we”) is a Florida-domiciled,
limited liability company formed in 1999. The Company and its three wholly-owned
subsidiaries are engaged in the property and casualty insurance business
in the
State of Florida. The Company’s subsidiaries include United Property &
Casualty Insurance Company (“UPCIC”), a property and casualty stock insurance
company; United Insurance Management, LC (“UIM”), (the Managing General Agent
(“MGA”) for UPCIC, that functions as the manager for the insurance subsidiary’s
business), and Skyway Claims Services LC (“Skyway”), which provides claims
adjusting services to UPCIC. We operate under one business
segment.
Since
its
formation, UPCIC, a licensed Florida insurer, has actively written homeowners’
and dwelling fire business throughout the State of Florida. UPCIC writes
business through its vast, independent agency force and writes business
through
an alliance with Allstate Insurance Company. In 1999, 2004 and 2005,
UPCIC
assumed policies from Citizens and these assumed policies comprise approximately
30% of UPCIC premium. UPCIC also writes flood coverage and a smaller
commercial
auto line of business (“Garage”). The Company, through UIM, manages
substantially all aspects of the insurance operations that would include
underwriting, policy administration, collections and disbursements, accounting
and claims processes. UIM contracts with a third-party administrator
(“TPA”) to
manage many aspects of policy processing including billing and policy
maintenance.
Basis
of Presentation
The
accompanying consolidated interim financial statements are unaudited
and are
prepared in accordance with the instructions for Form 10-Q and Article
10 of
Regulation S-X. In compliance with those instructions, certain information
and
footnote disclosures normally included in annual consolidated financial
statements prepared in accordance with generally accepted accounting
principles
(“GAAP”) in the United States of America have been condensed or
omitted.
Results
of operations and cash flows for the interim periods are not necessarily
indicative of the results that may be expected for the entire year or
any other
future period as a result of the presentation described
above.
All
significant intercompany transactions and accounts have been
eliminated.
In
the
opinion of management, these consolidated interim financial statements
include
all the normal recurring adjustments necessary to fairly present the
Company’s
consolidated results of operations, financial position and cash flows
as of
March 31, 2008, and for all periods presented. These consolidated financial
statements and footnotes should be read in conjunction with the Company’s
audited consolidated financial statements for the year ended December 31,
2007 within this Form S-4/A.
(2)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
PRACTICES
(a)
USE OF ESTIMATES
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management
to make
estimates and assumptions that affect the reported amounts of assets
and
liabilities and disclosures of contingent assets and liabilities at the
date of
the financial statements and reported amounts of revenues and expenses
during
the reporting period. Accordingly, actual results could differ from those
estimates.
Similar
to other property and casualty insurers, our liability for unpaid losses
and
loss adjustment expense (“LAE”), although supported by actuarial valuations and
other data, is ultimately based on management's reasoned expectations
of future
events. Although considerable variability is inherent in these estimates,
we
believe that this liability is reasonable. Estimates are reviewed regularly
and
adjusted as necessary. Any adjustments are reflected in current operations.
It
is reasonably possible that the expectations associated with these accounts
could change in the near term and that the effect of such changes could
be
material to the consolidated financial statements.
Various
assumptions and other factors underlie the determination of these significant
estimates, which are described in greater detail in Note 2 of the Company’s
audited financial statements for the fiscal year ended December 31, 2007
included within this Form S-4/A.
(b)
PREMIUM REVENUE AND PREMIUMS RECEIVABLE
Premiums
are recorded as earned on a daily pro rata basis over the contract period
of the
related policies that are in force. The portion of premiums not earned
at the
end of the quarter is recorded as unearned premiums.
United
Insurance Holdings, LC and Subsidiaries
Notes
to Consolidated Financial Statements
(Unaudited)
(Dollars
in thousands)
Premiums
receivable includes amounts due from UPCIC’s insureds for billed premiums. UPCIC
performs a policy-level evaluation to determine the extent the premiums
receivable balance exceeds the unearned premiums balance. This exposure
is then
aged to establish an allowance for credit losses based upon prior experience.
Recoveries paid on amounts previously charged off are credited to bad
debt
expense in the period received. As of March 31, 2008 and December 31,
2007, the
Company had recorded an allowance for credit losses of $152 and $160,
respectively.
(c)
STOCK OPTION PLANS
At
March
31, 2008 and December 31, 2007, the Company did not have a stock-based
employee
compensation plan;
however,
from time to time, the Company’s Board has granted membership units to key
personnel. In March 2008, the Company’s Board decided to discontinue any future
grants, and there were no grants issued to key personnel at March 31,
2008, or
at December 31, 2007.
(d)
OPERATIONAL RISKS
The
following is a description of the most significant risks facing us and
how we
mitigate those risks:
|
(I)
|
LEGAL/REGULATORY
RISKS—the risk that changes in the regulatory environment in which
an
insurer operates will create additional expenses not anticipated
by the
insurer in pricing its products. That is, regulatory initiatives
designed
to reduce insurer profits, restrict underwriting practices
and risk
classifications, mandate rate reductions and refunds, and
new legal
theories or insurance company insolvencies through guaranty
fund
assessments may create costs for the insurer beyond those
recorded in the
financial statements. We attempt to mitigate this risk by
monitoring
proposed regulatory legislation and by assessing the impact
of new laws.
As we write business only in the State of Florida, we are
more exposed to
this risk than more geographically-balanced
companies.
|
As
of
March 31, 2008 and December 31, 2007, the Company and its subsidiaries
were in
compliance with all regulatory requirements.
|
(II)
|
CREDIT
RISK—the risk that financial instruments, which potentially subject
the
Company to concentrations of credit risk, may decline in
value or default,
or the risk that reinsurers to which business is ceded and
from which
receivables are recorded on the balance sheet may not pay.
The Company
minimizes this risk by adhering to a conservative investment
strategy and
entering into reinsurance agreements with financially sound
reinsurers.
The Company maintains deposits, in excess of the federally
insured limits
(“FDIC”). SFAS 105 identifies this situation as a concentration
of credit
risk requiring disclosure, regardless of the degree of risk.
At March 31,
2008 and December 31, 2007, cash at one financial institution
exceeded the
$100 FDIC coverage by $35,242 and $56,752, respectively.
This risk is
managed by maintaining all deposits in high quality financial
institutions.
|
|
(III)
|
INTEREST
RATE RISK—the risk that interest rates will change and cause a decrease
in
the value of an insurer's investments. To the extent that
liabilities come
due more quickly than assets mature, an insurer might have
to sell assets
prior to maturity and potentially recognize a gain or a
loss. This risk is
managed by the monitoring of the investment portfolio by
management, the
investment committee and the Company’s outside investment manager.
|
|
(IV)
|
CATASTROPHIC
EVENT RISK—the risk associated with writing insurance policies covering
losses that result from catastrophes, including hurricanes,
tropical
storms, tornadoes or other weather-related events. We mitigate
our risk of
catastrophic events through the use of reinsurance, forecast-modeling
techniques and the monitoring of concentrations of risk,
all designed to
protect the statutory surplus of the insurance
company.
|
(e)
RECLASSIFICATIONS
Certain
amounts in 2007 financial statements have been reclassified to conform
to the
2008 presentation.
United
Insurance Holdings, LC and Subsidiaries
Notes
to Consolidated Financial Statements
(Unaudited)
(Dollars
in thousands)
(e)
RECENT ACCOUNTING PRONOUNCEMENTS
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, which
defines fair value, establishes a framework for measuring fair value,
and
expands disclosures about fair value measurements. The provisions of
SFAS No.
157 are effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years.
In
February 2008, the FASB issued FASB Staff Position No. 157-2 “Effective Date of
FASB Statement No. 157”, which permits the deferral of the effective date of
SFAS No. 157 to fiscal years beginning after November 15, 2008 for all
nonfinancial assets and liabilities, except those that are recognized
or
disclosed at fair value in the financial statements on a recurring basis.
The
Company plans to utilize the deferral for non-financial assets and liabilities.
The
standard describes three levels of inputs that may be used to measure
fair
value. Level 1 is defined as quoted prices in active markets for identical
assets or liabilities. Level 2 is defined as observable inputs other
than Level
1 prices such as quoted prices for similar assets or liabilities; quoted
prices
in markets that are not active; or other inputs that are observable or
can be
corroborated by observable market data for substantially the full term
of the
assets or liabilities. Level 3 is defined as unobservable inputs that
are
supported by little or no market activity and that are significant to
the fair
value of the assets or liabilities. All of the Company’s investments are valued
at fair market value using Level 1 and Level 2 inputs.
Based upon
the Company’s current use of fair value measurements, the adoption of SFAS No.
157 did not have a material effect on the Company’s results of operation or
financial position.
In
February 2007, the FASB issued SFAS No. 159
“The
Fair Value Option for Financial Assets and Financial Liabilities— Including an
Amendment of SFAS No. 115”
(“SFAS No. 159”), which permits an entity to measure many financial assets
and financial liabilities at fair value that are not currently required
to be
measured at fair value. Entities that elect the fair value option will
report
unrealized gains and losses in earnings at each subsequent reporting
date. The
fair value option may be elected on an instrument-by-instrument basis,
with a
few exceptions. SFAS No. 159 amends previous guidance to extend the use of
the fair value option to available-for-sale and held-to-maturity securities.
SFAS No. 159 became effective for the Company on January 1, 2008. The
adoption
of SFAS No. 159 had no material impact on our financial position or results
of
operations
as
the
Company did not elect to measure any financial instruments or other items
at
fair value that are not currently required to be measured at fair
value.
In
March
2008, the FASB issued SFAS No. 161, “Disclosures About Derivative
Instruments and Hedging Activities – an amendment of FASB Statement
No. 133” (“SFAS No. 161”). SFAS No. 161 will require a more
detailed discussion of how an entity uses derivative instruments and
hedging
activities and how such derivative instruments and related hedged items
affect
the entity’s financial position, financial performance and cash flows. Among
other things, the expanded disclosures will also require presentation
of the
fair values of derivative instruments and their gains and losses in tabular
format and enhanced liquidity disclosures, including discussion of
credit-risk-related derivative features. SFAS No. 161 is effective for
fiscal
years beginning after November 15, 2008. The Company has
determined that the adoption of SFAS No. 161 will have no impact on the
financial statements.
(3)
POLICY ASSUMPTION BONUS AGREEMENTS
As
part
of a policy assumption (or “takeout”) agreement with Citizens that ended in
2006, UPCIC receives takeout bonuses from Citizens for policies assumed
from
multiple assumptions. The bonuses were calculated at 17.5% of the written
premium originally assumed, net of adjustments related to policies that
were not
renewed or retained by the Company. The bonus money due to UPCIC is on
deposit
with an escrow agent, as specified by the terms of the takeout agreement.
To
receive the bonus, UPCIC is required to offer to renew the assumed policies
for
a period of three years at UPCIC’s approved rates and on substantially similar
terms. Approximately three years after the assumption date, the escrow
agent
distributes the bonus funds, with the related investment income thereon,
to
UPCIC. During the three months ended March 31, 2008 and 2007, UPCIC recognized
takeout bonus of $2,912 and $6,748, respectively which included $373
and $642 of
investment income, respectively from the 2004 and 2005 takeout periods.
(4)
REINSURANCE
We
follow
industry practice of reinsuring a portion of our risks and paying for
that
protection based primarily upon modeled projected maximum losses and
total
insured values of all policies in effect and subject to such reinsurance.
Reinsurance involves an insurance company transferring, or “ceding”, all or a
portion of its exposure on insurance underwritten by it to another insurer,
known as a reinsurer. The ceding of insurance does not legally discharge
the
insurer from its primary liability for the full amount of the policies.
To the
extent that reinsurers are unable to meet the obligations they assume
under
these reinsurance agreements, the ceding company remains liable for the
insured
loss.
Reinsurance
agreements provide UPCIC with increased capacity to write more and larger
risks
and maintain its exposure to loss within its capital resources. Our reinsurance
agreements are designed to coincide with the seasonality of Florida’s hurricane
season.
There
were no material changes to the reinsurance program during the three
months
ended March 31, 2008.
For
the
three months ended March 31, 2008 and 2007, there were no ceded premiums
under
the private excess of loss contracts or the FHCF excess of loss contract.
For
the three months ended March 31, 2008 and 2007, premiums of $1,251 and
$898 were
ceded for the federal flood policies, respectively.
United
Insurance Holdings, LC and Subsidiaries
Notes
to Consolidated Financial Statements
(Unaudited)
(Dollars
in thousands)
UPCIC
also participated in a quota share program on our Garage line of business.
There
were no material changes to the garage reinsurance program during the
three
months ended March 31, 2008. UPCIC recorded the commission at the minimum
for
the three months ended March 31, 2008 and 2007. For the three months
ended March
31, 2008 and 2007, premiums of $603 and $667 were ceded under the quota
share
Garage program agreement, respectively.
(5)
LONG-TERM DEBT
Long-term
debt consists of the following:
|
|
As of
|
|
|
|
March 31,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(unaudited)
|
|
(audited)
|
|
|
|
|
|
|
|
Unsecured
note payable to the Florida State Board of Administration ("FSBA")
by
UPCIC. The term of the note is 20 years with quarterly payments
to begin
October 1, 2006. Interest only payments are required for the
first three
years. The interest rate shall be determined two business days
prior to
the payment date in order to set the rate for the following
quarter.
(8.61% and 4.58% at March 31, 2008 and December 31, 2007, respectively).
Any payment of interest or repayment of principal is subject
to approval
by the Office and may be paid only out of UPCIC's earnings
and only if
UPCIC's surplus exceeds specified levels required by the
Office.
|
|
$
|
20,000
|
|
$
|
20,000
|
|
|
|
|
|
|
|
|
|
Secured
note payable to CB&T in 36 consecutive monthly installments through
February 20, 2010, including interest of 300 basis points above
the 30 day
LIBOR at March 31, 2008 and 400 basis points above LIBOR at
December 31,
2007. Interest rate at March 31, 2008 and December 31, 2007
was 5.6% and
9.8%, respectively.
|
|
|
21,083
|
|
|
23,833
|
|
|
|
$
|
41,083
|
|
$
|
43,833
|
|
On
September 10, 2006, the Company entered into a loan agreement (“York Note”) with
York Capital (“York”) in the amount of $20,000. In connection with the financing
transaction, York received a 4.75% equity ownership interest (“Ownership”) and
entered a Put Agreement (“Put”) with the Company. The Put provides York with an
option to sell its entire interest back to UIH at any time (i) between
September
15, 2009 and September 15, 2010, and (ii) between September 15, 2011
and
September 15, 2012 (“Exercise Period”) at a purchase price of two times the
consolidated book value of the Company at the end of the fiscal quarter
immediately preceding the put date and has no floor or ceiling as to
the amount
to be paid.
The
Company valued this Ownership at $715 at December 31, 2006. In accordance
with
SFAS No. 150, the recorded value of the Ownership will remain unchanged
and any
revaluation would apply to only the Put. The Company valued the related
redeemable Put at March 31, 2008 and December 31, 2007 at $2,564. The
Company
initially valued the Put by discounting the rights of two times the book
value
at December 31, 2006 by the average required return on equity as calculated
by a
capital asset pricing model driven formula utilizing historic geometric
and
arithmetic mean returns and a management-selected beta appropriate for
a
privately-held company. The Put was revalued at December 31, 2007 utilizing
this
same methodology. At March 31, 2008 and December 31, 2007, the Put was
discounted from 4.75% of two times the consolidated book value, or $4,536
that
represented the amount that would have been due if the put was exercisable
at
each period end. For the three months ended March 31, 2007, the Company
had
original issue discount expense related to the York Note of $680.
On
March
13, 2008 we entered into an amendment to the Columbus Bank & Trust
(“CB&T”) loan agreement that eliminated the “excess cash flow” provision of
the loan. In addition, the minimum balance in the investment accounts
at
CB&T was increased from $10,000 to $13,000 with no future payments into
escrow accounts required. The interest rate was decreased from 400 to
300 basis
points above the 30 day LIBOR. The agreement also provides for the potential
return of up to $3,000 of escrow funds if there is no material storm
activity as
of November 2008. See Note 7 for discussion of other related party transactions
with CB&T and Note 10 for a subsequent event related to this
loan.
United
Insurance Holdings, LC and Subsidiaries
Notes
to Consolidated Financial Statements
(Unaudited)
(Dollars
in thousands)
The
Company's loan agreements contain certain covenants including the maintenance
of
minimum specified financial ratios and balances. We were in compliance
with the
terms of the CB&T covenants at March 31, 2008. An event of default will
occur under the FSBA note if UPCIC: (i) defaults in the payment of the
surplus
note; (ii) fails to meet at least 2:1 ratio of net premium to surplus
(“Minimum
Writing Ratio”) by December 31, 2007; (iii) fails to submit quarterly filings to
the OIR; (iv) fails to maintain at least $50,000 of surplus during the
term of
the note, except for certain situations; (v) misuses proceeds of the
note; (vi)
makes any misrepresentations in the application for the program; or (vii)
pays
any dividend when principal or interest payments are past due under the
note. As
of March 31, 2008, UPCIC was in compliance with each of the aforementioned
loan
covenants except for the writing ratio covenant.
If
UPCIC
fails to increase its writing ratio for two consecutive quarters prior
to
December 31, 2007, fails to obtain the 2:1 Minimum Writing Ratio by December
31,
2007, or drops below the 2:1 Minimum Writing Ratio once it is obtained
for two
consecutive quarters, the interest rate on the surplus note will increase
during
such deficiency by 25 basis points if the resulting writing ratio is
between
1.5:1 and 2:1 and the interest rate will increase by 450 basis points
if the
writing ratio is below 1.5:1
.
Since
the writing ratio at March 31, 2008 and December 31, 2007 was 1.1:1 and
1.4:1 as
calculated by the SBA, respectively, which are below 1.5:1, UPCIC’s interest
rate in the first quarter of 2008 increased by 450 basis points. UPCIC’s
interest rate for the second quarter will be 450 basis points above the
stated
rate because its writing ratio was below 1.5:1 at the end of March 2008.
The
stated rate used by the FSBA is the 10-year Constant Treasury rate which
was
4.11% and 4.58% at March 31, 2008, and December 31, 2007, respectively.
In addition, if UPCIC remains in default, the FSBA may at its
sole
discretion due to the writing deficiency increase the interest rate to
25%,
which is
the maximum interest rate permitted by law, accelerate the
repayment of principal and interest, shorten the term of the note, or
call the
note and demand full repayment.
(6)
COMMITMENTS AND CONTINGENCIES
Our
company and its subsidiaries are exposed to certain commitments and
contingencies as a result of the nature of our business. They can be
summarized
as being either assessment related, insured claim activity, and other
matters
generally arising in the normal course of the insurance business.
We
operate in a regulatory environment where certain entities and organizations
have the authority to require us to participate in assessments. Currently
these
entities and organizations include, but are not limited to FIGA, Citizens,
and
FHCF. During February 2008, Florida’s House Insurance Committee held a workshop
on a proposal and legislation developed by the Florida Department of
Financial
Services regarding a significant reduction of capacity in the FHCF,
substantially increasing members’ co-insurance participation and the
reorganization of the FHCF under the Florida Cabinet. However, there
have been
no changes in the Company’s co-insurance participation that occurred in the
first quarter of 2008 that would impact the Company. Additionally, the
Board of
Directors of FIGA held separate meetings to discuss their continued financial
challenges in connection with the insolvency of a particular insurance
company
assumed subsequent to the 2005-2006 hurricane season. Because of the
Company’s
participation in assigned risk plans, it may be exposed to losses that
surpass
the capitalization of these facilities and/or to additional assessments
from
these facilities. In addition, while there is availability for recoupments
from
organizations or premium rate increases, they may not offset each other
in
financial statements for the same fiscal period.
We
are
involved in claims and legal actions arising in the ordinary course of
business.
Revisions to our estimates are based on our analysis of subsequent information
that we receive regarding various factors, including: (i) per claim information;
(ii) company and industry historical loss experience; (iii) legislative
enactments, judicial decisions, legal developments in the awarding of
damages,
and (iv) trends in general economic conditions, including the effects
of
inflation. Management revises its estimates based on the results of its
analysis. This process assumes that past experience, adjusted for the
effects of
current developments and anticipated trends, is an appropriate basis
for
estimating the ultimate settlement of all claims. There is no precise
method for
subsequently evaluating the impact of any specific factor on the adequacy
of the
reserves, because the eventual redundancy or deficiency is affected by
multiple
factors. In the opinion of management, the ultimate disposition of these
matters
will not have a material adverse effect on our consolidated financial
position,
results of operations, or liquidity.
The
company is also subject to changing social, economic, and regulatory
conditions.
Regulatory authorities as well as legislative bodies in the State of
Florida
seek to influence and restrict premium rates, require premium refunds
to
policyholders, restrict the ability of insurers to cancel or non-renew
policies,
require insurers to continue to write new policies or limit their ability
to
write new policies. They can also limit insurers’ ability to change coverage
terms or impose underwriting standards or impose additional regulations
regarding agent and broker compensation. All of these items result in
an
expansion of the overall regulation of insurance products and the insurance
industry. The ultimate changes and effects on the Company’s business, if any,
are uncertain. However, based upon information currently known to management,
the effect of regulation is not considered to have a material adverse
effect on
our consolidated financial statements.
United
Insurance Holdings, LC and Subsidiaries
Notes
to Consolidated Financial Statements
(Unaudited)
(Dollars
in thousands)
(7)
RELATED PARTY TRANSACTIONS
The
Company paid board fees and commissions for premiums produced during
the first
quarter of 2008 and 2007 to Alpha Insurance, Comegy’s Insurance Corner and San
of Tampa Bay (insurance agencies owned by one of its directors) totaling
$1,988
and $2,442, respectively. The commissions paid were determined in accordance
with industry rates.
The
Company places private reinsurance through Ballantyne, McKean and Sullivan,
Ltd., a broker that employs a director of the Company. The reinsurers
pay
commissions to the broker determined in accordance with industry
rates.
The
Company has entered into an Investment Management agreement with Synovus
Trust
Company, N.A. (“Synovus”), whereby Synovus provides discretionary investment
management services for the investment accounts of the Company’s subsidiaries.
The agreement was effective October 8, 2003, and remains in effect until
terminated by either party. Synovus Financial Corporation, Synovus’ parent,
owned 17.2% of the Company at March 31, 2008 and December 31, 2007,
respectively. The Company’s subsidiaries incurred combined fees under the
agreement of $52 and $12 for the three months ended March 31, 2008 and
2007,
respectively.
During
2008 and 2007, the Company held various secured loan agreements with
CB&T.
CB&T is a subsidiary of Synovus Financial Corporation. The amount
outstanding on the note payable executed in February 2007 was $21,083
and
$23,833 as of March 31, 2008 and December 31, 2007, respectively. Total
interest
paid to CB&T totaled $430 and $820 for the three month period ended March
31, 2008 and 2007, respectively. The balance in the investment account
at
CB&T was $13,055 at March 31, 2008. The interest rates charged and earned
were determined in accordance with industry rates. See Note 10 for a
subsequent
event related to this escrow account.
On
March
26, 2008, the Board agreed to forgive certain note receivable from officers
in
the amount of $100.
(8)
COMPREHENSIVE INCOME (LOSS)
Comprehensive
income (loss) includes unrealized gains and losses; net of the related
income
tax effect, on debt and equity securities classified as available-for-sale,
and
is included as a component of members’ equity.
|
|
Three Months Ended
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Unrealized
holdings gains or losses arising during year
|
|
|
2,679
|
|
|
336
|
|
Tax
effect
|
|
|
(1,009
|
)
|
|
(215
|
)
|
Net
unrealized change in investments, net of tax effect
|
|
|
1,670
|
|
|
121
|
|
(9)
DIVIDENDS AND DISTRIBUTIONS
The
Company is a legal entity separate and distinct from its subsidiaries.
As a
holding company, the primary sources of cash needed to meet its obligations
are
distributions, dividends, and other permitted payments from its subsidiaries.
While there are no restrictions on distributions from the Company, dividends
from UPCIC have certain restrictions.
In
accordance with the UIH Members Agreement, the Company provides cash
distributions to each member on an annual basis in order for each member
to pay
federal income taxes which may be owed by members due to the taxable
income
attributable to them as members of the Company. Distributions declared
in the
three months ended March 31, 2008 and 2007 were $2,000 and zero, respectively.
The distribution of $2,000 was made to members in April 2008, as allowed
under
the FMG merger agreement dated April 2, 2008.
United
Insurance Holdings, LC and Subsidiaries
Notes
to Consolidated Financial Statements
(Unaudited)
(Dollars
in thousands)
(10)
SUBSEQUENT EVENTS
On
April
2, 2008, we executed a Merger Agreement with FMG Acquisition Corporation
(“FMG”). Pursuant to the Merger Agreement, FMG agreed to purchase all of the
outstanding membership interests of the Company and we agreed to merge
with
United Subsidiary in a transaction whereby the Company would be the surviving
entity and a wholly-owned subsidiary of FMG.
On
May
27, 2008, we entered into a modification agreement to the CB&T agreement
which allowed us to utilize the $13,000 that was then currently held
in escrow
as a principal reduction to the term loan. The modification also eliminated
the
requirement to have any funds held in escrow.
FMG
ACQUISITION CORP.
THIS
PROXY IS BEING SOLICITED ON BEHALF OF OUR BOARD OF
DIRECTORS
The
undersigned hereby appoints Gordon G. Pratt and Larry G. Swets, Jr., together
as
proxies and each with full power of substitution, to represent and to vote
all
shares of common stock of FMG Acquisition Corp. at the special meeting of
stockholders of FMG Acquisition Corp. to be held on
[ ],
at 10:00 a.m. Eastern Time, and at any adjournment or postponement thereof,
hereby revoking any and all proxies heretofore given.
1.
Proposal 1:
to
approve the Merger Proposal—the proposed acquisition of all of the issued
membership units of United Insurance Holdings, LC, a Florida limited liability
company, by FMG Acquisition Corp., a Delaware corporation (the “Acquisition”),
pursuant to the Merger Agreement dated as of April 2, 2008, and the transactions
contemplated thereby (“Proposal 1” or the “Merger Proposal”).
o
FOR
|
o
AGAINST
|
o
ABSTAIN
|
If
you
voted “AGAINST” the Merger Proposal and you hold shares of FMG Acquisition Corp.
common stock issued as part of the units issued in FMG Acquisition Corp.’s IPO,
you may exercise your conversion rights and demand that FMG Acquisition Corp.
convert your shares of common stock for a pro rata portion of the trust account
by marking the “Exercise Conversion Rights” box below. If you exercise your
conversion rights, then you will be exchanging your shares of FMG Acquisition
Corp. common stock for cash and will no longer own these shares. You will only
be entitled to receive cash for these shares if you affirmatively vote against
the Merger Proposal and tender your stock certificate to FMG Acquisition Corp.
at or prior to the Special Meeting and the Merger Proposal is approved and
consummated. Failure to (a) vote against the Merger Proposal,
(b) check the following box, (c) submit this proxy in a timely manner
and (d) tender your stock certificates to FMG Acquisition Corp. at or prior
to the Special Meeting will result in the loss of your conversion
rights.
o
EXERCISE
CONVERSION RIGHTS
2.
Proposal 2
: the First Amendment Proposal—the amendment to FMG
Acquisition Corp.’s amended and restated certificate of incorporation, to remove
certain provisions containing procedural and approval requirements applicable
to
FMG Acquisition Corp. prior to the consummation of the business combination
that
will no longer be operative after the consummation of the Merger since they
are
specific to blank check companies (“Proposal 2” or the “First Amendment
Proposal”).
o
FOR
|
o
AGAINST
|
o
ABSTAIN
|
3.
Proposal 3
: the Second Amendment Proposal—the amendment to FMG
Acquisition Corp.’s amended and restated certificate of incorporation, to
increase the amount of authorized shares of common stock from 20,000,000 to
50,000,000 (“Proposal 3” or the “Second Amendment Proposal”).
o
FOR
|
o
AGAINST
|
o
ABSTAIN
|
4.
Proposal 4
: the Third Amendment Proposal—to change the name of FMG
Acquisition Corp. to United Insurance Holdings Corp. (“Proposal 4” or the
“Third Amendment Proposal”).
o
FOR
|
o
AGAINST
|
o
ABSTAIN
|
5.
Proposal 5
: to elect as directors the three persons listed as
nominees below (“Proposal 5” or the “Director Proposal”):
Nominees
for Directors Whose terms Will Expire in 2010
Gregory
C. Branch, Alec L. Poitevint, II and Kent G. Whittemore
INSTRUCTION:
To withhold authority to vote for any individual nominee, mark “For All Except”
and write that nominee’s name in the space provided below.
o
FOR
|
o
AGAINST
|
o
ABSTAIN
|
o
FOR
ALL EXCEPT ___________
|
6.
Proposal 6:
to approve the Adjournment Proposal—to adjourn the special meeting to a later
date or dates, if necessary, to permit further solicitation and vote of proxies
in the event that, based upon the tabulated vote at the time of the special
meeting, FMG Acquisition Corp. would not have been authorized to consummate
the
Merger (“Proposal 6” or the “Adjournment Proposal”).
This
proxy, when properly executed, will be voted in the manner directed herein
by
the undersigned stockholder. If no direction is made, this proxy will be voted
“
FOR
”
Proposals 1, 2, 3, 4, 5 AND 6.
Our
Board of Directors believes that the Merger Proposal, the First Amendment
Proposal, the Second Amendment Proposal, the Third Amendment Proposal, the
Director Proposal and the Adjournment Proposal are fair to, and in the best
interests of, all of our stockholders, including those who acquired shares
in
our IPO. Accordingly, our Board of Directors unanimously recommends that you
vote “FOR” Proposal 1, the Merger Proposal; “FOR” Proposal 2, the
First Amendment Proposal; “FOR” Proposal 3, the Second Amendment Proposal;
“FOR” Proposal 4, the Third Amendment Proposal; “FOR” Proposal 5, the
Director Proposal; and “FOR” Proposal 6, the Adjournment
Proposal.
In
their discretion, the proxies are authorized to vote upon such other matters
as
may properly come before the special meeting or any adjournments thereof. If
you
wish to vote in accordance with our Board of Directors’ recommendations, just
sign below. You need not mark any boxes.
Signature
of Stockholder
|
|
|
|
Signature
of Stockholder (if held jointly)
|
|
NOTES:
1. Please
sign your name exactly as your name appears hereon. If the shares are owned
by
more than one person, all owners should sign. Persons signing as executors,
administrators, trustees or in similar capacities should so indicate. If a
corporation, please sign the full corporate name by the president or other
authorized officer. If a partnership, please sign in the partnership name by
an
authorized person.
2. To
be valid, the enclosed form of proxy for the special meeting, together with
the
power of attorney or other authority, if any, under which it is signed, must
be
received by
[ ],
Eastern Time, on
[ ],
2008 at the offices of our transfer agent, Continental Stock Transfer &
Trust Company, 17 Battery Place, New York, New York 10004.
3. Returning
the enclosed form of proxy will not prevent you from attending and voting in
person at the special meeting or any adjournment or postponement
thereof.
PLEASE
COMPLETE, SIGN, DATE AND RETURN THIS PROXY CARD
PROMPTLY
TO CONTINENTAL STOCK TRANSFER & TRUST COMPANY
PART
II
INFORMATION
NOT REQUIRED IN THE PROSPECTUS
Item
20. Indemnification of Directors and Officers
Our
amended and restated certificate of incorporation provides that all of our
directors, officers, employees and agents will be entitled to be indemnified
by
us to the fullest extent permitted by Section 145 of the Delaware General
Corporation Law.
Section
145 of the Delaware General Corporation Law concerning indemnification of
officers, directors, employees and agents is set forth below.
“Section
145. Indemnification of officers, directors, employees and agents;
insurance.
(a)
A
corporation shall have power to indemnify any person who was or is a party
or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that the person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust account or other enterprise, against expenses (including
attorneys’ fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by the person in connection with such action, suit or
proceeding if the person acted in good faith and in a manner the person
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe the person’s conduct was unlawful. The termination
of any action, suit or proceeding by judgment, order, settlement, conviction,
or
upon a plea of nolo contendere or its equivalent, shall not, of itself, create
a
presumption that the person did not act in good faith and in a manner which
the
person reasonably believed to be in or not opposed to the best interests of
the
corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that the person’s conduct was unlawful.
(b)
A
corporation shall have power to indemnify any person who was or is a party
or is
threatened to be made a party to any threatened, pending or completed action
or
suit by or in the right of the corporation to procure a judgment in its favor
by
reason of the fact that the person is or was a director, officer, employee
or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust account or other enterprise against expenses (including
attorneys’ fees) actually and reasonably incurred by the person in connection
with the defense or settlement of such action or suit if the person acted in
good faith and in a manner the person reasonably believed to be in or not
opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
(c)
To
the extent that a present or former director or officer of a corporation has
been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in subsections (a) and (b) of this section, or in defense
of any claim, issue or matter therein, such person shall be indemnified against
expenses (including attorneys’ fees) actually and reasonably incurred by such
person in connection therewith.
(d)
Any
indemnification under subsections (a) and (b) of this section (unless ordered
by
a court) shall be made by the corporation only as authorized in the specific
case upon a determination that indemnification of the present or former
director, officer, employee or agent is proper in the circumstances because
the
person has met the applicable standard of conduct set forth in subsections
(a)
and (b) of this section. Such determination shall be made, with respect to
a
person who is a director or officer at the time of such determination, (1)
by a
majority vote of the directors who are not parties to such action, suit or
proceeding, even though less than a quorum, or (2) by a committee of such
directors designated by majority vote of such directors, even though less than
a
quorum, or (3) if there are no such directors, or if such directors so direct,
by independent legal counsel in a written opinion, or (4) by the
stockholders.
(e)
Expenses (including attorneys’ fees) incurred by an officer or director in
defending any civil, criminal, administrative or investigative action, suit
or
proceeding may be paid by the corporation in advance of the final disposition
of
such action, suit or proceeding upon receipt of an undertaking by or on behalf
of such director or officer to repay such amount if it shall ultimately be
determined that such person is not entitled to be indemnified by the corporation
as authorized in this section. Such expenses (including attorneys’ fees)
incurred by former directors and officers or other employees and agents may
be
so paid upon such terms and conditions, if any, as the corporation deems
appropriate.
(f)
The
indemnification and advancement of expenses provided by, or granted pursuant
to,
the other subsections of this section shall not be deemed exclusive of any
other
rights to which those seeking indemnification or advancement of expenses may
be
entitled under any bylaw, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in such person’s official capacity and
as to action in another capacity while holding such office.
(g)
A
corporation shall have power to purchase and maintain insurance on behalf of
any
person who is or was director, officer, employee or agent of the corporation,
or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust
account or other enterprise against any liability asserted against such person
and incurred by such person in any such capacity, or arising out of such
person’s status as such, whether or not the corporation would have the power to
indemnify such person against such liability under this section.
(h)
For
purposes of this section, references to “the corporation” shall include, in
addition to the resulting corporation, any constituent corporation (including
any constituent of a constituent) absorbed in a consolidation or merger which,
if its separate existence had continued, would have had power and authority
to
indemnify its directors, officers, and employees or agents, so that any person
who is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, shall stand in the same position
under
this section with respect to the resulting or surviving corporation as such
person would have with respect to such constituent corporation if its separate
existence had continued.
(i)
For
purposes of this section, references to “other enterprises” shall include
employee benefit plans; references to “fines” shall include any excise taxes
assessed on a person with respect to any employee benefit plan; and references
to “serving at the request of the corporation” shall include any service as a
director, officer, employee or agent of the corporation which imposes duties
on,
or involves services by, such director, officer, employee or agent with respect
to an employee benefit plan, its participants or beneficiaries; and a person
who
acted in good faith and in a manner such person reasonably believed to be in
the
interest of the participants and beneficiaries of an employee benefit plan
shall
be deemed to have acted in a manner “not opposed to the best interests of the
corporation” as referred to in this section.
(j)
The
indemnification and advancement of expenses provided by, or granted pursuant
to,
this section shall, unless otherwise provided when authorized or ratified,
continue as to a person who has ceased to be a director, officer, employee
or
agent and shall inure to the benefit of the heirs, executors and administrators
of such a person.
(k)
The
Court of Chancery is hereby vested with exclusive jurisdiction to hear and
determine all actions for advancement of expenses or indemnification brought
under this section or under any bylaw, agreement, vote of stockholders or
disinterested directors, or otherwise. The Court of Chancery may summarily
determine a corporation’s obligation to advance expenses (including attorneys’
fees).”
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers, and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion
of
the SEC such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim
for
indemnification against such liabilities (other than the payment of expenses
incurred or paid by a director, officer or controlling person in a successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, we
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to the court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
Paragraph
B of Article Eighth of our amended and restated certificate of incorporation
provides:
“The
Corporation, to the full extent permitted by Section 145 of the GCL, as amended
from time to time, shall indemnify all persons whom it may indemnify pursuant
thereto. Expenses (including attorneys’ fees) incurred by an officer or director
in defending any civil, criminal, administrative, or investigative action,
suit
or proceeding for which such officer or director may be entitled to
indemnification hereunder shall be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount
if
it shall ultimately be determined that he is not entitled to be indemnified
by
the Corporation as authorized hereby.”
Pursuant
to the Underwriting Agreement filed as Exhibit 1.1 to our Registration
Statement, we have agreed to indemnify the underwriters, and the underwriters
have agreed to indemnify us, against certain civil liabilities that may be
incurred in connection with this offering, including certain liabilities under
the Securities Act.
Item
21. Exhibits and Financial Statement Schedules
(a)
Exhibit
No.
|
|
Description
|
|
|
|
1.1
|
|
Agreement
and Plan of Merger dated April 2, 2008, by and among FMG Acquisition
Corp., United Insurance Holdings, L.C. and United Subsidiary Corp.
***
|
3.1
|
|
Form
of Second Amended and Restated Certificate of Incorporation.
***
|
3.2
|
|
Bylaws.**
|
5.1
|
|
Opinion
of Ellenoff Grossman & Schole LLP.
|
10.1
|
|
Form
of Investment Management Trust Account Agreement between Continental
Stock
Transfer & Trust Company and the Registrant. *
|
10.2
|
|
Form
of Securities Escrow Agreement among the Registrant, Continental
Stock
Transfer & Trust Company, and the Initial Stockholders.
*
|
10.3
|
|
Form
of Registration Rights Agreement among the Registrant and Initial
Stockholders. *
|
10.4
|
|
Form
of Letter Agreement by and between the Registrant and Gordon G.
Pratt.
**
|
10.5
|
|
Form
of Letter Agreement by and between the Registrant and Larry G.
Swets, Jr.
**
|
10.6
|
|
Form
of Letter Agreement by and between the Registrant and FMG Investors
LLC.
**
|
10.7
|
|
Form
of Letter Agreement by and between the Registrant and Thomas D.
Sargent.
**
|
10.8
|
|
Form
of Letter Agreement by and between the Registrant and David E.
Sturgess.
**
|
10.9
|
|
Form
of Letter Agreement by and between the Registrant and James R.
Zuhlke.
**
|
10.10
|
|
Form
of Letter Agreement by and between the Registrant and John Petry.
**
|
10.11
|
|
Administrative
Services Agreement between the Registrant and Fund Management Group
LLC.
**
|
10.12
|
|
Subscription
Agreement between the Registrant and the Sponsor.**
|
10.13
|
|
Promissory
Note, dated May 22, 2007, issued to FMG Investors LLC in the amount
of
$100,000**
|
10.14
|
|
Subordinated
Revolving Line of Credit Agreement by and between FMG Acquisition
Corp.
and FMG Investors LLC in the amount of $250,000.*
|
10.15
|
|
PLA
Assumption Agreement, dated December 3, 2003, by and between United
Property and Casualty Insurance Company and Citizens Property Insurance
Corporation.
|
10.16
|
|
Policy
Administration Agreement, as amended, between United Property and
Casualty
Insurance Company and West Point Underwriters , dated March 1,
2002
.
|
10.17
|
|
Lease
Agreement between ARC Group and United Insurance Holdings, L.C.,
dated
December 31, 2002.
|
10.18
|
|
Investment
Management Agreement between United Property and Casualty Insurance
Company and Synovus Trust Company, dated October 8,
2003.
|
10.19
|
|
First
Modification Agreement to Loan Agreement and Loan Agreement between
United
Insurance Holdings, L.C. and Columbus Bank and Trust Company, dated
February 8, 2007.
|
10.20
|
|
Term
Promissory Note between United Insurance Holdings, L.C. and Columbus
Bank
and Trust Company, dated February 8, 2007.
|
10.21
|
|
Pledge
and Security Agreement between United Insurance Holdings, L.C.
and
Columbus Bank and Trust Company, dated February 8,
2007.
|
10.22
|
|
Security
Agreement between United Insurance Holdings, L.C. and Columbus
Bank and
Trust Company, dated February 8, 2007.
|
10.23
|
|
Security
Agreement between United Insurance Management, L.C. and Columbus
Bank and
Trust Company, dated February 8, 2007.
|
10.24
|
|
Policy
Administration Agreement between United Property and Casualty Insurance
Company and CSC , dated March 11, 2008.
|
|
|
Form
of First Property Catastrophe Excess of Loss Reinsurance contract
issued
to United Property and Casualty Insurance Company.
|
|
|
Form
of Second Property Catastrophe Excess of Loss Reinsurance contract
issued
to United Property and Casualty Insurance Company.
|
|
|
Form
of Third Property Catastrophe Excess of Loss Reinsurance contract
issued
to United Property and Casualty Insurance Company.
|
|
|
Form
of Fourth Property Catastrophe Excess of Loss Reinsurance contract
issued
to United Property and Casualty Insurance Company.
|
10.29
|
|
Reimbursement
Contract issued to United Property and Casualty Insurance Company
by The
State Board of Administration of
the
State of Florida (SBA) which administers the Florida Hurricane
Catastrophe
Fund (FHCF), dated June 1, 2007.
|
10.30
|
|
Catastrophe
Excess of Loss Treaty issued to United Property and Casualty Insurance
Company by Caymaanz Insurance
Company,
dated June 1, 2007.
|
10.31
|
|
Surplus
Note between United Property and Casualty Insurance Company and
the State
Board of Administration of Florida (SBA)
dated
September 22, 2006.
|
10.32
|
|
Form
of Interests and Liabilities Agreement to Contract of Reinsurance
issued
to United Property and Casualty Insurance
Company.
|
14
|
|
Code
of Business Conduct and Ethics.**
|
23.1
|
|
Consent
of Rothstein Kass.
|
23.2
|
|
Consent
of Ellenoff Grossman & Schole LLP (included in Exhibit
5.1).
|
23.3
|
|
Consent
of DeMeo, Young, McGrath, CPA.
|
23.4
|
|
Consent
of Piper Jaffray & Co.
|
24.1
|
|
Power
of Attorney (included on Signature
Page)
|
*
|
|
Previously
filed on Form 8-K filed with the Securities and Exchange Commission
on
October 12, 2007
|
**
|
Previously
filed on Form S-1 filed with the Securities and Exchange Commission
on
June 4, 2007
|
***
|
Incorporated
by reference to Annex A and B of the proxy statement filed as
part of this
Registration Statement
|
(b)
Financial Statement Schedules
Schedule
I - Summary of Investments - Other Than Investments in Related Parties as of
December 31, 2007. Schedules other than those listed above are omitted for
the
reason that they are not applicable, not required or included in the
Consolidated Financial Statements and the related Notes to Consolidated
Financial Statements of United Holdings, L.C. and its subsidiaries.
(c)
The
fairness opinion of Piper Jaffray & Co. is being furnished as Annex C to
this joint proxy statement/prospectus.
Item
22. Undertakings
A.
The Company hereby undertakes:
(1)
To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i)
To include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933;
(ii)
To reflect in the prospectus any facts or events arising after the effective
date of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement. Notwithstanding
the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement.
(iii) To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement.
(2)
That, for the purpose of determining any liability under the Securities Act
of
1933, as amended, each such post-effective amendment shall be deemed to be
a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona
fide
offering
thereof.
(3)
To remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
(4)
To file a post-effective amendment to the registration statement to include
any financial statements required at the start of any delayed offering or
throughout a continuous offering. Financial statements and information otherwise
required by Section 10(a)(3) of the Act need not be furnished, provided,
that the registrant includes in the prospectus, by means of a post-effective
amendment, financial statements required pursuant to this paragraph (a)(4)
and other information necessary to ensure that all other information in the
prospectus is at least as current as the date of those financial statements.
Notwithstanding the foregoing, with respect to registration statements on
Form S-3, a post-effective amendment need not be filed to include financial
statements and information required by Section 10(a)(3) of the Act or
Rule 3-19 of this chapter if such financial statements and information are
contained in periodic reports filed with or furnished to the Commission by
the
registrant pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the
Form S-3.
(5)
Each prospectus filed by the registrant pursuant to Rule 424(b)(3) shall be
deemed to be part of this registration statement as of the date the filed
prospectus was deemed part of and included in this registration
statement.
(6) Each
prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or
(b)(7) as part of this registration statement for the purpose of providing
the
information required by section 10(a) of the Securities Act of 1933 shall
be deemed to be part of and included in this registration statement as of the
earlier of the date such form of prospectus is first used after effectiveness
or
the date of the first contract of sale of securities in the offering described
in the prospectus. As provided in Rule 430B, for liability purposes of the
issuer and any person that is at that date an underwriter, such date shall
be
deemed to be a new effective date of the registration statement relating to
the
securities in the registration statement to which that prospectus relates,
and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof. Provided, however, that no statement made in a
registration statement or prospectus that is part of the registration statement
or made in a document incorporated or deemed incorporated by reference into
the
registration statement or prospectus that is part of the registration statement
will, as to a purchaser with a time of contract of sale prior to such effective
date, supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or made
in
any such document immediately prior to such effective date.
(7) For
purposes of determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to section 13(a) or
section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report pursuant
to
section 15(d) of the Securities Exchange Act of 1934) that is incorporated
by reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona
fide offering thereof.
(8) The
undersigned registrant hereby undertakes as follows: that prior to any public
reoffering of the securities registered hereunder through use of a prospectus
which is a part of this registration statement, by any person or party who
is
deemed to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reoffering by persons
who may be deemed underwriters, in addition to the information called for by
the
other Items of the applicable form.
(9) The
registrant undertakes that every prospectus (i) that is filed pursuant to
the paragraph immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Securities Act of 1933 and is used
in connection with an offering of securities subject to Rule 415, will be
filed as part of an amendment to the registration statement and will not be
used
until such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(10)
The undersigned registrant undertakes that in a primary offering of securities
of the undersigned registrant pursuant to this registration statement,
regardless of the underwriting method used to sell the securities to the
purchaser, if the securities are offered or sold to such purchaser by means
of
any of the following communications, the undersigned registrant will be a seller
to the purchaser and will be considered to offer or sell such securities to
such
purchaser:
(i)
Any preliminary prospectus or prospectus of the undersigned registrant relating
to the offering required to be filed pursuant to Rule 424;
(ii)
Any free writing prospectus relating to the offering prepared by or on behalf
of
the undersigned registrant or used or referred to by the undersigned
registrant;
(iii)
The portion of any other free writing prospectus relating to the offering
containing material information about the undersigned registrant or its
securities provided by or on behalf of the undersigned registrant;
and
(iv)
Any other communication that is an offer in the offering made by the undersigned
registrant to the purchaser.
(11) The
undersigned Registrant hereby undertakes that, for purposes of determining
any
liability under the Securities Act of 1933, each filing of the registrant's
annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange
Act of 1934 (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall
be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be
the initial
bona
fide
offering
thereof
(12) The
undersigned registrant hereby undertakes to deliver or cause to be delivered
with the prospectus, to each person to whom the prospectus is sent or given,
the
latest annual report, to security holders that is incorporated by reference
in
the prospectus and furnished pursuant to and meeting the requirements of
Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of 1934;
and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to
deliver, or cause to be delivered to each person to whom the prospectus is
sent
or given, the latest quarterly report that is specifically incorporated by
reference in the prospectus to provide such interim financial
information.
B.
The Company hereby undertakes:
(1)
that prior to any public reoffering of the securities registered hereunder
through use of a prospectus which is a part of this registration statement,
by
any person or party who is deemed to be an underwriter within the meaning of
Rule 145(c), that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings
by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(2)
that every prospectus: (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be
a new registration statement relating to the securities offered therein, and
the
offering of such securities at that time shall be deemed to be the initial
bona
fide offering thereof.
C.
Insofar as indemnification for liabilities arising under the Securities Act
of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
Director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of
such issue.
D.
The undersigned registrant hereby undertakes (i) to respond to requests for
information that is incorporated by reference into the prospectus pursuant
to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt
of
such request, and to send the incorporated documents by first class mail or
other equally prompt means, and (ii) to arrange or provide for a facility
in the United States for the purpose of responding to such requests. The
undertaking in subparagraph (i) above includes information contained in
documents filed subsequent to the effective date of the registration statement
through the date of responding to the request.
E.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
SIGNATURES
Pursuant
to the requirements of the Securities Act, the registrant has duly caused
this
Registration Statement on Form S-4 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Farmington, State
of
Connecticut, on the 12th day of June, 2008.
FMG
ACQUISITION CORP.
|
|
|
By:
|
/s/
Gordon G. Pratt
|
|
Gordon
G. Pratt
|
|
Chairman,
Chief Executive Officer and
President
|
POWER
OF ATTORNEY
KNOW
ALL
MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints each of Gordon G. Pratt and Larry G. Swets, Jr.,
each
as his true and lawful attorney-in-fact, with full power of substitution
and
resubstitution for him or her and in each of his or her name, place and
stead,
in any and all capacities to sign any and all amendments including
post-effective amendments to this registration statement, and to file the
same,
with all exhibits thereto, and other documents in connection therewith,
with the
Securities and Exchange Commission, hereby ratifying and confirming all
that
said attorney-in-fact or his or her substitute, each acting alone, may
lawfully
do or cause to be done by virtue thereof.
Pursuant
to the requirements of the Securities Act, this Registration Statement has
been
signed by the following persons in the capacities and on the dates
indicated.
Name
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
Gordon G. Pratt
|
|
Chairman,
Chief Executive Officer and President
|
|
June
12, 2008
|
Gordon
G. Pratt
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
/s/
Larry G. Swets, Jr.
|
|
Chief Financial Officer, Executive Vice President,
|
|
|
Larry
G. Swets, Jr.
|
|
Secretary, Treasurer, and Director (Principal Financial and
|
|
|
|
|
Accounting Officer)
|
|
|
|
|
|
|
|
/s/
Thomas D. Sargent
|
|
Director
|
|
|
Thomas
D. Sargent
|
|
|
|
|
|
|
|
|
|
/s/
David E. Sturgess
|
|
Director
|
|
|
David
E. Sturgess
|
|
|
|
|
|
|
|
|
|
/s/
James R. Zuhlke
|
|
Director
|
|
|
James
R. Zuhlke
|
|
|
|
|
Exhibit
No.
|
|
Description
|
|
|
|
1.1
|
|
Agreement
and Plan of Merger dated April 2, 2008, by and among FMG Acquisition
Corp., United Insurance Holdings, L.C. and United Subsidiary
Corp.
***
|
3.1
|
|
Form
of Second Amended and Restated Certificate of Incorporation.
***
|
3.2
|
|
Bylaws.**
|
5.1
|
|
Opinion
of Ellenoff Grossman & Schole LLP.
|
10.1
|
|
Form
of Investment Management Trust Account Agreement between Continental
Stock
Transfer & Trust Company and the Registrant. *
|
10.2
|
|
Form
of Securities Escrow Agreement among the Registrant, Continental
Stock
Transfer & Trust Company, and the Initial Stockholders.
*
|
10.3
|
|
Form
of Registration Rights Agreement among the Registrant and Initial
Stockholders. *
|
10.4
|
|
Form
of Letter Agreement by and between the Registrant and Gordon
G. Pratt.
**
|
10.5
|
|
Form
of Letter Agreement by and between the Registrant and Larry
G. Swets, Jr.
**
|
10.6
|
|
Form
of Letter Agreement by and between the Registrant and FMG Investors
LLC.
**
|
10.7
|
|
Form
of Letter Agreement by and between the Registrant and Thomas
D. Sargent.
**
|
10.8
|
|
Form
of Letter Agreement by and between the Registrant and David
E. Sturgess.
**
|
10.9
|
|
Form
of Letter Agreement by and between the Registrant and James
R. Zuhlke.
**
|
10.10
|
|
Form
of Letter Agreement by and between the Registrant and John
Petry.
**
|
10.11
|
|
Administrative
Services Agreement between the Registrant and Fund Management
Group LLC.
**
|
10.12
|
|
Subscription
Agreement between the Registrant and the Sponsor.**
|
10.13
|
|
Promissory
Note, dated May 22, 2007, issued to FMG Investors LLC in the
amount of
$100,000**
|
10.14
|
|
Subordinated
Revolving Line of Credit Agreement by and between FMG Acquisition
Corp.
and FMG Investors LLC in the amount of $250,000.*
|
10.15
|
|
PLA
Assumption Agreement, dated December 3, 2003, by and between
United
Property and Casualty Insurance Company and Citizens Property
Insurance
Corporation.
|
10.16
|
|
Policy
Administration Agreement, as amended, between United Property
and Casualty
Insurance Company and West Point Underwriters , dated March
1, 2002
.
|
10.17
|
|
Lease
Agreement between ARC Group and United Insurance Holdings,
L.C., dated
December 31, 2002.
|
10.18
|
|
Investment
Management Agreement between United Property and Casualty Insurance
Company and Synovus Trust Company, dated October 8,
2003.
|
10.19
|
|
First
Modification Agreement to Loan Agreement and Loan Agreement
between United
Insurance Holdings, L.C. and Columbus Bank and Trust Company,
dated
February 8, 2007.
|
10.20
|
|
Term
Promissory Note between United Insurance Holdings, L.C. and
Columbus Bank
and Trust Company, dated February 8, 2007.
|
10.21
|
|
Pledge
and Security Agreement between United Insurance Holdings, L.C.
and
Columbus Bank and Trust Company, dated February 8,
2007.
|
10.22
|
|
Security
Agreement between United Insurance Holdings, L.C. and Columbus
Bank and
Trust Company, dated February 8, 2007.
|
10.23
|
|
Security
Agreement between United Insurance Management, L.C. and Columbus
Bank and
Trust Company, dated February 8, 2007.
|
10.24
|
|
Policy
Administration Agreement between United Property and Casualty
Insurance
Company and CSC , dated March 11, 2008.
|
|
|
Form
of First Property Catastrophe Excess of Loss Reinsurance contract
issued
to United Property and Casualty Insurance Company.
|
|
|
Form
of Second Property Catastrophe Excess of Loss Reinsurance contract
issued
to United Property and Casualty Insurance Company.
|
|
|
Form
of Third Property Catastrophe Excess of Loss Reinsurance contract
issued
to United Property and Casualty Insurance Company.
|
|
|
Form
of Fourth Property Catastrophe Excess of Loss Reinsurance contract
issued
to United Property and Casualty Insurance Company.
|
10.29
|
|
Reimbursement
Contract issued to United Property and Casualty Insurance Company
by The
State Board of Administration of
the
State of Florida (SBA) which administers the Florida Hurricane
Catastrophe
Fund (FHCF), dated June 1, 2007.
|
10.30
|
|
Catastrophe
Excess of Loss Treaty issued to United Property and Casualty
Insurance
Company by Caymaanz Insurance
Company,
dated June 1, 2007.
|
10.31
|
|
Surplus
Note between United Property and Casualty Insurance Company
and the State
Board of Administration of Florida (SBA)
dated
September 22, 2006.
|
10.32
|
|
Form
of Interests and Liabilities Agreement to Contract of Reinsurance
issued
to United Property and Casualty Insurance
Company.
|
14
|
|
Code
of Business Conduct and Ethics.**
|
23.1
|
|
Consent
of Rothstein Kass.
|
23.2
|
|
Consent
of Ellenoff Grossman & Schole LLP (included in Exhibit
5.1).
|
23.3
|
|
Consent
of DeMeo, Young, McGrath, CPA.
|
23.4
|
|
Consent
of Piper Jaffray & Co.
|
24.1
|
|
Power
of Attorney (included on Signature
Page)
|
*
|
|
Previously
filed on Form 8-K filed with the Securities and Exchange Commission
on
October 12, 2007
|
**
|
|
Previously
filed on Form S-1 filed with the Securities and Exchange Commission
on
June 4, 2007
|
***
|
Incorporated
by reference to Annex A and B of the proxy statement filed as
part of this
Registration Statement
|
ANNEX
A
AGREEMENT
AND PLAN OF MERGER
BY
AND AMONG
FMG
ACQUISITION CORP.,
UNITED
SUBSIDIARY CORP.
AND
UNITED
INSURANCE HOLDINGS LC
Dated
as of April 2, 2008
INDEX
Defined
Term
|
|
Page
|
Acquisition
Proposal
|
|
45
|
Action
|
|
18
|
Additional
Consideration
|
|
3
|
affiliate
|
|
67
|
Affiliate
Transaction
|
|
28
|
Agreement
|
|
1
|
Amended
Member Agreement
|
|
7
|
Antitrust
Laws
|
|
50
|
Articles
|
|
7
|
Board
|
|
1
|
Burdensome
Condition
|
|
52
|
Business
Day
|
|
67
|
Cash
Consideration
|
|
2
|
Certificate
of Incorporation
|
|
31
|
Articles
of Merger
|
|
2
|
Certifications
|
|
35
|
Claim
Notice
|
|
53
|
Closing
|
|
2
|
Closing
Date
|
|
2
|
Code
|
|
6
|
Common
Stock
|
|
3
|
Company
|
|
1
|
Company
Actuarial Analyses
|
|
30
|
Company
Disclosure Schedule
|
|
8
|
Benefit
Plans
|
|
21
|
Company
Financials
|
|
13
|
Company
Indemnified Party
|
|
53
|
Company
Intellectual Property
|
|
20
|
Company
Material Adverse Effect
|
|
9
|
Company
Material Contract
|
|
18
|
Company
Permits
|
|
17
|
Company
Producers
|
|
29
|
Company
Real Property
|
|
25
|
Company
Reinsurance Agreements
|
|
29
|
Company
SAP Statements
|
|
14
|
Company
Subsidiary
|
|
8
|
Confidentiality
Agreement
|
|
45
|
Consent
|
|
12
|
Damages
|
|
52
|
DGCL
|
|
2
|
Director
|
|
1
|
Dissenting
Membership Interest
|
|
6
|
DOJ
|
|
50
|
DOL
|
|
22
|
Effective
Time
|
|
2
|
Encumbrances
|
|
12
|
Enforceability
Exceptions
|
|
12
|
Entity
Equity Holders
|
|
7
|
Entity
Lock Up Agreement
|
|
7
|
Environmental
Laws
|
|
27
|
ERISA
|
|
21
|
ERISA
Affiliate
|
|
21
|
Exchange
Act
|
|
35
|
Exchange
Fund
|
|
4
|
Exclusivity
Period
|
|
45
|
Executive
Lock Up Agreement
|
|
7
|
Expenses
|
|
63
|
Florida
Act
|
|
1
|
FTC
|
|
50
|
GAAP
|
|
3
|
Governmental
Authority
|
|
12
|
Hazardous
Substance
|
|
27
|
Indebtedness
|
|
10
|
Indemnitee
|
|
53
|
Indemnitor
|
|
53
|
Initial
Consideration
|
|
3
|
Intellectual
Property
|
|
21
|
IPO
Warrant Agreement
|
|
32
|
IPO
Warrants
|
|
32
|
IRS
|
|
22
|
knowledge
|
|
67
|
Law
|
|
12
|
Lock
Up Agreement
|
|
|
Licensed
Intellectual Property
|
|
20
|
Member
|
|
2
|
Member
Agreement
|
|
7
|
Membership
Interest
|
|
1
|
Merger
|
|
1
|
Merger
Consideration
|
|
3
|
Merger
Sub
|
|
1
|
Net
Income
|
|
3
|
Net
Income Target
|
|
3
|
Off-the-Shelf
Software Agreements
|
|
19
|
Order
|
|
18
|
Parent
|
|
1
|
Parent
Disclosure Schedule
|
|
31
|
Parent
Executive
|
|
7
|
Parent
Indemnified Party
|
|
52
|
Parent
Material Adverse Effect
|
|
34
|
Parent
Material Contracts
|
|
38
|
Parent
Representatives
|
|
|
Parent
SEC Reports
|
|
35
|
|
|
|
Party
|
|
1
|
Paying
Agent
|
|
4
|
Period
One
|
|
3
|
Period
Two
|
|
3
|
Permitted
Encumbrances
|
|
26
|
Person
|
|
67
|
Prospectus
|
|
64
|
Proxy
Statement
|
|
55
|
Registration
Statement
|
|
55
|
Representatives
|
|
45
|
Requisite
Regulatory Approvals
|
|
57
|
SAP
|
|
14
|
Sarbanes
Oxley Act
|
|
35
|
SEC
|
|
4
|
Secretary
of State
|
|
2
|
Securities
Act
|
|
13
|
Special
Meeting
|
|
56
|
SSAP
No. 62
|
|
30
|
Stock
Consideration
|
|
3
|
subsidiary
|
|
67
|
Surviving
Company
|
|
1
|
Required
Company Vote
|
|
12
|
Required
Parent Vote
|
|
33
|
Takeover
Laws
|
|
46
|
Tax
|
|
25
|
Tax
Returns
|
|
23
|
Tenant
Leases
|
|
25
|
Terminating
Company Breach
|
|
62
|
Terminating
Parent Breach
|
|
62
|
Termination
Date
|
|
61
|
Trust
Account
|
|
39
|
Trust
Agreement
|
|
39
|
Trust
Fund
|
|
39
|
Trustee
|
|
39
|
AGREEMENT
AND PLAN OF MERGER
This
Agreement and Plan of Merger (this “
Agreement
”)
is
made and entered into as of April 2, 2008 by and among United Insurance
Holdings
LC, a Florida limited liability company (the “
Company
”),
FMG
Acquisition Corp., a Delaware corporation (“
Parent
”),
and
United Subsidiary Corp., a Florida corporation and wholly owned subsidiary
of
Parent (“
Merger
Sub
”). Parent,
Merger Sub and the Company are sometimes referred to herein as a “
Party
”
and
collectively as the “
Parties
.”
WITNESSETH:
A.
Parent, Company, and Merger Sub intend to effect the merger of Merger Sub
with
and into the Company (the “
Merger
”),
with
the Company continuing as the surviving entity in the Merger, as a result
of
which the entire issued and outstanding membership interest of the Company
(the
“
Membership
Interest
”)
will
automatically be exchanged into the right to receive the Merger Consideration
(as defined herein), without interest, upon the terms and subject to the
conditions set forth in this Agreement and in accordance with the Florida
Business Corporation Act (the “
FBCA
”)
and
the Florida Limited Liability Company Act (the “
Florida
Act
”),
each
as amended.
B.
The
individuals constituting the board of managers or directors of the Company
(each
a “
Director
”
and
collectively the “
Board
”)
and
the members of the Board of Directors of each of Parent and Merger Sub
have
unanimously approved this Agreement and the Merger and each of them have
determined that this Agreement, the Merger and the other transactions
contemplated hereby are advisable and in the respective best interests
of the
Company, Parent and Merger Sub.
C.
The
Board
has resolved to recommend that its members adopt this Agreement, and the
Board
of Directors of Parent has resolved to recommend that its stockholders
adopt
this Agreement.
NOW,
THEREFORE, in consideration of the premises set forth above, which are
incorporated in this Agreement as if fully set forth below, and the
representations, warranties, covenants and agreements contained in this
Agreement, and intending to be legally bound hereby, the Parties hereto
agree as
follows:
ARTICLE
I
TERMS
OF THE MERGER
1.1
The
Merger
.
Upon
the
terms and subject to the conditions of this Agreement and in accordance
with the
Florida Act and the FBCA, at the Effective Time, Merger Sub shall be merged
with
and into the Company. Upon consummation of the Merger, the separate existence
of
Merger Sub shall thereupon cease, and the Company, as the surviving company
in
the Merger (the “
Surviving
Company
”),
shall
continue its limited liability company existence under the laws of the
State of
Florida as a wholly owned subsidiary of Parent. It is not intended
that the Merger shall be a tax free purchase and sale of the Membership
Interest
for federal, state and local Tax purposes.
1.2
The
Closing; Effective Time; Effect
.
(a)
Unless
this Agreement shall have been terminated and the transactions contemplated
hereby shall have been abandoned pursuant to Section 7.1_and subject to
the
satisfaction or waiver of the conditions set forth in Article VI hereof,
the
closing of the Merger (the “
Closing
”)
shall
take place by the exchange of original or facsimile or electronic copies
of the
respective Closing documents at 10:00 a.m. local time no later than the
third
Business Day after the date that all of the closing conditions set forth
in
Article VI have been satisfied or waived, unless another time, date or
place is
agreed upon in writing by the Parties hereto. The date on which the
Closing occurs is herein referred to as the “
Closing
Date
.”
(b)
Subject
to the terms and conditions hereof, concurrently with the Closing, the
Parties
shall file with the Secretary of State of the State of Florida (the
“
Secretary
of State
”)
articles of merger in accordance with the Florida Act and the FBCA (referred
to
collectively herein as the “
Articles
of Merger
”)
executed in accordance with the relevant provisions of the Florida Act
and the
FBCA and shall make all other filings or recordings required under the
Florida
Act, the FBCA and the General Corporation Law of the State of Delaware,
as
amended (the “
DGCL
”),
in
order to effect the Merger. The Merger shall become effective upon
the filing of the Articles of Merger or at such other time as is agreed
by the
Parties hereto and specified in the Articles of Merger. The time when
the Merger shall become effective is herein referred to as the “
Effective
Time
.”
(c)
From and
after the Effective Time, except as otherwise expressly set forth herein,
the
Surviving Company shall possess all properties, rights, privileges, powers
and
franchises of the Company and Merger Sub, and all of the claims, obligations,
liabilities, debts and duties of the Company and Merger Sub shall become
the
claims, obligations, liabilities, debts and duties of the Surviving
Company.
1.3
Exchange
of Securities
.
At
the
Effective Time, by virtue of the Merger and without any action on the part
of
the Company, Merger Sub or the holders of any securities of Merger Sub
or the
Company:
(a)
All
of
the Membership Interest issued and outstanding immediately prior to the
Effective Time (other than Dissenting Membership Interest) shall automatically
be converted into the right to receive an aggregate of:
(i)
Twenty
Five Million Dollars ($25,000,000) in cash (the “
Cash
Consideration
”)
payable, without interest, to the holders of Membership Interest of the
Company
(individually, a “
Member
”
and
collectively, the “
Members
”)
in
accordance with the allocation set forth in Exhibit A;
(ii)
In
addition to Section 1.3(a)(i), Eight Million Seven Hundred Fifty Thousand
(8,750,000) shares of Parent common stock, par value $0.0001 per share
(the
“
Common
Stock
”),
issuable to the Members in accordance with the allocation set forth in
Exhibit A
(the “
Stock
Consideration
”) (the
Cash Consideration and Stock Consideration, collectively, the “
Initial
Consideration
”);
and
(iii)
In
addition to Sections 1.3(a)(i)-(ii) and subject to Section 1.4, up to Five
Million Dollars ($5,000,000) in cash (the “
Additional
Consideration
”)
payable, without interest, to the Members in accordance with the allocation
set
forth in Exhibit A.
The
Initial Consideration and Additional Consideration, collectively, the
“
Merger
Consideration
”.
(b)
Each
issued and outstanding share of common stock, par value $0.001 per share,
of
Merger Sub shall be exchanged into membership interests of the Surviving
Company, and all such membership interests shall constitute the only outstanding
membership interests of the Surviving Company following the Effective
Time. From and after the Effective Time, any certificate representing
the common stock of Merger Sub shall be deemed for all purposes to represent
membership interests of the Surviving Company into which such shares of
common
stock of Merger Sub represented thereby were exchanged in accordance with
the
immediately preceding sentence.
(c)
All
Membership Interest (except the Dissenting Membership Interest) shall,
by virtue
of the Merger and without any action on the part of the Members, be
automatically cancelled and shall cease to exist, and each Member shall
cease to
have any rights with respect thereto, except the right to receive the Merger
Consideration.
(d)
It
is
expressly understood and agreed by the parties that the Merger Consideration
shall be reduced on a pro rata basis with respect to those Membership Interests
that constitute Dissenting Membership Interests. By way of example, in
the event
there are Dissenting Membership Interests equal to 3% of all Membership
Interests, the Merger Consideration shall be reduced by 3%.
1.4
Additional
Consideration
.
Parent
shall pay to the Paying Agent (as defined below) as part of the Exchange
Fund
(as defined below) for distribution to the Members Two Dollars ($2.00)
in cash
for each dollar exceeding the Net Income Target of the Surviving Company
during
either of the period of (i) July 1, 2008 through June 30, 2009 (“
Period
One
”),
and
(ii) January 1, 2009 through December 31, 2009 (“
Period
Two
”).
In no
event shall the Additional Consideration exceed $5,000,000 in aggregate.
For
purposes of this Section 1.4, “
Net
Income Target
”
shall
mean the Net Income of the Surviving Company equal to Twenty Five Million
Dollars ($25,000,000) and “
Net
Income
”
shall
mean the net income achieved by Surviving Company for the applicable period
computed according to United States generally accepted accounting principles
(“
GAAP
”)
applied in a manner consistent with the Company’s past practices (but excluding
(i) costs and expenses associated with this Agreement and the Merger and
(ii)
revenue associated with bonuses paid to the Company under any “take-out”
transactions completed before January 1, 2008). The Additional Consideration,
if
any, shall be payable to the Members within forty five (45) days after
the end
of Period One and/ or Period Two, respectively, and shall be allocated
among the
Members as set forth on Exhibit A. For illustration purposes, in the event
the
Surviving Company achieves a Net Income of $27,500,000 for Period One,
the
Additional Consideration shall equal $5,000,000. For illustration purposes,
in
the event the Surviving Company does not achieve the Net Income Target
for
Period One and achieves a Net Income of $27,500,000 for Period Two, the
Additional Consideration shall equal $5,000,000. For further illustration
purposes, in the event the Surviving Company achieves a Net Income of
$25,500,000 for Period One and achieves a Net Income of $26,000,000 for
Period
Two, the Additional Consideration shall equal $3,000,000, of which $1,000,000
will be paid for Period One and $2,000,000 for Period Two. For further
illustration purposes, in the event the Surviving Company does not achieve
the
Net Income Target for Period One or Period Two, no Additional Consideration
shall be payable to the Members.
1.5
Tender
of and Payment
.
(a)
Paying
Agent; Deposit of Exchange Fund
. Prior
to the Effective Time, Parent and Company shall execute a Paying Agent
Agreement
designating Continental Stock Transfer & Trust Company as the paying agent
for the Merger Consideration (the “
Paying
Agent
”). No
later than the Effective Time, Parent shall deposit with the Paying Agent
the
Cash Consideration by wire transfer of immediately available funds and
shall
deliver to the Paying Agent certificates representing the Stock Consideration,
to be held for the benefit of the Members (other than holders of Dissenting
Membership Interests). No later than (a) forty five (45) days after the
end of
Period One, and (b) as soon as practicable (but no later than five (5)
days)
after the filing of Parent’s Form 10-K with the Securities and Exchange
Commission (the “
SEC
”)
for
Period Two, Parent shall deposit with the Paying Agent Additional Consideration,
if any, by wire transfer of immediately available funds (collectively with
the
Initial Consideration, the “
Exchange
Fund
”). The
Exchange Fund shall be held by the Paying Agent pursuant to the Paying
Agent
Agreement. Pursuant to the Paying Agent Agreement, the Paying Agent
shall distribute the Exchange Fund to the holders of the Membership Interests
pursuant to the allocation set forth in Exhibit A.
(b)
Distribution
Procedures
. Promptly
after the Effective Time, Parent and the Surviving Company shall cause
the
Paying Agent to mail to each Member of record, as of the Effective Time,
a
letter of transmittal in such form attached to the Paying Agent Agreement
which
shall set forth instructions for distributing the Merger Consideration
in
respect of the Membership Interests pursuant to Section 1.3(a)
hereof. Upon delivery to the Paying Agent of the letter of
transmittal, properly completed and duly executed by each Member in accordance
with the instructions thereto, and such other documents as may be reasonably
required pursuant to such instructions, the holder of such Membership Interests
shall be entitled to receive in exchange therefore its allocable share
of the
Merger Consideration, to be mailed promptly following the Paying Agent’s receipt
of such letter of transmittal. No interest shall be paid or accrued
for the Cash Consideration or any Additional Consideration payable
hereunder. If payment of the Merger Consideration is to be made to a
Person other than the Person in whose name the Membership Interest is
registered, it shall be a condition of payment that the letter of transmittal
be
in proper form for such transfer and that the Person requesting such payment
shall have paid all transfer and other Taxes required by reason of the
issuance
to a Person other than the registered holder of the Membership Interest
or such
Person shall have established to the satisfaction of the Surviving Company
that
such Tax either has been paid or is not applicable. Until receipt from
a Member
of a duly executed letter of transmittal as contemplated by this Section
1.5
(which such letter shall contain such (i) customary representations and
warranties, including, but not limited to, such Members’ right, title and
interest in their Membership Interest; their acceptance of the terms and
conditions of the proposed transaction; and acknowledgement by each Member
that
any and all rights, preferences, privileges and obligations owed by the
Company
to the Members, whether contained in the Member’s Agreement or otherwise, shall
cease and be of no further force or effect and (ii) the lock-up provisions
contained in Exhibit C), each Membership Interest shall be deemed at all
times
after the Effective Time to represent only the right to receive its allocable
share of the Merger Consideration as contemplated by Section 1.3(a) hereof,
without interest thereon. The Paying Agent shall accept such letters
of transmittal upon compliance with such reasonable terms and conditions
as the
Paying Agent may impose to effect an orderly exchange thereof in accordance
with
normal exchange practices.
(c)
Transfer
Books; No Further Ownership Rights in the Membership Interest
. At
the Effective Time, the transfer books of the Company shall be closed,
and
thereafter there shall be no further registration of transfers of Membership
Interest on the records of the Company. From and after the Effective
Time, the Membership Interest outstanding immediately prior to the Effective
Time shall cease to have any rights, except as otherwise provided for herein
or
by applicable Law.
(d)
Termination
of Exchange Fund; No Liability
. Any
portion of the Exchange Fund (including any interest received with respect
thereto) that remains undistributed to the Members following the one year
anniversary of the end of Period Two shall be delivered to the Surviving
Company
upon demand, and any Members who have not theretofore complied with this
Section
1.5 shall thereafter be entitled to look only to the Surviving Company
(subject
to abandoned property, escheat or other similar Laws) only as general creditors
thereof with respect to the Merger Consideration, payable without any interest
thereon. Notwithstanding the foregoing, none of Parent, Merger Sub,
the Company, the Surviving Company or the Paying Agent shall be liable
to any
Person in respect of any cash held in the Exchange Fund delivered to a
public
official pursuant to any applicable abandoned property, escheat or similar
Law. If any Merger Consideration shall not have been collected prior
to one year (1) year after the end of Period Two (or immediately prior
to such
earlier date on which any cash would otherwise escheat to or become the
property
of any Governmental Authority), any such cash in respect of such unclaimed
Merger Consideration shall, to the extent permitted by applicable Law,
become
the property of Parent, free and clear of all claims or interest of any
Person
previously entitled thereto.
(f)
Fractional
Shares
.
No
certificates or scrip representing fractional shares of Parent Common Stock
or
book-entry credit of the same shall be issued upon the surrender of the
Membership Interest for exchange and such fractional share interests will
not
entitle the owner thereof to vote or to have any rights of a stockholder
of
Parent. Notwithstanding any other provision of this Agreement, each Member
who
exchanged Membership Interest pursuant to the Merger who would otherwise
have
been entitled to receive a fraction of a share of Common Stock shall receive,
in
lieu thereof, cash (without interest) in an amount equal to the product
of (i)
such fractional part of a share of Common Stock multiplied by (ii) the
closing
price for a share of Common Stock on the over the counter bulletin board,
or
such other public market on the date of the Effective Time or, if such
date is
not a Business Day, the Business Day immediately before the date on which
the
Effective Time occurs.
(g)
Withholding
Taxes
. Parent
and the Surviving Company shall be entitled to deduct and withhold, or
cause the
Paying Agent to deduct and withhold, from the Merger Consideration payable
to a
Member pursuant to the Merger any such amounts as are required under the
Internal Revenue Code of 1986, as amended (the “
Code
”),
or
any applicable provision of state, local or foreign Tax Law. To the
extent that such amounts are so withheld by Parent or the Surviving Company,
or
caused to be withheld by the Paying Agent, such withheld amounts shall
be
treated for all purposes of this Agreement as having been paid to the Members
in
respect of which such deduction and withholding was made by Parent, the
Surviving Company or the Paying Agent, as the case may be.
Notwithstanding
any provision of this Agreement to the contrary, to the extent that Members
are
entitled to appraisal rights under Chapter 608.4352 of the Florida Act,
Membership Interest issued and outstanding immediately prior to the Effective
Time with respect to which the holder thereof has properly exercised and
perfected the right to dissent from the Merger and to be paid fair value
in
accordance with the Florida Act and as to which, as of the Effective Time,
the
holder thereof has not failed to timely perfect or shall have not effectively
withdrawn or lost dissenters’ rights under the Florida Act (the “
Dissenting
Membership Interest
”),
shall
not be exchanged into or represent a right to receive the Merger Consideration
into which Membership Interest are exchanged pursuant to Section 1.3(a)
hereof,
but the holder thereof shall be entitled only to such rights as are granted
by
the Florida Act. Notwithstanding the immediately preceding sentence,
if any Member who demands appraisal rights with respect to his, her or
its
Membership Interest under the Florida Act effectively withdraws or loses
(through failure to perfect or otherwise) his, her or its appraisal rights,
then
as of the Effective Time or the occurrence of such event, whichever later
occurs, such Member’s Membership Interest shall thereupon be deemed to have been
exchanged as of the Effective Time into the right to receive the Merger
Consideration as provided in Section 1.3(a) hereof, without interest thereon,
and such Membership Interest shall no longer be Dissenting Membership
Interest. At the Effective Time, any holder of Dissenting Membership
Interest shall cease to have any rights with respect thereto, except the
rights
provided under the Florida Act and as provided in this Section
1.6. The Company shall give Parent (i) prompt written notice of any
notice of intent to demand fair value for any Membership Interest, withdrawals
of such notices, and any other instruments served pursuant to the Florida
Act
and received by the Company, and (ii) the opportunity to direct all negotiations
and proceedings with respect to demands for fair value of Membership Interest
under the Florida Act. The Company shall not, except with the prior
written consent of Parent, voluntarily make any payment with respect to
any
demands for fair value of Membership Interest or offer to settle or settle
any
such demands.
At
and
after the Effective Time and by virtue of the Merger, and until the same
have
been duly amended, (i) the Articles of Organization of the Company (the
“
Articles
”),
as in
effect immediately prior to the Effective Time, shall be the articles of
organization of the Surviving Company and (ii) the Member Agreement, as
amended,
of the Company (“
Member
Agreement
”)
shall
be amended and restated in its entirety in substantially the form set forth
in
Exhibit B (the “
Amended
Member Agreement
”)
and
such Amended Member Agreement shall be the governing document of the Surviving
Company.
(a)
At
and
after the Effective Time, the board of managers of the Surviving Company
and the
board of directors of Parent shall each consist of six (6) members and
each
comprised of three (3) members appointed by Parent (who initially will
be
Messrs. Gordon G. Pratt, Larry G. Swets, Jr. and James R. Zuhlke) and three
(3)
members appointed by the Company (who initially will be Messrs. Gregory
C.
Branch, Alec L. Pointevint, II and Kent G. Whittemore). Mr. Branch shall
initially serve as the Chairman of the Board of the Surviving Company and
Parent
and Mr. Pratt shall initially serve as Vice Chairman of the Board of the
Surviving Company and Parent, in each case until their respective successors
are
duly elected or appointed and qualify. Each of the Parties hereto
shall take all necessary action to effectuate the forgoing
sentence. At the Effective Time, the board of managers of the
Surviving Company and the board of directors of Parent each shall appoint
and
designate as officers of the Surviving Corporation and Parent respectively:
(i)
Mr. Donald J. Cronin as President & Chief Executive Officer, (ii) Mr.
Nicholas W. Griffin as Chief Financial Officer, and (iii) Mr. Melville
Atwood
Russell, II as Chief Underwriting Officer. If, at the Effective Time, a
vacancy
shall exist on the board of directors, board of managers or in any office
of the
Surviving Company or Parent, such vacancy may thereafter be filled in the
manner
provided by the Parent Organizational Documents, the Company’s Articles, the
Member Agreement or the Law.
(b)
Certain
officers and directors of Parent set forth below (“
Parent
Executives
”),
and
certain entities set forth below (“
Entity
Equity Holders
”)
shall
enter into “lock-up” agreements substantially in the form set forth in Exhibit C
(each an “
Executive
Lock
Up Agreement
”
or
“
Entity
Lock
Up Agreement
”)
pursuant to which such Parent Executives or Entity Equity Holders, as the
case
may be, shall agree, for a period of 90 days from the Effective Time, that
such
Parent Executives or Entity Equity Holders shall neither, on their own
behalf or
on behalf of entities, family members or trusts affiliated with or controlled
by
them, offer, issue, grant any option on, sell or otherwise dispose of any
Stock
Consideration issued to such Parent Executives and Entity Equity Holders,
as the
case may be, pursuant to Section 1.3(a) hereinabove, without the prior
consent
of Parent. Initially, the Parent Executives shall include Messrs. Branch,
Pointevint, Whittemore, Cronin, Griffin, Russell and Eugene Hearn and any
other
new officer or director of Parent. The Entity Equity Holders shall include
Synovus Financial Corp. and Minova Enterprises Ltd.
The
Merger shall have all further effects as specified in the applicable provisions
of the Florida Act.
If,
at
any time after the Effective Time, the Surviving Company shall consider
or be
advised that any deeds, bills of sale, assignments, assurances or any other
actions or things are necessary or desirable to vest, perfect or confirm
of
record or otherwise in the Surviving Company its right, title or interest
in, to
or under any of the rights, properties or assets of Merger Sub or the Company
or
otherwise carry out this Agreement, the officers and directors of the Surviving
Company shall be authorized to execute and deliver, in the name and on
behalf of
Merger Sub or the Company, all such deeds, bills of sale, assignments and
assurances and to take and do, in the name and on behalf of Merger Sub
or the
Company, all such other actions and things as may be necessary or desirable
to
vest, perfect or confirm any and all right, title and interest in, to and
under
such rights, properties or assets in the Surviving Company or otherwise
to carry
out this Agreement.
REPRESENTATIONS
AND WARRANTIES OF THE COMPANY
The
following representations and warranties by the Company to Parent and Merger
Sub
are qualified by the Company Disclosure Schedule, which sets forth certain
disclosures concerning the Company, its subsidiaries (each a “
Company
Subsidiary
”
and
collectively, the “
Company
Subsidiaries
”)
and
its business (the “
Company
Disclosure Schedule
”).
The
Company hereby represents and warrants to Parent and Merger Sub as
follows:
Each
of
the Company and the Company Subsidiaries is a corporation or limited liability
company duly organized, validly existing and in good standing under the
Laws of
the jurisdiction of its organization and has all requisite corporate power
and
authority to own, lease and operate its properties and to carry on its
business
as now being conducted. Each of the Company and the Company
Subsidiaries is duly qualified or licensed and in good standing to do business
in each jurisdiction in which the character of the property owned, leased
or
operated by it or the nature of the business conducted by it makes such
qualification or licensing necessary, except where the failure to be so
duly
qualified or licensed and in good standing would not reasonably be expected
to
have a Company Material Adverse Effect. The Company has heretofore
made available to Parent accurate and complete copies of the Company’s Articles
and Member Agreement and the certificate of incorporation, articles of
organization, by-laws, operating agreements and the equivalent organizational
documents of each of the Company Subsidiaries, each as currently in
effect. None of the Company or any Company Subsidiary is in violation
of any provision of the Articles, certificate of incorporation, Member
Agreement, the by-laws or its equivalent organizational documents as the
case
may be.
For
purposes of this Agreement, the term “
Company
Material Adverse Effect
”
shall
mean any occurrence, state of facts, change, event, effect or circumstance
that,
individually or in the aggregate, has, or would reasonably be expected
to have,
a material adverse effect on the assets, liabilities, business, results
of
operations or financial condition of the Company and the Company Subsidiaries,
other than any occurrence, state of facts, change, event, effect or circumstance
to the extent resulting from (i) political instability, acts of terrorism
or
war, changes in national, international or world affairs, or other calamity
or
crisis, including without limitation as a result of changes in the international
or domestic markets but only to the extent such events are deemed to have
a
direct impact on the existing operations of the Company and its future
operating
prospects, (ii) any change affecting the United States economy generally
or the
economy of any region in which such entity conducts business that is material
to
the business of such entity but only to the extent such events are deemed
to
have a direct impact on the existing operations of the Company and its
future
operating prospects, (iii) the announcement of the execution of this Agreement,
or the pendency of the consummation of the Merger, (iv) any change in GAAP
or
interpretation thereof after the date hereof, or (v) the execution and
performance of or compliance with this Agreement.
(a)
Except
for the Membership Interest held by the Members as set forth in Exhibit
A, no
Membership Interest are issued and outstanding. All of the outstanding
Membership Interest are duly authorized, validly issued, fully paid and
non-assessable and not subject to any preemptive or similar
rights. None of the outstanding securities of the Company has been
issued in violation of any foreign, federal or state securities
Laws. Except as set forth above, no Membership Interest, or other
equity or voting interests in the Company, or options, warrants or other
rights
to acquire any such Membership Interest or securities were issued, reserved
for
issuance or outstanding. The Company has not granted any restricted
Membership Interest, warrants or other rights to purchase Membership Interest
or
entered into any other agreements or commitments to issue any Membership
Interest and has not split, combined or reclassified any Membership
Interest.
(b)
The
Company directly or indirectly owns all of the capital stock of, or other
equity
interests in, the Company Subsidiaries. There are no (i) outstanding options,
warrants, puts, calls, convertible securities, preemptive or similar rights,
(ii) bonds, debentures, notes or other indebtedness having general
voting rights or that are convertible or exchangeable into securities having
such rights, or (iii) subscriptions or other rights, agreements, arrangements,
contracts or commitments of any character, relating to the issued or unissued
Membership Interest of, or other equity interests in, the Company or any
of the
Company Subsidiaries or obligating the Company or any of the Company
Subsidiaries to issue, transfer, deliver or sell or cause to be issued,
transferred, delivered, sold or repurchased any options or Membership Interest
of, or other equity interest in, the Company or any of the Company Subsidiaries
or securities convertible into or exchangeable for such shares or equity
interests, or obligating the Company or any of the Company Subsidiaries
to
grant, extend or enter into any such option, warrant, call, subscription
or
other right, agreement, arrangement or commitment for such equity interest.
There are no outstanding obligations of the Company or any of the Company
Subsidiaries to repurchase, redeem or otherwise acquire any Membership
Interest,
capital stock of, or other equity interests in, the Company or any of the
Company Subsidiaries or to provide funds to make any investment (in the
form of
a loan, capital contribution or otherwise) in any other entity.
(c)
There
are
no stockholders or members agreements, voting trusts or other agreements
or
understandings to which the Company or any Company Subsidiary is a party
with
respect to the voting of the Membership Interest or the capital stock or
equity
interests of any Company Subsidiary.
(d)
No
Indebtedness of the Company or any of the Company Subsidiaries contains
any
restriction upon (i) the prepayment of any of such Indebtedness, (ii) the
incurrence of Indebtedness by the Company or any of the Company Subsidiaries,
or
(iii) the ability of the Company or any of the Company Subsidiaries to
grant any
Encumbrance on its properties or assets. As used in this Agreement,
“
Indebtedness
”
means
(A) all indebtedness for borrowed money or for the deferred purchase price
of
property or services (other than Expenses and current trade liabilities
incurred
in the ordinary course of business and payable in accordance with customary
practices), (B) any other indebtedness that is evidenced by a note, bond,
debenture, credit agreement or similar instrument, (C) all obligations
under
financing leases, (D) all obligations in respect of acceptances issued
or
created, (E) all liabilities secured by an Encumbrance on any property
and (F)
all guarantee obligations.
(e)
Since
January 1, 2005, the Company has not declared or paid any distribution
or
dividend in respect of the Membership Interest and has not repurchased,
redeemed
or otherwise acquired any Membership Interest, and the Board has not authorized
any of the foregoing.
(a)
The
Company has provided to Parent true, complete and correct list of all Company
Subsidiaries and their respective jurisdictions of organization. Each
Company Subsidiary is wholly owned, directly or indirectly, by the
Company. All of the capital stock and other equity interests of the
Company Subsidiaries are owned, directly or indirectly, by the Company
free and
clear of any Encumbrance with respect thereto. All of the outstanding
shares of capital stock or other equity interests in each of the Company
Subsidiaries are duly authorized, validly issued, fully paid and non-assessable
and were issued free of preemptive rights and in compliance with applicable
Laws. No capital stock or other equity interests of any of the
Company Subsidiaries are or may become required to be issued or purchased
by
reason of any options, warrants, rights to subscribe to, puts, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into or exchangeable for, shares of any capital stock of, or
other
equity interests in, any Company Subsidiary, and there are no contracts,
commitments, understandings or arrangements by which any Company Subsidiary
is
bound to issue additional shares of its capital stock or other equity interests,
or options, warrants or rights to purchase or acquire any additional shares
of
its capital stock or other equity interests or securities convertible into
or
exchangeable for such shares or interests. Neither the Company nor
any Company Subsidiary owns any shares of capital stock or other equity
or
voting interests in (including any securities exercisable or exchangeable
for or
convertible into capital stock or other equity or voting interests in)
any other
Person other than publicly traded securities constituting less than five
percent
of the outstanding equity of the issuing entity, other than capital stock
or
other equity interest of the Company Subsidiaries owned by the Company
or
another Company Subsidiary.
(b)
Section
2.3(b)
of the
Company Disclosure Schedule lists the jurisdiction of domicile of each
Company
Subsidiary conducting insurance operations and all jurisdictions in which
each
such Company Subsidiary is licensed to write insurance
business. Neither the Company nor any Company Subsidiary is or has
been since January 1, 2005 “
commercially
domiciled” in any jurisdiction other than its jurisdiction of organization or is
or since January 1, 2005 otherwise has been treated as domiciled in a
jurisdiction other than its jurisdiction of organization. Each of the Company
Subsidiaries conducting insurance operations is (i) duly licensed or authorized
as an insurance company in its state of organization, (ii) duly licensed
or
authorized as an insurance company in each other jurisdiction where it
is
required to be so licensed or authorized and (iii) duly authorized in its
jurisdiction of incorporation and each other applicable jurisdiction to
write
each line of business reported as being written in the Company SAP
Statements. All of the Company Permits of such Company Subsidiaries
conducting insurance operations are in full force and effect and there
is no
proceeding or, to the knowledge of the Company, investigation to which
the
Company or any Company Subsidiary is subject before a Governmental Authority
that is pending or, to the knowledge of the Company, threatened that would
reasonably be expected to lead to the revocation, amendment, failure to
renew,
limitation, suspension or restriction of any such Company Permits.
The
Company has all requisite corporate power and authority to execute and
deliver
this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby, including the Merger,
(i)
have been duly and validly authorized by the Board of the Company, and
(ii) no
other corporate proceedings on the part of the Company are necessary to
authorize the execution and delivery of this Agreement or to consummate
the
transactions contemplated hereby, other than receipt of the Required Company
Vote. The affirmative vote of the Members of the Company holding at least
66
2/3% of the issued and outstanding Membership Interest (the “
Required
Company Vote
”)
is
necessary to approve and adopt this Agreement and to consummate the transactions
contemplated hereby (including the Merger). This Agreement has been duly
and validly executed and delivered by the Company and constitutes the legal,
valid and binding obligation of the Company, enforceable against the Company
in
accordance with its terms, except to the extent that enforceability thereof
may
be limited by applicable bankruptcy, insolvency, reorganization and moratorium
laws and other laws of general application affecting the enforcement of
creditors’ rights generally, and the fact that equitable remedies or relief
(including, but not limited to, the remedy of specific performance) are
subject
to the discretion of the court from which such relief may be sought
(collectively, the “
Enforceability
Exceptions
”).
No
consent, approval, waiver, authorization or permit of, or notice to or
declaration or filing with (each, a “
Consent
”),
any
nation or government, any state or other political subdivision thereof,
any
entity, authority or body exercising executive, legislative, judicial,
regulatory or administrative functions of or pertaining to government,
including
any governmental or regulatory authority, agency, department, board, commission,
administration or instrumentality, any court, tribunal or arbitrator or
any
self-regulatory organization, other than the Florida Office of Insurance
Regulation (each, a “
Governmental
Authority
”),
on
the part of the Company or any of the Company Subsidiaries is required
to be
obtained or made in connection with the execution, delivery or performance
by
the Company of this Agreement or the consummation by the Company of the
transactions contemplated hereby (including the Merger), other than (i)
the
filing of the Articles of Merger with the Secretary of State in accordance
with
the Florida Act, (ii) such filings as may be required in any jurisdiction
where
the Company or any Company Subsidiary is qualified or authorized to do
business
as a foreign corporation in order to maintain such qualification or
authorization, and (iii) pursuant to Antitrust Laws.
The
execution and delivery by the Company of this Agreement, the consummation
by the
Company of the Merger and the other transactions contemplated hereby, and
compliance by the Company with any of the provisions hereof, will not (i)
conflict with or violate any provision of the Articles, Member Agreement,
certificate of incorporation, operating agreement, by-laws or equivalent
organizational documents of the Company or any of the Company Subsidiaries,
(ii)
require any Consent under or result in a material violation or breach of,
or
constitute (with or without due notice or lapse of time or both) a material
default (or give rise to any right of termination, cancellation, amendment
or
acceleration) under, any Company Material Contract to which the Company
or any
of the Company Subsidiaries is a party or by which the Company’s or any of the
Company Subsidiaries’ assets are bound, (iii) result (immediately or with the
passage of time or otherwise) in the creation or imposition of any liens,
claims, mortgages, pledges, security interests, equities, options, assignments,
hypothecations, preferences, priorities, deposit arrangements, easements,
proxies, voting trusts or charges of any kind or restrictions (whether
on
voting, sale, transfer, disposition or otherwise) or other encumbrances
or
restrictions of any nature whatsoever, whether imposed by agreement, Law
or
equity, or any conditional sale contract, title retention contract or other
contract to give or refrain from giving any of the foregoing (the “
Encumbrances
”)
upon
any of the properties, rights or assets of the Company or any of the Company
Subsidiaries causing a Company Material Adverse Effect, or (iv) subject
to
obtaining the Consents from Governmental Authorities referred to in Section
2.5
hereof, conflict with, contravene or violate in any material respect any
foreign, federal, state or local Order, statute, law, rule, regulation,
ordinance, writ, injunction, arbitration award, directive, judgment, decree,
principle of common law, constitution, treaty or any interpretation thereof
enacted, promulgated, issued, enforced or entered by any Governmental Authority
(each, a “
Law
”
and
collectively, the “
Laws
”)
to
which the Company or any of the Company Subsidiaries or any of their respective
assets or properties is subject.
(a)
As
used
herein, the term “
Company
Financials
”
means
the Company’s audited consolidated financial statements (including, in each
case, any related notes thereto), consisting of the Company’s balance sheets,
statements of income and statements of cash flow, as of December 31, 2005,
December 31, 2006 and December 31, 2007 and the unaudited consolidated
financial
statements as of March 31, 2008 and any subsequent quarter. The Company
has made
or will make available to Parent true and complete copies of the Company
Financials. The Company Financials (i) in all material respects accurately
reflects or will reflect the Company’s books and records as of the times and for
the periods referred to therein, (ii) were prepared in accordance with
GAAP
applied on a consistent basis throughout the periods involved
(except
for the absence of footnotes and year-end audit adjustments in the case
of
unaudited Company Financials)
,
(iii)
fairly present in all material respects the consolidated financial position
of
the Company as of the respective dates thereof and the consolidated results
of
the Company’s operations and cash flows for the periods indicated and (iv) to
the extent required for inclusion in the Proxy Statement, comply in all
material
respects with the Securities Act of 1933, as amended (the “
Securities
Act
”),
Regulation S-X and the published general rules and regulations of the SEC.
(b)
The
Company has disclosed to Parent and the Company’s outside auditors and the Board
(i) all significant deficiencies or material weaknesses in the design or
operation of the Company’s internal controls over financial reporting that are
reasonably likely to adversely affect the Company’s ability to record, process,
summarize and report financial information and (ii) any fraud, whether
or not
material, that involves management or other employees who have a significant
role in the Company’s internal controls over financial reporting.
(c)
None
of
the Company, any Company Subsidiary, or any manager, director, officer,
or to
the Company’s knowledge, any auditor or accountant of the Company or any Company
Subsidiary or any employee of the Company or any Company Subsidiary has
received
any complaint, allegation, assertion or claim, whether or not in writing,
regarding the accounting or auditing practices, procedures, methodologies
or
methods of the Company or any Company Subsidiary or their respective internal
accounting controls, including any complaint, allegation, assertion or
claim
that the Company or any Company Subsidiary has engaged in questionable
accounting or auditing practices. No attorney representing the Company
or any
Company Subsidiary, whether or not employed by the Company or any Company
Subsidiary, has reported evidence of any violation of consumer protection,
insurance (including regulations and Orders promulgated by the Florida
Office of
Insurance Regulation) or securities Laws, breach of fiduciary duty or similar
violation by the Company or any of its officers, Directors, employees or
agents
to the Board or any committee thereof or to any Director or executive officer
of
the Company.
(d)
As
used
herein, the term “
Company
SAP Statements
”
means
the statutory statements of the Company and each of the Company Subsidiaries
as
filed with the Florida Office of Insurance Regulation for the years ended
December 31, 2005, December 31, 2006 and December 31, 2007 and any such
quarterly statutory statements filed subsequent to the date
hereof. The Company has made available to Parent true and complete
copies of the Company SAP Statements filed as of the date of this Agreement
with
respect to the Company and with respect to the Company Subsidiaries required
to
file such Company SAP Statements. The Company and each of the Company
Subsidiaries has filed or submitted, or will file or submit, all Company
SAP
Statements required to be filed with or submitted to the Florida Office
of
Insurance Regulation on forms prescribed or permitted by the Florida Office
of
Insurance Regulation. The Company SAP Statements were, and any
Company SAP Statements filed after the date hereof will be, prepared in
all
material respects in conformity with statutory accounting principles
(“
SAP
”)
consistently applied for the periods covered thereby, and the Company SAP
Statements present, and any Company SAP Statements filed after the date
hereof
will present, in all material respects the statutory financial position
of the
Company and such Company Subsidiaries as of the respective dates thereof
and the
results of operations of the Company and such Company Subsidiaries for
the
respective periods then ended. The Company SAP Statements complied,
and the Company SAP Statements filed after the date hereof will comply,
in all
material respects with all applicable Laws when filed, and no deficiency
has
been asserted with respect to any Company SAP Statements filed prior to
the date
hereof by the Florida Office of Insurance Regulation or any other Governmental
Authority. The annual statutory balance sheets and income statements
included in the Company SAP Statements as of the date hereof have been,
where
required by applicable Law, audited by Thomas, Howell & Ferguson, P.A. and
the Company has made available to Parent true and complete copies of all
audit
opinions related thereto. Except as indicated therein, all assets
that are reflected as admitted assets on the Company SAP Statements comply
in
all material respects with all applicable Laws. The Company and
Company Subsidiaries use only prescribed (and no permitted) practices in
the
preparation of the Company SAP Statements.
(e)
The
policy reserves and other actuarial amounts carried on the Company SAP
Statements of the Company and each Company Subsidiary, as of the respective
dates of such Company SAP Statements, (i) were in compliance in all material
respects with the requirements for reserves established by the Florida
Office of
Insurance Regulation, (ii) have been computed in all material respects
in
accordance with the requirements for reserves established by the Florida
Office
of Insurance Regulation, (iii) were determined in all material respects
in
accordance with generally accepted actuarial principles in effect at such
time,
consistently applied and prepared in accordance with applicable SAP, (iv)
were
computed on the basis of methodologies consistent in all material respects
with
those used in computing the corresponding reserves in prior fiscal years,
except
as otherwise noted in the Company SAP Statements, (v) have been computed
on the
basis of assumptions consistent with those used to compute the corresponding
items in such financial statements, (vi) were fairly stated in all material
respects in accordance with sound actuarial principles, and (vii) include
provisions for all actuarial reserves and related items which ought to
be
established in accordance with applicable Laws and in accordance, in all
material respects, with prudent insurance practices generally followed
in the
insurance industry. To the knowledge of the Company, there are no
facts or circumstances that could reasonably necessitate any material change
in
such reserves above those reflected in the Company SAP Statements (other
than
increases or decreases consistent with past experience, computed in a manner
consistent with past practice, and resulting from the ordinary course of
business).
(f)
Except
for assessments of state mandated funds and associations, no claim or assessment
is pending or, to the knowledge of the Company, threatened against any
Company
Subsidiary.
(a)
Except
as
consented to in writing by Parent (and excluding the Merger), since December
31,
2007, the Company and the Company Subsidiaries have conducted their respective
businesses in the ordinary course of business consistent with past practice
and
there has not occurred any action that would constitute a breach of Section
4.1
if such action were to occur or be taken after the date of this
Agreement.
(b)
Since
December 31, 2007, there has not been any fact, change, effect, occurrence,
event, development or state of circumstances that has had or would reasonably
be
expected to have, individually or in the aggregate, a Company Material
Adverse
Effect.
Except
as
and to the extent reflected or reserved against in the Company Financials,
neither the Company nor any of the Company Subsidiaries has incurred any
liabilities or obligations of the type required to be reflected on a balance
sheet in accordance with GAAP that is not adequately reflected or reserved
on or
provided for in the Company Financials, other than liabilities of the type
required to be reflected on a balance sheet in accordance with GAAP that
have
been incurred since March 31, 2008 in the ordinary course of
business.
Neither
the Company nor any of the Company Subsidiaries is in conflict with, or
in
default or violation of, nor since January 1, 2005 has it received any
notice of
any conflict with, or default or violation of, (A) any applicable Law by
which
it or any property or asset of the Company or any Company Subsidiary is
bound or
affected, or (B) any Company Material Contract to which the Company or
any
Company Subsidiary is a party or by which the Company or any Company Subsidiary
or any property, asset or right of the Company or any Company Subsidiary
is
bound or affected, except, in each case, for any such conflicts, defaults
or
violations that would not reasonably be expected to be material to the
Company
or any of its Subsidiaries. Notwithstanding the generality of the
foregoing, (x) the Company and each Company Subsidiary and, to the knowledge
of
the Company, their respective agents, have marketed, sold and issued insurance
products in compliance in all material respects with all Laws applicable
to the
business of the Company and such Company Subsidiary and in the respective
jurisdictions in which such products have been sold, (y) since January
1, 2005,
the Company and each Company Subsidiary have given or made all required
notices,
submissions, reports or other filings under applicable Law, including insurance
holding company statutes, and (z) all contracts, agreements, arrangements
and
transactions in effect between the Company, any Company Subsidiary and
any
affiliate are in compliance in all material respects with the requirements
of
all applicable insurance holding company statutes. There is no pending
or, to
the knowledge of the Company, threatened proceeding or investigation to
which
the Company or a Company Subsidiary is subject before any Governmental
Authority
regarding whether the Company or any of the Company Subsidiaries has violated
in
any material respect (and none of the Company or any Company Subsidiary
has
received notice since January 1, 2005 of any material violation of or
noncompliance with any Law applicable to the Company or any Company Subsidiary,
or directing the Company or any Company Subsidiary to take any remedial
action
with respect to such applicable Law or otherwise, and no material deficiencies
of the Company or any Company Subsidiary have been asserted to the Company
or
any Company Subsidiary by any Governmental Authority with respect to possible
violations of) any applicable Laws. Since January 1, 2005, the Company
and the
Company Subsidiaries have filed all material reports, statements, documents,
registrations, filings or submissions required to be filed with any insurance
regulatory authority or Governmental Authority, and all such reports,
registrations, filings and submissions are in compliance (and complied
at the
relevant time) with applicable Law and no material deficiencies have been
asserted by any such Governmental Authority since January 1, 2005 with
respect
to any reports, statements, documents, registrations, filings or submissions
required to be filed with respect to the Company or the Company Subsidiaries
with any Governmental Authority that have not been remedied. Since
January 1, 2005, the businesses of the Company and each Company Subsidiary
are
and have been conducted in compliance in all material respects with any
applicable Laws.
(a)
There
are
no (1) written agreements, consent agreements, memoranda of understanding,
commitment letters, cease and desist orders, or similar undertakings to
which
the Company or any Company Subsidiary is a party, on the one hand, and
any
Governmental Authority is a party or addressee, on the other hand, (2)
Orders or
directives of or supervisory letters from a Governmental Authority specifically
with respect to the Company or any Company Subsidiary, or (3) resolutions
or
policies or procedures adopted by the Company or a Company Subsidiary at
the
request of a Governmental Authority, that (A) limit in any material respect
the ability of the Company or any of the Company Subsidiaries to issue
insurance
policies, (B) in any manner impose any requirements on the Company or any
of the
Company Subsidiaries in respect of risk-based capital requirements that
materially add to or otherwise materially modify in any respect the risk-based
capital requirements imposed under applicable Laws, (C) require the Company
or any of its affiliates to make capital contributions, purchase surplus
notes
or make loans to a Company Subsidiary, or (D) in any manner relate to the
ability of the Company or any of the Company Subsidiaries to pay dividends
or
otherwise materially restrict the conduct of business of the Company or
any of
the Company Subsidiaries in any respect.
(b)
The
Company and the Company Subsidiaries hold all permits, licenses, franchises,
grants, authorizations, consents, exceptions, variances, exemptions, orders
and
other governmental authorizations, certificates, consents and approvals
necessary to lawfully conduct their businesses as presently conducted and
contemplated to be conducted, and to own, lease and operate their assets
and
properties (collectively, the “
Company
Permits
”),
all
of which are in full force and effect, and no suspension or cancellation
of any
of the Company Permits is pending or, to the knowledge of the Company,
threatened, except where the failure of any Company Permits to have been
in full
force and effect, or the suspension or cancellation of any of the Company
Permits, would not reasonably be expected to have, individually or in the
aggregate, a Company Material Adverse Effect.
Section
2.11(b)
of the
Company Disclosure Schedule sets forth each Company Permit. The Company
and the
Company Subsidiaries are not in violation in any material respect of the
terms
of any Company Permit.
(c)
No
investigation, review or market conduct examination by any Governmental
Authority with respect to the Company or any Company Subsidiary is pending
or,
to the knowledge of the Company, threatened, nor does the Company have
knowledge
of any Governmental Authority’s intention to conduct any such investigation or
review.
There
is
no private, regulatory or governmental inquiry, action, suit, proceeding,
litigation, claim, arbitration or investigation (each, an “
Action
”)
pending before any arbitrator, agency, court or tribunal, foreign or domestic,
or, to the knowledge of the Company, threatened against the Company, any
of the
Company Subsidiaries or any of their respective properties, rights or assets
or
any of their respective managers, officers or directors (in their capacities
as
such) that would reasonably be expected to have, individually or in the
aggregate, a Company Material Adverse Effect. There is no decree,
directive, order, writ, judgment, stipulation, determination, decision,
award,
injunction, temporary restraining order, cease and desist order or other
order
by, or any capital plan, supervisory agreement or memorandum of understanding
with any Governmental Authority (each, an “
Order
”)
binding against the Company, any of the Company Subsidiaries or any of
their
respective properties, rights or assets or any of their respective managers,
officers or directors (in their capacities as such) that would prohibit,
prevent, enjoin, restrict or materially alter or delay any of the transactions
contemplated by this Agreement (including the Merger), or that would reasonably
be expected to have, individually or in the aggregate, a Company Material
Adverse Effect. The Company and the Company Subsidiaries are in
material compliance with all Orders. There is no material Action
that the Company or any of the Company Subsidiaries has pending against
other
parties.
There
is
no agreement or Order binding upon the Company or any of the Company
Subsidiaries that has or could reasonably be expected to have the effect
of
prohibiting, preventing, restricting or impairing in any respect any business
practice of the Company or any of the Company Subsidiaries as their businesses
are currently conducted, any acquisition of property by the Company or
any of
the Company Subsidiaries, the conduct of business by the Company or any
of the
Company Subsidiaries as currently conducted, or restricting in any material
respect the ability of the Company or any of the Company Subsidiaries from
engaging in business as currently conducted or from competing with other
parties.
(a)
Section
2.14
of the
Company Disclosure Schedule sets forth a list of, and the Company has made
available to Parent, true, correct and complete copies of, each written
contract, agreement, commitment, arrangement, lease, license, permit or
plan and
each other instrument to which the Company or any Company Subsidiary is
a party
or by which the Company or any Company Subsidiary is bound as of the date
hereof
(each, a “
Company
Material Contract
”)
that:
(ii)
contains
covenants that materially limit the ability of the Company or any Company
Subsidiary (or which, following the consummation of the Merger, could materially
restrict the ability of the Surviving Company or any of its affiliates)
(A) to
compete in any line of business or with any Person or in any geographic
area or
to sell, supply, price, develop or distribute any service, product or asset,
including any non-competition covenants, exclusivity restrictions, rights
of
first refusal or most-favored pricing clauses or (B) to purchase or acquire
an
interest in any other entity, except, in each case, for any such contract
that
may be canceled without any penalty or other liability to the Company or
any
Company Subsidiary upon notice of 60 days or less;
(iii)
involves
any joint venture, partnership, limited liability or other similar agreement
or
arrangement relating to the formation, creation, operation, management
or
control of any partnership or joint venture that is material to the business
of
the Company and the Company Subsidiaries, taken as a whole;
(iv)
involves
any exchange traded, over-the-counter or other swap, cap, floor, collar,
futures
contract, forward contract, option or other derivative financial instrument
or
contract, based on any commodity, security, instrument, asset, rate or
index of
any kind or nature whatsoever, whether tangible or intangible, including
currencies, interest rates, foreign currency and indices;
(v)
relates
to indebtedness (whether incurred, assumed, guaranteed or secured by any
asset)
having an outstanding principal amount in excess of $50,000;
(vi)
was
entered into after January 1, 2005 or has not yet been consummated, and
involves
the acquisition or disposition, directly or indirectly (by merger or otherwise),
of assets or capital stock or other equity interests of another
Person;
(vii)
by
its
terms calls for aggregate payments by the Company or the Company Subsidiaries
under such contract of more than $50,000 per year;
(ix)
involves
any managers, directors or executive officers of the Company or any Company
Subsidiary that cannot be cancelled by the Company (or the applicable Company
Subsidiary) within 60 days’ notice without liability, penalty or
premium;
(x)
obligates
the Company or any Company Subsidiary to provide indemnification or a guarantee
in excess of $50,000;
(xi)
obligates
the Company or any Company Subsidiary to make any capital commitment or
expenditure (including pursuant to any joint venture);
(xiii)
provides
for any confidentiality or standstill arrangements.
(b)
With
respect to each Company Material Contract: (i) the Company Material
Contract is legal, valid, binding and enforceable in all material respects
against the Company or the Company Subsidiary party thereto and, to the
Company’s knowledge, the other party thereto, and in full force and effect; (ii)
except as set forth in Section 2.14 of the Disclosure Schedule, the consummation
of the transactions contemplated by the Agreement will not affect the terms,
validity or enforceability of the Company Material Contract against the
Surviving Company or such Company Subsidiary and, to the Company’s knowledge,
the other party thereto; (iii) neither the Company nor any of the Company
Subsidiaries is in breach or default in any material respect, and no event
has
occurred that with the passage of time or giving of notice or both would
constitute such a breach or default by the Company or any of the Company
Subsidiaries, or permit termination or acceleration by the other party,
under
the Company Material Contract; and (iii) to the Company’s knowledge, no other
party to the Company Material Contract is in breach or default in any material
respect, and no event has occurred that with the passage of time or giving
of
notice or both would constitute such a breach or default by such other
party, or
permit termination or acceleration by the Company or any of the Company
Subsidiaries, under such Company Material Contract.
(a)
Section
2.15(a)
of the
Company Disclosure Schedule contains a list of (A) all registered Intellectual
Property, Intellectual Property that is the subject of a pending application
for
registration, and material unregistered Intellectual Property, in each
case that
is, owned by the Company or any of the Company Subsidiaries and (B) all
material
Intellectual Property, other than Off-the-Shelf Software Agreements, licensed,
used or held for use by the Company or any of the Company Subsidiaries
in the
conduct of its business (“
Licensed
Intellectual Property
”). Except
where failure to own, license or otherwise possess such rights has not
had and
would not reasonably be expected to result in a Company Material Adverse
Effect,
each of the Company and the Company Subsidiaries has (i) all right, title
and
interest in and to all Company Intellectual Property owned by it, (the
“
Company
Intellectual Property
”)
free
and clear of all Encumbrances, other than Permitted Encumbrances and (ii)
all
necessary proprietary rights in and to all of its Licensed Intellectual
Property, free and clear of all Encumbrances, other than Permitted
Encumbrances. Neither the Company nor any of the Company Subsidiaries
has received any notice alleging that it has infringed, diluted or
misappropriated, or, by conducting its business as proposed, would infringe,
dilute or misappropriate, the Intellectual Property rights of any Person,
and to
the knowledge of the Company there is no valid basis for any such
allegation. Neither the execution and delivery of this Agreement nor
the consummation of the transactions contemplated hereby will impair or
materially alter the Company’s or any Company Subsidiary’s rights to any Company
Intellectual Property or Licensed Intellectual Property. To the
knowledge of the Company, there is no unauthorized use, infringement or
misappropriation of the Company Intellectual Property or Licensed Intellectual
Property by any third party. All of the rights within the Company
Intellectual Property and Licensed Intellectual Property are valid, enforceable
and subsisting, and there is no Action that is pending or, to the Company’s
knowledge, threatened that challenges the rights of the Company or any
of the
Company Subsidiaries in respect of any Company Intellectual Property or
Licensed
Intellectual Property or the validity, enforceability or effectiveness
thereof. The Company Intellectual Property and the Licensed
Intellectual Property constitute all material Intellectual Property used
in or
necessary for the operation by the Company and the Company Subsidiaries
of their
respective businesses as currently conducted. Neither the Company nor
any of the Company Subsidiaries is in breach or default in any material
respect
(or would with the giving of notice or lapse of time or both be in such
breach
or default) under any license to use any of the Licensed Intellectual
Property.
(b)
For
purposes of this Agreement, “
Intellectual
Property
”
means
(A) United States, international and foreign patents and patent applications,
including divisionals, continuations, continuations-in-part, reissues,
reexaminations and extensions thereof and counterparts claiming priority
therefrom; utility models; invention disclosures; and statutory invention
registrations and certificates; (B) United States and foreign registered,
pending and unregistered trademarks, service marks, trade dress, logos,
trade
names, corporate names and other source identifiers, domain names, Internet
sites and web pages; and registrations and applications for registration
for any
of the foregoing, together with all of the goodwill associated therewith;
(C)
United States and foreign registered and unregistered copyrights, and
registrations and applications for registration thereof; rights of publicity;
and copyrightable works; (D) all inventions and design rights (whether
patentable or unpatentable) and all categories of trade secrets as defined
in
the Uniform Trade Secrets Act, including business, technical and financial
information; and (E) confidential and proprietary information, including
know-how.
(a)
Section
2.16(a)
of the
Company Disclosure Schedule lists, with respect to the Company and the
Company
Subsidiaries and any trade or business (whether or not incorporated) that
is
treated as a single employer with the Company and the Company Subsidiaries
within the meaning of Section 414(b), (c), (m) or (o) of the Code (an
“
ERISA
Affiliate
”),
(i)
all employee benefit plans (as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended (“
ERISA
”)),
(ii)
loans to managers, officers and directors other than advances for expense
reimbursements incurred in the ordinary course of business and any securities
option, securities stock purchase, phantom securities, securities appreciation
right, equity-related, supplemental retirement, severance, sabbatical,
medical,
dental, vision care, disability, employee relocation, cafeteria benefit
(Code
Section 125) or dependent care (Code Section 129), life insurance or accident
insurance plans, programs, agreements or arrangements, (iii) all bonus,
pension,
retirement, profit sharing, savings, deferred compensation or incentive
plans,
programs, policies, agreements or arrangements, (iv) other fringe, perquisite,
or employee benefit plans, programs, policies, agreements or arrangements
and
(v) any current or former employment, consulting, change of control, retention
or executive compensation, termination or severance plans, programs, policies,
agreements or arrangements, written or otherwise, as to which unsatisfied
liabilities or obligations (contingent or otherwise) remain for the benefit
of,
or relating to, any present or former employee, consultant, manager or
director,
or which could reasonably be expected to have any liabilities or obligations
(together, the “
Benefit
Plans
”).
(b)
Any
Company Benefit Plan intended to be qualified under Section 401(a) of the
Code
has either obtained from the Internal Revenue Service (“
IRS
”)
a
current favorable determination letter as to its qualified status under
the
Code, including all amendments to the Code effected by the Tax Reform Act
of
1986, or has applied to the IRS for such a determination letter prior to
the
expiration of the requisite period under applicable Treasury Regulations
or IRS
pronouncements in which to apply for such determination letter and to make
any
amendments necessary to obtain a favorable determination or has been established
under a standardized prototype plan for which an IRS opinion letter has
been
obtained by the plan sponsor and is valid as to the adopting
employer.
(c)
There
has
been no “
prohibited
transaction,” as such term is defined in Section 406 of ERISA and Section 4975
of the Code, by the Company or, to the knowledge of the Company, by any
trusts
created thereunder, any trustee or administrator thereof or any other Person,
with respect to any Company Benefit Plan. Each Company Benefit Plan
has been administered in accordance with its terms and in material compliance
with the requirements prescribed by any and all applicable Laws (including
ERISA
and the Code), and the Company and each ERISA Affiliate have performed
in all
material respects all obligations required to be performed by them under,
are
not in any respect in default under or violation of, and have no knowledge
of
any default or violation by any other party to, any of the Company Benefit
Plans. All contributions and premiums required to be made by the
Company or any ERISA Affiliate to any Company Benefit Plan have been made
on or
before their due dates, including any legally permitted
extensions. No Action has been brought, or to the knowledge of the
Company is threatened, against or with respect to any such Company Benefit
Plan,
including any audit or inquiry by the IRS, United States Department of
Labor
(the “
DOL
”)
or
other Governmental Authority (other than as would not result in a Company
Material Adverse Effect). To the knowledge of the Company, each
Company Benefit Plan that is a “
nonqualified
deferred compensation plan” within the meaning of Section 409A of the Code and
any awards thereunder, in each case that is subject to Section 409A of
the Code,
has been operated in good faith compliance, in all material respects, with
Section 409A of the Code since January 1, 2005.
(d)
Except
as
otherwise provided in this Agreement, the consummation of the transactions
contemplated by this Agreement will not, either alone or in combination
with any
other event or events, (i) entitle any current or former employee, manager,
director or consultant of the Company or any of the Company Subsidiaries
to any
payment (whether of severance pay, unemployment compensation, golden parachute,
bonus or otherwise), (ii) accelerate, forgive indebtedness, vest, distribute,
or
increase benefits or obligation to fund benefits with respect to any employee
or
director of the Company or any of the Company Subsidiaries, or (iii) accelerate
the time of payment or vesting of Company Options, or increase the amount
of
compensation due any such employee, director or consultant.
(e)
No
amounts payable under any of the Company Benefit Plans or any other contract,
agreement or arrangement with respect to which the Company or any of the
Company
Subsidiaries may have any liability will not be deductible for federal
income
Tax purposes by virtue of Section 162(m) or Section 280G of the
Code. None of the Company Benefit Plans contains any provision
requiring a gross-up pursuant to Section 280G or 409A of the Code or similar
Tax
provisions.
(a)
The
Company has or will have timely filed, or caused to be timely filed, all
material federal, state, local and foreign Tax returns and reports required
to
be filed by it or the Company Subsidiaries (taking into account all available
extensions) (collectively, “
Tax
Returns
”),
which
such Tax Returns are true, accurate, correct and complete, and has paid,
collected or withheld, or caused to be paid, collected or withheld set
forth on
such Tax Returns, all material Taxes required to be paid, collected or
withheld,
other than such Taxes for which adequate reserves in the Company Financials
have
been established in accordance with GAAP.
Section
2.17
of the
Company Disclosure Schedule sets forth each jurisdiction where the Company
and
each Company Subsidiary files or is required to file a Tax Return. There
are no
claims, assessments, audits, examinations, investigations or other proceedings
pending against the Company or any of the Company Subsidiaries in respect
of any
Tax, and neither the Company nor any of the Company Subsidiaries has been
notified in writing of any proposed Tax claims or assessments against the
Company or any of the Company Subsidiaries (other than, in each case, claims
or
assessments for which adequate reserves in the Company Financials have
been
established in accordance with GAAP or are immaterial in amount). There
are no
material liens with respect to any Taxes upon any of the Company’s or its
Subsidaries’ assets, other than (i) Taxes, the payment of which is not yet due,
or (ii) Taxes or charges being contested in good faith by appropriate
proceedings and for which adequate reserves in the Company Financials have
been
established in accordance with GAAP. Neither the Company nor any of the
Company
Subsidiaries has any outstanding waivers or extensions of any applicable
statute
of limitations to assess any material amount of Taxes. There are no
outstanding requests by the Company or any of the Company Subsidiaries
for any
extension of time within which to file any Tax Return or within which to
pay any
Taxes shown to be due on any Tax Return. There are no Encumbrances
for material amounts of Taxes on the assets of the Company or any of the
Company
Subsidiaries, except for statutory liens for current Taxes not yet due
and
payable or Taxes that are being contested in good faith and for which adequate
reserves in the Company Financials have been established in accordance
with
GAAP.
(c)
Neither
the Company nor any of the Company Subsidiaries is or (i) has been at any
time
within the five-year period ending on the date hereof a United States real
property holding corporation within the meaning of Section 897(c)(2) of
the Code
and (ii) has ever been a member of any consolidated, combined, unitary or
affiliated group of corporations for any Tax purposes other than a group
of
which the Company is or was the common parent corporation.
(d)
Neither
the Company nor any of the Company Subsidiaries has made any change in
accounting method or received a ruling from, or signed an agreement with,
any
taxing authority that would reasonably be expected to have a Company Material
Adverse Effect following the Closing.
(e)
As
of the
date hereof, neither the Company nor any of the Company Subsidiaries is
being
audited by any taxing authority or has been notified by any Tax authority
that
any such audit is contemplated or pending.
(h)
Since
December 31, 2005, neither the Company nor any of the Company Subsidiaries
have
(i) changed any Tax accounting methods, policies or procedures except as
required by a change in Law, (ii) made, revoked, or amended any material
Tax
election, (iii) filed any amended Tax Returns or claim for refund, or (iv)
entered into any closing agreement affecting or otherwise settled or compromised
any material Tax liability or refund.
(i)
For
purposes of this Agreement, the term “
Tax
”
or
“
Taxes
”
shall
mean any tax, custom, duty, governmental fee or other like assessment or
charge
of any kind whatsoever, imposed by any Governmental Authority (including
any
federal, state, local, foreign or provincial income, gross receipts, property,
sales, use, net worth, premium, license, excise, franchise, employment,
payroll,
alternative or added minimum, ad valorem, transfer or excise tax) together
with
any interest, addition or penalty imposed thereon.
Except
for Raymond James & Associates, Inc., the fees of which will be borne by the
Company, no broker, finder or investment banker is entitled to any brokerage,
finder’s or other fee or commission in connection with the transactions
contemplated hereby based upon arrangements made by or on behalf of the
Company.
(a)
Section
2.19(a)
of the
Company Disclosure Schedule contains a correct and complete list of all
real
property and interests in real property leased or subleased by the Company
or
any of the Company Subsidiaries from or to any Person (collectively, the
“
Company
Real Property
”). The
list set forth in
Section
2.19(a)
of the
Company Disclosure Schedule contains, with respect to each of the Company
Real
Properties, all existing leases, subleases, licenses or other occupancy
contracts to which the Company or any of the Company Subsidiaries is a
party or
by which the Company or any of the Company Subsidiaries is bound, and all
amendments, modifications, extensions and supplements thereto (collectively,
the
“
Tenant
Leases
”),
the
terms of which have been complied with by the Company and any Company Subsidiary
in all material respects. The Company Real Property set forth in
Section
2.19(a)
of the
Company Disclosure Schedule comprises all of the real property necessary
and/ or
currently used in the operations of the business of the Company and the
Company
Subsidiaries. The Company does not own any real
property. Except as would not have a Company Material Adverse Effect,
the Company or a Company Subsidiary has good and valid title to all of
its
personal property, assets and rights, free and clear of all Encumbrances
other
than Permitted Encumbrances.
(b)
A
correct
and complete copy of each Tenant Lease has been furnished to Parent prior
to the
date hereof. The Company or the Company Subsidiary party thereto has
a valid, binding and enforceable leasehold interest under each of the Tenant
Leases, free and clear of all Encumbrances other than Permitted Encumbrances,
and each of the Tenant Leases is in full force and effect. Neither
the Company or any of the Company Subsidiaries nor, to the knowledge of
the
Company, any other party to any Tenant Lease is in breach of or in default
under, in any material respect, any of the Tenant Leases. The Company
and the Company Subsidiaries enjoy peaceful and undisturbed possession
under all
such Tenant Leases, have not received notice of any material default,
delinquency or breach on the part of the Company or any Company Subsidiary,
and
there are no existing material defaults (with or without notice or lapse
of time
or both) by the Company or any Company Subsidiary or, to the knowledge
of the
Company, any other party thereto. For purposes of this Agreement, the
term “
Permitted
Encumbrances
”
means
(i) Encumbrances with respect to Taxes either not yet due or being contested
in
good faith in appropriate proceedings (and for which adequate reserves
in the
Company Financials have been established in accordance with GAAP); and
(ii)
mechanics’, materialmen’s or similar statutory Encumbrances for amounts not yet
due or being contested in good faith in appropriate proceedings; (iii)
the terms
and conditions of the lease creating the leaseholds.
(a)
There
are
no Actions pending or, to the knowledge of the Company, threatened involving
the
Company or any of the Company Subsidiaries and any of their employees or
former
employees, including any harassment, discrimination, retaliatory act or
similar
claim. There has been: (i) no labor union organizing or attempting to
organize any employee of the Company or any of the Company Subsidiaries
into one
or more collective bargaining units; and (ii) no labor dispute, strike,
work
slowdown, work stoppage or lock out or other collective labor action by
or with
respect to any employees of the Company or any of the Company Subsidiaries
pending or, to the Company’s knowledge, threatened against the Company or any of
the Company Subsidiaries. Neither the Company nor any of the Company
Subsidiaries is a party to, or bound by, any collective bargaining agreement
or
other agreement with any labor organization applicable to the employees
of the
Company or any of the Company Subsidiaries and no such agreement is currently
being negotiated.
(b)
The
Company and the Company Subsidiaries (i) are in compliance in all material
respects with all applicable Laws respecting employment and employment
practices, terms and conditions of employment, health and safety and wages
and
hours, including Laws relating to discrimination, disability, labor relations,
hours of work, payment of wages and overtime wages, pay equity, immigration,
workers compensation, working conditions, employee scheduling, occupational
safety and health, family and medical leave, and employee terminations,
and have
not received written notice, or to the knowledge of the Company any other
form
of notice, that there is any unfair labor practice charge or complaint
against
the Company or any of the Company Subsidiaries pending, (ii) are not liable
for
any material arrears of wages or any material penalty for failure to comply
with
any of the foregoing, and (iii) are not liable for any material payment
to any
trust or other fund or to any Governmental Authority, with respect to
unemployment compensation benefits, social security or other benefits or
obligations for employees (other than routine payments to be made in the
ordinary course of business and consistent with past
practice). Except as would not result in any material liability to
the Company or any Company Subsidiary, there are no complaints, lawsuits,
arbitrations, administrative proceedings, or other Actions pending or,
to the
knowledge of the Company, threatened against the Company or any Company
Subsidiary brought by or on behalf of any applicant for employment, any
current
or former employee, any Person alleging to be a current or former employee,
any
class of the foregoing, or any Governmental Authority, relating to any
such Law
or regulation, or alleging breach of any express or implied contract of
employment, wrongful termination of employment, or alleging any other
discriminatory, wrongful or tortious conduct in connection with the employment
relationship.
(a)
Neither
the Company nor any of the Company Subsidiaries is the subject of any federal,
state, local or foreign Order, judgment or claim, and neither the Company
nor
any of the Company Subsidiaries has received any notice or claim, or entered
into any negotiations or agreements with any Person, that would impose
a
material liability or obligation under any Environmental Law;
(b)
To
the
knowledge of the Company, the Company and the Company Subsidiaries are
in
compliance with all applicable Environmental Laws;
(c)
Neither
the Company nor any of the Company Subsidiaries has manufactured, treated,
stored, disposed of, arranged for or permitted the disposal of, generated,
handled or released any Hazardous Substance, or owned or operated any property
or facility, in a manner that has given or would reasonably be expected
to give
rise to any liability under all applicable Environmental Laws; and
(d)
Each
of
the Company and the Company Subsidiaries holds and is in compliance with
all
Company Permits required to conduct its business and operations under all
applicable Environmental Laws.
(e)
Neither
the Company, any Company Subsidiary nor any of their respective properties
are
subject to any Order, judgment or written claim asserted or arising under
any
Environmental Law.
“
Environmental
Laws
”
means
any Law relating to (a) the protection, preservation or restoration of
the
environment (including air, water vapor, surface water, groundwater, drinking
water supply, surface land, subsurface land, plant and animal life or any
other
natural resource), or (b) the exposure to, or the use, storage, recycling,
treatment, generation, transportation, processing, handling, labeling,
production, release or disposal of Hazardous Substances, in each case as
in
effect at the date hereof.
“
Hazardous
Substance
”
means
any substance listed, defined, designated or classified as hazardous, toxic,
radioactive or dangerous or as a pollutant or contaminant under any
Environmental Law. Hazardous Substances include any substance to
which exposure is regulated by any Governmental Authority or any Environmental
Law, including (a) petroleum or any derivative or byproduct thereof, toxic
mold,
asbestos or asbestos containing material or polychlorinated biphenyls and
(b)
all substances defined as Hazardous Substances, Oils, Pollutants or Contaminants
in the National and Hazardous Substances Contingency Plan, 40 C.F.R. Section
300.5.
Section
2.22
of the
Company Disclosure Schedule sets forth a true, correct and complete list
of the
contracts or arrangements that are in existence as of the date of this
Agreement
under which there are any existing or future liabilities or obligations
between
the Company or any of the Company Subsidiaries, on the one hand, and, on
the
other hand, any (i) present manager, officer or director of either the
Company
or any of its subsidiaries, or (ii) record or beneficial owner of more
than 5%
of the outstanding Company Capital Stock as of the date hereof (each, an
“
Affiliate
Transaction
”).
(a)
Examinations
. The
Company has made available to Parent copies of all draft and final financial
examination reports and market conduct examination reports of state insurance
departments with respect to any Company Subsidiary that have been issued
since
January 1, 2005.
(b)
Policy
Materials
. To
the extent required under applicable Laws, all policies, binders, slips
or other
agreements of insurance and other agreements and materials that are issued
or
used in connection with the Company or Company Subsidiaries’ business, including
applications, brochures and marketing materials, premium rates and reinsurance
agreements, are, in all material respects, on forms approved by applicable
insurance regulatory authorities or filed and not objected to by such
authorities within the period provided for objection, and, in either case,
not
subsequently disapproved or required to be withdrawn or retired from issuance
or
use which have not been so withdrawn or retired. Any rates or rating
plans of the Company or Company Subsidiaries required to be filed with
or
approved by any applicable Governmental Authority have in all material
respects
been so filed or approved and the rates applied by each of the Company
or the
Company Subsidiaries to the contracts of insurance conform in all material
respects to the relevant filed or approved rates.
(c)
Agents
and Producers
. No
Person performing the duties of insurance producer, reinsurance intermediary,
agency, agent, managing general agent, wholesaler or broker with respect
to the
Company or any of the Company Subsidiaries who has generated more than
two
percent of the Company’s premium revenues as reflected in the Company Financial
Statements (collectively, “
Company
Producers
”)
has
indicated to the Company or any Company Subsidiary that such Company Producer
will be unable or unwilling to continue its relationship as a Company Producer
with the Company or any Company Subsidiary within 12 months after the date
hereof. To the knowledge of the Company, at the time any Company
Producer wrote, sold, or produced business, or performed such other act
for or
on behalf of the Company or any Company Subsidiary that may require a license
under applicable Insurance Laws, such Company Producer was duly licensed
and
appointed as required by applicable Insurance Law, in the particular
jurisdiction in which such Company Producer wrote, sold, produced, solicited,
or
serviced such business, and each of the agency agreements and appointments
between the Company Producers, including as subagents under the Company’s
affiliated insurance agency, and the Company and any Company Subsidiary,
is
valid, binding and in full force and effect in accordance with its terms.
To the
knowledge of the Company, no Company Producer has been since January 1,
2005, or
is currently, in material violation (or with or without notice or lapse
of time
or both, would be in violation) of any term or provision of any Law applicable
to the writing, sale or production of insurance or other business of the
Company
or any Company Subsidiary. The contracts and other agreements
pursuant to which Company Producers act on behalf of the Company or any
Company
Subsidiary are valid, binding and in full force and effect in accordance
with
their terms, and none of the parties to such contracts and agreements are
in
default thereunder in any material respect. The Company has made
available to Parent a true and complete copy of each standard form agency
agreement used by the Company or any Company Subsidiary.
(d)
Reinsurance
. Section
2.23(d) of the Company Disclosure Schedule sets forth a list of all ceded
reinsurance treaties and agreements, including retrocessional agreements,
to
which the Company or any Company Subsidiary is a party or under which the
Company or any Company Subsidiary has any material existing rights, obligations
or liabilities (the “
Company
Reinsurance Agreements
”). Copies
of all Company Reinsurance Agreements that are in effect on the date of
this
Agreement have been made available to Parent. Neither the Company
nor any Company Subsidiary, nor, to the knowledge of the Company, any other
party to a reinsurance treaty, binder or other agreement to which the Company
or
any Company Subsidiary is a party, is in default in any material respect
as to
any provision thereof. The Company has no knowledge that the financial
condition of any party to any Company Reinsurance Agreement is impaired
to the
extent that a default thereunder may be reasonably anticipated. The
Company Subsidiaries are entitled under applicable Law to take full credit
on
the applicable Company SAP Statement with respect to any Company Reinsurance
Agreement pursuant to which such subsidiary has ceded
reinsurance. Neither the Company nor any Company Subsidiary have
received any notice from any party to any reinsurance agreement or treaty
of any
dispute or default with respect to such reinsurance agreement or
treaty. Assuming no default by any party other than any subsidiary of
the Company, all such Company Reinsurance Agreements are in full force
and
effect to the respective dates noted thereon. There are no entities,
other than the Company and the Company Subsidiaries, that have rights to
access
coverage under any such Company Reinsurance Agreements.
(e)
Finite
Risk Insurance or Reinsurance
. With
respect to any Company Reinsurance Agreement for which the Company or any
Company Subsidiary is taking credit on its most recent statutory financial
statements or has taken credit on any statutory financial statements from
and
after January 1, 2005, (i) there has been no separate written or oral agreement
between the Company or any Company Subsidiary and the assuming reinsurer
that
would under any circumstances reduce, limit, mitigate or otherwise affect
any
actual or potential loss to the parties under any such Company Reinsurance
Agreement, other than inuring contracts that are explicitly defined in
any such
Company Reinsurance Agreement, (ii) for each such Company Reinsurance Agreement
under which the Company or any Company Subsidiary has or may have recoverables,
and for which risk transfer is not reasonably considered to be self-evident,
documentation concerning the economic intent of the transaction and the
risk
transfer analysis evidencing the proper accounting treatment, as required
by
Statement of Statutory Accounting Principles No. 62 (“
SSAP
No. 62
”),
is
available for review by the domiciliary state insurance departments for
the
Company and the Company Subsidiaries, (iii) each of the Company and the
Company
Subsidiaries complies and has complied in all material respects from and
after
January 1, 2005 with all of the requirements set forth in SSAP No. 62 and
(iv)
each of the Company and the Company Subsidiaries has and has had from and
after
January 1, 2001 appropriate controls in place to monitor the use of reinsurance
and comply with the provisions of SSAP No. 62.
(f)
Actuarial
Reports
. Prior
to the date of this Agreement, the Company has made available to Parent
a true
and complete copy of all actuarial reports prepared by independent actuaries,
with respect to the Company or any Company Subsidiary since January 1,
2005, and
all attachments, addenda, supplements and modifications thereto (the
“
Company
Actuarial Analyses
”). There
have been no actuarial reports of a similar nature covering any of the
entities
referred to in those reports in respect of any period subsequent to the
latest
period covered in such actuarial reports. The information and data
furnished by the Company or any Company Subsidiary to its independent actuaries
in connection with the preparation of any Company Actuarial Analysis was
accurate in all material respects for the periods covered in such
reports. Each Company Actuarial Analysis was based upon an accurate
inventory of policies in force for the Company and the Company Subsidiaries,
as
the case may be, at the relevant time of preparation and was prepared in
conformity with generally accepted actuarial principles in effect at such
time,
consistently applied (except as may be noted therein).
(g)
Policy
Dividends
. There
are no insurance policies issued, reinsured or assumed by the Company or
any of
the Company Subsidiaries that are currently in force under which the Company
or
any of the Company Subsidiaries may be required to pay dividends to the
holders
thereof.
The
Company and each Company Subsidiary is covered by valid and currently effective
insurance policies issued in favor of the Company or one or more of the
Company
Subsidiaries that are customary for companies of similar size in the industry
and locales in which the Company and the Company Subsidiaries
operate.
Section
2.24
of the
Company Disclosure Schedule sets forth a true, correct and complete list
of all
material insurance policies issued in favor of the Company or any Company
Subsidiary, or pursuant to which the Company or any Company Subsidiary
is a
named insured or otherwise a beneficiary, as well as any historic
incurrence-based policies still in force. With respect to each such
insurance policy, (i) the policy is in full force and effect and all premiums
due thereon have been paid, (ii) neither the Company nor any Company Subsidiary
is in any material respect, in breach of or default under, and neither
the
Company nor any Company Subsidiary have taken any action or failed to take
any
action which, with notice or the lapse of time or both, would constitute
such a
breach or default, or permit termination or modification of, any such policy,
and (iii) to the knowledge of the Company, no insurer on any such policy
has
been declared insolvent or placed in receivership, conservatorship or
liquidation, and no notice of cancellation or termination has been received
with
respect to any such policy.
All
of
the books and records of the Company and the Company Subsidiaries are complete
and accurate in all material respects and have been maintained in the ordinary
course and in accordance with applicable Laws and standard industry practices
with regard to the maintenance of such books and records.
2.26
Information
Supplied
.
None
of
the information supplied or to be supplied by Company or its Members for
inclusion or incorporation by reference in the Proxy Statement will, at
the date
the Proxy Statement is first mailed to Parent’s stockholders or at the time of
the Special Meeting, contain any untrue statement of a material fact or
omit to
state any material fact required to be stated therein or necessary in order
to
make the statements therein, in light of the circumstances under which
they are
made, not misleading. None of the information supplied or to be supplied
by
Company or its Members for inclusion in the Registration Statement shall,
at the
time such document is filed, at the time amended or supplemented, or at
the time
the Registration Statement is declared effective by the SEC, contain any
untrue
statement of a material fact or omit to state any material fact required
to be
stated therein or necessary in order to make the statements therein, in
light of
the circumstances under which they were made, not misleading. Notwithstanding
the foregoing, Company and its Members make no representation, warranty
or
covenant with respect to any information supplied by the Parent which is
contained in the Registration Statement or Proxy Statement.
REPRESENTATIONS
AND WARRANTIES OF PARENT AND MERGER SUB
The
following representations and warranties by Parent and Merger Sub to the
Company
are qualified by the Parent Disclosure Schedule, which sets forth certain
disclosures concerning Parent and Merger Sub (the “
Parent
Disclosure Schedule
”). Parent
and Merger Sub hereby jointly and severally represent and warrant to the
Company
as follows:
Each
of
Parent and Merger Sub is a corporation duly organized, validly existing
and in
good standing under the Laws of the jurisdiction of its organization and
has all
requisite corporate power and authority to own, lease and operate its properties
and to carry on its business as now being conducted. Each of Parent and
Merger
Sub is duly qualified to do business in each jurisdiction where the nature
of
its business or its ownership or leasing of properties its properties make
such
qualification necessary. Parent has heretofore made available to Company
accurate and complete copies of Parent’s Certificate of Incorporation, as
amended (the “
Certificate
of Incorporation
”)
and
bylaws (the “
Parent
Organization Documents
”)
and
the equivalent organizational documents of Merger Sub (the “
Merger
Sub Organizational Documents
”,
each
as currently in effect. Neither Parent nor Merger Sub is in violation of
any
provision of the Certificate of Incorporation, by-laws ors its equivalent
organizational documents as the case may be.
(a)
The
authorized capital stock of Parent consists of 20,000,000 shares of Common
Stock
and 1,000,000 shares of preferred stock, par value $0.0001 per
share. As of the date hereof, (i) 5,858,625 shares of Common Stock
were issued and outstanding and no shares of preferred stock were issued
and
outstanding, and (ii) 7,199,344 shares of Common Stock are authorized but
unissued. As of the date hereof, warrants issued pursuant to the Warrant
Agreement, dated as of October 4, 2007 between Parent and Continental Stock
Transfer & Trust Company (the “
IPO
Warrant Agreement
”)
to
purchase 4,733,625 shares of Common Stock (the “
IPO
Warrants
”)
were
issued and outstanding. As of the date hereof, options to purchase 450,000
shares of Common Stock and 450,000 warrants (convertible into 450,000 shares
of
Common Stock), in the aggregate, were issued and outstanding (collectively,
the
“
Option
Securities
”).
Except as set forth above, no shares of capital stock or other voting securities
of Parent are issued, reserved for issuance or outstanding. All outstanding
shares of Common Stock are duly authorized, validly issued, fully paid
and
nonassessable and not subject to or issued in violation of any purchase
option,
right of first refusal, preemptive right, subscription right or any similar
right under any provision of the DGCL, the Certificate of Incorporation,
Parent’s by-laws or any contract to which Parent is a party.
(b)
Except
for the IPO Warrants, the Option Securities and 1,250,000 warrants sold
in a
private placement immediately prior to the IPO, and other than the conversion
rights set forth in the Prospectus, there are no (i) outstanding options,
warrants, puts, calls, convertible securities, preemptive or similar rights,
(ii) bonds, debentures, notes or other indebtedness having general voting
rights
or that are convertible or exchangeable into securities having such rights,
or
(iii) subscriptions or other rights, agreements, arrangements, contracts
or
commitments of any character, relating to the issued or unissued Common
Stock or
obligating Parent to issue, transfer, deliver or sell or cause to be issued,
transferred, delivered, sold or repurchased any options or Common Stock
or
securities convertible into or exchangeable for such shares, or obligating
the
Company to grant, extend or enter into any such option, warrant, call,
subscription or other right, agreement, arrangement or commitment for such
common stock. Other than the conversion rights set forth in the Prospectus,
there are no outstanding obligations of Parent to repurchase, redeem or
otherwise acquire any shares of Common Stock of Parent or Merger
Sub.
3.3
Merger
Sub
.
(a)
All
the
outstanding shares of common stock in Merger Sub have been validly issued
and
are fully paid and nonassessable and owned by Parent, free and clear of
all
Encumbrances.
(b)
Except
for 100% of the common stock of Merger Sub, Parent does not as of the date
hereof own, directly or indirectly, any capital stock, membership interest,
partnership interest, joint venture interest or other equity interest in
any
Person.
(c)
Since
the
date of its formation, Merger Sub has not carried on any business or conducted
any operations other than the execution of this Agreement, and the performance
of its obligations hereunder.
3.4
Authorization;
Binding Agreement
.
Parent
and Merger Sub have all requisite corporate power and authority to execute
and
deliver this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby, including the Merger,
(i)
have been duly and validly authorized by the Board of Directors of Parent
and
Merger Sub, and (ii) no other corporate proceedings on the part of Parent
or
Merger Sub are necessary to authorize the execution and delivery of this
Agreement or to consummate the transactions contemplated hereby, other
than
receipt of the Required Parent Vote (as defined below). The
affirmative vote of the stockholders of Parent holding at least a majority
of
the issued and outstanding Common Stock of Parent (the “
Required
Parent Vote
”)
is
necessary to approve and adopt this Agreement and to consummate the transactions
contemplated hereby (including the Merger),
provided
,
further
,
that
stockholders of Parent holding thirty percent (30%) or more of the shares
of
Common Stock sold in Parent’s initial public offering shall not have voted
against the Merger and exercised their conversion rights under the Certificate
of Incorporation to convert their shares of Common Stock into a cash payment
from the Trust Fund. This Agreement has been duly and validly executed
and
delivered by each of Parent and Merger Sub and (assuming the due authorization,
execution and delivery hereof by the Company) constitutes the legal, valid
and
binding obligation of each of Parent and Merger Sub, enforceable against
each of
Parent and Merger Sub in accordance with its terms, subject to the
Enforceability Exceptions.
No
Consent of or with any Governmental Authority on the part of Parent or
Merger
Sub is required to be obtained or made in connection with the execution,
delivery or performance by Parent or Merger Sub of this Agreement or the
consummation by Parent or Merger Sub of the transactions contemplated hereby
(including the Merger) other than (i) the filing of the Articles of Merger
with
the Secretary of State in accordance with the Florida Act, (ii) such filings
as
may be required with the SEC and foreign and state securities Laws
administrators, (iii) pursuant to Antitrust Laws, (iv) the filing of the
Proxy
Statement and Registration Statement with the SEC, and (v) those consents,
approvals, authorizations, waivers, permits, filings or notices set forth
in
Section
3.5
of the
Parent Disclosure Schedule, which schedule includes all such consents,
approvals, authorizations, waivers, permits, filings or notices with the
Florida
Office of Insurance Regulation, and (vi) those Consents that, if they were
not
obtained or made, would not reasonably be expected to have, individually
or in
the aggregate, a Parent Material Adverse Effect.
For
purposes of this Agreement, “
Parent
Material Adverse Effect
”
shall
mean any occurrence, state of facts, change, event, effect or circumstance
that,
individually or in the aggregate, has, or would reasonably be expected
to have,
a material adverse effect on the assets, liabilities, business, results
of
operations or financial condition of Parent and Merger Sub on an aggregate
basis, other than any occurrence, state of facts, change, event, effect
or
circumstance to the extent resulting from (i) political instability, acts
of
terrorism or war, changes in national, international or world affairs,
or other
calamity or crisis, including without limitation as a result of changes
in the
international or domestic markets but only to the extent such events are
deemed
to have a direct impact on the existing operations of Parent and Merger
Sub and
their future operating prospects, (ii) any change affecting the United
States
economy generally or the economy of any region in which such entity conducts
business that is material to the business of such entity, (iii) the announcement
of the execution of this Agreement, or the pendency of the consummation
of the
Merger, (iv) any change in GAAP or interpretation thereof after the date
hereof,
or (v) the execution and performance of or compliance with this
Agreement.
The
execution and delivery by Parent and Merger Sub of this Agreement and the
consummation by Parent and Merger Sub of the transactions contemplated
hereby
(including the Merger) and compliance by Parent and Merger Sub with any
of the
provisions hereof will not (i) conflict with or violate any provision of
the
certificate of incorporation or by-laws or other governing instruments
of Parent
or Merger Sub, (ii) require any Consent under or result in a violation
or breach
of, or constitute (with or without due notice or lapse of time or both)
a
default (or give rise to any right of termination, cancellation or acceleration)
under, any note, bond, mortgage, indenture, contract, lease, license, agreement
or instrument to which Parent or Merger Sub is a party or by which its
assets
are bound, (iii) result (immediately or with the passage of time or otherwise)
in the creation or imposition of any Encumbrance upon any of the properties,
rights or assets of Parent or Merger Sub or (iv) subject to obtaining the
Consents from Governmental Authorities referred to in
Section
3.5
hereof,
and the waiting periods referred to therein have expired, and any condition
precedent to such consent, approval, authorization or waiver has been satisfied,
conflict with, contravene or violate in any respect any Law to which Parent
or
Merger Sub or any of their respective assets or properties is subject,
except,
in the case of clauses (ii), (iii) and (iv) above, for any deviations from
the
foregoing that would not reasonably be expected to have, individually or
in the
aggregate, a Parent Material Adverse Effect.
3.7
SEC
Filings and Parent Financial Statements
.
(a)
Parent
has filed all forms, reports, schedules, statements and other documents
required
to be filed or furnished by the Company with the SEC since October 4, 2007
under
the Securities Exchange Act of 1934, as amended (the “
Exchange
Act
”)
or the
Securities Act, together with any amendments, restatements or supplements
thereto, and will file all such forms, reports, schedules, statements and
other
documents required to be filed subsequent to the date of this
Agreement.
Section
3.7
of the
Parent Disclosure Schedule lists and Parent has delivered to the Company
copies
in the form filed with the SEC of all of the following, except to the extent
available in full without redaction on the SEC’s web site through EDGAR for at
least two (2) days prior to the date of this Agreement: (i) Parent’s Annual
Reports on Form 10-K for each fiscal year of Parent beginning with the
first
year Parent was required to file such a form, (ii) Parent’s Quarterly Reports on
Form 10-QSB for each fiscal quarter that Parent was required to file a
Quarterly
Report on Form 10-QSB in each of the fiscal years of Parent referred to
in
clause (i) above, (iii) all proxy statements relating to Parent’s meetings of
stockholders (whether annual or special) held, and all information statements
relating to stockholder consents, since the beginning of the first fiscal
year
referred to in clause (i) above, (iv) its Current Reports on Form 8-K filed
since the beginning of the first fiscal year referred to in clause (i)
above,
(v) all other forms, reports, registration statements and other documents
(other
than preliminary materials if the corresponding definitive materials have
been
provided to the Company pursuant to this
Section
3.7
)
filed
by Parent with the SEC since the beginning of the first fiscal year referred
to
in clause (i) above (the forms, reports, registration statements and other
documents referred to in clauses (i), (ii), (iii), (iv) and (v) above,
whether
or not available through EDGAR, are, collectively, the “
Parent
SEC Reports
”)
and
(vi) all certifications and statements required by (x) Rule 13a-14 or 15d-14
under the Exchange Act, or (y) 18 U.S.C. §1350 (Section 906) of the
Sarbanes-Oxley Act of 2002 (the “
Sarbanes-Oxley
Act
”)
with
respect to any report referred to in clause (i) or (ii) above (collectively,
the
“
Certifications
”).
The
Parent SEC Reports (x) were prepared in all material respects in accordance
with
the requirements of the Securities Act and the Exchange Act, as the case
may be,
and the rules and regulations thereunder and (y) did not at the time they
were
filed with the SEC (except to the extent that information contained in
any
Parent SEC Report has been revised or superseded by a later filed Parent
SEC
Report) contain any untrue statement of a material fact or omit to state
a
material fact required to be stated therein or necessary in order to make
the
statements made therein, in the light of the circumstances under which
they were
made, not misleading. The Certifications are each true and correct. Parent
and
Merger Sub maintain disclosure controls and procedures required by Rule
13a-15(e) or 15d-15(e) under the Exchange Act; such controls and procedures
are
effective to ensure that all material information concerning Parent and
Merger
Sub is made known on a timely basis to the individuals responsible for
the
preparation of Parent’s filings with the SEC and other public disclosure
documents. Each director and executive officer of Parent has filed with
the SEC
on a timely basis all statements required by Section 16(a) of the Exchange
Act
and the rules and regulations thereunder since the date of Parent’s formation.
As used in this
Section
3.7
,
the
term “file” shall be broadly construed to include any manner in which a document
or information is furnished, supplied or otherwise made available to the
SEC.
(b)
The
financial statements and notes contained or incorporated by reference in
the
Parent SEC Reports (“
Parent
Financials
”)
fairly
present the financial condition and the results of operations, changes
in
stockholders’ equity, and cash flow of Parent and Merger Sub as at the
respective dates of and for the periods referred to in such financial
statements, all in accordance with (i) GAAP and (ii) Regulation S-X or
Regulation S-B, as applicable, subject, in the case of interim financial
statements, to normal recurring year-end adjustments (the effect of which
will
not, individually or in the aggregate, be materially adverse) and the omission
of notes to the extent permitted by Regulation S-X or Regulation S-B, as
applicable. No financial statements other than those of Parent and Merger
Sub
are required by GAAP to be included in the consolidated financial statements
of
Parent.
Section
3.7
of the
Parent Disclosure Schedule contains a description of all non-audit services
performed by the Parent’s auditors for Parent and Merger Sub since the date of
Parent’s formation and the fees paid for such services; further, all such
non-audit services were approved by the Board of Directors of Parent. Parent
has
no off-balance sheet arrangements.
(c)
Neither
Parent nor Merger Sub, or any manager, director, officer or employee of
Parent
or Merger Sub has received any complaint, allegation, assertion or claim,
whether or not in writing, regarding the accounting or auditing practices,
procedures, methodologies or methods of Parent or Merger Sub or their respective
internal accounting controls, including any complaint, allegation, assertion
or
claim that Parent or Merger Sub has engaged in questionable accounting
or
auditing practices. No attorney representing Parent or Merger Sub, whether
or
not employed by Parent or Merger Sub, has reported evidence of any violation
of
consumer protection, insurance or securities Laws, breach of fiduciary
duty or
similar violation by Parent or any of its officers, Directors, employees
or
agents to the Board or any committee thereof or to any Director or executive
officer of Parent.
(d)
Merger
Sub has never been subject to the reporting requirements of Sections 13(a)
and
15(d) of the Exchange Act.
3.8
Absence
of Undisclosed Liabilities
.
Except
as
and to the extent reflected or reserved against in the Parent Financials,
neither the Parent nor Merger Sub has incurred any liabilities or obligations
of
the type required to be reflected on a balance sheet in accordance with
GAAP
that is not adequately reflected or reserved on or provided for in the
Parent
Financials, other than liabilities of the type required to be reflected
on a
balance sheet in accordance with GAAP that have been incurred since December
31,
2007 in the ordinary course of business.
3.9
Information
Supplied
.
None
of
the information supplied or to be supplied by Parent or Merger Sub for
inclusion
or incorporation by reference in the Proxy Statement will, at the date
it is
first mailed to Parent’s stockholders or at the time of the Special Meeting,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Proxy Statement will comply as to form in all material
respects
with the requirements of the Exchange Act and the rules and regulations
thereunder, except that no representation is made by Parent with respect
to
statements made or incorporated by reference therein based on information
supplied by the Company in writing for inclusion or incorporation by reference
in the Proxy Statement. None of the information supplied or to be supplied
by
Parent or Merger Sub for inclusion in the Registration Statement shall,
at the
time such document is filed, at the time amended or supplemented, or at
the time
the Registration Statement is declared effective by the SEC, contain any
untrue
statement of a material fact or omit to state any material fact required
to be
stated therein or necessary in order to make the statements therein, in
light of
the circumstances under which they were made, not misleading The Registration
Statement will comply as to form in all material respects with the provisions
of
the Securities Act. Notwithstanding the foregoing, Parent makes no
representation, warranty or covenant with respect to any information supplied
by
the Company which is contained in the Registration Statement or Proxy
Statement.
3.10
Absence
of Certain Changes
.
(a)
Except
as
set forth in the Parent Disclosure Schedule or as consented to in writing
by
Company (and excluding the Merger), since October 4, 2007, Parent and Merger
Sub
have conducted their respective businesses in the ordinary course of business
consistent with past practice and there has not occurred any action that
would
constitute a breach of
Section
4.6
if such
action were to occur or be taken after the date of this Agreement.
(b)
Since
October 4, 2007, there has not been any fact, change, effect, occurrence,
event,
development or state of circumstances that has had or would reasonably
be
expected to have, individually or in the aggregate, a Parent Material Adverse
Effect.
3.11
Taxes
and Returns
.
(a)
Except
as
set forth on the Parent Disclosure Schedule, Parent has or will have timely
filed, or caused to be timely filed, all Tax Returns and has paid, collected
or
withheld, or caused to be paid, collected or withheld, all material Taxes
required to be paid, collected or withheld, other than such Taxes for which
adequate reserves, as disclosed in the Parent SEC Reports, have been established
in accordance with GAAP.
Section
3.11
of the
Parent Disclosure Schedule sets forth each jurisdiction where the Parent
and
Merger Sub files or is required to file a Tax Return. There are no material
liens with respect to any Taxes upon any of the Parent’s or Merger Sub’s assets,
other than (i) Taxes, the payment of which is not yet due, or (ii) Taxes
or
charges being contested in good faith by appropriate proceedings. Neither
Parent
nor Merger Sub has any outstanding waivers or extensions of any applicable
statute of limitations to assess any material amount of Taxes. There
are no outstanding requests by Parent or Merger Sub for any extension of
time
within which to file any Tax Return or within which to pay any Taxes shown
to be
due on any Tax Return.
(b)
Neither
Parent nor Merger Sub has made any change in accounting method or received
a
ruling from, or signed an agreement with, any taxing authority that would
reasonably be expected to have a Parent Material Adverse Effect following
the
Closing.
(c)
As
of the
date hereof, neither Parent nor Merger Sub is being audited by any taxing
authority or has been notified by any Tax authority that any such audit
is
contemplated or pending.
(d)
Since
their respective dates of incorporation, neither Parent nor Merger Sub
has (i)
changed any Tax accounting methods, policies or procedures except as required
by
a change in Law, (ii) made, revoked, or amended any material Tax election,
(iii)
filed any amended Tax Returns or claim for refund, or (iv) entered into
any
closing agreement affecting or otherwise settled or compromised any material
Tax
liability or refund.
3.12
Employee
Benefit Plans.
Parent
does not maintain, and has no liability under, any Benefit Plan, and neither
the
execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will (i) result in any payment (including
severance, unemployment compensation, golden parachute, bonus or otherwise)
becoming due to any director or employee of Parent, or (ii) result in the
acceleration of the time of payment or vesting of any such
benefits.
3.13
Employee
Matters
.
Neither
Parent nor Merger Sub has ever had any current or former employees.
3.14
Material
Contracts
.
(a)
Except
as
set forth in the Parent SEC Reports filed prior to the date hereof or in
the
Prospectus, or on Schedule 3.14 hereto, there are no contracts, agreements,
leases, mortgages, indentures, notes, bonds, liens, license, permit, franchise,
purchase orders, sales orders or other understandings, commitments or
obligations (including without limitation outstanding offers or proposals)
of
any kind, whether written or oral, to which Parent is a party or by or
to which
any of the properties or assets of Parent may be bound, subject or affected,
which either (i) creates or imposes a liability greater than $50,000, or
(ii)
may not be cancelled by Parent on less than 60 days’ or less prior notice (the
“
Parent
Material Contracts
”).
All
Parent Material Contracts have been made available to the Company, and
are set
forth in
Section
3.14(a)
of the
Parent Disclosure Schedule other than those that are exhibits to the Parent
SEC
Reports.
(b)
With
respect to each Parent Material Contract: (i) the Parent Material Contract
was
entered into at arms’ length and in the ordinary course of business; (ii) the
Parent Material Contract is legal, valid and enforceable in all material
respects (except as such enforcement may be limited by the Enforceability
Exceptions); (iii) neither Parent nor Merger Sub is in breach or default
in any
material respect, and no event has occurred that with the passage of time
or
giving of notice or both would constitute such a breach or default by Parent
or
Merger Sub, or permit termination or acceleration by the other party, under
the
Parent Material Contract; and (iv) to the Parent’s knowledge, no other party to
the Parent Material Contract is in breach or default in any material respect,
and no event has occurred that with the passage of time or giving of notice
or
both would constitute such a breach or default by such other party, or
permit
termination or acceleration by Parent or Merger Sub, under any Parent Material
Contract.
There
is
no Action pending before any arbitrator, agency, court or tribunal, foreign
or
domestic, or, to the knowledge of Parent, threatened against Parent, Merger
Sub,
any of their respective subsidiaries or any of their respective properties,
rights or assets or, any of their respective officers, directors, partners,
managers or members (in their capacities as such) that would reasonably
be
expected to have, individually or in the aggregate, a Parent Material Adverse
Effect. There is no Order against Parent, Merger Sub, any of their
respective subsidiaries or any of their respective properties, rights or
assets
or any of their respective officers, directors, partners, managers or members
(in their capacities as such) that would prohibit, prevent, enjoin, restrict
or
materially alter or delay any of the transactions contemplated by this
Agreement
(including the Merger), or that would reasonably be expected to have,
individually or in the aggregate, a Parent Material Adverse Effect. There
is no
material Action that Parent or Merger Sub has pending against other
parties.
3.16
Transactions
with Affiliates
.
Other
than as set forth in the Parent SEC Reports, there are no contracts or
arrangements that are in existence as of the date of this Agreement under
which
there are any existing or future liabilities or obligations between Parent
or
Merger Sub, on the one hand, and on the other hand, any (i) director, officer,
employee or affiliate of either Parent or Merger Sub, or (ii) record or
beneficial owner of more than 5% of the Parent’s outstanding Common Stock as of
the date hereof.
3.17
Trust
Fund
.
(a)
Since
October 11, 2007, Parent has had at least $37,452,930 in the trust fund
established by Parent for the benefit of its public stockholders (the
“
Trust
Fund
”),
invested in U.S. government securities in a trust account at Deutsche Bank
Trust
Company Americas (the “
Trust
Account
”),
held
in trust by Continental Stock Transfer & Trust Company (the “
Trustee
”)
pursuant to the Investment Management Trust Account Agreement, dated as
of
October 4, 2007, between Parent and Trustee (the “
Trust
Agreement
”).
Upon
consummation of the Merger and notice thereof to the Trustee and disbursement
from the Trust Account by the Trustee, the Trust Account will terminate
and the
Trustee shall thereupon be obligated to release as promptly as practicable
to
Parent the Trust Fund held in the Trust Account and, after taking into
account
any funds paid to stockholders of Parent holding shares of Common Stock
sold in
Parent’s initial public offering who shall have voted against the Merger and
demanded that Parent convert their shares of Common Stock into cash pursuant
to
the Certificate of Incorporation, which Trust Fund will be free of any
Encumbrances whatsoever, and will be available for use in the businesses
of
Parent and the Company.
(b)
As
of the
Effective Time, those obligations of Parent to dissolve or liquidate within
a
specified time period as contained in the Certificate of Incorporation
will
terminate, and effective as of the Effective Time Parent shall have no
obligation whatsoever to dissolve and liquidate the assets of Parent by
reason
of the consummation of the Merger, and following the Effective Time no
Parent
stockholder shall be entitled to receive any amount from the Trust Account
except to the extent such stockholder votes against the approval of this
Agreement and demands, contemporaneous with such vote, that Parent convert
such
stockholder’s shares of Common Stock into cash pursuant to the Certificate of
Incorporation.
3.18
Investment
Company Act
.
Parent
is
not an “investment company” or a person directly or indirectly “controlled” by
or acting on behalf of an “investment company”, in each case within the meaning
of the Investment Company Act of 1940, as amended.
Except
for Pali Capital, Inc. and Piper Jaffray, no broker, finder or investment
banker
is entitled to any brokerage, finder’s or other fee or commission in connection
with the transactions contemplated hereby based upon arrangements made
by or on
behalf of Parent or Merger Sub.
3.20
Disclaimer
.
Parent
and Merger Sub each acknowledges and agrees that, other than to the extent
set
forth in, or otherwise relied on for use in, the Proxy Statement or Registration
Statement, neither the Company nor any other person is making any
representations or warranties in connection with, or will have or be subject
to
any claim, liability, or indemnification obligation (under Section 5.3
hereof or
otherwise) to Parent, Merger Sub, or any other person resulting from, any
projections, forecasts, or any other information made available to Parent
or
Merger Sub in certain data rooms or in management presentations (formal
or
informal) or in any other manner prior to the execution of this Agreement,
unless any such information is expressly included in a representation or
warranty contained in Article II hereof.
COVENANTS
(a)
Unless
Parent shall otherwise consent in writing (such consent not to be unreasonably
withheld), during the period from the date of this Agreement to the Effective
Time, except as expressly contemplated by this Agreement or as set forth
on
Section 4.1 of the Company Disclosure Schedule (i) the Company and the
Company
Subsidiaries shall conduct their business, in all material respects in
the
ordinary course of business consistent with past practice and (ii) the
Company
shall use its commercially reasonable efforts consistent with the foregoing
to
preserve intact, in all material respects, its business organization, to
keep
available the services of its and the Company Subsidiaries’ managers, directors,
officers, key employees, Company Producers and consultants, to maintain,
in all
material respects, existing relationships with all Persons with whom it
and the
Company Subsidiaries do significant business, and to preserve the possession,
control and condition of its and the Company Subsidiaries’ assets.
(b)
Without
limiting the generality of the foregoing clause (a), except as set forth
on
Section 4.1 of the Company Disclosure Schedule, during the period from
January
1, 2008 to the Effective Time, neither the Company nor any of the Company
Subsidiaries has or will (except as specifically contemplated by the terms
of
this Agreement), without the prior written consent of Parent (such consent
not
to be unreasonably withheld):
(A)
amend,
waive or otherwise change, in any respect, its articles of organization,
Member
Agreement, certificate of incorporation, operating agreement or by-laws
(or
comparable governing instruments);
(B)
authorize
for issuance, issue, grant, sell, pledge, dispose of or propose to issue,
grant,
sell, pledge or dispose of any Membership Interest, or any options, warrants,
commitments, subscriptions or rights of any kind to acquire or sell Membership
Interest, any shares of capital stock or other securities or equity interests,
including any securities convertible into or exchangeable for Membership
Interest or equity interest of any class and any other equity-based
awards;
(C)
split,
combine, recapitalize or reclassify any of its equity interests or issue
any
other securities in respect thereof, or declare, pay or set aside any
distribution or other dividend (whether in cash, equity or property or
any
combination thereof) in respect of its equity interests, or directly or
indirectly redeem, purchase or otherwise acquire or offer to acquire any
of its
capital equity or other securities or equity interests, provided, however,
the
Company may declare, pay or set aside any (i) distributions in an amount
equal
to the Company’s accrual for Taxes as computed consistently with past practices
and presented on the Company Financials dated December 31, 2007, (ii)
distributions not to exceed $2,000,000 in the aggregate and (iii) distributions
to Directors of the Company in an amount not to exceed $500,000 in the
aggregate; provided, however, that the Company shall notify Parent within
seven
(7) days of such distributions;
(D)
incur,
create, assume, prepay or otherwise become liable for any indebtedness
(directly, contingently or otherwise), make a loan or advance to or investment
in any third party, or guarantee or endorse any indebtedness, liability
or
obligation of any Person;
(E)
increase
the wages, salaries or compensation exceeding 10% of current wages, salaries
or
compensation of any of its current or former consultants, officers, managers,
directors or employees, or increase bonuses for the foregoing individuals
exceeding 120% in the aggregate of the aggregate bonuses paid for fiscal
year
2006 (provided, however, that the Company shall notify Parent within seven
(7)
days of such increase), or increase other benefits of any of the foregoing
individuals, or enter into, establish, amend or terminate any Company Benefit
Plan or any other employment, consulting, retention, change in control,
collective bargaining, bonus or other incentive compensation, profit sharing,
health or other welfare, stock option or other equity or equity-related,
pension, retirement, consulting, vacation, severance, separation, termination,
deferred compensation, fringe, perquisite, or other compensation or benefit
plan, policy, program, agreement, trust, fund or other arrangement with,
for or
in respect of any current or former consultant, officer, manager, director
or
employee, in each case other than as required by applicable Law or pursuant
to
the terms of any Company Benefit Plan in effect on the date of this
Agreement;
(F)
make
or
rescind any material election relating to Taxes, settle any claim, action,
suit,
litigation, proceeding, arbitration, investigation, audit or controversy
relating to Taxes, file any amended Tax Return or claim for refund, or
make any
change in its accounting or Tax policies or procedures, in each case except
as
required by applicable Law or GAAP;
(G)
transfer
or license to any Person or otherwise extend, materially amend or modify,
permit
to lapse or fail to preserve any of the Company Intellectual Property or
Licensed Intellectual Property, other than nonexclusive licenses in the
ordinary
course of business consistent with past practice, or disclose to any Person
who
has not entered into a confidentiality agreement any trade secrets;
(H)
terminate
or waive or assign any material right under any Company Material Contract
or
enter into any (i) contract involving amounts potentially exceeding $50,000
or
(ii) that would be a Company Material Contract or (iii) with a term longer
than
one year that cannot be terminated without payment of a material penalty
and
upon notice of 60 days or less;
(I)
fail
to
maintain its books, accounts and records in all material respects in the
ordinary course of business consistent with past practice;
(J)
establish
any subsidiary or enter into any new line of business;
(K)
fail
to
use commercially reasonable efforts to keep in force insurance policies
or
replacement or revised policies providing insurance coverage with respect
to the
assets, operations and activities of the Company and the Company Subsidiaries
in
an amount and scope of coverage as are currently in effect;
(L)
revalue
any of its material assets or make any change in accounting methods, principles
or practices, except as required by GAAP and approved by the Company’s outside
auditors;
(M)
waive,
release, assign, settle or compromise any claim, action or proceeding (including
any suit, action, claim, proceeding or investigation relating to this Agreement
or the transactions contemplated hereby, including the Merger), other than
waivers, releases, assignments, settlements or compromises that involve
only the
payment of monetary damages (and not the imposition of equitable relief
on, or
the admission of wrongdoing by, the Company or any of the Company Subsidiaries)
not in excess of $50,000 individually or in the aggregate, or otherwise
pay,
discharge or satisfy any claims, liabilities or obligations other than
in the
ordinary course of business consistent with past practice, unless such
amount
has been reserved in the Company Financial Statements;
(N)
close
or
materially reduce the Company’s or any Company Subsidiary’s activities, or
effect any layoff or other Company-initiated personnel reduction or change,
at
any of the Company’s or any Company Subsidiary’s facilities;
(O)
acquire,
including by merger, consolidation, acquisition of stock or assets, or
any other
form of business combination, any corporation, partnership, limited liability
company, other business organization or any division thereof, or any material
amount of assets;
(P)
make
capital expenditures in excess of $150,000;
(Q)
adopt
a
plan of complete or partial liquidation, dissolution, merger, consolidation,
restructuring, recapitalization or other reorganization;
(R)
voluntarily
incur any material liability or obligation (whether absolute, accrued,
contingent or otherwise) other than in the ordinary course of business
consistent with past practice;
(S)
sell,
lease, license, transfer, exchange or swap, mortgage or otherwise pledge
or
encumber (including securitizations), or otherwise dispose of any material
portion of its properties, assets or rights;
(T)
enter
into any agreement, understanding or arrangement with respect to the voting
of
the Membership Interest or the capital equity of any Company
Subsidiary;
(U)
take
any
action that would reasonably be expected to delay or impair the obtaining
of any
consents or approvals of any Governmental Authority to be obtained in connection
with this Agreement;
(V)
enter
into, amend, waive or terminate (other than terminations in accordance
with
their terms) any Affiliate Transaction; or
(W)
enter
into any new reinsurance transaction as assuming or ceding insurer (i)
which
does not contain market cancellation, termination and commutation provisions
or
(ii) which adversely changes the existing reinsurance profile of the Company
and
the Company Subsidiaries on a consolidated basis outside of the ordinary
course
of business consistent with past practice;
(X)
alter
or
amend in any material respect any existing underwriting, claims handling,
loss
control, investment, actuarial, financial reporting or accounting practices,
guidelines or policies (including compliance policies) or any material
assumption underlying an actuarial practice or policy, except as may be
required
by GAAP, applicable SAP, any Governmental Authority or applicable Law,
or
(Y)
authorize
or agree to do any of the foregoing actions.
(c)
In
the
event the Company enters into any reinsurance agreement or a new lease
for its
office space, the Company shall: (i) notify Parent in writing that it has
done
so and (ii) provide a copy of the reinsurance agreement or lease, as applicable,
together with any analysis or comments of the Company on such agreement
or
lease. Within three business days after confirming receipt of same, Parent
may
send the Company a written objection to the reinsurance contract and lease,
at
which point the Parties shall negotiate in good faith for ten days to resolve
such Parent objections, at which time if the Parties are unable to resolve
Parent’s objections, Parent may terminate the Agreement as provided in Section
7.1(d). If Parent does not provide Company with written notice of its intent
to
terminate the Agreement pursuant to Section 7.1(d) within ten days of receiving
notice of an agreement or lease described above, then Parent shall be deemed
to
have waived any objection to such agreement or lease and its related right
to
terminate the Agreement pursuant to Section 7.1(d). In the event Parent
sends no
such objection, Parent shall be deemed to have approved such agreement(s)
or
such lease.
(a)
Between
the date of this Agreement and the Effective Time, each Party shall give
the
other Party, and shall direct its accountants and legal counsel to give,
the
other Party and its Representatives, at reasonable times and upon reasonable
intervals and notice, access to all offices and other facilities and to
all
employees, properties, contracts, agreements, commitments, books and records
of
or pertaining to such Party and its subsidiaries (including Tax Returns,
internal work papers, client files, client contracts and director service
agreements) and such financial and operating data and other information,
all of
the foregoing as the requesting Party or its Representatives may reasonably
request regarding such Party’s business, assets, liabilities, employees and
other aspects (including unaudited quarterly financial statements, including
a
consolidated quarterly balance sheet and income statement, in the form
such
financial statements have been delivered to the other Party prior to the
date
hereof) and instruct such Party’s Representatives to cooperate with the
requesting Party in its investigation (including by reading available
independent public accountant’s work papers), and a copy of each material
report, schedule and other document filed or received pursuant to the
requirements of applicable securities Laws;
provided
that the
requesting Party shall conduct any such activities in such a manner as
not to
interfere unreasonably with the business or operations of the Party providing
such information.
(b)
All
information obtained by the Company or any Company Subsidiary, on one hand,
and
Parent or Merger Sub, on the other hand, pursuant to this Agreement shall
be
kept confidential in accordance with and subject to the Confidentiality
Agreement, dated November 20, 2007, between Parent and the Company (the
“
Confidentiality
Agreement
”).
(a)
For
purposes of this Agreement, “
Acquisition
Proposal
”
means
(other than the Merger) any inquiry, proposal or offer, or any indication
of
interest in making an offer or proposal, from any Person or group at any
time
relating to a merger, reorganization, recapitalization, consolidation,
share
exchange, business combination or similar transaction, including any single
or
multi-step transaction or series of related transactions involving the
Company,
the Company Subsidiaries or Parent on the one hand and any third party
on the
other hand or acquisition or purchase of assets of the Company and the
Company
Subsidiaries or Parent representing 50% or more of such Person’s assets or
business.
(b)
From
and
after the date hereof, in order to induce the Company and the Parent to
continue
to commit to expend management time and financial resources in furtherance
of
the transactions contemplated hereby, from the date hereof until the earlier
of
(i) the date that is seven months from the date hereof or (ii) the date
that is
six months from the date of filing the Registration Statement (the “
Exclusivity
Period
”),
neither the Company, any Company Subsidiary nor the Parent shall, directly
or
indirectly, and shall not, directly or indirectly, authorize or permit
any
officer, manager, director, employee, accountant, consultant, legal counsel,
financial advisor, agent or other representative of such Person (collectively,
the “
Representatives
”)
to,
(i) solicit, encourage, assist, initiate or facilitate the making, submission
or
announcement of any Acquisition Proposal, (ii) furnish any non-public
information regarding the Company, any Company Subsidiary, the Parent or
the
Merger to any Person or group (other than a Party to this Agreement or
their
Representatives) in connection with or in response to an Acquisition Proposal,
(iii) engage or participate in discussions or negotiations with any Person
or
group with respect to, or that could be expected to lead to, an Acquisition
Proposal, (iv) withdraw, modify or qualify, or propose publicly to withdraw,
modify or qualify, in a manner adverse to Parent, the approval of this
Agreement
or the Merger or the Board’s recommendation that holders of Membership Interest
adopt this Agreement, (v) approve, endorse or recommend, or publicly propose
to
approve, endorse or recommend, any Acquisition Proposal, (vi) discuss,
negotiate
or enter into any letter of intent, agreement in principle, acquisition
agreement or other similar agreement related to any Acquisition Proposal,
or
(vii) release any third party from, or waive any provision of, any
confidentiality agreement to which the Company, any Company Subsidiary
or Parent
is a party (except as permitted pursuant to Section 4.2(a)
hereof). Without limiting the foregoing, each Party agrees that it
shall be responsible for the actions of its Representatives that would
constitute a violation of the restrictions set forth in this Section 4.3
if done
by such Party. Each Party shall promptly inform its Representatives
of the obligations undertaken in this Section 4.3.
(c)
Each
Party shall notify the other Party hereto as promptly as practicable (and
in any
event within 48 hours) orally and in writing of the receipt by such Party
or any
of its Representatives of (i) any bona fide inquiries, proposals or offers,
requests for information or requests for discussions or negotiations regarding
or constituting any Acquisition Proposal or any bona fide inquiries, proposals
or offers, requests for information or requests for discussions or negotiations
that could be expected to result in an Acquisition Proposal, and (ii) any
request for non-public information relating to such Party, specifying in
each
case the material terms and conditions thereof (including a copy thereof
if in
writing) and the identity of the party making such inquiry, proposal, offer
or
request for information. Each Party shall keep the other Party hereto
promptly informed of the status of any such inquiries, proposals, offers
or
requests for information. From and after the date of this Agreement,
each Party shall immediately cease and cause to be terminated any solicitations,
discussions or negotiations with any parties with respect to any Acquisition
Proposal and shall direct, and use its reasonable best efforts to cause,
its
Representatives to cease and terminate any such solicitations, discussions
or
negotiations.
Notwithstanding
any other provision in this Agreement, if any “fair price”, “business
combination”, “moratorium”, “control share acquisition” or similar anti-takeover
Law (collectively, “
Takeover
Law
”)
may
become, or may purport to be, applicable to the transactions contemplated
by
this Agreement, the Company and the members of its Board will grant such
approvals and take such actions as are necessary so that the transactions
contemplated by this Agreement may be consummated as promptly as practicable
on
the terms and conditions contemplated hereby and otherwise act to eliminate
the
effect of any Takeover Law on any of the transactions contemplated by this
Agreement.
The
Company shall give Parent the opportunity to participate in, subject to
a
customary joint defense agreement, any Member litigation against the Company
or
its managers, directors or officers relating to the Merger or any other
transactions contemplated hereby;
provided
,
however
,
that no
settlement of any such litigation shall be agreed to without Parent’s
consent.
4.6
Conduct
of Business of Parent
.
(a)
Unless
the Company shall otherwise consent in writing (such consent not to be
unreasonably withheld), during the period from the date of this Agreement
to the
Effective Time, except as specifically contemplated by the terms of this
Agreement, (i) Parent and Merger Sub shall conduct their business in, and
shall
not take any action other than in, the ordinary course of business consistent
with past practice, (ii) Parent shall use commercially reasonable efforts
to
continue to maintain, in all material respects, its assets, properties,
rights
and operations in accordance with present practice in a condition suitable
for
their current use, (iii) Parent shall use commercially reasonable efforts
consistent with the foregoing to conduct the business of Parent in compliance
with applicable Laws in all material respect, including without limitation
the
timely filing of all reports, forms or other documents with the SEC required
to
be filed with the SEC by Parent pursuant to the Securities Act, the Exchange
Act
and the Sarbanes-Oxley Act, and to preserve intact the business organization
of
Parent.
(b)
Without
limiting the generality of the foregoing clause (a), during the period
from the
date of this Agreement to the Effective Time, neither Parent or Merger
Sub will
(except as specifically contemplated by this Agreement), without the prior
written consent of the Company (such consent not to be unreasonably
withheld):
(i)
authorize
for issuance, issue, grant, sell, pledge, dispose of or propose to issue,
grant,
sell, pledge or dispose of any shares of, or any options, warrants, commitments,
subscriptions or rights of any kind to acquire or sell Common Stock (including
upon exercise of any outstanding option, warrant or similar right to acquire
such Common Stock), any shares of capital stock or other securities or
equity
interests, including any securities convertible into or exchangeable for
Common
Stock or equity interest of any class and any other equity-based awards
or alter
in any way its outstanding securities or make any changes in outstanding
shares
of capital stock or its capitalization, whether by means of a reclassification,
recapitalization, stock split or combination, exchange or readjustment
of
shares, stock dividend or otherwise or agree to register under the Securities
Act any capital stock of Parent or Merger Sub, except as contemplated in
the
Prospectus;
(ii)
declare,
pay or set aside any dividend;
(iii)
incur,
create, assume, prepay or otherwise become liable for any indebtedness
(directly, contingently or otherwise), make a loan or advance to or investment
in any third party, or guarantee or endorse any indebtedness, liability
or
obligation of any Person or subject any of its assets, properties or rights,
or
any part thereof to any mortgage, pledge, security interest, encumbrance,
claim,
charge, lien (statutory or other), or other limitation or restriction,
except as
contemplated in the Prospectus;
(iv)
make
any
change in any Parent Organizational Documents or Merger Sub Organizational
Documents (other than as contemplated by the Proxy);
(v)
redeem,
retire, purchase or otherwise acquire, directly or indirectly, any shares
of the
capital stock, membership interests or other ownership interests of Parent
or
Merger Sub;
(vi)
acquire,
lease or sublease any material tangible assets, raw material or properties
(including real property);
(vii)
enter
into any Benefit Plan or any employment, severance, or change of control
agreement;
(viiii)
contractually
commit to make capital expenditures for any period following the Effective
Time;
(ix)
make
or
rescind any material election relating to Taxes, settle any claim, action,
suit,
litigation, proceeding, arbitration, investigation, audit or controversy
relating to Taxes, file any amended Tax Return or claim for refund, or
make any
change in its accounting or Tax policies or procedures, in each case except
as
required by applicable Law or GAAP;
(x)
enter
into any agreement or contract that would be a Parent Material
Contract;
(xi)
fail
to
maintain its books, accounts and records in all material respects in the
ordinary course of business consistent with past practice;
(xii)
establish
any subsidiary (other than as contemplated hereby) or enter into any new
line of
business;
(xiii)
fail
to
use commercially reasonable efforts to keep in force insurance policies
or
replacement or revised policies providing insurance coverage with respect
to the
assets, operations and activities of the Parent and the Merger Sub in an
amount
and scope of coverage as are currently in effect;
(xiv)
revalue
any of its material assets or make any change in accounting methods, principles
or practices, except as required by GAAP and approved by the Parent’s outside
auditors;
(xv)
waive,
release, assign, settle or compromise any claim, action or proceeding (including
any suit, action, claim, proceeding or investigation relating to this Agreement
or the transactions contemplated hereby, including the Merger), other than
waivers, releases, assignments, settlements or compromises that involve
only the
payment of monetary damages (and not the imposition of equitable relief
on, or
the admission of wrongdoing by, the Parent or Merger Sub) not in excess
of
$50,000 individually or in the aggregate, or otherwise pay, discharge or
satisfy
any claims, liabilities or obligations other than in the ordinary course
of
business consistent with past practice, unless such amount has been reserved
in
the Parent financial statements included in the Parent SEC Reports;
(xvi)
acquire,
including by merger, consolidation, acquisition of stock or assets, or
any other
form of business combination, any corporation, partnership, limited liability
company, other business organization or any division thereof, or any material
amount of assets;
(xvii)
make
capital expenditures in excess of $150,000;
(xviii)
adopt
a
plan of complete or partial liquidation, dissolution, merger, consolidation,
restructuring, recapitalization or other reorganization;
(xix)
voluntarily
incur any material liability or obligation (whether absolute, accrued,
contingent or otherwise) other than in the ordinary course of business
consistent with past practice;
(xx)
sell,
lease, license, transfer, exchange or swap, mortgage or otherwise pledge
or
encumber (including securitizations), or otherwise dispose of any material
portion of its properties, assets or rights;
(xxi)
take
any
action that would reasonably be expected to delay or impair the obtaining
of any
consents or approvals of any Governmental Authority to be obtained in connection
with this Agreement;
(xxii)
enter
into, amend, waive or terminate (other than terminations in accordance
with
their terms) any Affiliate Transaction; or
(xxiii)
authorize
or agree to do any of the foregoing actions.
ADDITIONAL
COVENANTS OF THE PARTIES
Each
of
Parent and the Company shall give prompt notice to the other (and, if in
writing, furnish copies of) if any of the following occurs after the date
of
this Agreement: (i) there has been a material failure on the part of the
Party
providing the notice to comply with or satisfy any covenant, condition
or
agreement to be complied with or satisfied by it hereunder; (ii) receipt
of any
notice or other communication in writing from any third party alleging
that the
Consent of such third party is or may be required in connection with the
transactions contemplated by this Agreement, (including the Merger); (iii)
receipt of any notice or other communication from any Governmental Authority
in
connection with the transactions contemplated by this Agreement (including
the
Merger); (iv) the discovery of any fact or circumstance that, or the occurrence
or non-occurrence of any event the occurrence or non-occurrence of which,
would
reasonably be expected to cause or result in any of the conditions to the
Merger
set forth in Article VI not being satisfied or the satisfaction of those
conditions being materially delayed; or (v) the commencement or threat,
in
writing, of any Action against any Party or any of its affiliates, or any
of
their respective properties or assets, or, to the knowledge of the Company
or
Parent, as applicable, any officer, director, partner, member or manager,
in his
or her capacity as such, of the Company or Parent, as applicable, or any
of
their affiliates with respect to the consummation of the Merger. No
such notice to any Party shall constitute an acknowledgement or admission
by the
Party providing notice regarding whether or not any of the conditions to
Closing
or to the consummation of the Merger have been satisfied or in determining
whether or not any of the representations, warranties or covenants contained
in
this Agreement have been breached.
(a)
Subject
to the terms and conditions of this Agreement, prior to the Effective Time,
each
Party shall use reasonable best efforts, and shall cooperate fully with
the
other Parties, to take, or cause to be taken, all actions and to do, or
cause to
be done, all things necessary, proper or advisable under applicable Laws
and
regulations to consummate the Merger and the other transactions contemplated
by
this Agreement (including the receipt of all Requisite Regulatory Approvals),
and to comply as promptly as practicable with all requirements of Governmental
Authorities applicable to the transactions contemplated by this
Agreement. In furtherance and not in limitation of the foregoing, to
the extent required under the Hart-Scott-Rodino Antitrust Improvements
Act of
1976, as amended, and any other Laws that are designed to prohibit, restrict
or
regulate actions having the purpose or effect of monopolization or restraint
of
trade (“
Antitrust
Laws
”),
each
Party hereto agrees to make required filing or application under Antitrust
Laws,
as applicable, with respect to the transactions contemplated hereby as
promptly
as practicable, to supply as promptly as reasonably practicable any additional
information and documentary material that may be requested pursuant to
Antitrust
Laws and to take all other actions necessary, proper or advisable to cause
the
expiration or termination of the applicable waiting periods under Antitrust
Laws
as soon as practicable, including by requesting early termination of the
waiting
period provided for under the Antitrust Laws. In furtherance and not in
limitation of the foregoing, to the extent required by the Florida Office
of
Insurance Regulation, each Party hereto agrees to make required filing
or
application required by the Florida Office of Insurance Regulation with
respect
to the transactions contemplated hereby, which shall include filing a Form
A, as
promptly as practicable (but no later than 30 days after the date of this
Agreement) and to supply as promptly as reasonably practicable any additional
information and documentary material that may be requested by the Florida
Office
of Insurance Regulation.
(b)
Each
of
Parent and Merger Sub, on the one hand, and the Company, on the other hand,
shall, in connection with the efforts referenced in Section 5.2(a) to obtain
all
requisite approvals and authorizations for the transactions contemplated
by this
Agreement under any Antitrust Law, use its reasonable best efforts
to: (i) cooperate in all respects with each other in connection with
any filing or submission and in connection with any investigation or other
inquiry, including any proceeding initiated by a private party; (ii) keep
the
other Party reasonably informed of any communication received by such Party
from, or given by such Party to, the Federal Trade Commission (the “
FTC
”),
the
Antitrust Division of the Department of Justice (the “
DOJ
”)
or any
other U.S. or foreign Governmental Authority and of any communication received
or given in connection with any proceeding by a private party, in each
case
regarding any of the transactions contemplated hereby; and (iii) permit the
other Party and its outside counsel to review any communication given by
it to,
and consult with each other in advance of any meeting or conference with,
the
FTC, the DOJ or any other Governmental Authority or, in connection with
any
proceeding by a private party, with any other Person, and to the extent
permitted by the FTC, the DOJ or such other applicable Governmental Authority
or
other Person, give the other Party the opportunity to attend and participate
in
such meetings and conferences.
(c)
In
furtherance and not in limitation of the covenants of the Parties contained
in
Section 5.2(a) and Section 5.2(b), (i) as soon as reasonably practicable
following the date of this Agreement, the Company and Parent shall cooperate
in
all respects with each other and use (and shall cause their respective
subsidiaries to use) their respective reasonable best efforts to prepare
and
file with the relevant insurance regulators requests for approval of the
transactions contemplated by this Agreement (including the Merger) and
shall use
all reasonable efforts to have such insurance regulators approve the
transactions contemplated by this Agreement, and (ii) each of Parent and
Merger
Sub, on the one hand, and the Company, on the other hand, shall give prompt
written notice if such Party receives any notice from any insurance regulator
in
connection with the transactions contemplated by this Agreement, and, in
the
case of any such written notice, shall promptly furnish the other Party
with a
copy thereof. If an insurance regulator requires that a hearing be
held in connection with its approval of the transactions contemplated hereby,
each Party shall use its reasonable best efforts to arrange for such hearing
to
be held promptly. At Parent’s request, the Company shall obtain from
applicable regulatory authorities written assurances in form reasonably
satisfactory to Parent with respect to the applicability to the Company
and/or
any of the Company Subsidiaries of orders, decrees or pronouncements of
such
regulatory authorities.
(d)
In
furtherance and not in limitation of the covenants of the Parties contained
in
Section 5.2(a), Section 5.2(b) and Section 5.2(c), if any objections are
asserted with respect to the transactions contemplated hereby under any
Antitrust Law or any other applicable Law or if any suit is instituted
(or
threatened to be instituted) by the FTC, the DOJ or any other applicable
Governmental Authority or any private party challenging any of the transactions
contemplated hereby as violative of any Antitrust Law or any other applicable
Law or which would otherwise prevent, materially impede or materially delay
the
consummation of the transactions contemplated hereby, each of Parent, Merger
Sub
and the Company shall use its reasonable best efforts to resolve any such
objections or suits so as to permit consummation of the transactions
contemplated by this Agreement, including in order to resolve such objections
or
suits which, in any case if not resolved, could reasonably be expected
to
prevent, materially impede or materially delay the consummation of the
transactions contemplated hereby (including the Merger).
(e)
In
the
event that any administrative or judicial action or proceeding is instituted
(or
threatened to be instituted) by a Governmental Authority or private party
challenging the Merger or any other transaction contemplated by this Agreement,
or any other agreement contemplated hereby, each of Parent, Merger Sub
and the
Company shall cooperate in all respects with each other and use its respective
reasonable best efforts to contest and resist any such action or proceeding
and
to have vacated, lifted, reversed or overturned any decree, judgment, injunction
or other order, whether temporary, preliminary or permanent, that is in
effect
and that prohibits, prevents or restricts consummation of the transactions
contemplated by this Agreement.
(f)
Prior
to
the Effective Time, the Company shall use its commercially reasonable efforts
to
obtain any Consents of third parties with respect to any contracts to which
the
Company or any Company Subsidiary is a party as may be necessary or appropriate
for the consummation of the transactions contemplated hereby or required
by the
terms of any contract as a result of the execution, performance or consummation
of the transactions contemplated hereby (including the Merger).
(g)
Notwithstanding
anything to the contrary contained in this Agreement, nothing in this Agreement
shall obligate Parent, Merger Sub or any of their respective affiliates
to take
any action or commit to take any action, or consent or agree to any condition,
restriction or undertaking requested or imposed by any Governmental Authority,
whether in connection with obtaining any Requisite Regulatory Approval
or
otherwise, if, in the good faith determination of Parent, such action,
condition, restriction or undertaking, individually or in the aggregate,
with
all other such actions, conditions, restrictions or undertakings, would
materially adversely affect the benefits, taken as a whole, that Parent
reasonably expects to derive from the transactions contemplated by this
Agreement (a “
Burdensome
Condition
”);
including, without limitation, that any requirement that Parent, the Surviving
Company or any of its or their subsidiaries (i) provide or commit to provide
additional capital to the Company or any Company Subsidiary or (ii) provide
any
surplus maintenance, guarantee, keep-well or similar agreements or commitments
that are more burdensome than currently required of the Company by such
Governmental Authority shall each be deemed to be a Burdensome
Condition.
(h)
Notwithstanding
anything herein to the contrary, neither Parent nor the Company shall be
required to agree to any term, condition or modification with respect to
obtaining any Consents in connection with the Merger and consummation of
the
transactions contemplated by this Agreement that would result in, or would
be
reasonably likely to result in, (i) either individually or in the aggregate,
a
Company Material Adverse Effect or a Parent Material Adverse Effect or
(ii)
Parent, Merger Sub, the Company or Company Subsidiaries having to cease,
sell or
otherwise dispose of any assets or business (including the requirement
that any
such assets or business be held separate).
(a)
Indemnification
by the Company
.
From
the date of this Agreement through the Closing Date, the Company shall
indemnify
and hold harmless each of Parent, Merger Sub, their affiliates and each
of their
respective successors and assigns, and their respective officers, directors,
employees and agents (each, a “
Parent
Indemnified Party
”)
from
and against any liabilities, claims (including claims by third parties),
demands, judgments, losses, costs, damages or expenses whatsoever (including
reasonable attorneys’, consultants’ and other professional fees and
disbursements of every kind, nature and description) (collectively,
“
Damages
”)
that
such Parent Indemnified Party may sustain, suffer or incur and that result
from,
arise out of or relate to (i) any breach by the Company or any Company
Subsidiary of any of their representations, warranties, covenants or agreements
contained in this Agreement, and/ or (ii) any fraud committed by or the
willful
breach of this Agreement by the Company or any Company Subsidiary.
(b)
Indemnification
by Parent and Merger Sub
.
From
the date of this Agreement through the Closing Date, Parent and Merger
Sub shall
jointly and severally indemnify and hold harmless the Company, its successors
and assigns, and their respective managers, officers, directors, employees
and
agents (each, a “
Company
Indemnified Party
”)
from
and against any Damages that such Company Indemnified Party may sustain,
suffer
or incur and that result from, arise out of or relate to (i) any breach
by
either Parent or Merger Sub of any of their representations, warranties,
covenants or agreements contained in this Agreement, and/ or (ii) any fraud
committed by or the willful breach of this Agreement by Parent or Merger
Sub.
(c)
Indemnification
Procedures
.
A
Person seeking indemnification under this Section 5.3 (the “
Indemnitee
”)
must
give timely written notice to the Person from whom indemnification is sought
(the “
Indemnitor
”)
as
soon as practical after the Indemnitee becomes aware of any condition or
event
that gives rise to Damages for which indemnification is sought under this
Section 5.3. The failure of the Indemnitee to give timely notice shall
not
affect the Indemnitee’s rights to indemnification hereunder except to the extent
that the Indemnitor demonstrates that it was materially prejudiced by such
failure.
In
the
event a claim or demand is made by a party against an Indemnitee, the Indemnitee
shall promptly notify the Indemnitor of such claim or demand, specifying
the
nature and the amount (the “
Claim
Notice
”).
The
Indemnitor shall notify the Indemnitee within fifteen (15) days after receipt
of
the Claim Notice whether the Indemnitor will undertake, conduct, and control,
through counsel of its own choosing (subject to the consent of Indemnitee,
such
consent not to be unreasonably withheld or delayed) and at its expense,
the
settlement or defense thereof, and Indemnitee shall cooperate with Indemnitor
in
connection therewith, provided that if Indemnitor undertakes such defense:
(i)
Indemnitor shall not thereby permit to exist any Encumbrance or other adverse
charge upon any asset of Indemnitee or settle such action without first
obtaining the consent of Indemnitee, except for settlements solely covering
monetary matters for which Indemnitor has acknowledged responsibility for
payment; (ii) Indemnitor shall permit Indemnitee (at Indemnitee’s sole cost and
expense) to participate in such settlement or defense through counsel chosen
by
Indemnitee; and (iii) Indemnitor shall agree promptly to reimburse Indemnitee
for the full amount of any loss resulting from such claim and all related
expenses incurred by Indemnitee, except for those costs expressly assumed
by the
Indemnitee hereunder. The Indemnitee agrees to preserve and provide access
to
all evidence that may be useful in defending against such claim and to
provide
reasonable cooperation in the defense thereof or in the prosecution of
any
action against a third party in connection therewith. The Indemnitor’s defense
of any claim or demand shall not constitute an admission or concession
of
liability therefor or otherwise operate in derogation of any rights Indemnitor
may have against Indemnitee or any third party. So long as Indemnitor is
reasonably contesting any such claim in good faith, Indemnitee shall not
pay or
settle any such claim. If Indemnitor does not notify Indemnitee within
fifteen
(15) days after receipt of Indemnitee’s Claim Notice that it elects to undertake
the defense thereof, Indemnitee shall have the right to contest, settle
or
compromise the claim in the exercise of its exclusive discretion at the
expense
of the Indemnitor (provided that the Indemnitor shall not be required to
pay
Indemnitee's expenses for the defense, settlement or compromise of claims
which
are not covered by Indemnitor’s obligations
this
Section 5.3
).
(d)
Limitations
on Indemnification
.
T
he
Parties’ rights to indemnification hereunder are subject to the following
limitations:
(i)
The
maximum aggregate amount of Damages that may be recovered from the Company
on
the one hand or the Parent and Merger Sub on the other hand pursuant to
this
Section 5.3 shall not exceed $1,000,000.
(ii)
Any
claim
for indemnification hereunder may not be pursued and is hereby irrevocably
waived upon and after the Closing Date.
(iii)
The
Company and its Members may only seek indemnification hereunder against
Parent
and Merger Sub and Parent and Merger Sub may only seek indemnification
hereunder
against the Company. The Parties hereby irrevocably waive in perpetuity
any and
all claims for indemnification hereunder against the officers, directors
and
affiliated entities of the other Party hereto, as well as any and all claims
for
indemnification hereunder against the Trust Fund and all other entities
controlled by Parent, Company or their officers and directors.
(e)
Exclusive
Remedy.
The
rights of the Parties for indemnification relating to this Agreement or
the
transactions contemplated hereby shall be strictly limited to those contained
in
this Section 5.3, and, except as specifically set forth in Section 9.10,
such
indemnification rights shall be the exclusive remedies of the Parties with
respect to any matter arising under or in connection with this Agreement.
To the
maximum extent permitted by applicable Law, the Parties hereby waive all
other
rights and remedies with respect to any matter arising under or in connection
with this Agreement, whether under any applicable Law, at common law or
otherwise. Neither Company nor any of its affiliates, successors or permitted
assigns, make any representation, warranty or covenant to Parent or Merger
Sub
or any of their affiliates, successors or permitted assigns, except as
set forth
in this Agreement. Consequently, neither Parent nor Merger Sub nor any
of their
affiliates, successors or permitted assigns may bring or otherwise maintain
any
claim, action or remedy against the Company or any of its affiliates, successors
or permitted assigns, and no recourse shall be brought against any of them,
by
virtue of any claim or allegation of any representation, warranty or covenant
not set forth in this Agreement.
Parent
and the Company agree that no public release or announcement concerning
this
Agreement or the Merger shall be issued by either Party or any of their
affiliates without the prior consent of the other Party (which consent
shall not
be unreasonably withheld or delayed), except as such release or announcement
may
be required by applicable Law or the rules or regulations of any securities
exchange, in which case the applicable Party shall use reasonable best
efforts
to allow the other Party reasonable time to comment on such release or
announcement in advance of such issuance;
provided
,
however
,
that
either Parent or the Company may make any public statement in response
to
specific questions by the press, analysts, investors or those attending
industry
conferences or financial analyst conference calls, so long as any such
statements are not inconsistent with previous public releases or announcements
made by Parent or the Company in compliance with this Agreement.
As
promptly as practical following the date of this Agreement, and in any
event
within ten (10) Business Days, and in compliance with applicable Law, Parent
and
the Company shall develop a joint plan for the communication by the Company
regarding the transactions contemplated by this Agreement (including the
Merger)
with the Company Producers. Each Party must get the written consent
of the other Party (such consent not to be unreasonably withheld, conditioned
or
delayed) prior to initiating any communication with any Company Producers
regarding the transactions contemplated by this Agreement (including the
Merger).
5.6
Registration
Statement
.
(a)
Simultaneously with the date of this Agreement or, if such date is impractical,
promptly thereafter (but no later than thirty (30) days after the date
of this
Agreement), Parent shall file with the SEC a registration statement on
Form S-4
(or other appropriate form) for the purpose of registering the Stock
Consideration to be issued in the Merger (the “
Registration
Statement
”),
which
shall include proxy materials for the purpose of , among other things,
soliciting
proxies
from current holders of Parent Common Stock to approve and adopt this Agreement
and the transactions
contemplated
hereby (the “
Proxy
Statement
”).
Parent, with the assistance of the Company, shall promptly respond to any
SEC
comments on the Registration Statement and shall use reasonable best efforts
to
cause such Registration Statement to be declared effective by the SEC as
soon
after filing as practicable. Parent shall bear all expenses of the Registration
Statement, including fees and expenses, if any, of a counsel or other advisors.
In connection with the Registration Statement, each Member will furnish
to
Parent in writing such information with respect to the name and address
of such
Member and such other information as may be reasonably required for use
in
connection with the Registration Statement.
(b)
Parent shall make all necessary filings with respect to the Merger and
the
transactions contemplated thereby under the Securities Act and the Exchange
Act
and applicable “blue sky” laws and the rules and regulations thereunder. Parent
will advise the Company, promptly after it receives notice thereof, of
the time
when the Registration Statement has been declared effective by the SEC
or any
supplement or amendment to the Registration Statement or Proxy Statement
has
been filed, or any request by the SEC for amendment of the Registration
Statement or Proxy Statement or comments thereon and responses thereto
or
requests by the SEC for additional information. No amendment or supplement
to
the Registration Statement or Proxy Statement shall be filed without the
approval of the Company, which approval shall not be unreasonably withheld.
If
at any time prior to the Effective Time, any information relating to Parent
or
the Company, or any of their respective affiliates, officers or directors,
should be discovered by Parent or the Company that should be set forth
in an
amendment or supplement to the Registration Statement or Proxy Statement,
so
that such documents would not include any misstatement of a material fact
or
omit to state any material fact necessary to make the statements therein,
in
light of the circumstances under which they were made, not misleading,
the party
which discovers such information shall promptly notify the other Party
hereto
and an appropriate amendment or supplement describing such information
shall be
promptly filed with the SEC and, to the extent required by law, disseminated
to
the stockholders of the Parent.
5.7
Reservation
of Stock Consideration
.
Parent
hereby agrees there shall be, or Parent shall cause to be, reserved for
issuance
and/ or delivery such number of shares of Common Stock as shall be required
for
issuance and delivery of the Stock Consideration. The Company covenants
that it
will authorize or cause to be authorized such number of shares of Common
Stock
as shall from time to time sufficient to issue the Stock Consideration.
5.8
Special
Meetings; Proxy
.
As
promptly as practicable following the execution of this Agreement, Parent,
acting through its board of directors, shall, in accordance with applicable
Law:
(a)
duly
call, give notice of, convene and hold a special meeting of its stockholders
(the “
Special
Meeting
”)
for
the purposes of considering and taking action upon the approval and adoption
of
this Agreement and the Merger, including adjourning such meeting for up
to
thirty (30) Business Days to obtain such approval. Parent shall (i)
use reasonable best efforts to solicit the approval of this Agreement by
the
stockholders of Parent and (ii) include in the Proxy Statement (x) the
board of
directors’ declaration of the advisability of this Agreement and its
recommendation to the stockholders of Parent that they adopt this Agreement
and
approve the Merger and (y) all other requests or approvals necessary to
consummate the transactions contemplated by this Agreement.
1
Notwithstanding the foregoing, Parent may adjourn or postpones the Special
Meeting as and to the extent required by applicable Law. Parent shall use
its
commercially reasonable efforts to cause the Proxy Statement to be mailed
to its
stockholders as promptly as practicable after the Registration Statement,
of
which the Proxy Statement is a part, is declared effective by the SEC.
The
Company shall cooperate and assist Parent and its counsel in preparing
the Proxy
Statement and acknowledges that a substantial portion of the Proxy Statement
shall include disclosure regarding the Company, any Company Subsidiary
and their
respective management, operations and financial condition. The Company
shall
make its, and cause each Company Subsidiary to make its, managers, directors,
officers and employees available to Parent and its counsel in connection
with
the drafting of the Proxy Statement and responding in a timely manner to
comments from the SEC. Prior to the filing of the Proxy Statement with
the SEC
and each amendment thereto, the Company shall confirm in writing to Parent
and
its counsel that it has reviewed the Proxy Statement (and each amendment
thereto) and approved any information provided by the Company and its Members.
If, prior to the Effective Time, any event occurs with respect to the Company
or
any Company Subsidiary, or any change occurs with respect to other information
supplied by the Company or any Company Subsidiary for inclusion in the
Proxy
Statement, the Company shall promptly notify Parent of such event, and
the
Company and Parent shall cooperate in the prompt filing with the SEC of
any
necessary amendment or supplement to the Proxy Statement and, as required
by
Law, in disseminating the information contained in such amendment or supplement
to Parent’s stockholders.
1
Consider
including charter amendment changing name
(b)
promptly
transmit any amendment or supplement to its stockholders, if at any time
prior
to the Special Meeting there shall be discovered any information that should
be
set forth in an amendment or supplement to the Proxy Statement.
CONDITIONS
The
obligations of each Party to consummate the Merger shall be subject to
the
satisfaction or waiver (where permissible), at or prior to the Effective
Time,
of the following conditions:
(a)
Stockholder
Approval
.
The
Required Parent Vote shall have been obtained in accordance with the DGCL
and
the stockholders of Parent holding thirty percent (30%) or more of the
shares of
Common Stock sold in Parent’s initial public offering shall not have voted
against the Merger and exercised their conversion rights under Parent’s
Certificate of Incorporation, as amended, to convert their shares of Common
Stock into a cash payment from the Trust Fund.
(b)
Antitrust
Laws
. The
applicable waiting period (and any extension thereof) under any Antitrust
Laws
shall have expired or been terminated.
(c)
Requisite
Regulatory Approvals and Consents
. All
authorizations, approvals and permits required to be obtained from or made
with
any Governmental Authority in order to consummate the transactions contemplated
by this Agreement (the “
Requisite
Regulatory Approvals
”),
and
all Consents from third parties that are required in connection with the
transactions contemplated by this Agreement, shall have been obtained or
made,
including, without limitation, the consent of Columbus Bank and Trust
Company.
(d)
No
Law
. No
Governmental Authority shall have enacted, issued, promulgated, enforced
or
entered any Law (whether temporary, preliminary or permanent) or Order
that is
then in effect and has the effect of making the Merger illegal or otherwise
preventing or prohibiting consummation of the Merger.
(e)
Effective
Registration Statement
.
The
Registration Statement shall have been declared effective by the SEC and
no stop
order suspending the effectiveness of the Registration Statement shall
be in
effect and no proceedings for that purpose shall be pending before or threatened
by the SEC.
(f)
Company
Member Approval
.
This
Agreement and the transactions contemplated hereby shall have been duly
approved
by the Required Company Vote.
The
obligations of Parent and Merger Sub to consummate the Merger are subject
to the
satisfaction or waiver by Parent, at or prior to the Effective Time, of
the
following additional conditions:
(a)
Representations
and Warranties
.
Each of
the representations and warranties of the Company and any Company Subsidiary
set
forth in this Agreement that are qualified by materiality shall be true
and
correct and those not so qualified shall be true and correct in all material
respects as of the date of this Agreement and as of the Effective Time
as though
made as of the Effective Time (except to the extent that any of such
representations and warranties expressly speaks only as of an earlier date,
in
which case such representation and warranty that is qualified by materiality
shall be true and correct, and those not so qualified shall be true and
correct
in all material respects, as of such earlier date).
(b)
Agreements
and Covenants
. The
Company shall have performed, in all material respects, all of its obligations
and complied with, in all material respects, all of its agreements and
covenants
to be performed or complied with by it under this Agreement at or prior
to the
Effective Time.
(c)
Officer
Certificate
. The
Company shall have delivered to Parent a certificate, dated the Closing
Date,
signed by the chief executive officer or chief financial officer of the
Company,
certifying in such capacity as to the satisfaction of the conditions specified
in Sections 6.2(a), 6.2(b) and 6.2(e).
(d)
Secretary’s
Certificate
.
The
Company shall have delivered to Parent a true copy of the resolutions of
the
Board of the Company authorizing the execution of this Agreement and the
consummation of the Merger and transactions contemplated herein, certified
by
the Secretary of the Company or similar officer.
(e)
Company
Material Adverse Effect
. No
Company Material Adverse Effect shall have occurred since the date of this
Agreement.
(f)
Burdensome
Condition
. The
Requisite Regulatory Approvals shall not have included or contained, or
resulted
in the imposition of, any Burdensome Condition.
(g)
Required
Company Vote and Dissenting Membership Interest
. The
Required Company Vote shall have been obtained. No more than ten percent
(10%)
of the outstanding Membership Interest shall constitute Dissenting Membership
Interest.
(h)
Legal
Opinion
.
Parent
shall have received an opinion of the Company’s counsel, Foley & Lardner or
Myers & Fuller, P.A., in form and substance reasonably satisfactory to
Parent, addressed to Parent and Merger Sub, and dated as of the Closing
Date.
(i)
Lock
Up Agreements
.
Parent
shall have received Executive Lock Up Agreements and Entity Lock Up Agreements
from each Parent Executive and Entity Equity Holder set forth in Section
1.8(b).
(j)
Conversion
.
The
stockholders of Parent holding thirty percent (30%) or more of the shares
of
Common Stock sold in Parent’s initial public offering shall not have voted
against the Merger and exercised their conversion rights under Parent’s
Certificate of Incorporation, as amended, to convert their shares of Common
Stock into a cash payment from the Trust Fund.
(k)
Board
of Directors
.
The
officers and the Board of Directors of Parent and the Surviving Corporation
shall be constituted as set forth in Section 1.8 hereof, effective as of
the
Effective Time.
(l)
Waiver
of Right of First Refusal
.
(i)
The
Company shall have waived, in writing, its right of first option to purchase
all
of the Membership Interests being sold pursuant hereto, including, without
limitation, its rights pursuant to Section 5.3 of the Member’s Agreement of the
Company (the
“Member’s
Agreement”
);
and
(ii)
All
Members, including, without limitation, the holders of Dissenting Membership
Interests, shall each have waived, in writing, their respective rights
of first
option to purchase all of the Membership Interests being sold pursuant
hereto,
including, without limitation, its rights pursuant to Section 5.4 of the
Member’s Agreement of the Company or the relevant provision in the Member’s
Agreement shall not be applicable with respect to the Merger or the transactions
contemplated in connection therewith and such non-applicability has been
agreed
to in writing by such percentage of Membership Interests as is necessary
to
amend such provision of the Member’s Agreement.
(m)
Waiver
of Chairman Purchase Right
.
The
Chairman of the Company shall have waived its right to purchase Membership
Interests pursuant to Section 8.1 of the Member’s Agreement.
The
obligations of the Company to consummate the Merger are subject to the
satisfaction or waiver by the Company, at or prior to the Effective Time,
of the
following additional conditions:
(a)
Representations
and Warranties
. Each
of the representations and warranties of the Parent and Merger Sub set
forth in
this Agreement that are qualified by materiality shall be true and correct
and
those not so qualified shall be true and correct in all material respects
as of
the date of this Agreement and as of the Effective Time as though made
as of the
Effective Time (except to the extent that any of such representations and
warranties expressly speaks only as of an earlier date, in which case such
representation and warranty that is qualified by materiality shall be true
and
correct, and those not so qualified shall be true and correct in all material
respects, as of such earlier date).
(b)
Agreements
and Covenants
. Each
of Parent and Merger Sub shall have performed, in all material respects,
its
obligations and complied with, in all material respects, its agreements
and
covenants to be performed or complied with by it under this Agreement at
or
prior to the Effective Time, including, without limitation, the resignation
from
the Board of Parent of those persons currently on the Board of Parent who
are
not named as directors following the Effective Time in the Proxy
Statement.
(c)
Officer
Certificate
. Parent
shall have delivered to the Company a certificate, dated the Closing Date,
signed by the chief executive officer or chief financial officer of Parent,
certifying in such capacity as to the satisfaction of the conditions specified
in Sections 6.3(a) and 6.3(b).
(d)
Secretary’s
Certificate
.
The
Parent shall have delivered to the Company a true copy of the resolutions
of the
Board of Directors of the Parent authorizing the execution of this Agreement
and
the consummation of the Merger and transactions contemplated herein, certified
by the Secretary of the Company or similar officer.
(e)
Parent
Material Adverse Effect
. No
Parent Material Adverse Effect shall have occurred since the date of this
Agreement.
(f)
Legal
Opinion
.
The
Company shall have received an opinion of the Parent’s and Merger Sub’s counsel,
Ellenoff Grossman & Schole, LLP, in form and substance reasonably
satisfactory to the Company, addressed to the Company, and dated as of
the
Closing Date.
(g)
Board
of Directors
.
The
officers and the Board of Directors of Parent and the Surviving Corporation
shall be constituted as set forth in Section 1.8 hereof, effective as of
the
Effective Time.
Neither
Parent nor the Company may rely on the failure of any condition set forth
in
this Article VI to be satisfied if such failure was caused by such Party’s
failure to comply with or perform any of its covenants or obligations set
forth
in this Agreement.
TERMINATION
AND ABANDONMENT
This
Agreement may be terminated and the Merger and the other transactions
contemplated hereby may be abandoned at any time prior to the Effective
Time,
notwithstanding any approval of the matters presented in connection with
the
Merger by the stockholders of Parent and Members of the Company (the date
of any
such termination, the “
Termination
Date
”),
as
follows:
(a)
by
mutual
written consent of each of the Company and Parent, as duly authorized by
the
Board of Directors of Parent and the Board of the Company;
(b)
by
written notice by either Parent or the Company if the Closing conditions
set
forth in Section 6.1 have not been satisfied by the Company or Parent,
as the
case may be (or waived by Parent or the Company as the case may be) by
the date
that is the earlier of (A) six months from filing of the Registration Statement
or (B) seven months from date of the Agreement;
provided
,
however
,
that
the right to terminate this Agreement under this Section 7.1(b) shall not
be
available to Parent or the Company due to failure by Parent or Merger Sub,
on
one hand, or the Company or any Company Subsidiary, on the other hand,
to
fulfill any obligation under this Agreement;
(c)
by
written notice by either Parent or the Company, if any Governmental Authority
shall have enacted, issued, promulgated, enforced or entered any Order
or Law
that is, in each case, then in effect and is final and nonappealable and
has the
effect of permanently restraining, enjoining or otherwise preventing or
prohibiting the transactions contemplated by this Agreement (including
the
Merger);
provided
,
however
,
that
the right to terminate this Agreement under this Section 7.1(c) shall not
be
available to any Party whose failure to fulfill any obligation under this
Agreement has been the cause of, or resulted in, any such Order or Law
to have
been enacted, issued, promulgated, enforced or entered;
(d)
by
written notice by Parent, if after following the procedures set forth in
Section
4.1(c), Parent and Company are unable to resolve Parent’s objections to the
reinsurance contract and lease.
(e)
by
written notice by Parent, if there has been a breach by the Company of
any of
its representations, warranties, covenants or agreements contained in this
Agreement, or if any representation or warranty of the Company shall have
become
untrue or inaccurate, in either case that would result in a failure of
a
condition set forth in Section 6.2 (a “
Terminating
Company Breach
”);
(f)
by
written notice by the Company, if there has been a breach by Parent or
Merger
Sub of any of its representations, warranties, covenants or agreements
contained
in this Agreement, or if any representation or warranty of Parent or Merger
Sub
shall have become untrue or inaccurate, in either case that would result
in a
failure of a condition set forth in Section 6.3 (a “
Terminating
Parent Breach
”);
(g)
by
written notice by either Parent or Company, if, at the Special Meeting
(including any adjournment or postponement thereof at which this Agreement
is
voted upon), the Required Parent Vote is not obtained;
provided
,
however
,
that
the right to terminate this Agreement under this Section 7.1(f) shall not
be
available to Parent where the failure to obtain the Required Parent Vote
shall
have resulted from Parent’s breach of this Agreement;
(h)
by
written notice by either Parent or Company, if the stockholders of Parent
holding thirty percent (30%) or more of the shares of Common Stock sold
in
Parent’s initial public offering shall have voted against the Merger and
exercised their conversion rights under Parent’s Certificate of Incorporation,
as amended, to convert their shares of Common Stock into a cash payment
from the
Trust Fund;
(i)
by
written notice by either Parent or Company if the Required Company Vote
is not
obtained, provided, that in the event of termination pursuant to this
subsection, Company shall be obligated to pay Parent for all costs, expenses
and
fees incurred in connection with the transactions contemplated hereby,
up to a
maximum of $500,000 cash within three (3) business days of the date of
such
written notice from either Parent or Company;
(j)
by
written notice by either Parent or Company in the event more than five
percent
(5%) of Membership Interests are Dissenting Membership Interests;
(k)
by
written notice by Parent if the Closing conditions set forth in Section
6.2 have
not been satisfied by the Company (or waived by Parent) by the date that
is the
earlier of (A) six months from filing of the Registration Statement or
(B) seven
months from date of the Agreement;
provided
,
however
,
that
the right to terminate this Agreement under this Section 7.1(k) shall not
be
available to Parent if Parent is in material breach of any representation,
warranty or covenant contained in this Agreement; or
(l)
by
written notice by Company if the Closing conditions set forth in Section
6.3
have not been satisfied by Parent (or waived by Company) by the date that
is the
earlier of (A) six months from filing of the Registration Statement or
(B) seven
months from date of the Agreement;
provided
,
however
,
that
the right to terminate this Agreement under this Section 7.1(l) shall not
be
available to Company if Company is in material breach of any representation,
warranty or covenant contained in this Agreement.
In
the
event of the termination of this Agreement pursuant to Section 7.1, this
Agreement shall forthwith become void, and there shall be no liability
on the
part of any Party hereto or any of their respective affiliates or the directors,
officers, partners, members, managers, employees, agents or other
representatives of any of them, and all rights and obligations of each
Party
hereto shall cease, except (i) as set forth in this Section 7.2 and in
Section
7.3 and Article VIII and (ii) subject to Section 5.3, nothing herein shall
relieve any Party from liability for any fraud or willful breach of this
Agreement prior to termination. Without limiting the foregoing,
Section 4.2(b), Section 5.3, this Section 7.2, Section 7.3 and Article
VIII
shall survive the termination of this Agreement.
(a)
Except
as
otherwise set forth in this Agreement, including this Section 7.3, all
Expenses
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by the Party incurring such expenses, whether or not
the
Merger or any other related transaction is consummated. As used in
this Agreement, “
Expenses
”
shall
include all out-of-pocket expenses (including all fees and expenses of
counsel,
accountants, investment bankers, financing sources, experts and consultants
to a
Party hereto and its affiliates) incurred by a Party or on its behalf in
connection with or related to the authorization, preparation, negotiation,
execution or performance of this Agreement, the preparation, printing,
filing or
mailing of the Proxy Statement and Registration Statement, the solicitation
of
the Required Parent Vote and all other matters related to the consummation
of
the Merger. Each Party shall, upon the request of the other Party, disclose
the
costs that such Party has incurred or anticipates to incur with respect
to the
Merger and the transactions contemplated herein.
(b)
Notwithstanding
the foregoing Section 7.3(a), Parent will reimburse the Company, up to
and not
to exceed $25,000, for audit expenses relating to the audit of 2007 Company
Financials that exceed the amount of expense the Company incurred for its
2006
audit by Thomas Howell Ferguson.
This
Agreement may be amended by the Parties hereto by action taken by or on
behalf
of their respective boards of directors and managers at any time prior
to the
Effective Time. This Agreement may only be amended pursuant to a
written agreement signed by each of the Parties hereto.
At
any
time prior to the Effective Time, subject to applicable Law, any Party
hereto
may in its sole discretion (i) extend the time for the performance of any
obligation or other act of any other Party hereto, (ii) waive any inaccuracy
in
the representations and warranties by such other Party contained herein
or in
any document delivered pursuant hereto and (iii) waive compliance by such
other
Party with any agreement or condition contained herein. Any such
extension or waiver shall be valid only if set forth in an instrument in
writing
signed by the Party or Parties to be bound thereby. Notwithstanding
the foregoing, no failure or delay by the Company, Parent or Merger Sub
in
exercising any right hereunder shall operate as a waiver thereof nor shall
any
single or partial exercise thereof preclude any other or further exercise
of any
other right hereunder.
TRUST
FUND WAIVER
8.1
Trust
Fund Waiver
.
Reference is made to the final prospectus of Parent, dated October 4, 2007
(the
“
Prospectus
”).
The
Company understands that, except for a portion of the interest earned on
the
amounts held in the Trust Fund, Parent may disburse monies from the Trust
Fund
only: (a) to its public stockholders in the event of the redemption of
their
shares or the dissolution and liquidation of Parent, (b) to Parent and
the
underwriters listed in the Prospectus (with respect to such underwriters’
deferred underwriting compensation only) after Parent consummates a business
combination (as described in the Prospectus) or (c) as consideration to
the
sellers of a target business with which Parent completes a business combination.
The Company agrees that the Company does not now have, and shall not at
any time
prior to the Closing have, any claim to, or make any claim against, the
Trust
Fund or any asset contained therein, regardless of whether such claim arises
as
a result of, in connection with or relating in any way to, the business
relationship between the Company, on the one hand, and Parent, on the other
hand, this Agreement, or any other agreement or any other matter, and regardless
of whether such claim arises based on contract, tort, equity or any other
theory
of legal liability. The Company hereby irrevocably waives any and all claims
it
may have, now or in the future (in each case, however, prior to the consummation
of a business combination), and will not seek recourse against, the Trust
Fund
for any reason whatsoever in respect thereof. In the event that the Company
commences any action or proceeding based upon, in connection with, relating
to
or arising out of any matter relating to Parent, which proceeding seeks,
in
whole or in part, relief against the Trust Fund or the public stockholders
of
Parent, whether in the form of money damages or injunctive relief, Parent
shall
be entitled to recover from the Company the associated legal fees and costs
in
connection with any such action.
This
Section 8.1 shall not limit any covenant or agreement of the Parties that
by its
terms contemplates performance after the Effective Time.
ARTICLE
IX
MISCELLANEOUS
The
respective representations and warranties of the Company and Parent contained
herein or in any certificates or other documents delivered prior to or
at the
Closing shall terminate at the Effective Time. Any indemnity claim arising
under
Section 5.3 hereof shall expire and be waived in perpetuity as of the Effective
Time. None of
the
covenants set forth in Article IV and Section 5.2 shall survive the
Effective Time.
The
Confidentiality Agreement shall survive termination of this Agreement in
accordance with its terms.
All
notices, consents, waivers and other communications hereunder shall be
in
writing and shall be deemed to have been duly given when delivered in person,
by
facsimile, receipt confirmed, or on the next Business Day when sent by
reliable
overnight courier to the respective Parties at the following addresses
(or at
such other address for a Party as shall be specified by like
notice):
(i) if
to the Company, to:
United
Insurance Holdings LC
700
Central Avenue
Suite
302
St.
Petersburg, Florida 33701
Attention:
Gregory C. Branch, Chairman
Facsimile:
___________
with
a
copy to (but which shall not constitute notice to the Company):
Attention:
____________
Facsimile:
____________
(ii) if
to Parent or Merger Sub, to:
FMG
Acquisition Corp.
Four
Forest Park
Second
Floor
Farmington,
Connecticut 06032
Attention:
Gordon G. Pratt, Chairman
Facsimile:
(860) 674-1163
with
a
copy to (but which shall not constitute notice to Parent or Merger
Sub):
Ellenoff
Grossman & Schole, LLP
370
Lexington Avenue
New
York,
New York 10017
Attention: Douglas
Ellenoff, Esq.
Facsimile:
(212) 370-7889
This
Agreement and all of the provisions hereof shall be binding upon and inure
to
the benefit of the Parties hereto and their respective successors and permitted
assigns. This Agreement shall not be assigned by operation of Law or
otherwise without the prior written consent of the other Parties, and any
assignment without such consent shall be null and void, except that Parent
and
Merger Sub may assign any or all of their rights and obligations hereunder
to
any direct or indirect wholly owned subsidiary of Parent;
provided
that no
such assignment shall relieve the assigning Party of its obligations
hereunder.
This
Agreement shall be governed by, construed and enforced in accordance with
the
Laws of the State of Delaware without regard to the conflict of laws principles
thereof. All Actions arising out of or relating to this Agreement
shall be heard and determined exclusively in any state or federal court
located
in New York, New York. The Parties hereto hereby (A) submit to the
exclusive jurisdiction of any Delaware state or federal court for the purpose
of
any Action arising out of or relating to this Agreement brought by any
Party
hereto and (B) irrevocably waive, and agree not to assert by way of motion,
defense or otherwise, in any such Action, any claim that it is not subject
personally to the jurisdiction of the above-named courts, that its property
is
exempt or immune from attachment or execution, that the Action is brought
in an
inconvenient forum, that the venue of the Action is improper, or that this
Agreement or the transactions contemplated hereby may not be enforced in
or by
any of the above-named courts. Each of Parent, Merger Sub and the
Company agrees that a final judgment in any action or proceeding shall
be
conclusive and may be enforced in other jurisdictions by suit on the judgment
or
in any other manner provided by Law. Each of Parent, Merger Sub and
the Company irrevocably consents to the service of the summons and complaint
and
any other process in any other action or proceeding relating to the transactions
contemplated by this Agreement, on behalf of itself or its property, by
personal
delivery of copies of such process to such Party. Nothing in this
Section 9.4 shall affect the right of any Party to serve legal process
in any
other manner permitted by Law.
9.5
Waiver
of Jury Trial
.
Each
of
the Parties hereto hereby waives to the fullest extent permitted by applicable
Law any right it may have to a trial by jury with respect to any Action
directly
or indirectly arising out of, under or in connection with this Agreement
or the
transactions contemplated hereby. Each of the Parties hereto (A)
certifies that no representative, agent or attorney of any other party
has
represented, expressly or otherwise, that such other party would not, in
the
event of any Action, seek to enforce that foregoing waiver and (B) acknowledges
that it and the other Parties hereto have been induced to enter into this
Agreement by, among other things, the mutual waivers and certifications
in this
Section 9.5.
This
Agreement may be executed and delivered (including by facsimile transmission)
in
one or more counterparts, and by the different Parties hereto in separate
counterparts, each of which when executed shall be deemed to be an original
but
all of which taken together shall constitute one and the same
agreement.
The
article and section headings contained in this Agreement are solely for
the
purpose of reference, are not part of the agreement of the Parties and
shall not
in any way affect the meaning or interpretation of this Agreement. As
used in this Agreement, (i) the term “
Person
”
shall
mean and include an individual, a partnership, a joint venture, a corporation,
a
limited liability company, a trust, an association, an unincorporated
organization, a Governmental Authority and any other entity, (ii) unless
otherwise specified herein, the term “
affiliate
,”
with
respect to any Person, shall mean and include any Person, directly or
indirectly, through one or more intermediaries controlling, controlled
by or
under common control with such Person, (iii) the term “
subsidiary
”
of
any
specified Person shall mean any corporation a majority of the outstanding
voting
power of which, or any partnership, joint venture, limited liability company
or
other entity a majority of the total equity interests of which, is directly
or
indirectly (either alone or through or together with any other subsidiary)
owned
by such specified Person, (iv) the term “
knowledge
,”
when
used with respect to the Company, shall mean the actual knowledge after
due
inquiry of Don Cronin, Nick Griffin, Eugene Hearn, Gregory C. Branch, Alec
L.
Pointevint, II and Melville Atwood Russell, II, and, when used with respect
to
Parent, shall mean the knowledge of the executive officers of Parent after
due
inquiry, and (v) the term “
Business
Day
”
means
any day on which the principal offices of the SEC in Washington, D.C. are
open
to accept filings, or, in the case of determining a date when any payment
is
due, any day on which banks are not required or authorized to close in
the City
of New York. Whenever the words “
include,”
“
includes”
or “
including”
are used in this Agreement, they shall be deemed to be followed by the
words
“
without
limitation.” The words “
hereof,”
“
herein,”
“
hereby”
and “
hereunder”
and words of similar import when used in this Agreement shall refer to
this
Agreement as a whole and not to any particular provision of this
Agreement. The Parties have participated jointly in the negotiation
and drafting of this Agreement. Consequently, in the event an
ambiguity or question of intent or interpretation arises, this Agreement
shall
be construed as if drafted jointly by the Parties hereto, and no presumption
or
burden of proof shall arise favoring or disfavoring any party by virtue
of the
authorship of any provision of this Agreement.
This
Agreement and the documents or instruments referred to herein, including
any
exhibits attached hereto and the Company Disclosure Schedule referred to
herein,
which exhibits and Company Disclosure Schedule are incorporated herein
by
reference and the Confidentiality Agreement embody the entire agreement
and
understanding of the Parties hereto in respect of the subject matter contained
herein. There are no restrictions, promises, representations,
warranties, covenants or undertakings, other than those expressly set forth
or
referred to herein. This Agreement and such other agreements
supersede all prior agreements and the understandings among the Parties
with
respect to such subject matter.
In
case
any provision in this Agreement shall be held invalid, illegal or unenforceable
in a jurisdiction, such provision shall be modified or deleted, as to the
jurisdiction involved, only to the extent necessary to render the same
valid,
legal and enforceable, and the validity, legality and enforceability of the
remaining provisions hereof shall not in any way be affected or impaired
thereby
nor shall the validity, legality or enforceability of such provision be
affected
thereby in any other jurisdiction. Upon such determination that any
term or other provision is invalid, illegal or incapable of being enforced,
the
Parties hereto shall negotiate in good faith to modify this Agreement so
as to
effect the original intent of the Parties as closely as possible in a mutually
acceptable manner in order that the Merger be consummated as originally
contemplated to the fullest extent possible.
The
Parties hereto agree that irreparable damage would occur in the event that
any
of the provisions of this Agreement were not performed by the Company or
the
Parent or the Merger Sub in accordance with their specific terms or were
otherwise breached. Accordingly, the Parties further agree that prior
to the termination of this Agreement pursuant to Article VI, each Party
shall be
entitled to seek an injunction or restraining order to prevent breaches
of this
Agreement and to seek to enforce specifically the terms and provisions
hereof,
this being in addition to any other right or remedy to which such Party
may be
entitled under this Agreement, at law or in equity.
9.11
Third
Parties
.
Nothing
contained in this Agreement or in any instrument or document executed by
any
party in connection with the transactions contemplated hereby shall create
any
rights in, or be deemed to have been executed for the benefit of, any Person
that is not a party hereto or thereto or a successor or permitted assign
of such
a party other than Sections 1.4 and 5.3 hereof (which is intended to be
for the
benefit of the Persons covered thereby and may be enforced by such
Persons). Without limiting the foregoing, Section 1.4 hereof is
intended to be for the benefit of the Members and may be brought by any
Members
or their representatives.
[SIGNATURE
PAGE FOLLOWS]
IN
WITNESS WHEREOF, the Parties hereto have caused this Agreement and Plan
of
Merger to be signed and delivered by their respective duly authorized officers
as of the date first above written.
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UNITED
INSURANCE HOLDINGS LC
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By:
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Name:
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Title:
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FMG
ACQUISITION CORP.
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By:
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Name:
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Title:
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UNITED
SUBSIDIARY CORP.
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By:
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Name:
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Title:
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[SIGNATURE
PAGE TO AGREEMENT AND PLAN OF MERGER]
ANNEX
B
SECOND
AMENDED AND RESTATED
CERTIFICATE
OF INCORPORATION
OF
FMG
ACQUISITION CORP.
FMG
Acquisition Corp., a Delaware corporation (the “Corporation”), does hereby
certify as follows:
1.
The
name
of the Corporation is FMG Acquisition Corp. The date of filing of its original
Certificate of Incorporation with the Secretary of State was May 22, 2007
under
the name of FMG Acquisition Corp. The date of filing of its Amended and
Restated
Certificate of Incorporation with the Secretary of State was October 4,
2007
under the name of FMG Acquisition Corp.
2.
This
Second Amended and Restated Certificate of Incorporation of FMG Acquisition
Corp., in the form attached hereto as
Exhibit
A
,
has
been duly adopted in accordance with the provisions of Sections 228, 242
and 245
of the Delaware General Corporation Law by the directors and stockholders
of the
Corporation.
3.
This
Second Amended and Restated Certificate of Incorporation restates, integrates
and amends the Amended and Restated Certificate of Incorporation of the
Corporation.
4.
This
Second Amended and Restated Certificate of Incorporation shall be effective
on
the date of filing with the Secretary of State of the State of
Delaware.
5.
The
text
of the Amended and Restated Certificate of Incorporation of the Corporation
is
hereby amended and restated to read in its entirety as set forth on
Exhibit
A
attached
hereto and incorporated herein by reference.
IN
WITNESS WHEREOF, the Corporation has caused this Second Amended and Restated
Certificate of Incorporation to be duly executed on its behalf by an authorized
officer on this ___ day of _______, 2008.
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FMG
ACQUISITION CORP.
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By:
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Name:
Donald J. Cronin
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Title:
Chief Executive Officer
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EXHIBIT
A
SECOND
AMENDED AND RESTATED
CERTIFICATE
OF INCORPORATION
OF
FMG
ACQUISITION CORP.
FIRST:
The
name
of the corporation is United Insurance Holdings Corp. (the
“Corporation”).
SECOND:
The
address of the Corporation’s registered office in the State of Delaware is
National Registered Agents, Inc., 160 Greentree Drive, Suite 101, Dover,
Delaware 19904, County of Kent. The name of the Corporation’s registered agent
at such address is National Registered Agents, Inc.
THIRD:
The
purpose of the Corporation is to engage in any lawful act or activity for
which
corporations may be organized under the Delaware General Corporation Law,
as
amended from time to time (the “DGCL”).
In
addition to the powers and privileges conferred upon the Corporation by
law and
those incidental thereto, the Corporation shall possess and may exercise
all the
powers and privileges which are necessary or convenient to the conduct,
promotion or attainment of the business or purposes of the
Corporation.
FOURTH:
The
total
number of shares of all classes of capital stock which the Corporation
shall
have authority to issue is 51,000,000, of which 50,000,000 shares shall
be
Common Stock of the par value of $.0001 per share and 1,000,000 shares
shall be
Preferred Stock of the par value of $.0001 per share.
A.
Preferred
Stock. The Board of Directors is expressly granted authority to issue shares
of
the Preferred Stock, in one or more series, and to fix for each such series
such
voting powers, full or limited, and such designations, preferences and
relative,
participating, optional or other special rights and such qualifications,
limitations or restrictions thereof as shall be stated and expressed in
the
resolution or resolutions adopted by the Board of Directors providing for
the
issue of such series (a “Preferred Stock Designation”) and as may be permitted
by the DGCL. The number of authorized shares of Preferred Stock may be
increased
or decreased (but not below the number of shares thereof then outstanding)
by
the affirmative vote of the holders of a majority of the voting power of
all of
the then outstanding shares of the capital stock of the Corporation entitled
to
vote generally in the election of directors, voting together as a single
class,
without a separate vote of the holders of the Preferred Stock, or any series
thereof, unless a vote of any such holders is required pursuant to any
Preferred
Stock Designation.
B.
Common
Stock. Except as otherwise required by law or as otherwise provided in
any
Preferred Stock Designation, the holders of the Common Stock shall exclusively
possess all voting power and each share of Common Stock shall have one
vote.
FIFTH:
The
Corporation's existence shall be perpetual.
SIXTH:
The
Board
of Directors shall be divided into two classes: Class A and Class B.
The number of directors in each class shall be as nearly equal as
possible. Commencing at the first Annual Meeting of Stockholders, and at
each annual meeting thereafter, directors elected to succeed those directors
whose terms expire shall be elected for a term of office to expire at the
second
succeeding annual meeting of stockholders after their election. Except
as the
DGCL may otherwise require, in the interim between annual meetings of
stockholders or special meetings of stockholders called for the election
of
directors and/or the removal of one or more directors and the filling of
any
vacancy in that connection, newly created directorships and any vacancies
in the
Board of Directors, including unfilled vacancies resulting from the removal
of
directors for cause, may be filled by the vote of a majority of the remaining
directors then in office, although less than a quorum (as defined in the
Corporation’s Bylaws), or by the sole remaining director. All directors shall
hold office until the expiration of their respective terms of office and
until
their successors shall have been elected and qualified. A director elected
to
fill a vacancy resulting from the death, resignation or removal of a director
shall serve for the remainder of the full term of the director whose death,
resignation or removal shall have created such vacancy and until his successor
shall have been elected and qualified.
SEVENTH:
The
following provisions are inserted for the management of the business and
for the
conduct of the affairs of the Corporation, and for further definition,
limitation and regulation of the powers of the Corporation and of its directors
and stockholders:
A.
Election
of directors need not be by ballot unless the by-laws of the Corporation
so
provide.
B.
The
Board
of Directors shall have the power, without the assent or vote of the
stockholders, to make, alter, amend, change, add to or repeal the by-laws
of the
Corporation.
C.
The
directors in their discretion may submit any contract or act for approval
or
ratification at any annual meeting of the stockholders or at any meeting
of the
stockholders called for the purpose of considering any such act or contract,
and
any contract or act that shall be approved or be ratified by the vote of
the
holders of a majority of the stock of the Corporation which is represented
in
person or by proxy at such meeting and entitled to vote thereat (provided
that a
lawful quorum of stockholders be there represented in person or by proxy)
shall
be as valid and binding upon the Corporation and upon all the stockholders
as
though it had been approved or ratified by every stockholder of the Corporation,
whether or not the contract or act would otherwise be open to legal attack
because of directors’ interests, or for any other reason.
D.
In
addition to the powers and authorities hereinbefore or by statute expressly
conferred upon them, the directors are hereby empowered to exercise all
such
powers and do all such acts and things as may be exercised or done by the
Corporation; subject, nevertheless, to the provisions of the statutes of
Delaware, of this Certificate of Incorporation, and to any by-laws from
time to
time made by the stockholders; provided, however, that no by-law so made
shall
invalidate any prior act of the directors which would have been valid if
such
by-law had not been made.
EIGHTH:
A.
A
director of the Corporation shall not be personally liable to the Corporation
or
its stockholders for monetary damages for any breach of fiduciary duty
by such
director as a director, except for liability (i) for any breach of the
director’s duty of loyalty to the Corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct
or a
knowing violation of law, (iii) under Section 174 of the DGCL, or
(iv) for any transaction from which the director derived an improper
personal benefit. If the DGCL is amended to authorize corporate action
further
eliminating or limiting the personal liability of directors, then the liability
of a director of the Corporation shall be eliminated or limited to the
fullest
extent permitted by the DGCL, as so amended. Any repeal or modification
of this
paragraph A by the stockholders of the Corporation shall not adversely
affect
any right or protection of a director of the Corporation with respect to
events
occurring prior to the time of such repeal or modification.
B.
The
Corporation, to the full extent permitted by Section 145 of the DGCL, as
amended from time to time, shall indemnify all persons whom it may indemnify
pursuant thereto. Expenses (including attorneys’ fees) incurred by an officer or
director in defending any civil, criminal, administrative, or investigative
action, suit or proceeding for which such officer or director may be entitled
to
indemnification hereunder shall be paid by the Corporation in advance of
the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount
if
it shall ultimately be determined that he is not entitled to be indemnified
by
the Corporation as authorized hereby.
NINTH:
Whenever
a compromise or arrangement is proposed between this Corporation and its
creditors or any class of them and/or between this Corporation and its
stockholders or any class of them, any court of equitable jurisdiction
within
the State of Delaware may, on the application in a summary way of this
Corporation or of any creditor or stockholder thereof or on the application
of
any receiver or receivers appointed for this Corporation under Section 291
of Title 8 of the Delaware Code or on the application of trustees in dissolution
or of any receiver or receivers appointed for this Corporation under
Section 279 of Title 8 of the Delaware Code order a meeting of the
creditors or class of creditors, and/or of the stockholders or class of
stockholders of this Corporation, as the case may be, to be summoned in
such
manner as the said court directs. If a majority in number representing
three
fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this Corporation, as the case
may be,
agree to any compromise or arrangement and to any reorganization of this
Corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned
by
the court to which the said application has been made, be binding on all
the
creditors or class of creditors, and/or on all the stockholders or class
of
stockholders, of this Corporation, as the case may be, and also on this
Corporation.
TENTH:
The
Corporation hereby elects not to be governed by Section 203 of the
DGCL.
ANNEX
C
March
20,
2008
Board
of
Directors
FMG
Acquisition Corp.
Four
Forest Park
Second
Floor
Farmington,
CT 06032
Dear
Members
of the Board
of
Directors
:
We
understand that FMG Acquisition Corp. (“Parent” or “You”) will enter into an
Agreement and Plan of Merger
,
on or
about April 2, 2008, with United Insurance Holdings LC, a Florida limited
liability company (the “Company”) and
United
Acquisition Corp., a
Florida
corporation and wholly
-
owned
subsidiary of Parent (“Merger Sub”) (the “Agreement”).
Pursuant
to the Agreement, Parent,
the
Company,
and Merger Sub intend to effect the merger of Merger Sub with and into
the
Company (the “Merger”), with the Company continuing as the surviving entity in
the Merger, as a result of which the entire issued and outstanding membership
interest of the Company (the “Membership Interest”) will automatically be
exchanged into the right to receive the Consideration (as defined herein),
without interest, upon the terms and subject to the conditions set forth
in the
Agreement. Upon consummation of the Merger, the separate existence of
Merger Sub
shall thereupon cease and the Company, as the surviving entity in the
Merger
(the “Surviving Company”)
,
shall
continue
its
limited liability company existence as a wholly-owned subsidiary of Parent.
All
of
the Membership Interest (other than Dissenting Membership Interest
(as
defined in the Agreement)
)
shall
automatically be converted into the right to receive an aggregate of:
(i) Twenty
Five Million Dollars ($25,000,000) in cash (the “Cash Consideration”) payable,
without interest, to the holders of Membership Interest of the Company
(individually, a “Member” and collectively, the “Members”); plus, Eight Million
Seven Hundred Fifty Thousand (8,750,000) shares of Parent common stock,
par
value $0.0001 per share (the “Common Stock”), issuable to the Members in
accordance with the allocation set forth in
Exhibit
A
to
the
Agreement
(the
“Stock Consideration”) (the Cash Consideration and Stock Consideration,
collectively, the “Initial Consideration”); plus, up to Five Million Dollars
($5,000,000) in cash (the “Additional Consideration”) payable, without interest,
to the Members
as more
fully set forth below
.
The
Initial Consideration and Additional Consideration,
are
collectively
,
hereinafter referred to as
the
“Consideration”.
With
respect to the Additional Consideration, Parent shall pay Members
(as
defined in the Agreement)
Two
Dollars ($2.00) in cash for each dollar that the Net Income of the Surviving
Company exceeds Twenty Five Million Dollars ($25,000,000) during any
of the
period of (i) July 1, 2008 through June 30, 2009, and (ii) January 1,
2009
through December 31, 2009. In no event shall the Additional Consideration
exceed
$5,000,000 in aggregate. “Net Income” shall mean the net income achieved by
Surviving Company for the applicable period computed according to United
States
generally accepted accounting principles applied in a manner consistent
with the
Company’s past practices (but excluding (
a
)
costs
and expenses associated with the Agreement and the Merger and (
b
)
revenue
associated with bonuses paid to the Company under any “take-out” transactions
completed before January 1, 2008).
Page
2
of
5
March
20,
2008
Board
of
Directors
FMG
Acquisition Corp.
You
have
requested
our
opinion as to whether the Consideration to be paid by
Parent
pursuant to the
Merger
is fair,
from a financial point of view, to the holders of Common Stock
of
Parent
.
In
connection with this opinion, we have made such reviews, analyses and
inquiries
as we have deemed necessary and appropriate under the circumstances.
We
have,
among other things:
|
(i)
|
reviewed
a draft of the Agreement, dated March 12, 2008, which we understand
will
be substantially in conformity with the final executed
Agreement;
|
|
(ii)
|
reviewed
certain publicly available financial and other information
about
Parent
and the Company
,
including, among other things, the Company’s annual reports to
shareholders for the fiscal years ended December 31, 2004 through
December
31, 2007
;
|
|
(iii)
|
reviewed
certain information furnished to us by the Company’s management, including
historical financial information and financial forecasts and
analyses
relating to the business, operations and prospects of the
Company,
including, among other things, financial forecasts with respect
to the
fiscal years ended December 31, 2008 through December 31,
2012,
which information included (
a
)
limited forecast information relating to the Company’s business, having
been advised that more detailed financial forecasts for that
business were
not available, and (
b
)
certain adjustments to the Company’s historical financial statements that
were prepared by the management of the Company and also agreed
to by
Parent’s
management;
|
|
(iv)
|
met
with certain members of the senior management of
Parent
and the Company to discuss the operations, financial condition,
future
prospects and projected operations and performance of the Company;
and
|
|
(v)
|
conducted
such other studies, analyses and inquiries as we have deemed
appropriate.
|
In
our
review and analysis and in rendering this opinion, we have assumed and
relied
upon, but have not assumed any responsibility to independently investigate
or
verify, the accuracy and completeness of all financial and other information
that was supplied or otherwise made available to us by
Parent
and the Company or that was publicly available (including, without limitation,
the information described above), or that was otherwise reviewed by us.
In our
review, we did not obtain any independent evaluation or appraisal of
any of the
assets or liabilities of, nor did we conduct a physical inspection of
any of the
properties or facilities of,
Parent
or
the Company
,
and
have not attempted to confirm whether Parent or the Company have good
title to
their respective assets
,
nor
have we been furnished with any such evaluations or appraisals of such
physical
inspections, nor do we assume any responsibility to obtain any such evaluations
or appraisals.
Page
3
of
5
March
20,
2008
Board
of
Directors
FMG
Acquisition Corp.
With
respect to the financial forecasts provided to and examined by us, we
note that
projecting future results of any company is inherently subject to
uncertainty.
We also
note that the financial forecasts relating to the Company’s business were
limited and we have been advised by the Company that more detailed financial
forecasts for its business were not available, and that there were certain
adjustments to the Company’s historical financial statements that were prepared
by the management of the Company and agreed to by Parent’s management.
Parent
and the Company have informed us, however, and we have assumed, that
such
financial forecasts were reasonably prepared on bases reflecting the
best
currently available estimates and good faith judgments of the management
of the
Company as to the future financial performance of the Company, and
to
the
extent that the financial forecasts were considered by us as part of
our
analysis,
we
have
relied solely upon such financial forecasts
as
prepared
by the management of the Company
without
independent investigation
.
We
express,
therefore,
no
opinion as to the
reliability
of the
Company’s
financial forecasts or the
underlying
assumptions on which they are made.
We
have
also relied upon and assumed without independent verification that there
have
been no material changes in the assets, liabilities, financial condition,
business or prospects of the Company since the date of the most recent
financial
statements and forecasts provided to us.
Our
opinion is based on economic, monetary, regulatory, market and other
conditions
existing and which can be evaluated as of the date hereof.
We
expressly disclaim any undertaking or obligation to advise any person
of any
change in any fact or matter affecting our opinion of which we become
aware
after the date hereof.
We
have
made no independent investigation of any legal or accounting matters
affecting
Parent
or
the Company, and we have assumed the correctness in all
material
respects
to our
analysis of all legal and accounting advice given to
Parent
and its Board of Directors, including, without limitation, advice as
to the
legal, accounting and tax consequences of the terms of, and transactions
contemplated by, the Agreement to
Parent
and its stockholders. We have also assumed that
,
in the
course of obtaining the necessary regulatory or third party approvals,
consents
and releases for the
Merger
,
no
delay, limitation, restriction or condition will be imposed that would
have an
adverse effect on
Parent,
the Company or the contemplated benefits of the
Merger
.
We
have
assumed that the final form of the Agreement will be in all material
respects
identical to the last draft reviewed by us, without modification of material
terms or conditions by Parent or any party thereto. We have relied upon
and
assumed, without independent verification, that (i) the representations
and
warranties of all parties to the Agreement and all other related documents
and
instruments that are referred to therein are true and correct, (ii) each
party
to all such agreements will fully and timely perform all of the covenants
and
agreements required to be performed by such party, (iii) all conditions
to the
consummation of the Merger will be satisfied without waiver thereof,
and (iv)
the Merger will be consummated in a timely manner in accordance with
the terms
described in the agreements and document provided to us, without any
material
amendments or modifications thereto or any adjustment to the Consideration
(through offset, reduction, indemnity claims or otherwise) or any other
financial term of the Merger. We assumed that the Merger will be consummated
in
a manner that complies in all respects with the applicable provisions
of the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934,
as
amended, and all other applicable federal and state statutes, rules and
regulations.
Page
4
of
5
March
20,
2008
Board
of
Directors
FMG
Acquisition Corp.
We
have
also
(i)
reviewed the share trading price history for the Common Stock
of
Parent
for
the
period ending March 20, 2008, and considered the implied value of the
Consideration based upon the closing price of the Common Stock
of
Parent
as
of
such
date;
(
ii
)
reviewed the valuation multiples for certain publicly traded companies
that we
deemed relevant
and
that
are
in
lines
of business similar to the Company; (
iii
)
compared the proposed financial terms of the
Merger
with the
financial terms of certain other transactions that we deemed relevant;
(
iv
)
reviewed and analyzed the projected free cash flows of the Company and
prepared
a disounted cash flow analysis; and (
v
)
conducted such other financial studies, analyses and investigations as
we deemed
appropriate.
In
addition, we were not requested to and did not provide advice concerning
the
structure of the Merger, the specific amount of the Consideration, or
any other
aspects of the
Merger
,
or to
provide services other than the delivery of this opinion. We were not
authorized
to and did not solicit any expressions of interest from any other parties
with
respect to the sale of all or any part of
Parent
or
any other alternative transaction. We did not participate in negotiations
with
respect to the terms of the
Merger
and
related transactions. Consequently, we have assumed
without
independent investigation
that
such
terms are the most beneficial terms from
Parent’s
perspective that could under the circumstances be negotiated among the
parties
to such transactions, and no opinion is expressed whether any alternative
transaction might result in terms and conditions more favorable to
Parent
or
its stockholders than those contemplated by the Agreement.
It
is
understood that our opinion is for the use and benefit of the Board of
Directors
of
Parent
in
its consideration of the
Merger
,
and our
opinion does not address the relative merits of the transaction contemplated
by
the Agreement as compared to any alternative transaction or opportunity
that
might be available to
Parent,
nor does it address the underlying business decision by
Parent
to engage in the
Merger
or the
terms of the Agreement or the documents referred to therein. Our opinion
does
not constitute a recommendation as to how any holder of shares of
the
Common
Stock
of
Parent
should
vote on the
Merger
or any
matter related thereto.
This
opinion should not be construed as creating any fiduciary duty on Piper
Jaffray
& Co.’s part to any party.
In
addition, you have not asked us to address, and this opinion does not
address,
the fairness, financial or otherwise, of: (i) the amount or nature of
any
compensation to be paid to Parent’s officers, directors, or employees, or any
class of such persons, relative to the compensation to be paid to or
received by
any other person, or (ii) any other consideration to be paid to or received
by
the holders of any class of securities, creditors or other constituencies
of the
Merger
,
other
than the holders of shares of
the
Common
Stock
of
Parent
.
We
express no opinion as to the price at which shares of Common Stock
of
Parent
will trade at any time. Furthermore, no opinion, counsel, or interpretation
is
intended in matters that require legal, accounting, insurance, tax or
other
similar professional advice. It is assumed that such opinions, counsel,
or
interpretations have been or will be obtained from the appropriate professional
sources, and we have relied, with your consent, on the assessment by
Parent and
its advisers, as to all legal, regulatory, accounting, insurance, and
tax
matters with respect to Parent and the Merger.
We
have
been engaged by
Parent
in connection with the delivery of this opinion and will receive a fee
for our
services, which is payable upon our presentation of this opinion. We
will
also
be reimbursed for
our
incurred
expenses
in
connection with this engagement.
Parent
has agreed to indemnify us against liabilities arising out of or in connection
with the services rendered and to be rendered by us under such engagement.
Page
5
of
5
March
20,
2008
Board
of
Directors
FMG
Acquisition Corp.
In
the
ordinary course of our business, we and our affiliates may trade or hold
securities of
Parent
and/or its affiliates for our own account and for the accounts of our
customers
and, accordingly, may at any time hold long or short positions in those
securities. In addition, we may seek to, in the future, provide financial
advisory and financing services to
Parent,
the Company or entities that are affiliated with
Parent
or
the Company, for which we would expect to receive compensation.
Our
opinion has been authorized for issuance by the Piper Jaffray & Co. Opinion
Committee.
Except
as
otherwise expressly provided in our engagement letter with
Parent,
our opinion may not be used or referred to by
Parent,
or quoted or disclosed to any person in any manner, without our prior
written
consent.
Based
upon and subject to the foregoing,
and
in
reliance thereon,
we
are of
the opinion that, as of the date hereof, the Consideration to be paid
by
Parent
pursuant to the
Merger
is fair,
from a financial point of view, to the holders of Common Stock
of
Parent
.
Very
truly yours,
/s/
PIPER
JAFFRAY & CO.
PIPER
JAFFRAY & CO.