On June 4, 2007, we formally requested in writing
that the three parties that submitted initial indications of interest, including Humana, submit formal bid proposals, including
proposed purchase price and comments to our proposed merger agreement. Two other parties indicated to us that they were still
considering submitting initial indications of interest at that time, but they ultimately did not do so.
On June 8, 2007, Mr. Kenneth U. Kuk, our
Chairman, President and Chief Executive Officer, Mr. Scott H. DeLong III, our Senior Vice President and Chief Financial
Officer, and Mr. J. Peter J. Bang, a principal of KBW, met in person with Mr. Thomas J. Liston, Senior Vice
President-Strategy and Corporate Development of Humana, and other representatives of Humana at our offices in Lancaster,
South Carolina, to discuss Humana’s possible interest in a transaction with us.
On June 14, 2007, we held a special telephonic board
of directors meeting. Hunton & Williams made a presentation to the board of directors to remind them of their fiduciary duties
and other legal obligations under Virginia law and the Federal securities laws when considering significant decisions including a
change of control transaction and other strategic alternatives. Management and KBW provided the directors with an update on recent
efforts in connection with the strategic alternatives review process. They advised the board of directors that the three potential
bidders that submitted initial non-binding indications of interest (including Humana) had indicated that they remained interested
in a potential transaction with us, and that Humana and another of those potential bidders had recently engaged in a significant
due diligence review of non-public information about us. KBW discussed with our board of directors and management the strategic
alternatives reasonably available to KMG. Hunton & Williams reviewed with the directors the draft merger agreement that
potential bidders would be requested to revise with proposed changes as part of their bid submission.
Following the special telephonic meeting of the board
of directors, the special committee of our board of directors held a telephonic meeting. The special committee members and KBW
further discussed the different strategic alternatives reasonably available to KMG. The special committee concluded that, based on
such discussions and other relevant factors, pursuing bids from the three potential bidders that submitted initial indications of
interest (including Humana) was the process most likely to yield the best result for our shareholders, and directed management and
KBW to continue such process.
On June 20, 2007, our management met in person with
representatives of Humana at our offices in Lancaster, South Carolina, to discuss Humana’s due diligence and operational
questions.
On June 22, 2007, Mr. Kenneth U. Kuk, our Chairman,
President and Chief Executive Officer, Mr. Paul F. Kraemer, our Senior Vice President, Sales, and Mr. Thomas J. Gibb, our Senior
Vice President, Marketing, met with members of Humana’s management at Humana’s offices in Louisville, Kentucky, to
discuss Humana’s due diligence and operational questions.
On June 28, 2007, Humana submitted a non-binding bid,
including a proposal letter and mark-up of the draft merger agreement. Humana’s proposal letter indicated an intention of
paying an all-cash aggregate purchase price of $150 million, subject to adjustment based on, among other things, our transaction
costs and expenses, our outstanding indebtedness and the results of Humana’s due diligence investigation of our long-term
care and voluntary products businesses. Humana indicated that its proposal was not contingent on receiving financing to fund the
acquisition.
On June 28, 2007, we held a special in-person board of
directors meeting. KBW and the board members discussed the fact that Humana had submitted a bid and that the two other potential
bidders that had submitted initial indications of interest had indicated that they remained interested in exploring a potential
transaction. Hunton & Williams, Faegre & Benson and KBW discussed with the board of directors and management the
mark-up of the draft merger agreement, and accompanying proposal letter, submitted by Humana. They discussed possible responses to
Humana’s proposal and noted questions regarding the structure of the purchase price payment in Humana’s proposal. The
board of directors’ questions focused on the ambiguity of the proposed $150 million purchase price, which was to be reduced
by the amount of our transaction costs and our outstanding debt, and what that price would be on a per share basis.
Following the special meeting of our board of
directors, the special committee held an in-person meeting. The special committee members further discussed with KBW and Faegre
& Benson the proposal letter and mark-up
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of the draft merger agreement submitted by Humana. The special committee discussed issues relating to the draft
merger agreement mark-up, focusing on the purchase price, the extensive representations and warranties, the break-up fee and the
closing conditions. The members of the special committee then discussed its response to Humana. The special committee members
determined that KBW and management should contact Humana and express the special committee’s comments and questions regarding
Humana’s proposal and request further clarification on the proposed purchase price and other items, and report back to the
special committee following receipt of such clarification.
On
July 3, 2007, Humana provided us with a revised non-binding proposal letter and
revised comments on the draft merger agreement, which provided that the
purchase price would be $150 million, less our transaction expenses, and was
subject to adjustment upon completion of Humana’s due diligence investigation,
but would not be reduced for our outstanding indebtedness as previously
proposed.
On
July 6, 2007, KBW spoke with Mr. William White, Director, Strategy and
Corporate Development of Humana, regarding due diligence matters related to our
long-term care block of insurance policies and our voluntary insurance
business. Mr. White indicated that Humana was interested in beginning
negotiation of the merger agreement.
On
July 12, 2007, we held a special telephonic board of directors meeting.
Management and KBW provided an update to the board of directors on discussions
with Humana. Management indicated that one matter Humana wanted to discuss was
post-closing employment and compensation of management. Hunton & Williams
discussed with our board of directors their fiduciary duties with regard to
overseeing negotiations concerning a change of control transaction and
management’s negotiations of their post-closing employment and compensation.
The board of directors, management and KBW discussed that two other potential
bidders had indicated an interest in continuing discussions of a potential
transaction, but on terms less favorable and subject to contingencies that made
consummation of a definitive agreement with such parties less likely than
Humana’s proposal. The board of directors concluded that we should only pursue
limited discussions with such parties as an alternative in the event we could
not reach an agreement with Humana, because such discussions were not likely to
result in a transaction more favorable to our shareholders than the transaction
proposed by Humana.
Between
July 12 and July 20, 2007, James E. Nelson, Esq., Senior Vice President,
General Counsel and Secretary of KMG, representatives of Hunton & Williams,
Ralph M. Wilson, Esq., Vice President and Assistant General Counsel of Humana,
and representatives of Greenebaum Doll & McDonald PLLC, legal advisor to
Humana, (collectively, the “Legal Advisors”) negotiated certain terms of the
merger agreement including, among other things, the impact of our transaction
expenses on the purchase price being offered by Humana. During this time,
Humana also continued its due diligence review of our non-public information.
On July 20, 2007, Humana proposed a purchase price of $6.75 per share in cash
for all shares of our common stock, subject to an adjustment upon completion of
Humana’s investigation of due diligence matters, including our anticipated
transactions costs.
On
July 20, 2007, the special committee of our board of directors held a
telephonic meeting. Management and KBW discussed with the special committee a
due diligence items and issues list, which had been provided to us by Humana,
and the status of our responses. They noted that Humana’s proposed purchase
price was still ambiguous because it was subject to adjustment upon completion
of Humana’s investigation of due diligence matters, including our anticipated
transaction costs. The special committee, management and KBW discussed the possible
impact KMG’s estimated transaction costs could have on Humana’s proposed
purchase price. The special committee directed that KBW would be involved in
discussions with Humana regarding the estimated transaction costs, including
any negotiations regarding executive compensation, Mr. Kuk’s employment
contract and retention payments for certain members of our executive management
team. The special committee directed management to engage our independent
compensation consultant for the purpose of advising the special committee on
matters involving management compensation, severance and retention payments
relating to the proposed transaction.
On
July 23, 2007, the special committee of our board of directors held a
telephonic meeting. The special committee, management and KBW discussed
Humana’s ongoing due diligence investigation of our operations and assets.
Hunton & Williams discussed with the special committee the status of
negotiations with Humana on the draft merger agreement. They noted the matters
still being negotiated including, among others, the impact of estimated
transaction costs on Humana’s proposed purchase price, closing conditions,
remedies of the parties and representations and warranties. The special
committee, management and KBW discussed the estimated costs of
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severance payments, cash payments for vested restricted stock and estimated retention payments for our management
and sales representatives, the impact these costs could have on Humana’s proposed purchase price and the risk that some of
our management or sales employees might resign prior to completion of the proposed transaction.
Between July 23 and July 25, 2007, we, Humana and the
Legal Advisors continued to negotiate the terms of the draft merger agreement.
On July 27, 2007, we held a special telephonic board
of directors meeting. Management and KBW provided an update on recent discussions with Humana and the status of negotiations on
the draft merger agreement with Humana. The board of directors, management and KBW discussed that several human resources matters
needed to be resolved with Humana, but that Humana had not yet made a formal proposal regarding management employment and
compensation and had not initiated any discussions regarding Mr. Kuk’s continued employment. Management and Hunton &
Williams discussed with the board of directors the outstanding issues regarding the draft merger agreement, including the purchase
price, the definition of a material adverse effect, transition of our employee benefit plans and questions resulting from
Humana’s due diligence investigation of us.
Between July 27 and August 2, 2007, the Legal Advisors
exchanged revised drafts of the merger agreement, continued to negotiate the terms of the merger agreement and discussed issues
relating to Humana’s due diligence review of us.
On July 31 and August 1, 2007, Mr. Kuk and Mr. White,
along with members of Humana’s human resources department, participated in conference calls to discuss issues related to
employment and compensation arrangements with our management.
On August 3, 2007, Humana provided us with initial
term sheets for employment and compensation arrangements with Mr. Kraemer, Mr. Gibb and Mr. Paul P. Moore, our Senior Vice
President, Sales. Mr. Kuk participated in a conference call with representatives of Humana to discuss the terms of those
employment and compensation arrangements, but did not discuss the terms of his own employment agreement.
On August 3, 2007, we held a regular in-person board
of directors meeting. Hunton & Williams reminded the directors of their fiduciary duties under Virginia law and the
board’s ability to rely on the special committee in evaluating a potential change of control transaction. Management and KBW
provided the directors with an update on negotiations with Humana. They indicated that there were still several significant issues
remaining, including, among other things, Humana’s position with respect to our current executive employment agreements,
compensation issues relating to sales representatives and completion of its due diligence investigation of our properties. KBW
discussed with our board of directors the current financial terms of the proposed merger. Hunton & Williams reviewed the terms
of the proposed merger agreement with the directors. Hunton & Williams also noted that the parties were still negotiating
several issues that could affect the merger agreement including, among other things, purchase price, executive employment
agreements, the definition of a material adverse effect, the break-up fee, transition of our employee benefit plans, completion of
Humana’s due diligence investigation and completion of our disclosure letter. Following the meeting of the board of
directors, the special committee of our board of directors held a special in-person meeting and discussed, among other things, the
current financial terms of the proposed merger.
On August 7 and 8, 2007, the special committee of our
board of directors held two telephonic meetings. The special committee, management and KBW discussed that Humana required that,
before it would sign the merger agreement, certain of our executive officers must sign new employment agreements providing that
upon the closing of the proposed transaction their existing employment agreements would terminate and new employment and
compensation arrangements would become effective. They noted that the terms of those new employment and compensation arrangements
would have to be agreed upon prior to signing a definitive merger agreement. They discussed whether or not incentive payments
might be necessary to induce certain of our executives to terminate their employment agreements with us, as required by Humana.
They noted that Humana had not yet made a proposal with respect to Mr. Kuk’s employment and compensation arrangements. The
special committee discussed potential conflicts of interest involved in negotiating Mr. Kuk’s employment and compensation
arrangements and the process for negotiating such arrangements. The special committee confirmed that KBW should be involved in
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discussions with Humana regarding Mr. Kuk’s employment and compensation arrangements. Faegre & Benson
discussed with the special committee a summary of the existing employment agreement between Mr. Kuk and us.
On August 8 and 9, 2007, Mr. Bang discussed the
executive employment and compensation matters with Humana’s mergers and acquisitions and human resources staff.
Humana’s representatives confirmed that it would insist on Mr. Kuk, Mr. Kraemer, Mr. Gibb, Mr. Moore and Mr. R. Dale Vaughan,
President and Chief Operating Officer of Kanawha, each signing new employment agreements prior to Humana signing a definitive
merger agreement, under which they would agree to the termination of their existing employment contracts upon closing of a merger
and agree to the proposed new terms of employment, including reduced base salaries. Humana’s representatives provided a
detailed proposal for Mr. Kuk’s employment and compensation arrangement, which included a base salary reduction and terms
similar to the terms proposed earlier for Messrs. Kraemer, Moore and Gibb. Humana also provided us with revised proposed terms and
conditions relating to the employment and compensation agreements for our executive officers.
On August 9, 2007, the special committee of our board
of directors held a telephonic meeting. The special committee, management and KBW discussed Humana’s employment proposal for
Mr. Kuk. They also noted that Humana had not communicated any change in its offered purchase price. The special committee
discussed with management and KBW the possible incentive payments being discussed with Humana that would likely be necessary to
induce the executives to terminate their existing employment agreements and agree to new employment terms as required by Humana as
a condition to it signing a definitive merger agreement.
On August 10, 2007, the Legal Advisors participated in
conference calls to negotiate various terms of the draft merger agreement and proposed executive employment agreements. The
parties discussed, among other matters, the definition of “material adverse effect,” the treatment of transaction
expenses, revisions to the covenants section of the draft merger agreement and the terms for special incentive and annual
incentive payments under the proposed executive employment agreements. Subsequent to and based upon these discussions, Humana and
its legal advisors provided us with revised versions of the proposed executive employment agreements.
On August 12, 2007, Mr. Kuk participated in a call
with Mr. Liston regarding certain due diligence matters, including our operating performance and deferred maintenance and
other issues with respect to our properties in Lancaster, South Carolina. Mr. Liston indicated that Humana desired a reduction in
the purchase price of approximately $10 million to account for such matters. We estimated that such a reduction would result in a
per share purchase price of between $6.20 and $6.30. Mr. Liston also confirmed that Humana, prior to signing a definitive merger
agreement, would require new employment agreements to be executed with Mr. Robert E. Matthews, Executive Vice President, Chief
Financial Officer and Treasurer of Kanawha, in addition to Messrs. Kraemer, Moore, Vaughan, Gibb and Kuk.
Between August 13 and 16, 2007, the parties continued
to negotiate the terms of the draft merger agreement and the executive employment agreements.
On August 16, 2007, we received a letter from the SEC
with comments on our annual report on Form 10-K for the year ended December 31, 2006, which we had filed with the SEC on March 14,
2007.
On August 17, 2007, we held a special telephonic board
of directors meeting. The board of directors, management and KBW discussed the open issues related to merger negotiations with
Humana. They noted that Humana indicated earlier that day that it was willing to pay $6.20 per share for our common stock. They
noted that, since Humana’s initial purchase price offer, Humana had identified approximately $10 million worth of items
that caused it to lower its proposed purchase price, including, among others, the estimated costs of transitioning our employee
benefits plans and necessary property maintenance. Hunton & Williams reported on the status of negotiations of the
draft merger agreement and executive employment agreements. Management and Hunton & Williams informed the board of directors
about the SEC comment letter.
From August 17, 2007 until August 23, 2007, the
parties continued to negotiate and exchange drafts of the merger agreement and the executive employment agreements, including
conversations and communications among KMG, KBW, Hunton & Williams, Mr. Kuk and his personal counsel, and Humana and its
legal representatives. Among other things in the executive employment agreements, they discussed the vesting of restricted shares
upon
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employment termination and non-solicitation and non-compete provisions. On August 21, 2007, we provided Humana
with a copy of the SEC comment letter.
On August 23, 2007, Humana’s board of
directors met and approved Humana’s acquisition of us in accordance with the terms of the draft merger agreement, which
included a purchase price of $6.20 per share for our common stock, subject to satisfactory resolution of the comments in the SEC
comment letter, execution of the new executive management agreements and other matters consistent with the intent and purposes of
the board’s resolutions. Following that meeting, Humana informed us of its board of directors’ action. Later that day,
we held a special telephonic board of directors meeting at which our management reported the action taken by Humana’s board
of directors earlier that day.
On September 6, 2007, we received a letter from the
SEC noting that it had completed its review of our 2006 annual report on Form 10-K and had no further comments. A copy of such
letter was provided to Humana for its consideration.
On September 7, 2007, Humana’s management
concluded that it was satisfied with the resolution of the comments in the SEC comment letter and approved the acquisition of us
in accordance with the terms of the draft merger agreement.
On September 7, 2007, we held a special telephonic
board of directors meeting. Hunton & Williams reminded the directors of their fiduciary duties under Virginia law and the
board’s ability to rely on the special committee in evaluating a potential change of control transaction. Management reported
that the comments in the SEC comment letter had been satisfactorily resolved and that Humana had approved the proposed merger
agreement. KBW made a presentation to the board of directors regarding the fairness, from a financial point of view, of the
consideration to be received by our shareholders in the proposed merger to such holders. Following the presentation, KBW delivered
its oral opinion (subsequently confirmed in writing) to the effect that, as of that date and based upon and subject to the
assumptions made, matters considered and qualifications and limitations on the review undertaken by KBW, the consideration to be
received by our shareholders in the merger was fair, from a financial point of view, to our shareholders. For a discussion of
KBW’s fairness opinion and final valuation analysis, please see “—Opinion of Financial Advisor.”
Hunton & Williams reviewed the terms of the proposed merger agreement with the directors and noted the resolution of
material matters including, among other things, purchase price, executive employment agreements, the definition of “material
adverse effect,” the break-up fee, treatment of our defined benefit pension plan, completion of Humana’s due diligence
investigation and completion of our disclosure letter. Hunton & Williams reviewed the terms of the proposed executive
employment agreements to be executed by us and Messrs. Kuk, Gibb, Kraemer, Matthews, Moore and Vaughan concurrently with execution
of the proposed merger agreement by us and Humana and as a condition to Humana’s execution thereof. Management and KBW
reviewed the compensation component amounts and aggregate compensation amounts that each of those executives would receive
following the closing of the proposed merger under the proposed executive employment agreements. Following the foregoing
discussions, the board of directors adjourned the meeting so that the special committee could convene separately to discuss the
merger agreement.
Following the meeting of the board of directors, the
special committee held a telephonic meeting and discussed the information and materials presented at the earlier meeting of the
board of directors, including, among other things, the financial analyses and fairness opinion of KBW. At the request of the
special committee, Mr. Nelson, KBW, Faegre & Benson and Hunton & Williams participated in the meeting and responded to
questions about the proposed merger agreement and executive employment agreements from the members of the special committee. At
the conclusion of its discussion, the special committee unanimously concluded that the proposed merger agreement and the
transactions contemplated in the proposed merger agreement, including the executive employment agreements, were in the best
interests of us and our shareholders and recommended that our board of directors approve the proposed merger agreement and the
transactions contemplated in the proposed merger agreement, including the executive employment agreements.
Following the special committee meeting, the board of
directors reconvened the special telephonic board of directors meeting. The special committee presented to the board of directors
its unanimous recommendation that the proposed merger agreement and the transactions contemplated in the proposed merger
agreement, including the executive employment agreements, were in the best interests of us and our shareholders and that our board
of
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directors approve the proposed merger agreement and the transactions contemplated in the proposed merger
agreement, including the executive employment agreements. The directors discussed the special committee’s recommendation and
the information and materials presented to the board of directors earlier in the meeting among themselves and with members of
management, KBW, Hunton & Williams and Faegre & Benson. After considering, among other things, the factors described below
under “—Recommendation of Our Board of Directors — Reasons for the Merger,” including the financial analyses
and fairness opinion of KBW, the board of directors unanimously concluded that the proposed merger agreement and the transactions
contemplated in the proposed merger agreement, including the executive employment agreements, were in the best interests of us and
our shareholders, adopted resolutions authorizing the execution of the proposed merger agreement and recommended that our
shareholders approve the merger agreement.
On
September 7, 2007, after the close of trading on the NYSE, we and Messrs. Kuk,
Gibb, Kraemer, Matthews, Moore and Vaughan executed their new employment
agreements. We and Humana executed the merger agreement and related agreements
and issued a joint press release announcing execution of the merger agreement.
Purposes and Effects
of the Merger; Consideration
The
principal purposes of the merger are to enable Humana to acquire all of the
outstanding shares of our common stock and to provide our shareholders with the
opportunity to receive a cash payment for their shares at a premium over the
market prices at which our common stock traded before the public announcement
of the merger agreement. The acquisition will be accomplished by a merger of
Merger Sub with and into KMG, with KMG surviving the merger as a wholly owned
subsidiary of Humana. If the merger is completed, each outstanding share of our
common stock will be converted into the right to receive $6.20 in cash. You
will receive the per share amount of $6.20 in cash after you remit your
certificate(s) evidencing your shares of our common stock in accordance with
the instructions contained in a letter of transmittal to be sent to you as soon
as reasonably practicable after completion of the merger, together with a
properly completed and signed letter of transmittal and any other documentation
required to be completed pursuant to the written instructions in the letter of
transmittal. If your shares of our common stock are held in street name by your
broker, you will receive instructions from your broker as to how to surrender
your street name shares and receive cash for those shares.
Each
outstanding option to purchase shares of our common stock has an exercise price
per share greater than $6.20 and will be canceled without consideration at the
effective time of the merger. Each outstanding restricted share of our common
stock will be vested immediately prior to the effective time of the merger and
will be eligible to receive the $6.20 per share merger consideration.
The
merger will terminate all interests in our common stock held by our
shareholders, we will become a wholly owned subsidiary of Humana and Humana
will be the sole beneficiary of any earnings and growth of KMG following the
merger. Upon completion of the merger, our common stock will be delisted from
the NYSE, will no longer be publicly traded and will be deregistered under the
Exchange Act.
Effects of the Merger Not Being Completed
If
the merger is not completed for any reason, our shareholders will not receive
the merger consideration. Instead, we will remain a public company and shares
of our common stock will continue to be listed on the NYSE. If the merger is
not completed, we do not expect to be able to continue to conduct our business
in a manner similar to the manner in which it is presently conducted. A.M. Best
has announced that, if the merger is not completed, A.M. Best will reduce
Kanawha’s financial strength rating. If Kanawha’s rating is reduced, we would
likely be precluded from participating in certain markets that are key to our
growth plans and financial prospects under our current business strategy, our
competitive position in the insurance industry would likely suffer, we would
likely lose customers, our cost of borrowing would likely increase, our sales
and earnings would likely decrease and our results of operations and financial
condition would likely be materially adversely affected. To address these
risks, we would likely need to materially change our business strategy and
there can be no assurances that acceptable alternatives exist or could be
implemented. In such event, the value of shares of our common stock would
continue to be subject to risks and opportunities, including the various
factors described in our past filings with the SEC, in particular the risks
associated with A.M. Best’s financial strength rating of Kanawha, the condition
of the insurance industry and prevailing economic and market conditions.
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If the merger is not completed, our common stock may
trade at or below levels at which it traded prior to the announcement of the merger due to adverse market reaction. If the
merger is not completed, there can be no assurance that any other transaction similar to the merger would be available to us. Even
if such a transaction were available, there can be no assurance that such transaction would be acceptable to our board of
directors and would offer our shareholders the opportunity to receive a cash payment for their shares of our common stock at a
premium over the market prices at which our common stock traded before the public announcement of any such transaction.
Recommendation of Our Board of Directors
After careful consideration, our board of directors,
by unanimous vote, has adopted the merger agreement and has declared the merger, the merger agreement and the other transactions
contemplated by the merger agreement advisable and in the best interests of us and our shareholders. Our board of directors
recommends that you vote “FOR” the approval of the merger agreement and “FOR” the adjournment of the special
meeting, if necessary or appropriate, to solicit additional proxies in favor of the merger agreement.
Reasons for the Merger
Before reaching its decision to approve the merger
agreement and to recommend approval of the merger agreement to our shareholders, our board of directors and the special committee
consulted with our management, KBW, Hunton & Williams and Faegre & Benson. In addition, the board of directors received an
oral opinion from KBW (subsequently confirmed in writing) that, as of the date of the opinion, the consideration to be received by
our shareholders in the merger is fair, from a financial point of view, to our shareholders. In reaching its decision to recommend
the merger agreement to our board of directors, the special committee of our board of directors considered a number of factors,
including those described below. In reaching its decision to adopt the merger agreement and to recommend the approval of the
merger agreement to our shareholders, our board of directors considered a number of factors, including the recommendation of the
special committee and the following material factors that our board of directors viewed as supporting its decision to adopt the
merger agreement and to recommend the approval of the merger agreement:
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the current
and historical market prices of our common stock and the fact that the cash
consideration of $6.20 for each share of our common stock represented an
approximate 36% premium over the average closing price of our common stock
for the 60 trading days ending September 7, 2007;
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our
business, financial performance, competitive position and prospects, as well
as the risks associated with achieving those prospects, many of which are
beyond our control;
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the
increasingly competitive nature of the industry in which we operate and our
relatively small size in comparison with our competitors, many of which are
better capitalized, have higher financial strength ratings and have
significantly greater resources;
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the
potential value that might result from other strategic alternatives available
to us, including the alternative of remaining an independent public company,
considering, in particular, the risk of financial strength rating or outlook
reductions that could adversely impact our ability to compete in the group
insurance market and the high costs associated with continuing to operate as
a public company;
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the fact
that we solicited 106 entities over a seven-month period, and the other
expressions of interest we received were all less favorable to us and our
shareholders than the merger with Humana and were less likely to be
consummated;
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the possible
alternatives to the merger (including the possibility of continuing to
operate as an independent entity and the perceived risks of that
alternative), the range of potential benefits to our shareholders of the
possible alternatives and the timing and likelihood of accomplishing the
goals of such alternatives, and the assessments of the special committee and
the board of directors that none of such alternatives were reasonably likely
to create greater value for our shareholders than the merger;
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the fact
that we have faced numerous challenges as a relatively small company in an
industry that is dominated by large insurance companies that have
significantly more capital and name recognition to compete in the markets in
which we conduct business;
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the fact
that the merger consideration to be received by our shareholders in the
merger will consist entirely of cash, which will provide liquidity and
certainty of value to our shareholders;
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KBW’s
financial analyses presented to our board of directors, including KBW’s
opinion, dated September 7, 2007, to our board of directors as to the
fairness, from a financial point of view and as of the date of the opinion,
of the consideration provided for in the merger agreement;
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the
conditions to the closing of the merger, including the fact that the obligations of Humana under the merger agreement are not
subject to a financing condition;
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the terms of our right, prior to receiving shareholder approval of the merger, to engage in
negotiations with, and provide information to, a third party that makes an unsolicited acquisition proposal if the board of
directors determines in good faith, after consultation with its legal and financial advisors, that such proposal could reasonably
be expected to result in a transaction that is more favorable to our shareholders, from a financial point of view, than the
merger;
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the $6.20 in cash per share consideration to be received in the merger was determined through
arm’s length negotiations between us and Humana;
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the
termination fee provision in the merger agreement, and a comparison of other
provisions to precedent transactions; and
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our
relatively small market capitalization and low trading volume when compared
to other NYSE-listed companies making the liquidity and certainty of value
associated with the merger consideration attractive to our shareholders.
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In
the course of its deliberations, the board of directors and the special
committee also considered a variety of risks and other potentially negative
factors, including the following:
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the fact
that we will no longer exist as an independent public company and that
holders of our common stock will forgo any future increase in value that
might result from our growth;
|
|
|
|
|
|
|
•
|
the risks
and contingencies related to the announcement and pendency of the merger,
including the impact on our ability to attract and retain employees, the
diversion of management and employee attention and the potential effect such
factors may have on our stock price;
|
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|
|
|
|
|
•
|
the
conditions to Humana’s obligation to complete the merger and the right of
Humana to terminate the merger agreement under certain circumstances;
|
|
|
|
|
|
|
•
|
the amount
of time it could take to complete the merger, including the risk that we and
Humana might not receive the necessary regulatory approvals or clearances to
complete the merger or that governmental authorities could attempt to
condition their approvals or clearances of the merger on one or more of the
parties’ compliance with burdensome terms or conditions;
|
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|
|
|
|
|
•
|
the fact
that under the terms of the merger agreement, we may not solicit other
acquisition proposals and must pay to Humana a termination fee of $4,820,000
and reimburse Humana for its documented out-of-pocket fees and expenses
reasonably incurred in connection with the merger (up to a maximum of
$500,000) if the merger agreement is terminated under certain circumstances,
which, in addition to being costly, could discourage third parties from
proposing an alternative transaction that might be more advantageous to our
shareholders than the merger;
|
25
|
|
|
|
|
|
•
|
the fact that, pursuant to the merger agreement, without Humana’s consent, we may not declare or pay any
dividends on our common stock prior to the completion of the merger or the earlier termination of the merger agreement;
|
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|
|
|
|
•
|
the fact that any gain realized by holders of our common stock as a result of the merger may be
taxable; and
|
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|
|
|
|
|
•
|
the fact that, pursuant to the merger agreement, without Humana’s consent, we must generally conduct our
business in the ordinary course and the fact that we are subject to a variety of other restrictions on the conduct of our business
prior to completion of the merger or termination of the merger agreement, which may delay or prevent us from undertaking business
opportunities that may arise or preclude actions that would be advisable if we were to remain an independent company.
|
In addition, the board of directors and special
committee were aware of and considered the interests that certain directors and executive officers may have with respect to the
merger that are different from, or are in addition to, their interests as our shareholders generally, as described in
“— Interests of Our Directors and Executive Officers in the Merger.”
The foregoing discussion of the information and
factors considered by the board of directors and special committee includes material positive and potentially negative factors
considered by the board of directors and special committee, but it is not intended to be exhaustive and may not include all of the
factors the board of directors and special committee considered. In reaching their determinations to approve and adopt the merger
agreement and the transactions contemplated by the merger agreement, the board of directors and special committee did not quantify
or assign any relative or specific weights to the various factors that they considered in reaching their determination that the
merger agreement and the transactions contemplated by the merger agreement are fair to and in the best interests of us and the
holders of our common stock. Rather, the determination and recommendation of the board of directors and special committee were
based on an analysis of the totality of the information presented to, and the factors considered by, the board of directors and
special committee. In addition, in considering the factors described above, individual members of the board of directors and
special committee may have accorded greater or lesser relative importance to specific factors considered than did other members of
the board of directors and special committee.
Opinion of Financial Advisor
On October 11, 2006, in connection with our process of
evaluating the risks of a potential financial strength rating or outlook reduction and alternatives to minimize those risks, we
engaged KBW to render financial advisory and investment banking services in connection with the possible sale of KMG or an equity
interest in KMG to another corporation or other business entity, which such engagement included, if requested by us, rendering an
opinion as to the fairness, from a financial point of view, to our shareholders of the consideration offered in a transaction. We
selected KBW because KBW is a nationally recognized investment banking firm with substantial experience in transactions similar to
the merger and is familiar with us and our business. As part of its investment banking business, KBW is continually engaged in the
valuation of insurance businesses and their securities in connection with mergers and acquisitions.
On September 7, 2007, our board of directors held a
meeting to evaluate the proposed merger with Humana. At this meeting, KBW reviewed the financial aspects of the proposed merger
and rendered an oral opinion (subsequently confirmed in writing) to our board of directors that, as of that date, the
consideration to be received by our shareholders in the merger was fair, from a financial point of view, to our
shareholders.
The full text of KBW’s written opinion is
attached as
Annex B
to this proxy statement and is incorporated in this proxy statement by reference. You are urged to read
the opinion in its entirety for a description of the procedures followed, assumptions made, matters considered and qualifications
and limitations on the review undertaken by KBW.
KBW’s opinion is solely for the use and benefit
of our board of directors. It does not address the relative merits of the merger as compared to any alternative transactions that
might exist for us or the effect of any other
26
transaction in which we might engage and does not constitute a recommendation to any shareholder as to how
such shareholder should vote on the proposed merger or any matter related thereto.
In connection with its opinion, KBW reviewed and
analyzed the merger and the financial and operating condition of us and Humana, including, among other things, the
following:
|
|
|
|
|
|
•
|
a draft of
the merger agreement, dated August 21, 2007;
|
|
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|
|
|
|
•
|
our annual
reports to shareholders and annual reports on Form 10-K for the years ended
December 31, 2004, 2005 and 2006;
|
|
|
|
|
|
|
•
|
the
definitive final prospectus filed pursuant to Rule 424(b) of the Securities
Act of 1933, as amended, dated December 15, 2004, relating to our initial
public offering of shares;
|
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|
|
|
|
•
|
certain
interim reports to our shareholders and our quarterly reports on Form 10-Q
and certain other communications from us to our shareholders;
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|
|
•
|
Humana’s
annual report to shareholders and annual report on Form 10-K for the years
ended December 31, 2004, 2005 and 2006;
|
|
|
|
|
|
|
•
|
certain
operating, financial and actuarial information relating to our business and
prospects, including projections for the five years ending December 31, 2011,
all as prepared and provided to KBW by our management; and
|
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|
|
|
|
|
•
|
other
financial information concerning the businesses and operations of us and
Humana furnished to KBW by us for purposes of KBW’s analysis.
|
KBW
also held discussions with our senior management regarding our past and current
business operations, regulatory relations, financial condition and future
prospects and such other matters as KBW deemed relevant to its inquiry. In
addition, KBW considered such financial and other factors as it deemed
appropriate under the circumstances, including, among others, the following:
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|
|
•
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the historical
and current financial position and results of operations of us and Humana;
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|
|
•
|
the assets
and liabilities of us and Humana;
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•
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the nature
and terms of certain other merger transactions involving insurance companies
and insurance holding companies;
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|
•
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publicly available
financial data, stock market performance data and trading multiples of
companies which KBW deemed generally comparable to us; and
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•
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such other
studies and analyses as KBW considered appropriate.
|
KBW
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. KBW’s
opinion is necessarily based upon conditions as they existed and could be
evaluated on the date thereof and the information made available to it through
the date thereof.
In
conducting its review and arriving at its opinion, KBW relied upon 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. KBW relied upon
our management as to the reasonableness and achievability of the financial and
operating forecasts and projections (and the assumptions and bases therefor)
provided to it, and assumed that such forecasts and projections reflected the
best currently available estimates and judgment of management and that such
forecasts and projections would be realized in the amounts and in the time
periods currently estimated by management. KBW is not an expert in the
independent verification of the adequacy of reserves for loss and loss
adjustment expenses and assumed, with our
27
consent, that
the aggregate reserves for our loss and loss adjustment expenses are adequate
to cover such losses. In rendering its opinion, KBW did not make or obtain any
evaluations or appraisals of the property of us or Humana, nor did it examine
any of our individual underwriting files.
KBW
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 Humana or us. KBW further
assumed that the final terms of the merger agreement would not vary materially
from those set forth in the draft reviewed by KBW.
The
following is a summary of the material analyses presented by KBW to our board
of directors on September 7, 2007, in connection with its review of the financial
considerations of the merger. The summary is not a complete description of the
analyses underlying the KBW opinion or the presentation made by KBW 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, KBW 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. KBW 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 KBW
made its determination as to the fairness of the merger consideration 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. Accordingly,
KBW believes that its analyses and the summary of 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 its
analyses and opinion. The tables alone do not constitute a complete description
of KBW’s financial analyses.
Summary
of Proposal
. KBW reviewed the financial terms of the
proposed transaction. Pursuant to the merger agreement, each share of our
common stock will be converted into the right to receive $6.20 in cash. The
aggregate transaction value to the holders of our common stock is $137.7
million, based on the number of our common shares outstanding on September 6,
2007.
Analysis
of Historical Trading Prices
. KBW reviewed the
historical trading prices and volumes for the shares of our common stock for
the period from December 15, 2004, through September 6, 2007. KBW’s analysis
showed the following concerning the $6.20 per share price offered in the merger
relative to historical prices of our common stock:
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|
KMG
America
|
|
|
Premium /
(Discount)
|
|
|
|
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|
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|
|
Prior day
price (9/6/07)
|
|
|
$
|
3.66
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|
|
|
|
69.4
|
%
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|
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|
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|
Volume-weighted
average closing price since public announcement to explore strategic
alternatives (5/7/07)
|
|
|
$
|
4.81
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|
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|
28.8
|
%
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|
Volume-weighted
average closing price since A.M. Best announced “negative” outlook (3/29/07)
|
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|
$
|
4.83
|
|
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28.3
|
%
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3-month
volume-weighted average closing price
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|
|
$
|
4.48
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38.5
|
%
|
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|
52-week low
(8/6/07)
|
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$
|
2.97
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|
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108.8
|
%
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52-week high
(1/8/07)
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|
$
|
10.06
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|
(38.4
|
%)
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|
IPO price
(12/15/04)
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|
$
|
9.50
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|
(34.7
|
%)
|
|
28
Discounted
Cash Flow Analysis
. KBW performed a discounted cash
flow analysis to generate a range for the implied present value per share of
our common stock assuming KMG continued to operate as a stand-alone entity.
This
range was determined by adding (i) the present value of our estimated future
dividendable cash flows to shareholders for the years 2007 through 2011 and
(ii) the present value of the terminal value of our common stock. Terminal
values for our common stock were calculated based on a range of terminal
multiples applied to the projected 2011 book value and net income.
In
connection with this analysis, KBW utilized 5-year projections provided by us
reflecting management’s currently available estimates and judgments of our
future financial performance. KBW assumed, among other things, that (i) no
dividends could be paid during the forecast period while maintaining the
Capital Adequacy Ratio required by A. M. Best to maintain an A- financial
strength rating and (ii) KMG is sold at December 31, 2011, based on a trailing
multiple with the proceeds (plus the net present value of our remaining net
operating losses at 2011) being discounted back to present across a range of
discount rates, which range was calculated based on a cost of equity analysis considered
by KBW to be appropriate for a company with our risk characteristics.
KBW
estimated the range for the implied present value per share of our common stock
by varying the following assumptions:
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•
|
a range of
terminal multiples applied to year 2011 estimated book value (excluding
accumulated other comprehensive income (“AOCI”)) of 0.85x to 0.95x; and
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|
•
|
a range of
discount rates of 16.0% to 17.0%.
|
This
analysis resulted in a range for the implied present value per share of our
common stock of $4.10 to $4.99.
KBW
also estimated the range for the implied present value per share of our common
stock by varying the following assumptions:
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|
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|
•
|
a range of
terminal multiples applied to year 2011 estimated net income (calculated in
accordance with generally accepted accounting principles) of 12.0x to 13.0x;
and
|
|
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|
|
|
|
•
|
a range of
discount rates of 16.0% to 17.0%.
|
This analysis resulted in a range for the implied
present value per share of our common stock of $3.74 to $4.38.
KBW stated that the discounted cash flow analysis is a
widely used valuation methodology, but that it is highly sensitive to the assumptions for projected net income and
shareholders’ equity, the terminal exit multiple and the discount rate.
Comparable Companies Analysis.
Using publicly
available information, KBW compared our financial performance, financial condition and market valuation to those of a group of
selected publicly-traded life and health insurance companies.
Selected companies with a market capitalization
greater than $3.0 billion as of September 6, 2007, included:
|
|
|
|
|
|
•
|
MetLife,
Inc.;
|
|
|
|
|
|
|
•
|
Prudential
Financial, Inc.;
|
|
|
|
|
|
|
•
|
AFLAC
Incorporated;
|
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|
|
|
|
|
•
|
Lincoln
National Corporation;
|
|
|
|
|
|
|
•
|
Principal
Financial Group, Inc.;
|
29
|
|
|
|
|
|
•
|
Genworth
Financial, Inc.;
|
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|
|
|
|
•
|
UnumProvident
Corporation;
|
|
|
|
|
|
|
•
|
Assurant,
Inc.; and
|
|
|
|
|
|
|
•
|
Torchmark
Corporation.
|
|
|
|
|
|
|
Selected
companies with a market capitalization less than $3.0 billion as of September
6, 2007, included:
|
|
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|
|
|
•
|
Protective
Life Corporation;
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|
|
|
|
|
|
•
|
Conseco,
Inc.;
|
|
|
|
|
|
|
•
|
StanCorp
Financial Group, Inc.;
|
|
|
|
|
|
|
•
|
Delphi
Financial Group, Inc.;
|
|
|
|
|
|
|
•
|
Phoenix
Companies, Inc.;
|
|
|
|
|
|
|
•
|
Universal
American Financial Corp.;
|
|
|
|
|
|
|
•
|
Great
American Financial Resources, Inc.;
|
|
|
|
|
|
|
•
|
Kansas City
Life Insurance Company;
|
|
|
|
|
|
|
•
|
Independence
Holding Company;
|
|
|
|
|
|
|
•
|
Penn Treaty
American Corporation; and
|
|
|
|
|
|
|
•
|
American
Independence Corp.
|
To perform its analysis, KBW used financial
information at or for the six months ended June 30, 2007, with the exception of Penn Treaty American Corporation, information for
which was at or for the year ended December 31, 2005. Market price information was as of September 6, 2007, and 2007 and 2008
earnings per share estimates were consensus estimates taken from First Call, a nationally recognized earnings per share estimate
consolidator.
KBW’s analysis showed the following concerning
our and the selected companies’ financial performance and financial condition:
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|
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|
KMG
America
|
|
Group
Median
|
|
Market Cap >
$3.0 Billion
Median
|
|
Market Cap <
$3.0 Billion
Median
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Last 3
months total shareholder return
|
|
|
(31.3
|
) %
|
|
(10.3
|
) %
|
|
(12.2
|
) %
|
|
(5.7
|
) %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Last 12
months total shareholder return
|
|
|
(52.5
|
) %
|
|
3.3
|
%
|
|
6.8
|
%
|
|
(2.4
|
) %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt and
preferred to total capital ratio
|
|
|
22.2
|
%
|
|
24.2
|
%
|
|
25.0
|
%
|
|
22.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
estimated return on average equity (excluding AOCI)
|
|
|
(3.2
|
) %
|
|
13.1
|
%
|
|
14.7
|
%
|
|
11.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
estimated return on average equity (excluding AOCI)
|
|
|
4.5
|
%
|
|
13.3
|
%
|
|
14.3
|
%
|
|
12.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
growth rate
|
|
|
NA
|
|
|
11.0
|
%
|
|
11.0
|
%
|
|
11.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
KBW’s analysis showed the following concerning
our and the selected companies’ market valuation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KMG
America
|
|
Group
Median
|
|
Market Cap >
$3.0 Billion
Median
|
|
Market Cap <
$3.0 Billion
Median
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock price
as a multiple of book value per share (excluding AOCI)
|
|
|
0.42
|
x
|
|
1.31
|
x
|
|
1.55
|
x
|
|
1.05
|
x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock price
as a multiple of 2007 estimated earnings per share
|
|
|
NA
|
|
|
11.8
|
x
|
|
11.1
|
x
|
|
12.2
|
x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock price
as a multiple of 2008 estimated earnings per share
|
|
|
9.2
|
x
|
|
10.4
|
x
|
|
10.5
|
x
|
|
10.1
|
x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
yield
|
|
|
0.0
|
%
|
|
1.0
|
%
|
|
1.2
|
%
|
|
0.4
|
%
|
KBW
also performed a regression analysis comparing the 2007 and 2008 estimated
return on average equity (“ROAE”) for the comparable companies to the price to
book value per share multiple. This analysis indicated that based on our
estimated ROAE of 4.5% for 2008, our implied book value multiple was 0.22x.
Since our 2007 estimated ROAE is negative, the regression analysis for 2007 was
deemed not meaningful by KBW.
Based
on the analyses described above, KBW calculated the following implied ranges of
trading values for shares of our common stock:
|
|
|
|
|
|
|
|
Implied Trading Values Based on First Call Estimates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value
(excluding AOCI) (1)
|
|
$
|
4.38 to
$4.58
|
|
|
|
|
|
|
|
|
2008
estimated net income (2)
|
|
$
|
4.40 to
$5.20
|
|
|
|
|
|
|
|
|
Implied Trading Values Based on Management Estimates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value
(excluding AOCI) (3)
|
|
$
|
4.30 to
$5.04
|
|
|
|
|
|
|
|
|
2008
estimated net income (4)
|
|
Not
meaningful
|
|
|
|
|
|
(1)
|
Implied
values were derived from our June 30, 2007, book value and First Call mean
earnings estimates for 2007 and 2008 to roll forward book value and applying
to such book value the book value multiples implied by the regression
analyses of the selected comparable companies. For purposes of this analysis,
KBW assumed a price-to-book value multiple floor of 0.50x for each of 2007
and 2008.
|
|
|
|
|
(2)
|
Implied
values were based on 2008 First Call mean earnings estimates and assumed an
earnings multiple range of 11.0x to 13.0x.
|
|
|
|
|
(3)
|
Implied
values were derived from management’s internal estimates and applying to
management’s estimated book value the book value multiples implied by the
regression analyses of the selected comparable companies. For purposes of
this analysis, KBW assumed a price-to-book value multiple floor of 0.50x for
each of 2007 and 2008.
|
|
|
|
|
(4)
|
Not meaningful
due to management’s low 2008 projected earnings per share estimate.
|
Comparable
Transactions Analysis.
KBW explored comparable
transactions in its review of the merger. Given that KMG is a going-concern
entity actively writing new business and that most recent similar life and
health
31
insurance
company change-of-control transactions have involved targets that (i) were
significantly larger than us, (ii) operated in different business lines with
different sensitivity to A.M. Best rating concerns, or (iii) had declared
themselves in run-off and were not actively writing new business, KBW believed
that a comparable transactions analysis was not relevant.
Miscellaneous.
Our board of directors retained KBW as an independent contractor to act as our
financial advisor regarding the merger. As part of its investment banking
business, KBW 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, KBW has experience in, and knowledge of, the valuation of insurance
enterprises. In the ordinary course of its business as a broker-dealer, KBW may
from time to time purchase securities from, and sell securities to, us and
Humana, and as a market maker in securities, KBW may from time to time have a
long or short position in, and buy or sell, debt or equity securities of us and
Humana for its own account and for the accounts of its customers.
KBW
has provided certain other investment banking services to us in the past,
including with respect to the placement of $35 million of our trust preferred
securities in March 2007, and has received customary compensation for such
services.
We
and KBW have entered into an engagement letter relating to the services to be
provided by KBW in connection with the merger. For the services described
above, we agreed to pay a cash fee of $50,000 promptly after execution of the
engagement letter and approximately $1.5 million subject to and upon the
closing of the merger. Additionally, upon the delivery of the opinion, KBW
received a cash fee in the amount of $469,560. Both the $50,000 fee and the
$469,560 opinion fee are creditable against the $1.5 million fee. Under the KBW
engagement letter, we also agreed to reimburse KBW for reasonable out-of-pocket
expenses and disbursements incurred in connection with its retention and to
indemnify it against certain liabilities, including liabilities under the
federal securities laws. No limitations were imposed by us on the scope of the
analyses conducted by KBW in rendering its opinion described above.
Interests of Our Directors and Executive
Officers in the Merger
You
should be aware that some of our directors and executive officers may have
interests in the merger that are different from, or in addition to, the
interests of our other shareholders. Our board of directors and special
committee were aware of these interests and considered them, among other
matters, in unanimously adopting and approving the merger agreement and the
transactions contemplated by the merger agreement. Among other things, these
interests included:
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•
|
Certain of
our directors and all of our executive officers hold restricted shares of our
common stock that will automatically vest immediately prior to completion of
the merger and such restricted shares will be treated in the merger in the
same manner as our shares of common stock.
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|
|
|
|
|
|
•
|
Our
directors and executive officers will be entitled, under certain
circumstances, to indemnification by the surviving corporation and the
benefit of directors’ and officers’ insurance coverage.
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|
|
|
|
|
|
•
|
To induce
Humana to execute the merger agreement, certain of our executive officers
executed new employment agreements with us. Such executives’ current
employment agreements with us will remain in full force and effect until the
closing of the merger. At the effective time of the merger, the executives’
current employment agreements will terminate and the new employment
agreements will govern the executives’ employment with us from and after the
effective time of the merger.
|
All
of these additional interests are described below, to the extent material, and,
except as described below, such persons have, to our knowledge, no material
interest in the merger apart from those of our common shareholders generally.
32
Employment Agreements
At Humana’s request, on September 7, 2007,
prior to executing the merger agreement, we entered into new employment agreements with Kenneth U. Kuk, R. Dale Vaughan, Thomas J.
Gibb, Paul F. Kraemer, Paul P. Moore and Robert E. Matthews. Those executives’ current employment agreements with us will
remain in full force and effect until the closing of the merger. Effective upon completion of the merger, the current employment
agreements will terminate and the new employment agreements will govern the executives’ employment. In addition, pursuant to
the terms of the new employment agreements, each executive has waived all rights and claims for compensation due to such executive
under his current employment agreement in the event that the executive’s employment terminates prior to the completion of the
merger and the executive claims that the cause of such termination was the anticipated consummation of the merger or anticipated
changes to KMG or his position, compensation or benefits contemplated in the new employment agreements.
Each new employment agreement provides for employment
at-will, meaning that KMG and each executive may unilaterally terminate the employment with or without notice, cause or reason,
from the effective time of the merger until the later of the third anniversary of such effective time or December 31, 2010. The
executives will receive an annual base salary, a cash bonus paid on the closing date of the merger and a cash bonus paid on the
third anniversary of the effective time of the merger. Each executive will also be entitled to participate in all employee benefit
plans maintained by KMG for its employees. At Humana’s discretion, Humana may replace such employee
benefit plans with similar plans available to Humana employees under the same terms and conditions as provided in Humana’s
employee benefit plans.
Pursuant to the terms of their respective new
employment agreements that will become effective upon completion of the merger,
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|
|
|
|
|
•
|
Mr. Kuk is
entitled to receive a base annual salary of $300,000 cash, a cash bonus to be
paid on the closing of the merger of $500,000 and a cash bonus to be paid on
the third anniversary of the closing of the merger of $1,500,000;
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|
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|
|
|
•
|
Mr. Vaughan
is entitled to receive a base annual salary of $215,000 cash, a cash bonus on
the closing of the merger of $75,000 and a cash bonus on the third
anniversary of the closing of the merger of $125,000;
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|
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•
|
Mr. Gibb is
entitled to receive a base annual salary of $180,000 cash, a cash bonus on
the closing of the merger of $75,000 and a cash bonus on the third
anniversary of the closing of the merger of $125,000;
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|
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•
|
Mr. Kraemer
is entitled to receive a base annual salary of $225,000 cash, a cash bonus on
the closing of the merger of $75,000 and a cash bonus on the third
anniversary of the closing of the merger of $125,000;
|
|
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|
|
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|
•
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Mr. Moore is
entitled to receive a base annual salary of $225,000 cash, a cash bonus on
the closing of the merger of $75,000 and a cash bonus on the third
anniversary of the closing of the merger of $125,000; and
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|
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|
|
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|
•
|
Mr. Matthews
is entitled to receive a base annual salary of $200,000 cash and a cash bonus
on the closing of the merger of $50,000.
|
Under
the terms of their respective new employment agreements, the executives will
participate in a management incentive plan whereby they will be eligible to
earn additional annual cash compensation upon achieving specific objectives
determined annually for 2008, 2009 and 2010. The executives are guaranteed
payouts under the management incentive plan for years 2008 and 2009 of 75% and
50% of their targeted incentive amount, respectively. The targeted incentive
amount in 2008 is: $150,000 for Mr. Kuk, $86,000 for Mr. Vaughan, $72,000 for
Mr. Gibb, $90,000 for each of Messrs. Moore and Kraemer and $50,000 for Mr.
Matthews.
Under
the terms of their respective new employment agreements, Messrs. Kuk, Gibb,
Kraemer and Moore will participate in a special incentive compensation plan,
whereby they will be able to earn additional annual cash
33
compensation upon KMG achieving annual earnings before income tax, depreciation and amortization
(“EBITDA”) targets. In each of 2008, 2009 and 2010, Mr. Kuk is eligible to receive up to $149,000, Mr. Gibb up to
$38,000 and each of Messrs. Moore and Kraemer up to $140,000 pursuant to the terms of the special incentive compensation plan.
Each of Messrs. Kuk, Gibb, Kraemer and Moore are guaranteed payouts for years 2008 and 2009 of 75% and 50% of their potential
special incentive compensation, respectively.
Each executive will receive upon completion of the
merger grants of performance-based restricted shares of Humana common stock, subject to the terms and conditions of the Humana
Restricted Stock Agreement and Agreement Not to Compete or Solicit under the Humana 2003 Stock Incentive Plan. Mr. Matthews
will receive upon completion of the merger a grant of restricted shares totaling $200,000 and each of Messrs. Kuk, Gibb, Vaughan,
Kraemer and Moore will receive a grant of $1,000,000. Such shares of restricted stock will vest after three years and will be
earned by the executives upon KMG achieving annual EBITDA targets for 2008, 2009 and 2010.
Mr. Kuk will receive upon completion of the merger a
grant of performance-based options to acquire shares of Humana common stock having an aggregate value of $1,000,000 using a
Black-Scholes option-pricing model as of the date of the grant. The options will vest after three years and will be earned by Mr.
Kuk upon KMG achieving annual EBITDA targets for 2008, 2009 and 2010.
Under the terms of their respective new employment
agreements, if we terminate an executive’s employment without cause or on account of the executive’s death or
disability, or the executive resigns for good reason, the executive shall receive (i) any earned and unpaid base salary and any
bonuses earned in any prior year and not yet paid, (ii) the bonus to be paid on the third anniversary of the merger, if any, (iii)
a pro rata portion of the guaranteed payout for the year of termination under the management incentive plan, (iv) in general, an
amount equal to the pro rata portion of the special incentive compensation the executive could have earned in the year of
termination and (v) all other compensation and benefits payable upon such termination under our other plans. If an
executive’s employment is terminated under the same circumstances within 24 months after the closing of the merger, we will
continue to pay the executive’s base salary for six months.
The new employment agreements and the related
restricted stock agreements also contain non-competition, non-solicitation and confidentiality provisions.
Our other executive officers, including, among others,
Mr. Scott H. DeLong III, our Senior Vice President and Chief Financial Officer, Mr. Thomas D. Sass, our Senior Vice President of
Underwriting/Risk Management, and James E. Nelson, Esq., our Senior Vice President, General Counsel and Secretary, did not sign
new employment agreements and their current employment agreements with us will remain in full force and effect at and after the
effective time of the merger, unless Humana requests that they sign, and they agree to sign, a new employment agreement prior to
the effective time of the merger.
Copies of the current employment agreements between us
and Messrs. Kuk, DeLong, Kraemer, Moore and Sass have been filed with the SEC and can be obtained from the SEC’s Internet
website or from us. Descriptions of those current employment agreements were included in the proxy statement for our 2007 annual
meeting of shareholders, which we filed with the SEC on March 30, 2007, and can be obtained from the SEC’s Internet website
or from us. For more information on how you can obtain these and other documents that we have filed with the SEC, please see
“Where You Can Find More Information” in this proxy statement.
Restricted Shares
Each outstanding restricted share of our common stock
will be vested immediately prior to the effective time of the merger and will be eligible to receive the $6.20 per share merger
consideration. None of our non-management directors own any restricted shares of our common stock. The following table sets forth
the number of restricted shares of our common stock held by our executive officers as of the date of this proxy statement, all of
which will be vested immediately prior to the effective time of the merger and will be eligible to receive the $6.20 per share
merger consideration (one-fourth of which (one-third with respect to Mr. Kuk’s restricted shares) have previously vested).
34
|
|
|
|
|
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|
|
|
Name
|
|
Restricted
Shares
|
|
Total Value of
Restricted Shares
|
|
|
|
|
|
|
|
|
|
|
Scott H.
DeLong III
|
|
|
6,000
|
|
$
|
37,200
|
|
|
Thomas J.
Gibb
|
|
|
10,050
|
|
$
|
62,310
|
|
|
Stanley D.
Johnson
|
|
|
6,500
|
|
$
|
40,300
|
|
|
Paul F.
Kraemer
|
|
|
17,974
|
|
$
|
111,439
|
|
|
Kenneth U.
Kuk
|
|
|
14,000
|
|
$
|
86,800
|
|
|
Robert E.
Matthews
|
|
|
3,500
|
|
$
|
21,700
|
|
|
Paul P.
Moore
|
|
|
17,974
|
|
$
|
111,439
|
|
|
James E.
Nelson
|
|
|
4,000
|
|
$
|
24,800
|
|
|
Thomas D.
Sass
|
|
|
16,974
|
|
$
|
105,239
|
|
|
R. Dale
Vaughan
|
|
|
5,000
|
|
$
|
31,000
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
101,972
|
|
$
|
632,227
|
|
Directors’ and Officers’ Indemnification and Insurance
For six years from and after the effective time of the
merger, Humana will cause the surviving corporation to indemnify, defend and hold harmless (including rights to advancement of
expenses and exculpation from liability) our and our subsidiaries’ current and former officers, directors, employees and
agents, on terms no less favorable than those provided for in our articles of incorporation and bylaws (or those of our
subsidiaries, as applicable) in effect on the date of the merger agreement.
Prior to the closing of the merger, we will purchase
six-year coverage under a directors’ and officers’ liability insurance policy, from the date of the effective time of
the merger, on terms and conditions no less advantageous to the beneficiaries thereof than our existing directors’ and
officers’ liability insurance.
35
Delisting and Deregistration of Our Common Stock
If the merger is completed, our common stock will be
delisted from the NYSE and will be deregistered under the Exchange Act.