Some surprising disclosures about Equitable General Corp. of McLean and Gulf United Corp. of Jacksonville, Fla.-two insurance companies that plan to merge - are coming from a scandal that's too far away from Washington for most people to hear about and from a report to shareholders that's too long for most people to read.
In a Florida case that's still unravelling, Gulf United has been linked to a questionable loan to former state insurance commissioner and treasurer Thomas D.O'Malley. O'Malley was impeached and removed from office after he allegedly made two rulings benefiting Guld United after receiving a favorable loan to finance a shopping center in which he secretly owned an interest.
On Friday, a federal jury in Miami convicted O'Malley of two counts ofextortion and 19 counts of mail fraud for allegedly peddling favors to insurance companies. None of the insurance companies were accused of criminal wrongdoing in either the impeachment or criminal cases.
No mention of Gulf United's role in the O'Malley matter-a major scandal in Florida-is made in the 103-page proxy statement that Gulf United and Equitable General have sent to their stockholders soliciting their approval of the merger. The proxy statement is required by law to disclose all "material facts" about the two insurance companies.
But the long and legalistic report reveals other details of the transaction that have not been reported publicly:
$1 million worth of management contracts have been promised to three top Equitable General executives who negotiated the merger agreement with Gulf United and have agreed to vote stock they own in favor of the merger.
$12 million of the cash that Gulf United plans to use to acquire Equitable General shares will come from Equitable General itself.
The plan is to have Equitable Life Insurance, a wholly owned subsidiary of Equitable General, pay an extraordinary dividend of $12 million to its parent company and then used that cash to buy Equitable General shares from stockholders.
The proposed extraordinary dividend has been getting close scrutiny from the Virginia Insurance Department, which must approve all extroodinary dividends paid by state-regulated insurance companies. Virginia regulators already have approved the merger of the two companies. A decision on the dividend is expected next Tuesday.
Although the takeover has been valued at $146 million- $51 for each of Equitable General's 2.8 million shares - Gulf United will put up only $14 million of its own cash, the proxy statement discloses.
In addition to Equitable General's $12 million and $14 million of its own funds, Gulf United plans to borrow $40 million and to issue new stock to pay for the rest of the transaction.
Florida Insurance Commissioner William T.Gunter - a former congressman - approved the merger last week, but expressed reservations about Gulf United's growing investments in subsidiaries and related companies, and imposed limits on its holdings in Equitable General.
Gunter permitted the acquisition with the restriction that the capital and surplus of Gulf United's principal subsidiary, Gulf Life Insurance, "will never be represented by more than 20 percent of the investment" in Equitable General.
A broadly diversified holding company with assets of $1.35 billion, Gulf United had total revenues of $353 million last year and earned $45 million The company gets 90 percent of its business from insurance.
Gulf United's main operation is Gulf Life Insurance. It also owns American Amicable Life Insurance of Waco, Tex. and Interstate Life & Accident Co. of Chattanooga, Tenn., plus television station WGHP-TV in High Point, N.c., radio stations in Jacksonville andDallas, and other subsidiaries in the real estate, insurance and financing fields.
Under the merger agreement, Gulf Life is to be combined with Equitable General, which has assets of $319 million and earned $10 million on revenues of $47 million in 1977. Equitable General would remain in McLean, operating independently.
Stockholders of Equitable General will vote on the merger Dec. 28, and Gulf United's shareholders will vote the following day on the merger and a related proposal to authorize inssuance of additional stock needed for the purchase.
In anticipation of the merger, Equitable General has entered into employment agreements with its three top officers that will become effective when the merger goes through, the proxy statement discloses.
The agreements include a five-year contract at $110,000 a year for EG President Charles E.Phillips, a three year $1000,000 contract for Senior Executive Vice President George C.Boddiger, and three-year $70,000 contract for Executive Vice Presient Frank Eslinger.
The new contract provides a $20,000 a-year raise for Phillips, who will serve as chairman after the merger. Phillips is 76, and the contract is conditioned upon his health allowing him to continue to work. As president, Boddiger gets a $13,000-a-year raise under the new contract. Eslinger, as chief financial officer, will get $10,000 a year more than he now earns.
The three top executives have agreed to vote all their Equitable General shares in favor of the merger; which under Virginia law requies a two-thirds majority.
The holdings of Eslinger and Boddiger are relatively small-21,000 and 6,500 shares respectively - but Phillips owns almost 105,000 shares directly and has an interest in 15.8 percent of the stock. Philips's wife owns 26,000 shares, another 131,000 shares are owned by trustes of which he is contrustee and 192,000 shares are owned by the Clark-Winchcole Foundation, of which he is president.
The largest single Equitable General shareholder is Dorothy Clark Winchcole, daughter of the firm's founder, who owns 259,000 shares and is also treasurer of the Clark-Winchcole Foundation.
The merger terms provide tax advantages to the large shareholders, who would have to pay large capital gains taxes if they sold their stock for cash. Gulf United will buy up to 1.3 million of the 2.8 million shares for cash at $51 per share and will exchange each of the remaining shares for a share of a new issue of class B convertible preferred stock that pays a $3.78-a-year divident. Generally speaking, stockholders who take shares rather than cash will not have to pay capital gains tax, the proposal indictates.
The new class B stock is immediately convertible into two shares of Gulf United common stock but, with Gulf United shares trading on the New York Stock Exchange for between $13 and $14, conversion would produce little more than half the $51 cash price.
The new class B stock, however, will be redeemed by Gulf United at $50 per share, and under terns of the issue, all of it could be called in after 12 to 14 years.
The advantage to Gulf United of issuing the new stock is that no cash is required and the dividends and redemption of the stock can be paid from future earnings of Equitable General.
Issuing the new stock will require an amendment to Gulf United's articleds of incorporation that must be approved by the company's stockholders and the Florida insurance commissioner.
It was the need for a favorable ruling on other matters from the state insurance commissioner that drew Gulf United into what has become known in Florida as "The O'Malley Scandal."
Details of the matter are spelled out in a report to the Florida legislature's select committee on impeachment by special counsel Myron Rudnick, who is now a U.S. Department of Justice special prosecutor handling oil priced manipulation cases.
Neither the impeachment report nor subsequent criminal prosecutions of O'Malley - some of which still pending - has charged any criminal wrongdoing on the part of Gulf United.
According to that report, O'Malley - who held the dual post of state treasurer and state insurance commissioner - appraoched a Gulf Life executive in 1971 about the company making a $2.475 million loan at 8 3/4 percent interest for 20 years to finance purchase of a small Florida shopping center center called Fort Walton Square.
O'Malley secretly owned a one-eighth interest in the shopping center, the report that led to his impeachment says. A member of the state legislature influential on insurance legislation was also an investor in the shpping center.
O'Malley brought up the loan, the report discloses, when a Gulf representative came to visit him about two major regulatory issues the company had pending before the state insurance commission: a plan for a reverse stock split that could be made only with the commissioner's approval and an order by the commission to divest stock that Gulf Life owned in its own parent company.
The oan eventually was made at the rate O'Malley asked for, which was "among the lowest granted" by Gulf Life during that time. Gulf Life officer Cecil Bailey later testified the low rate was given because of "hard bargaining" by the borrowers. "The prominence of the commissioner, who said he would like to have us make it to some people who were his friends, certainly had some bearing on the consideration," he told impeachment investigators.
According to the report that led to his removal from office, 10 days after Gulf Life notified the shopping center owners it would make the loan, O'Malley approved a six-month delay in the order forcing Gulf Life to sell its stock.
Approval of Gulf United's reverse stock split came the same month that O'Malley's partners closed the loan on their shopping center.
Equitable General officials, who have consistently refused to discuss their merger plans during months of offers, counteroffers and negotiations, had no comment on Gulf's involvement in the Florida case. "I don't know a thing about it," said Eslinger.