UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

 

Proxy Statement Pursuant to Section 14(a) of the Securities

Exchange Act of 1934

Filed by the Registrant þ

 

Filed by a Party other than the Registrant o

 

Check the appropriate box:

 

þ  Preliminary Proxy Statement

o  Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

o  Definitive Proxy Statement

o  Definitive Additional Materials

o  Soliciting Material Pursuant to §240.14a-12

 

DIRECT GENERAL CORPORATION

(Name of Registrant as Specified In Its Charter)

 

Not Applicable

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

Payment of Filing Fee (Check the appropriate box):

 

o  No fee required.

 

 

Common stock, no par value per share, of Direct General Corporation (“Direct General Common Stock”)

 

 

20,347,675 shares of Direct General Common Stock; 952,200 options to purchase Direct General Common Stock

 

 

$21.25 per share of Direct General Common Stock; $21.25 minus the actual exercise prices of outstanding options to purchase 946,200 shares of Direct General Common Stock which have exercise prices less than $21.25 per share

 

 

$433,740,194.00

 

 

$46,411.00

 

o  Fee paid previously with preliminary materials:

 

 

 

 

 

 

 

 

 

Preliminary Copy — Subject to Completion

 

 

Dear Fellow Shareholder:

 

On December 4, 2006, Direct General Corporation (“Direct General”) entered into an Agreement and Plan of Merger, which we refer to as the merger agreement, with Elara Holdings, Inc. (“Parent”), an affiliate of Fremont Partners and Texas Pacific Group, and Elara Merger Corporation (“Sub”), a wholly owned subsidiary of Parent, pursuant to which we will become a wholly owned subsidiary of Parent. A special meeting of our shareholders will be held on [ • ], 2007, at [ • ] a.m. CDT, to vote on a proposal to approve the merger agreement and the transactions contemplated thereby so that the merger can occur. The meeting will be held at our corporate headquarters located at 1281 Murfreesboro Road, Nashville, Tennessee 37217. Notice of the special meeting is enclosed.

 

If the merger is completed, you will be entitled to receive $21.25 in cash, without interest and less any applicable withholding tax, for each share of Direct General common stock that you own. This price represents a premium of approximately 29% over the closing price of Direct General’s common stock on December 4, 2006, the last trading date before the public announcement that Direct General and Parent had entered into the merger agreement, and a premium of approximately 39% over the average closing price for the last 30 trading days ending on December 4, 2006.

 

The proxy statement attached to this letter gives you detailed information about the special meeting and the merger and includes the merger agreement as Annex A. The receipt of cash in exchange for shares of common stock in the merger will constitute a taxable transaction to U.S. taxpayers for U.S. federal income tax purposes. We encourage you to read the proxy statement and the merger agreement carefully.

 

Our board of directors (based in large part upon the unanimous recommendation of the special committee of our board, the members of which are not affiliated with Parent or Sub and are not members of Direct General’s management) (1) approved the acquisition of Direct General by Parent on the terms and subject to the conditions set forth in the merger agreement, (2) adopted the merger agreement and approved the transactions contemplated thereby, and (3) recommends that you approve the merger agreement and the transactions contemplated thereby, including the merger.

 

Your vote is important. We cannot complete the merger unless holders of a majority of all outstanding shares of common stock vote to approve the merger agreement. Our board of directors recommends that you vote “FOR” the proposal to approve the merger agreement and the transactions contemplated thereby, including the merger. The failure of any shareholder to vote on the proposal to approve the merger agreement will have the same effect as a vote against the merger.

 

Our board of directors fixed the close of business on [ • ], 2007, as the record date for the special meeting, and only holders of common stock on the record date are entitled to vote at the special meeting. On the record date, there were [20,347,675] shares of common stock outstanding and entitled to vote.

 

Regardless of your decision whether to attend the special meeting, please mark, sign and date the accompanying proxy card and return it in the enclosed prepaid envelope.

 

Our board of directors and management appreciate your support of our company, and we hope you will support this exciting transaction.

 

 

This transaction has not been approved or disapproved by the Securities and Exchange Commission or any state securities commission. Neither the Securities and Exchange Commission nor any state securities commission has passed upon the fairness or merits of this transaction or upon the accuracy or adequacy of the information contained in this proxy statement. Any representation to the contrary is a criminal offense.

The proxy statement is dated [ • ], 2007, and is first being mailed to shareholders on or about [ • ], 2007.

 

 

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held On [ • ], 2007

 

PLEASE TAKE NOTICE that a special meeting of shareholders of Direct General Corporation, a Tennessee corporation, will be held on [ • ], 2007, at [ • ] a.m. CDT, at Direct General Corporation’s corporate headquarters located at 1281 Murfreesboro Road, Nashville, Tennessee, 37217 for the following purposes:

 

1) To vote on a proposal to approve the Agreement and Plan of Merger, dated as of December 4, 2006, by and among Elara Holdings, Inc., a Delaware corporation, Elara Merger Corporation, a Tennessee corporation, and Direct General Corporation, a Tennessee corporation, as the merger agreement may be amended from time to time, and the transactions contemplated thereby, including the merger.

 

2) To approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the meeting to approve the merger agreement.

 

3) To act upon other business as may properly come before the special meeting and any and all adjourned or postponed sessions thereof.

 

We urge you to carefully read the accompanying proxy statement as it sets forth details of the proposed merger and other important information related to the merger.

 

The record date for the determination of shareholders entitled to notice of and to vote at the special meeting is [ • ], 2007. Accordingly, only shareholders of record as of that date will be entitled to notice of and to vote at the special meeting or any adjournment or postponement thereof.

 

By Order of the Board of Directors,

 

Ronald F. Wilson

Secretary

 

Nashville, Tennessee

[ • ], 2007

 

 

 

TABLE OF CONTENTS

 

 

This summary term sheet, together with the “Questions and Answers About the Special Meeting and the Merger” highlights selected information contained in the proxy statement and the Annexes and may not contain all the information that may be important to you. You should carefully read this entire proxy statement and the other documents to which this proxy statement refers you for a more complete understanding of the matters being considered at the special meeting. In addition, the proxy statement incorporates by reference important information about Direct General Corporation into this proxy statement. You may obtain the information incorporated by reference into this proxy statement without charge by following the instructions in “Where You Can Find More Information” found on page 63.

 

 

 

 

 

 

 

 

 

 

 

Under specific circumstances set forth in the merger agreement, including in order to comply with our board of directors’ fiduciary duties, the board may withhold, withdraw, amend or modify its recommendation, and in the event that a third party has made a tender or exchange offer directly to you, and such offer is a superior offer (as defined in the merger agreement), the board may recommend that you accept the other offer, or, in the event of a superior offer, the board may approve, endorse or recommend such a superior offer. We may provide nonpublic information to third parties making acquisition proposals and engage in negotiations with such persons, provided that our board of directors has concluded in good faith, and after consultation with its legal and financial advisors, that such acquisition proposal is reasonably likely to result in a superior offer, we have complied with our obligations to not solicit acquisition proposals, we enter into a confidentiality agreement with the third party and we provide any information to Parent that is provided to the third party. Please see “The Merger Agreement — No Solicitations of Other Offers.”

 

 

 

 

 

 

 

 

 

 

 

 

Parent will be required to pay us a termination fee of $13.0 million if we are not in material breach of the merger agreement and:

 

 

 

 

Date:   [ • ], 2007

Time:   [ • ] a.m., CDT

Nashville, Tennessee 37217

 

 

 

 

 

 

 

The following questions and answers are intended to address briefly some commonly asked questions regarding the special meeting, the merger agreement, and the merger. These questions and answers do not address all questions that may be important to you as a Direct General shareholder. Please refer to the more detailed information contained elsewhere in this proxy statement, the annexes to this proxy statement and the documents referred to or incorporated by reference in this proxy statement.

 

 

 

 

This proxy statement, and the documents to which we refer you in this proxy statement, contain forward-looking statements about our plans, objectives, expectations and intentions. Forward-looking statements include information concerning possible or assumed future results of operations of our company, the expected completion and timing of the merger and other information relating to the merger. You can identify these statements by words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” “may,” “will” and “continue” or similar words. You should read statements that contain these words carefully. They discuss our future expectations or state other forward-looking information, and may involve known and unknown risks over which we have no control, including, without limitation,

 

 

See “Where You Can Find More Information” on page 63 of this proxy statement. You should not place undue reliance on forward-looking statements. We cannot guarantee any future results, levels of activity, performance or achievements. The statements made in this proxy statement represent our views as of the date of this proxy statement, and it should not be assumed that the statements made herein remain accurate as of any future date. Moreover, we assume no obligation to update forward-looking statements or update the reasons actual results could differ materially from those anticipated in forward-looking statements, except as required by law.

 

Direct General Corporation, headquartered in Nashville, Tennessee, was incorporated in 1993 and is a financial services holding company whose principal operating subsidiaries provide non-standard personal automobile insurance, term life insurance, premium finance and other consumer products and services primarily on a direct basis and primarily in the southeastern United States. We own five property/casualty insurance companies, two life/health insurance companies, two premium finance companies, twelve insurance agencies, two administrative service companies and one company that provides non-insurance consumer products and services.

Our core business involves issuing non-standard personal automobile insurance policies. These policies, which generally are issued for the minimum limits of coverage required by state laws, provide coverage to drivers who generally cannot obtain insurance from standard carriers due to a variety of factors, including the lack of flexible payment plans, the failure to maintain continuous coverage, age, prior accidents, driving violations, occupation and type of vehicle.

 

Through our premium finance subsidiaries, we finance the majority of the insurance policies that we sell. Premium finance involves making a loan to the insurance customer that is backed by the unearned portion of the insurance premiums being financed, which is the portion of the loan attributable to future periods of coverage under the financed policy.

 

Direct General’s principal executive offices are located at 1281 Murfreesboro Road, Nashville, TN 37217, and our telephone number is (615) 399-4700. For more information about Direct General, please visit our website at www.direct-general.com. Our website address is provided as an inactive textual reference only. Information provided on our website is not part of this proxy statement, and therefore is not incorporated by reference. See also “Where You Can Find More Information” beginning on page 63. Direct General common stock is traded on the NASDAQ Global Select Market under the symbol “DRCT.”

 

Parent is a Delaware corporation formed solely for the purpose of facilitating the transactions contemplated by the merger agreement and holding the stock of Sub and any successor by merger to Sub and has not conducted any other business activities since its organization. Parent is affiliated with Fremont Partners and Texas Pacific Group. Fremont Partners, founded in 1991, is a private investment partnership that has managed more than $2 billion of equity investments in 22 companies, representing a total transaction value of $5.6 billion. Texas Pacific Group is a private investment partnership that was founded in 1992 and currently has more than $30 billion of assets under management. The executive offices of Parent are located at 199 Fremont Street, San Francisco, CA 94105, and its telephone number is (415) 284-8100.

 

Sub is a Tennessee corporation formed solely for the purpose of merging with and into Direct General and has not conducted any business activities since its organization. Sub is a wholly owned subsidiary of Parent. The executive offices of Sub are located at 199 Fremont Street, San Francisco, CA 94105, and its telephone number is (415) 284-8100.

 

This proxy statement is furnished in connection with the solicitation of proxies by our board of directors in connection with a special meeting of our shareholders.

 

The special meeting is scheduled to be held as follows:

 

Date:   [ • ], 2007

Time:   [ • ] a.m., CDT

Nashville, Tennessee 37217

 

At the special meeting, you will consider and vote upon a proposal to approve the merger agreement and the transactions contemplated thereby. A copy of the merger agreement is attached as Annex A to this proxy statement. You will also be asked to vote on a proposal to approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the merger agreement, as may be amended from time to time, and the transactions contemplated thereby.

 

Our board of directors has fixed the close of business on [ • ], 2007, as the record date for the special meeting, and only holders of record of Direct General common stock on the record date are entitled to vote at the special meeting. On the record date, there were outstanding and entitled to vote [20,347,675] shares of common stock.

 

Each share of common stock entitles its holder to one vote on all matters properly coming before the special meeting. The presence in person or representation by proxy of shareholders entitled to cast a majority of the votes of all issued and outstanding shares entitled to vote on the proposal to approve the merger agreement, considered together, shall constitute a quorum for the purpose of considering the proposal. Shares of our common stock represented at the special meeting but not voted, including shares of our common stock for which proxies have been received but for which shareholders have abstained, will be treated as present at the special meeting for purposes of determining the presence or absence of a quorum for the transaction of all business. In the event that a quorum is not present at the special meeting, it is expected that the meeting will be adjourned or postponed to solicit additional proxies.

 

If you hold your shares in an account with a broker or bank, you must instruct the broker or bank on how to vote your shares. If an executed proxy card returned by a broker or bank holding shares indicates that the broker or bank does not have authority to vote on the proposal to approve the merger agreement, the shares will be considered present at the meeting for purposes of determining the presence of a quorum, but will not be voted on the proposal to approve the merger agreement. This is called a broker non-vote. Your broker or bank will vote your shares only if you provide instructions on how to vote by following the instructions provided to you by your broker or bank.

 

Approval of the merger agreement requires the affirmative vote of the holders of a majority of all outstanding shares of Direct General common stock.

 

ABSTENTIONS AND BROKER NON-VOTES WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE PROPOSAL TO APPROVE THE MERGER AGREEMENT.

 

Each of our directors and executive officers has indicated that he or she intends to vote his or her own shares in favor of the proposal to approve the merger agreement. If our directors and executive officers vote their shares in favor of approving the merger agreement, 5.69% of the outstanding voting power of shares of common stock will have voted for the proposal to approve the merger agreement. In addition, our President is trustee of the Trust, which owns 4,323,149, or 21.25% of our outstanding common stock. The Trust entered into a voting agreement on December 4, 2006, which requires our President, solely in her capacity as trustee of the Trust, to vote in favor of the merger agreement. If our directors and executive officers and the trustee of the Trust vote in favor of the merger, holders of approximately 23.07% of the voting power of all other shares entitled to vote at the meeting would need to vote in favor of the merger agreement for the merger to be approved.

 

Shareholders of record may submit proxies by mail. Shareholders who wish to submit a proxy by mail should mark, date, sign and return the proxy card in the envelope furnished. If you hold your shares in your name as a shareholder of record, you may vote by telephone or electronically through the Internet by following the instructions included with your proxy card. Shareholders who hold shares beneficially through a nominee (such as a bank or broker) may be able to submit a proxy by telephone or the Internet if those services are offered by the nominee.

 

Proxies received at any time before the special meeting, and not revoked or superseded before being voted, will be voted at the special meeting. Where a specification is indicated by the proxy, it will be voted in accordance with the specification. Where no specification is indicated, the proxy will be voted “FOR” the proposal to approve the merger agreement.

 

The persons you name as proxies may propose and vote for one or more adjournments or postponements of the special meeting, including adjournments or postponements to permit further solicitations of proxies. No proxy voted against the proposal to approve the merger agreement will be voted in favor of any adjournment or postponement.

 

PLEASE DO NOT SEND IN YOUR STOCK CERTIFICATES WITH YOUR PROXY CARD. When the merger is completed, a separate letter of transmittal will be mailed to you that will provide instructions concerning your stock certificates and enable you to receive the merger consideration.

 

Until your proxy is exercised at the special meeting, you can revoke your proxy and change your vote in any of the following ways:

 

 

Although it is not currently expected, the special meeting may be adjourned or postponed for the purpose of soliciting additional proxies. Any adjournment may be made without notice (if the adjournment is not for more than four months), other than by an announcement made at the special meeting of the time, date and place of the adjourned meeting. Regardless of whether a quorum exists, holders of a majority of the voting power of common stock present in person or represented by proxy at the special meeting and entitled to vote thereat may adjourn the special meeting. Any signed proxies received by us in which no voting instructions are provided on such matter will be voted “FOR” an adjournment or postponement of the special meeting, if necessary or appropriate, to solicit additional proxies. Any adjournment or postponement of the special meeting for the purpose of soliciting additional proxies will allow our shareholders who have already sent in their proxies to revoke them at any time prior to their use at the special meeting as adjourned or postponed.

 

Our shareholders do not have a right to dissent under the Tennessee Business Corporation Act unless our common stock is delisted from the NASDAQ Global Select Market prior to consummation of the merger.

 

We will bear the expenses in connection with the solicitation of proxies. Arrangements will also be made with brokerage houses and other custodians, nominees and fiduciaries for the forwarding of solicitation material to the beneficial owners of common stock held of record by those persons, and we may reimburse them for their reasonable transaction and administrative expenses. Solicitation of proxies will be made principally by mail. Proxies may also be solicited in person, or by telephone, facsimile, telegram, electronic mail or other means of communication, by our officers and regular employees. These people will receive no additional compensation for these services, but will be reimbursed for any transaction expenses incurred by them in connection with providing these services. We have retained D.F. King & Co., Inc., a proxy solicitation firm, for assistance in connection with the solicitation of proxies for the special meeting for a fee of $7,500 plus reimbursement of reasonable out-of-pocket expenses for such items as mailing, copying, phone calls, faxes and other related items.

 

If you have more questions about the merger or how to submit your proxy, or if you need additional copies of this proxy statement or the enclosed proxy card or voting instructions, please call our proxy solicitor, D.F. King & Co., Inc., toll-free at 1-800-859-8511 or collect at 1-212-269-5550, or contact Direct General in writing at our principal executive offices at 1281 Murfreesboro Road, Nashville, Tennessee 37217, Attention: Ronald F. Wilson, Secretary, or by telephone at (615) 399-0600.

 

Our board of directors has periodically reviewed our strategic plan and alternatives. From time to time since the Company’s initial public offering in August 2003, representatives of the Company have received inquiries from third parties expressing interest in discussing possible transactions with the Company.

 

In late December 2005, representatives of Fremont Partners contacted William C. Adair, Jr., the Company’s Chairman and Chief Executive Officer and a shareholder of the Company to express a tentative interest in discussing an acquisition of the Company. Thereafter, some very preliminary discussions of the parties’ level of mutual interest in an acquisition were held intermittently between Fremont Partners and William Adair. On January 18, 2006, representatives of Fremont Partners met at the Company’s Nashville offices with William Adair, Jacqueline C. Adair, a director and the Company’s Executive Vice President and Chief Operating Officer, and Tammy R. Adair, the Company’s President (collectively, the “Adairs”). Fremont Partners discussed with the Adairs the possibility of a transaction in which an entity formed by Fremont Partners would acquire the Company.

 

During the last few weeks of January, 2006, and at a meeting held on February 10, 2006, Fremont Partners and management held general discussions regarding a proposed transaction between the Company and Fremont Partners. The Company determined to allow Fremont Partners to conduct a limited due diligence review of its organization, business and finances, and, consequently, on February 16, 2006, entered into a confidentiality agreement with Fremont Partners. On February 21, 2006, the Company received a preliminary due diligence request from Fremont Partners, and it continued its discussions with Fremont Partners during the remainder of the month.

 

During the week of February 13, 2006, Party B, a strategic bidder, initiated contact with William Harter, the Company’s Senior Vice President — Corporate Development, Banking and Finance, to request a meeting with representatives of the Company. Representatives of Party B and Messrs. William Adair and Harter and Ms. Tammy Adair met at the Company’s Memphis offices on February 21, 2006. At that meeting, Party B asked whether the Company might be interested in exploring a possible business combination, but no details of any transaction were discussed.

In late February, 2006, the Company began providing Fremont Partners and its advisors with confidential information in response to Fremont Partners’ due diligence request, and on March 2, 2006, representatives of Fremont Partners met with members of the Company’s executive management team in Memphis, Tennessee to discuss a potential transaction and to conduct in-person due diligence. Representatives of Fremont Partners and the Company held a follow-up meeting by telephone conference on March 10, 2006, to further discuss the Company’s finances. J. Todd Hagely, the Company’s Senior Vice President and Chief Financial Officer, and Mr. Harter participated in the March 10th meeting.

 

Subsequent to the March 10, 2006 meeting, representatives of Fremont Partners and the Company discussed generally the proposed terms of a transaction between Fremont Partners and Direct. As initially presented, the transaction described by Fremont Partners contemplated, among other things, that the Adairs roll over Company common stock held by them, including Company common stock held by the Trust, into equity of the acquiring entity. On or about March 27, 2006, Fremont Partners delivered a form of term sheet that outlined generally the proposed transaction with Direct. On March 27, 2006, at a meeting in Memphis, Tennessee, representatives of Fremont Partners and the Company met to discuss the proposed terms of a transaction, as reflected in the form of term sheet. Shortly, thereafter, the Company received a letter from Fremont Partners proposing, on a confidential non-binding basis, to acquire the Company through a merger at a price of $20 per common share in cash. The proposal was subject to further due diligence and the negotiation and execution of definitive agreements.

 

During April, 2006, the Company’s management continued to examine the Fremont Partners proposal and explored the engagement of financial advisers to the Company.

 

On April 20, 2006, Party B met with representatives of the Company at its Memphis offices to discuss further the possibility of a transaction between the Company and Party B. Party B requested the opportunity to conduct a due diligence review of the Company. Shortly thereafter, the Company began providing Party B with non-confidential information to allow Party B to evaluate the feasibility of a transaction with the Company.

 

On May 3, 2006, a previously scheduled meeting of the Company’s board of directors was held at the Company’s headquarters, at which the Fremont Partners proposal, as set forth in its letter, was discussed. The board of directors discussed the desirability of establishing a special committee comprised of directors independent of Fremont Partners, management and the Adairs. The independent members of the Company’s board, Fred H. Medling, Raymond L. Osterhout and Stephen L. Rohde, met in executive session and were briefed on the Fremont Partners letter and the other recent activities related to a potential transaction involving the Company. A representative of the Company’s outside legal advisor, Baker, Donelson, Bearman, Caldwell & Berkowitz, PC, which we refer to in this proxy statement as Baker Donelson, was present. The Baker Donelson representative advised the directors as to their fiduciary duties under the circumstances.

 

On May 11, 2006, representatives of Fremont Partners met with management of the Company, including the Adairs and Mr. Harter, to discuss the Fremont Partners proposal.

 

On May 15, 2006, at the suggestion of representatives of the Company, Fremont Partners submitted a second written proposal which improved Fremont Partner’s offer per share from $20 to $21 in cash. The revised Fremont Partners proposal required that the Adairs roll over an aggregate of at least one million shares of the Company’s common stock, including the Company’s common stock held in the Trust, into equity of the acquiring entity. It also eliminated the previously proposed requirement that a portion of the consideration payable to the Company shareholders would be held in escrow pending resolution of the securities and derivative actions filed against the Company and certain of the Company’s officers and directors. These lawsuits, which we refer to in this proxy statement as the shareholder lawsuits, and in which the securities action SunTrust Robinson Humphrey is also a defendant, are described in our annual report on Form 10-K for the year ended December 31, 2005.

 

On May 17, 2006, a representative of Party B telephoned Mr. Harter and advised him that Party B had decided not to proceed with an acquisition of the Company.

 

On May 19, 2006, the Company’s board of directors held a meeting. In view of a proposed equity rollover of the Company shares owned by the Adairs that was contemplated by the Fremont Partners proposal,

the board determined at this time to form a special committee composed entirely of independent directors to evaluate the Company’s strategic options, including the Fremont Partners proposal, to engage independent financial and legal advisors and to report to the entire board of directors with respect to any acquisition of the Company and the special committee’s evaluation. Messrs. Medling, Osterhout and Rohde, the independent members of the Company’s board, were appointed to the special committee, and Mr. Rohde was appointed chairman of the special committee.

 

On May 24, 2006, the special committee held a meeting to discuss and authorize the engagement of a legal advisor to the special committee. The results of preliminary interviews with each of three law firms were discussed. After discussion, the special committee authorized that Dorsey & Whitney LLP, which we refer to in this proxy statement as Dorsey, be engaged as independent counsel to the special committee. A formal engagement letter was subsequently executed between the special committee and Dorsey.

 

On May 26, 2006, the special committee held a meeting. A representative of Dorsey briefed the special committee members on their fiduciary duties in connection with the Fremont Partners proposal and the exploration of strategic alternatives for the Company generally. The special committee discussed the status of the Fremont Partners proposal and discussed the engagement of a financial advisor in connection with its evaluation of the Company’s strategic alternatives. The special committee authorized a representative of Dorsey to solicit proposals from investment banking firms.

 

On May 31, 2006, representatives of Party C contacted Mr. Harter to request a meeting.

 

On June 2, 2006, the special committee held a meeting to discuss the engagement of a financial advisor in connection with its evaluation of the Company’s strategic alternatives. The special committee discussed the proposals submitted by the investment banks and the qualifications of each of them. After discussion, the special committee authorized that SunTrust Robinson Humphrey be engaged as financial adviser to the special committee. A formal engagement letter was subsequently executed between the special committee and SunTrust Robinson Humphrey on June 9, 2006. The special committee directed that the due diligence materials previously provided to Fremont Partners be provided to SunTrust Robinson Humphrey for its review of the Company’s business and strategic alternatives.

 

On or about June 2, 2006, representatives of Party A contacted Mr. Harter to express a tentative interest in discussing an acquisition of the Company. The parties agreed to meet on June 12, 2006 at the Company’s Memphis offices to engage in further discussions of a potential transaction between the Company and Party A.

 

On June 7, 2006, representatives of Party C met at the Company’s Nashville offices with certain members of Company management, including Ms. Tammy Adair, Messrs. Harter and Hagely and the Company’s General Counsel, Ronald F. Wilson. Very preliminary discussions of a potential transaction between the Company and Party C ensued. In these preliminary discussions, Party C indicated that it was interested in a transaction that did not involve a complete acquisition of the Company. Following the preliminary discussions, Party C declined to submit a written proposal for a transaction between the Company and Party C.

 

On June 9, 2006, the special committee held a meeting at Dorsey’s offices in Minneapolis, Minnesota. Representatives of SunTrust Robinson Humphrey led a detailed discussion of a situational overview that SunTrust Robinson Humphrey had prepared for the special committee. The situational overview included an analysis of the Company’s business, a preliminary evaluation analysis of the Fremont Partners proposal and possible alternative courses of action for the special committee to consider. The preliminary evaluation analysis included a comparison of the Fremont Partners preliminary proposal against various valuation metrics. The special committee discussed SunTrust Robinson Humphrey’s presentation in detail. The special committee also discussed at length the Company’s long-term prospects, the Company’s current market valuation, the time needed to achieve a higher market valuation and the Company’s strategic alternatives, including the pursuit of the current business plan and the potential sale of all or parts of the Company. At the conclusion of this discussion, it was the consensus of the special committee that the special committee, with the assistance of its advisors, should proceed with a process to explore the possible sale of the Company. The special committee concluded that the valuation of the Company in Fremont Partners’ preliminary proposal was credible and directed SunTrust Robinson Humphrey to seek clarification from Fremont Partners on certain aspects of the

preliminary proposal. It also considered Fremont Partners’ requests that the Company agree to work exclusively with Fremont Partners and determined to reject Fremont Partners’ request. The special committee directed SunTrust Robinson Humphrey to commence the preparation of a confidential information memorandum to be used in connection with soliciting proposals from other potential buyers.

 

On June 12, 2006, representatives of Party A met at the Company’s Memphis offices with members of the Company’s executive management team, including Messrs. Adair and Harter. During these meetings, Party A indicated an interest in acquiring the Company. Thereafter, in early June 2006, representatives of Party A contacted representatives of the Company and orally indicated an interest in making a proposal for an acquisition of the Company for consideration comprised of shares of Party A’s common stock and cash, having a combined value of $21.00 per common share of the Company. Representatives of Party A subsequently indicated to the Company that Party A was tentatively prepared to increase the consideration, comprised of Party A’s common stock and cash, to $21.60 per common share.

 

On June 15, 2006, the special committee held a meeting, at which time representatives of SunTrust Robinson Humphrey updated the special committee on recent discussions with Fremont Partners and briefed the special committee on management’s discussions with Party A. The special committee held a follow-up meeting on June 19, 2006 at which representatives of SunTrust Robinson Humphrey updated the special committee on discussions with Fremont Partners and described the oral indication of interest received from Party A. Representatives of SunTrust Robinson Humphrey presented to the special committee a list of public and private insurance companies and non-insurance financial services companies identified by SunTrust Robinson Humphrey as potentially having a strategic interest in an acquisition of the Company. Representatives of SunTrust Robinson Humphrey also presented to the special committee a list of potential financial buyers. The special committee discussed the SunTrust Robinson Humphrey presentation and suggested that an additional non-insurance financial services company be added to the list of potential acquirers. The special committee discussed with its financial and legal advisors various sale processes that might be undertaken, including the possibility of conducting a public auction of the Company. The special committee noted the risk of losing one or both of the current proposals posed by conducting a public auction and also discussed the limited ability of the Company’s management to conduct simultaneous due diligence with numerous potential buyers. The special committee discussed with its financial and legal advisors the efficacy of a private market check in maximizing shareholder value. Accordingly, the special committee decided to approach a targeted number of potential buyers (including Fremont Partners, Party A, Party B and Party C) based on the list suggested by SunTrust Robinson Humphrey.

 

On June 21, 2006, the special committee held a meeting, which was also attended by certain members of the Company’s executive management team, including Messrs. Adair, Harter, Hagely and Wilson and Ms. Tammy Adair, and a representative of Baker Donelson. Representatives of SunTrust Robinson Humphrey updated management on the solicitation process to date and on the status of discussions with Fremont Partners and Party A. Representatives of SunTrust Robinson Humphrey led a discussion concerning the parties on the list of potential buyers which had been presented to the special committee at the June 19 meeting, as subsequently expanded based on input from the special committee. The special committee discussed the list of potential buyers with members of management and solicited management’s views on how to prioritize contacting potential buyers. In this discussion, members of the Company’s management gave their views of the respective strategic fit with the certain of the potential strategic buyers and the financial strength of certain potential financial buyers. Some potential buyers were eliminated, on the grounds that the chances of obtaining a viable proposal from such potential buyers were remote, either because an acquisition of the Company would not represent a good strategic fit for the potential buyer or because the potential buyer did not possess the financial resources to fund an acquisition of the Company. Elimination of those potential buyers allowed the special committee and SunTrust Robinson Humphrey to focus their efforts on buyers more likely to lead to a successful sale. The special committee discussed with the Company’s management team that negotiations with all potential buyers would be conducted through the special committee and its financial advisor.

 

At this point, the members of the Company’s management team and the representative of Baker Donelson in attendance were excused from the meeting. The special committee proceeded to discuss with its financial and legal advisors the recommendations of the Company’s management regarding the list of potential buyers

to be contacted and, after discussion, concluded that it agreed with management’s recommendations and directed that SunTrust Robinson Humphrey refine the contact list based on a further analysis of strategic fit and financial wherewithal. The special committee noted that, after giving effect to the recommendations, the list of parties to be contacted would contain at least 26 potential strategic parties and 7 financial parties, with the potential for additions as the process unfolded. The special committee instructed its financial and legal advisors to prepare an appropriate form of non disclosure agreement to be executed by potential buyers and authorized SunTrust Robinson Humphrey to commence contacting all 33 potential buyers.

 

From mid June 2006 through late July 2006, SunTrust Robinson Humphrey contacted each of the potential buyers on the list formulated at the June 19 and 21 special committee meetings. A form of non-disclosure agreement was sent to each of the contacted parties, which included customary confidentiality, standstill and non-solicitation provisions. Upon execution of the non-disclosure agreement, SunTrust Robinson Humphrey provided the contacted party with a copy of a confidential information memorandum and granted the party access to limited preliminary due diligence information in electronic form.

 

On June 26, 2006, Party A submitted to the special committee a written non-binding indication of interest for an acquisition of the Company. Party A’s proposal confirmed Party A’s preliminary valuation of the Company at $21.60 per common share, payable in a combination of cash and Party A’s common stock. Party A’s proposal required that members of the Company’s senior management roll over a portion of the Company’s common stock owned by them into Party A common stock and that Party A be granted a 40-day exclusivity period in which to complete due diligence and execute definitive transaction agreements.

 

On June 27, 2006, Fremont Partners submitted to the special committee a revised preliminary term sheet describing its proposal to acquire the Company for $21.00 per common share in cash. Fremont Partners submitted the revised proposal in response to a special committee request that Fremont Partners clarify several matters of concern to the special committee. The revised Fremont Partners proposal further provided that the definitive transaction agreements would include a termination fee equal to 3.5% of the merger consideration in the event that the Company exercised its fiduciary out to terminate the definitive transaction agreement to accept a superior offer. The proposal specifically rejected the special committee’s earlier request that a “reverse termination fee” be paid by Parent to the Company in the event of a termination of the definitive transaction agreement due to Fremont Partners’ failure to secure necessary financing or regulatory approvals. The proposal reiterated Fremont Partners’ request that it be granted an exclusivity period in which to complete due diligence and negotiate definitive transaction agreements.

 

On June 27, 2006, the special committee met and discussed at length with its financial and legal advisors the June 26 proposal made by Party A and the June 27 proposal made by Fremont Partners, including the requests for an exclusivity period made by of each of Fremont Partners and Party A. The special committee concluded that, since SunTrust Robinson Humphrey had only recently commenced contacting potential buyers, it was not willing to grant exclusivity to either party at this stage in the process.

 

At or about the same time that the special committee was considering the proposals of Fremont Partners and Party A, SunTrust Robinson Humphrey continued contacting other potential bidders, and on June 28, 2006, the Company entered into a non-disclosure agreement with Party B, one of the potential bidders contacted by SunTrust Robinson Humphrey.

 

Shortly after the June 27 special committee meeting, Fremont Partners submitted a revised proposal to the special committee in which Fremont Partners increased the merger consideration payable to the Company’s shareholders to $22.00 per share in cash, subject to its completion of due diligence and negotiation of definitive agreements. The proposal also lowered the termination fee payable by the Company from 3.5% of the merger consideration to 3.0% of the merger consideration. In this proposal, Fremont Partners reiterated its request that it be granted exclusivity.

 

At or about the same time, representatives of Party A, during discussions with representatives of SunTrust Robinson Humphrey, indicated Party A’s willingness to raise the consideration payable to the Company’s shareholders under Party A’s proposal to $22.00 per share, payable in a combination of cash and shares of Party A’s common stock, subject to completion of due diligence. During these discussions, Party A also

indicated that it was potentially willing to allow a reverse termination fee in the definitive transaction agreements.

 

During the period between June 29, 2006 and July 5, 2006, in which the foregoing events were occurring, the special committee held three meetings to receive updates from representatives of SunTrust Robinson Humphrey on the status of its contacts with potential bidders on the list formulated at the June 21, 2006 special committee meeting. At these meetings, the special committee also discussed with its legal and financial advisors developments in the ongoing discussions with Fremont Partners and Party A.

 

On June 30, 2006, the Company’s management completed work on an updated financial forecast for the 2006 fiscal year and a financial forecast for the 2007 fiscal year. Subsequently, representatives of SunTrust Robinson Humphrey distributed the financial forecasts to each of Fremont Partners, Party A, Party B and other parties that had executed a non-disclosure agreement and had been provided the previous financial forecast for the 2006 fiscal year.

 

On July 6, 2006, Party B submitted to the special committee a preliminary non-binding indication of interest for the acquisition of the Company at a price of $22.00 per share in cash, subject to completion of due diligence. Party B’s indication of interest letter was accompanied by a “highly confident” letter from Party B’s financial advisor regarding the debt financing that would be required in connection with Party B’s acquisition of the Company. In its indication of interest, Party B requested that it be granted a 30-day exclusivity period in which to conduct further due diligence and negotiate definitive transaction agreements.

 

On July 7, 2006, the special committee held a meeting that was also attended by members of the Company’s executive management team, including Messrs. Adair, Harter, Hagely and Wilson and Ms. Jacqueline Adair, and a representative of Baker Donelson. The special committee discussed with management the proposals received from each of Fremont Partners, Party A and Party B. In particular, the special committee solicited management’s views regarding the regulatory risk posed by each of the respective proposals. The special committee directed SunTrust Robinson Humphrey to prepare an analysis of the anticipated post-closing capital structure under each of the proposals.

 

On July 11, 2006, the special committee held a meeting at which representatives of SunTrust Robinson Humphrey presented the special committee with an overview of the sale process to date. SunTrust Robinson Humphrey had contacted 36 potential buyers, including Fremont Partners, Party A, Party B and Party C. Three potential buyers, Fremont Partners, Party A and Party B, had submitted non-binding proposals. Representatives of SunTrust Robinson Humphrey presented an overview of each of the three non-binding proposals to the special committee. The special committee discussed at length with its financial and legal advisors the process to date and reconsidered other options, including commencing a public auction, that might be employed. After a thorough discussion of the options, including a discussion of the risk that a public auction might drive the three current bidders out of the process, the special committee concluded that the process employed would provide an effective means of maximizing shareholder value. The special committee directed SunTrust Robinson Humphrey to contact each of the three bidders and request that each party revise its proposal to provide its best and final offer. The special committee instructed SunTrust Robinson Humphrey to inform each of the three bidders to include, in its revised proposal, the amount of the termination fee that it proposed to include in the definitive transaction agreement and whether it was willing to include a reverse termination fee in the definitive transaction agreement.

 

Pursuant to the instructions of the special committee, SunTrust Robinson Humphrey contacted the three bidders to request their best and final offer. Thereafter, on or about July 12, 2006, representatives of the three bidders contacted representatives of SunTrust Robinson Humphrey concerning their bids. Party A advised SunTrust Robinson Humphrey that Party A would not raise its offer from $22.00 per common share, payable in a combination of cash and Party A common stock. Party B advised SunTrust Robinson Humphrey that Party B was evaluating its ability to raise its offer of $22.00 per common share in cash. Representatives of Party B subsequently contacted SunTrust Robinson Humphrey and indicated that Party B would not submit a revised proposal but that it was prepared to raise its offer. Party B requested that the special committee propose a price at which it would be prepared to enter into an exclusivity agreement with Party B. Fremont Partners advised SunTrust Robinson Humphrey that Fremont Partners was evaluating its ability to raise its

offer of $22.00 per common share in cash. Representatives of Fremont Partners subsequently notified SunTrust Robinson Humphrey that Fremont Partners would not be able to respond to the special committee’s request to provide a revised proposal until on or around July 17, 2006.

 

On July 13, 2006, the special committee held a meeting, which it adjourned until July 14, 2006. At those July 13 and July 14 sessions, the special committee discussed with its legal and financial advisors developments in the discussions with each of Fremont Partners, Party A and Party B.

 

On or shortly after July 13, 2006, a representative of Party A contacted Mr. Adair and informed him that Party A would consider raising its offer price above $22.00 per common share, payable in a combination of cash and Party A common stock.

 

On July 17, 2006, the special committee held a meeting. The special committee discussed with its legal and financial advisors developments in the discussions with each of Fremont Partners, Party A and Party B. Representatives of SunTrust Robinson Humphrey advised the special committee on recent discussions with the Company’s management shareholders, including that the Adairs had determined that they were not willing to participate in the equity roll-over contemplated by the Fremont Partners proposal. Members of the Company’s executive management team, including the Adairs, Mr. Harter and a representative of Baker Donelson, were then invited to address the special committee for the purpose of clarifying the position of the Adair family on the equity roll-over contained in the Fremont Partners proposal. The Adairs confirmed that they would not participate in an equity roll-over. Mr. Adair also described for the special committee his conversation with a representative of Party A, in which Party A had indicated that it would be willing to raise its offer. At this point, the members of the Company’s management team and the representative from Baker Donelson in attendance were excused from the meeting. The special committee directed SunTrust Robinson Humphrey to clarify Party A’s position on increasing the price of its offer and to inform Fremont Partners of the position of the Adair family regarding the equity roll-over.

 

Thereafter, on or about July 18, 2006, SunTrust Robinson Humphrey contacted Party A to confirm its willingness to increase its offer. A representative of Party A advised SunTrust Robinson Humphrey that Party A was not prepared to increase its offer, but that the offer would remain at $22.00 per share, payable in a combination of cash and Party A common stock.

 

On July 18, 2006, the special committee held a meeting to discuss with its financial and legal advisors developments in discussions with each of Fremont Partners, Party A and Party B. The special committee discussed alternative approaches for advancing the process. Each of the three bidders had declined to submit a revised proposal or increase its price. After discussion, and with input from the financial and legal advisors, the special committee directed SunTrust Robinson Humphrey to inform each of the three bidders that the special committee was willing to enter into an exclusivity arrangement if the bidder would increase its offer to $22.75 per share. The special committee also instructed SunTrust Robinson Humphrey to communicate to each bidder the special committee’s views regarding several key definitive transaction agreement terms. The special committee directed SunTrust Robinson Humphrey to instruct the bidders that the special committee would consider the bidders’ positions on these issues in evaluating the proposals and to set a deadline of 10:00 a.m., Eastern Time, on July 19 for response.

 

Also on or about July 18, 2006, a representative of Party B informed SunTrust Robinson Humphrey that it had increased its offer to $22.50 per common share in cash. In this discussion, Party B did not address the Company’s preferred definitive transaction agreement terms that had been proposed by the special committee. At or about the same time, a representative of Party A informed SunTrust Robinson Humphrey that, despite its earlier indications to the contrary, it had increased its offer to $22.25 per share, payable in a combination of cash and Party A common stock.

 

The morning of July 19, 2006, the special committee held a meeting to receive an update from its financial and legal advisors on the status of the bidders’ responses to the special committee’s July 18 proposal. At the request of the special committee, representatives of SunTrust Robinson Humphrey reviewed the analyses contained in the presentation made to the special committee at the July 11 meeting, focusing on the financing and regulatory risk posed by each proposal. The special committee concluded, based primarily on

the post-closing capital structures of each proposal, that the proposal submitted by Party B carried the least regulatory risk.

 

Following the morning meeting of the special committee, a representative of Fremont Partners contacted SunTrust Robinson Humphrey and indicated that it would increase its offer to $22.75 per share in cash. The representative of Fremont Partners indicated that it would remove the condition of its offer that the Adairs participate in an equity roll-over. In this discussion, Fremont Partners did not address the Company’s preferred definitive transaction agreement terms that had been proposed by the special committee.

 

The special committee met again on July 19, 2006 to discuss the responses of each of the bidders. The special committee noted that Fremont Partners had reached the targeted valuation level, while Party A and Party B had not. The special committee again discussed the risk to completion of a transaction with Fremont Partners, including financing and regulatory risk. The special committee determined that, subject to Fremont Partners indicating an acceptable position on the Company’s preferred definitive transaction agreement terms, it would enter into an exclusivity period with Fremont Partners not to exceed 30 days. The special committee authorized SunTrust Robinson Humphrey to inform Party A and Party B and directed Dorsey to work with Fremont Partners and its counsel, Skadden, Arps, Slate, Meagher & Flom LLP, which we refer to in this proxy statement as Skadden Arps, on an exclusivity agreement based on the draft exclusivity agreement previously provided by Fremont Partners.

 

In the afternoon of July 19, 2006, following the early afternoon meeting of the special committee, SunTrust Robinson Humphrey contacted each of Party A and Party B to inform it that another bidder had submitted a higher bid and that the special committee intended to grant exclusivity to the other bidder. In response to this information, and contrary to its previous indications that it would not increase its price from $22.50, Party B increased its offer to $23.00 per share in cash.

 

The special committee met again in the afternoon of July 19, 2006, to discuss the revised Party B proposal and the Fremont Partners proposal. The special committee again discussed the risks to closing posed by each of the Party B and Fremont Partners proposals. After discussion, the special committee determined, subject to confirmation of an acceptable position of Party B on the special committee’s preferred definitive transaction agreement terms, to enter into an exclusivity period not to exceed 30 days with Party B. The special committee authorized SunTrust Robinson Humphrey to advise Fremont Partners of the special committee’s decision.

 

Later in the afternoon of July 19, 2006, following the afternoon meeting of the special committee, SunTrust Robinson Humphrey contacted Fremont Partners to inform it that another bidder had submitted a higher price and that the special committee intended to grant exclusivity to the other bidder. In response to this information, Fremont Partners increased its offer to $23.10 per common share in cash. Separately, a representative of Party B confirmed an acceptable position on each of the preferred definitive transaction agreement terms and indicated that it would shortly provide a form of exclusivity agreement to the special committee.

 

The special committee met a third time on July 19, 2006 to discuss the revised Fremont Partners proposal and the Party B proposal. The special committee noted that the valuation of the Fremont Partners proposal was only slightly higher than the valuation of the Party B proposal. The special committee then again discussed the respective risks of not completing a transaction posed by the Fremont Partners proposal and the Party B proposal on the terms proposed at that time, and determined to proceed with the Party B proposal.

 

In the late afternoon of July 19, 2006, the special committee, on behalf of the Company, and Party B entered into an agreement which provided Party B an exclusive period of 30 days to complete due diligence and negotiate definitive transaction agreements. Following execution of the exclusivity agreement with Party B on July 19, 2006, Fremont Partners submitted a revised proposal to the special committee in which Fremont Partners increased its offer to $23.50 per share in cash.

 

On July 20, 2006, the special committee held a meeting to discuss the revised Fremont Partners proposal. The special committee, with input from its financial and legal advisors, discussed how to proceed with the revised Fremont Partners proposal in light of the exclusivity agreement that had been executed with Party B.

Among the options considered were requesting that Party B either increase its price or terminate the exclusivity agreement. The special committee considered the relatively short exclusivity period and the possibility that the exclusivity period could expire without a definitive transaction agreement having been reached. The special committee instructed SunTrust Robinson Humphrey to advise Party B of the higher offer.

 

From July 21, 2006 throughout the 30-day exclusivity period, representatives of Party B met frequently with various members of management of, and with in-house and outside legal counsel to, the Company to conduct due diligence, both in person at the Company’s Nashville offices and by telephone. During this time, representatives of each of Fremont Partners and Party A contacted members of the Company’s management and representatives of SunTrust Robinson Humphrey to indicate each party’s continued interest in an acquisition of the Company. In each instance, Fremont Partners or Party A acted on its own initiative in making contact and without any solicitation from the special committee, the Company or their respective advisors. Further, in each instance, Fremont Partners or Party A was reminded that the Company had entered into an exclusivity agreement with Party B.

 

Between July 28, 2006 and August 15, 2006, the special committee held four meetings to discuss issues related to the draft of the merger agreement provided by Party B in early August, 2006, and the status of Party B’s due diligence.

 

During the period between August 4, 2006 and August 14, 2006, Party B’s legal advisor delivered to Dorsey a draft of the merger agreement and representatives of Dorsey, Party B’s legal counsel, Baker Donelson and the Company’s internal legal personnel reviewed, discussed and negotiated terms of the merger agreement.

 

On or about August 16, 2006, a representative of Party B contacted SunTrust Robinson Humphrey and indicated that Party B had identified several matters during its due diligence review of the Company. These matters were memorialized in a letter from Party B to the special committee dated August 17, 2006.

 

On August 16, 2006, the special committee held a meeting, which was also attended by members of the Company’s executive management team, including Messrs. Adair, Harter, Hagely and Wilson, Ms. Jacqueline Adair and Ms. Tammy Adair, and a representative of Baker Donelson. The due diligence-related matters raised by Party B were discussed. After discussion with the financial and legal advisors, the special committee directed that SunTrust Robinson Humphrey work with the Company’s management to formulate a response to Party B.

 

On August 17, 2006, the special committee held a meeting to discuss in more detail the matters raised by Party B in connection with its due diligence and how to respond to Party B. Representatives of SunTrust Robinson Humphrey advised the special committee that the Company’s management was formulating a response to Party B and that SunTrust Robinson Humphrey would review the response and schedule a meeting with Party B to discuss it. The special committee then discussed the imminent expiration of the exclusivity period with Party B and authorized SunTrust Robinson Humphrey, following the expiration, to contact each of Fremont Partners and Party A to gauge their respective continued interest in pursuing an acquisition of the Company.

 

At midnight on August 17, 2006, Party B’s exclusivity period expired.

 

On August 18, 2006, SunTrust Robinson Humphrey provided Party B with the Company’s response to the due diligence matters raised by Party B.

 

On August 18, 2006, a representative of SunTrust Robinson Humphrey contacted representatives of Party A to gauge Party A’s continued interest in an acquisition of the Company. Party A indicated that it would welcome the opportunity to proceed on an exclusive basis with a transaction valued at $23.00 per share in cash.

 

On August 18, 2006, a representative of SunTrust Robinson Humphrey contacted representatives of Fremont Partners who reiterated their interest in acquiring the Company in a transaction valued at $23.50 per share in cash. Fremont Partners indicated its desire to enter into an exclusivity agreement with the Company and also requested that the Company enter into an agreement to reimburse Fremont Partners’ expenses in the event that the Company consummated a transaction with another party.

On August 18, 2006, the special committee held a meeting to discuss the Company’s response to Party B and the status of recent discussions with Party A.

 

On August 20, 2006, Fremont Partners delivered to the special committee a draft merger agreement, a proposed due diligence plan and a draft regulatory approval timeline.

 

On August 21, 2006, the special committee held a meeting at which the special committee discussed a recent communication from Party B that it was lowering its price to $18.50 per share. The special committee also discussed recent communications with Fremont Partners and considered Fremont Partners’ exclusivity request and proposal for expense reimbursement. After discussion, the special committee authorized SunTrust Robinson Humphrey to contact Fremont Partners and propose that Fremont Partners perform its initial due diligence and confirm its valuation of $23.50 per share. After completion of these items, the special committee would reconsider Fremont Partners’ requests regarding exclusivity and expense reimbursement. The special committee also asked SunTrust Robinson Humphrey and Dorsey to confirm with Fremont Partners’ that its proposal would not require management shareholders to roll-over the Company’s common stock held by them into the acquiring entity.

 

On August 22, 2006, a representative of Fremont Partners contacted SunTrust Robinson Humphrey and indicated that Fremont Partners would commence initial due diligence without an exclusivity agreement, but that it would require the Company to enter into an exclusivity agreement before engaging outside advisors to assist it with due diligence.

 

On August 23, 2006, Party B delivered to the special committee a letter stating that, based on the due diligence matters previously identified by it, and notwithstanding the Company’s response to those matters, it was no longer prepared to move forward with an acquisition of the Company at $23.00 per share. The letter reiterated Party B’s earlier communication that it would be prepared to move forward with a transaction valued at $18.50 per share in cash.

 

Also in mid-August 2006, representatives of Party A contacted Company management, including Mr. Adair, to express Party A’s continued interest in a transaction with the Company.

 

Between August 22, 2006 and September 5, 2006, the special committee held four meetings to discuss the status of discussions between the Company and each of Fremont Partners and Party A. At the August 30 meeting, the special committee discussed a proposal to circulate a letter to each party, other than Fremont Partners and Party A, that had executed a non-disclosure agreement with the Company. The letter would waive the standstill provisions contained in the non-disclosure agreement. After discussion, the special committee authorized SunTrust Robinson Humphrey to prepare and distribute the waiver letter. SunTrust Robinson Humphrey sent a letter to each party, other than Fremont Partners and Party A, that had executed a non-disclosure agreement with the Company waiving the standstill provision contained in the non-disclosure agreements.

 

On August 23, 2006, Mr. Rohde contacted Party A’s chief executive officer to discuss Party A’s continued interest in an acquisition of the Company. During this conversation, Mr. Rohde noted the existence of a higher offer.

 

During the week of August 28, 2006, representatives of Fremont Partners performed on-site due diligence on the Company at the Company’s headquarters in Nashville, Tennessee. During Fremont Partners’ on-site due diligence, representatives of Fremont Partners met with members of the Company’s senior management. Thereafter, from August 28, 2006 through the signing of a definitive merger agreement on December 4, 2006, Fremont Partners conducted ongoing due diligence. During that period, as part of its due diligence, Fremont Partners and its advisors met frequently, both in person and by telephone, with members of Company management and the Company’s in-house and outside legal and financial advisors.

 

On September 8, 2006, Fremont Partners delivered to the special committee a letter in which it lowered its offer to $21.00 per common share in cash. Fremont Partners’ letter requested that Fremont Partners be granted exclusivity and stated that the proposal would expire at 5:00 p.m., Pacific Time, on September 12, 2006.

On September 9, 2006, the special committee held a meeting to discuss the September 8 letter from Fremont Partners. The special committee also discussed the status of discussions with Party A. The special committee discussed with its financial and legal advisors Fremont Partners’ request for exclusivity. The special committee concluded that, given Party A’s previous oral indication of an offer higher than $21.00 per share, the special committee would not consider Fremont Partners’ request for exclusivity until the special committee had an opportunity to assess Party A’s continued level of interest. The special committee directed SunTrust Robinson Humphrey to contact Party A to gauge Party A’s continued interest in an acquisition of the Company.

 

On or about September 11, 2006, Mr. Rohde and a representative of SunTrust Robinson Humphrey each contacted Party A’s chief financial officer. During these conversations, Party A’s chief financial officer indicated that Party A remained interested in an acquisition of the Company and that it would need to perform approximately two weeks of due diligence in order to confirm the valuation underlying its prior offer.

 

On September 11, 2006, the special committee held a meeting to further discuss Fremont Partners’ September 8 letter and receive an update on recent discussions with Party A. The special committee, with input from its financial and legal advisors, again discussed Fremont Partners’ request that it be granted exclusivity. Given Party A’s continued interest in a transaction and Party A’s oral indication of a valuation of $22.25 per common share, the special committee concluded that it would not grant Fremont Partners’ request for exclusivity. The special committee directed SunTrust Robinson Humphrey to inform Fremont Partners that Fremont Partners would have to increase its offer materially in order for the special committee to proceed on an exclusive basis with Fremont Partners.

 

On or about September 12, 2006 a representative of Fremont Partners contacted a representative of SunTrust Robinson Humphrey and indicated that Fremont Partners would increase its offer to $21.25 per common share in cash. The Fremont Partners representative noted that $21.25 represented Fremont Partners’ best and final offer.

 

On September 12, 2006, Fremont Partners sent to the special committee a letter confirming that it had increased its offer to $21.25 per common share in cash. Fremont Partners’ letter reiterated its request that Fremont Partners be granted exclusivity and stated that the proposal would expire at 5:00 p.m., Pacific Time, on September 12, 2006. Also on that day, a representative of Party A’s financial advisor contacted a representative of SunTrust Robinson Humphrey to reiterate Party A’s continued interest in an acquisition of the Company.

 

On September 12, 2006, the special committee held a meeting to discuss the Fremont Partners September 12 letter and receive an update on discussions with Party A. It was noted that Party A’s last written proposal had indicated a valuation of the Company at $21.60 per common share and that Party A had subsequently orally indicated that it would raise its offer to $22.25 per common share. The special committee discussed at length alternative courses of action, including proceeding on an exclusive basis with Fremont Partners. In considering the Company’s options, the special committee considered the risk that Party A would lower its offer after completing further due diligence and the risk that Fremont Partners would decline to continue in the due diligence process if the special committee did not grant Fremont Partners’ request for exclusivity. However, given Party A’s indications that it was willing to pay a higher price than Fremont Partners, the special committee concluded that the best option was to re-engage in intensive discussions with Party A on a non-exclusive basis and encourage Party A to move quickly to complete due diligence and to confirm its valuation of the Company’s stock. The special committee also agreed that Fremont Partners would be informed that the special committee had concluded that Fremont Partners would be encouraged to continue its ongoing due diligence and the negotiation of definitive transaction documents on a non-exclusive basis.

 

On September 12, 2006, a representative of SunTrust Robinson Humphrey contacted representatives of each of Fremont Partners and Party A to inform them of the special committee’s determination. Shortly thereafter, Fremont Partners indicated it would continue its due diligence without an exclusivity agreement.

 

Between September 11, 2006 and September 15, 2006, attorneys from Dorsey, Baker Donelson and the Company’s internal legal staff prepared a form of merger agreement to be delivered to Party A. On

September 15, 2006, SunTrust Robinson Humphrey sent Party A a letter outlining the process for submitting a written proposal for the acquisition of the Company. The process letter instructed Party A to deliver its proposal by September 27, 2006. The process letter included the form of merger agreement prepared on behalf of the Company and requested that Party A submit a mark-up of the merger agreement with its written proposal. In the interim, Party A was allowed to conduct its due diligence to confirm its valuation. Party A began conducting that stage of its due diligence the week of September 18, 2006, and its due diligence continued thereafter until the Company entered into a definitive merger agreement on December 4, 2006. Party A’s due diligence included numerous conferences with Company management and senior employees, as well as with the Company’s internal and external financial and legal advisors, both by telephone and at meetings held on site at the Company’s Nashville and Memphis offices.

 

Between September 13, 2006 and September 21, 2006, the special committee held three meetings to receive updates on the status of discussions with each of Fremont Partners and Party A.

 

On September 29, 2006, Party A’s chief executive officer contacted Mr. Rohde to discuss Party A’s proposal and indicated that Party A was preparing a term sheet regarding its proposal that Party A expected to deliver to the Company shortly.

 

On October 2, 2006, Party A delivered to the special committee an indicative offer term sheet for the acquisition of the Company at a price of $20.50 per common share in cash. Party A’s proposal required that Party A be able to terminate the definitive transaction agreement in the event of a decrease in the price of Party A’s stock of 20% or more. Party A’s proposal also required that a portion of the merger consideration be placed in escrow to cover certain settlement amounts or litigation expenses incurred after closing in connection with the shareholder lawsuits. Party A’s proposal also called for a post-closing adjustment to the purchase price to reflect any differences in the Company’s June 30, 2006 balance sheet and the Company’s balance sheet on the closing date. Party A’s proposal included a request for exclusivity. Party A’s proposal did not include its mark-up of the form of merger agreement as had been requested in the September 15 process letter.

 

Throughout October 2006, and from time to time thereafter until December 4, 2006, Party A initiated numerous contacts with senior Company management to discuss an indemnity or escrow for the shareholder lawsuits and to conduct further due diligence on the shareholder lawsuits to increase its comfort level concerning that litigation.

 

On October 2, 2006, the special committee held a meeting to discuss Party A’s indicative offer term sheet. The special committee discussed at length with its financial and legal advisors several aspects of Party A’s proposal, including the walk-away right of Party A triggered by a 20% or greater drop in Party A’s stock price, the proposed escrow of merger consideration and the post-closing purchase price adjustment. The special committee was advised that these provisions were unusual for acquisitions of public companies, and the special committee discussed the risks that would be posed by entering into a definitive agreement containing these provisions. The special committee also received an update from SunTrust Robinson Humphrey on Fremont Partners’ progress on its due diligence and in securing debt financing for an acquisition of the Company. The special committee discussed Party A’s request for exclusivity and concluded that, given the proposed price and unusual and unfavorable terms of Party A’s proposal, it would not grant the request. After discussion, the special committee directed SunTrust Robinson Humphrey to advise Party A of the special committee’s concerns with Party A’s proposal and to request that Party A revise its proposal in response to the special committee’s concerns.

 

At that October 2 meeting, the special committee also directed Dorsey to work with Baker Donelson and the Company’s internal legal staff to prepare a mark-up of the form of merger agreement previously delivered by Fremont Partners. The Company and its outside counsel revised the merger agreement, and Dorsey delivered it to Fremont Partners’ counsel on October 8, 2006. Negotiation of the merger agreement by management of, and in-house and outside counsel to, the Company and Fremont Partners was conducted intermittently during the period from October 8, 2006 until the signing of that merger agreement on December 4, 2006.

Also on or about October 2, 2006, representatives of Party A’s financial advisor contacted representatives of SunTrust Robinson Humphrey to discuss Party A’s proposal. In these discussions, Party A’s financial advisor indicated that Party A was willing to discuss the deletion of the walk-away right and the escrow from Party A’s proposal. Mr. Rohde engaged in similar discussions with Party A’s chief financial officer. During this conversation, Party A’s chief financial officer indicated that Party A’s proposed valuation of $20.50 per common share represented Party A’s best price.

 

On October 3, 2006 and October 5, 2006, the special committee held meetings to discuss the status of discussions with each of Fremont Partners and Party A.

 

On October 9, 2006, Fremont Partners delivered to the special committee a draft plan for the completion of due diligence and negotiation of definitive transaction agreements, a draft commitment letter for the debt financing required to complete an acquisition of the Company and a form of expense reimbursement agreement.

 

On October 10, 2006, the special committee held a meeting to discuss the status of discussions with each of Fremont Partners and Party A. The special committee also discussed the documents delivered by Fremont Partners the previous day. The special committee discussed the expense reimbursement agreement under which Fremont Partners would be reimbursed for its out-of-pocket expenses in the event that the Company completed a transaction with a party other than Fremont Partners. The special committee noted Fremont Partners’ cooperation in the process to date, despite Fremont Partners’ stated preference that the special committee negotiate with it on an exclusive basis. The special committee also noted that Fremont Partners had demonstrated an understanding of the process and had delivered a reasonable form of merger agreement. The special committee directed Dorsey and SunTrust Robinson Humphrey to develop a counter-proposal to Fremont Partners’ request.

 

On October 11, 2006, the special committee held a meeting to discuss the status of discussions with each of Fremont Partners and Party A. The special committee discussed the expense reimbursement agreement requested by Fremont Partners. After discussions with its financial and legal advisors, the special committee authorized SunTrust Robinson Humphrey to propose two modifications to Fremont Partners expense reimbursement proposal. First the amount of expenses subject to reimbursement would be capped at $1.5 million. Second, the Company would have no obligation to Fremont Partners for expense reimbursement in the event that the valuation of the Fremont Partners’ proposal was lowered from $21.25 per share.

 

On October 16, 2006, representatives of Dorsey spoke with Party A’s legal advisors to discuss the form of merger agreement that the special committee had provided to Party A.

 

On October 16, 2006, representatives of Fremont Partners informed SunTrust Robinson Humphrey that the special committee’s proposals regarding the expense reimbursement agreement were acceptable. Subsequently, Fremont Partners and the special committee, on behalf of the Company, executed the expense reimbursement agreement.

 

On October 16, 2006, the special committee held a meeting to receive an update on the status of discussions with each of Fremont Partners and Party A. The special committee also engaged an insurance regulatory consultant to advise the special committee on regulatory matters in connection with each of the Fremont Partners and Party A proposals.

 

On October 23, 2006, the special committee held a meeting to discuss the status of discussions with each of Fremont Partners and Party A.

 

On October 24, 2006, representatives of the Company, Fremont Partners and several advisors to Fremont Partners made a presentation to A.M. Best concerning the proposed transaction between the Company and Fremont, to allow evaluation of the impact that such a transaction might have on the A.M. Best ratings of the Company’s insurance subsidiaries.

 

On October 24, 2006, Party A’s legal advisor delivered to the special committee Party A’s mark-up of the merger agreement that the special committee had supplied to Party A.

On October 27, 2006, the special committee held a meeting to discuss the status of discussions with each of Fremont Partners and Party A. The insurance regulatory consultant engaged by the special committee reported to the committee on the results of his analysis of regulatory issues presented by each of the proposals. His report included a summary of the Company’s regulatory history, the effects that various states’ review process and the upcoming elections might have on the timing of the review of a transaction by state regulatory authorities. He also presented his analysis of each of the proposals, including an analysis of the post-closing capital structure of the Company under each of Fremont Partners’ and Party A’s proposals. He concluded that the regulatory approval process would be manageable under either proposal and that he was of the opinion that neither proposal posed significantly more regulatory risk than the other.

 

On October 30, 2006, a representative of Dorsey discussed Party A’s mark-up of the merger agreement with Party A’s legal advisors. During this discussion, Dorsey highlighted several areas that were of concern to the special committee.

 

On October 31, 2006, the special committee held a meeting to discuss the status of discussions with each of Fremont Partners and Party A. The special committee also discussed with Dorsey the mark-up of the merger agreement delivered to the special committee by Party A, and Dorsey reported on the results of its October 30 discussion with Party A’s legal advisor.

 

On November 2, 2006, the special committee held a meeting to discuss the status of discussions with each of Fremont Partners and Party A. Representatives of Dorsey discussed with the special committee issues raised during recent discussions with Fremont Partners’ legal counsel and proposed resolutions of such issues.

 

During the week of October 30, 2006, Mr. Rohde and Mr. Adair each discussed with Party A’s chief executive officer that Party A would condition closing any acquisition of the Company on the shareholder lawsuits being settled. Alternatively, Party A would insist that the Adairs personally fund an escrow to indemnify Party A for expenses incurred in settlement or defense of the shareholder lawsuits.

 

On November 7, 2006, the special committee held a meeting to discuss the status of discussions with each of Fremont Partners and Party A. The special committee discussed in detail Party A’s requirement that the Adairs personally fund an indemnity escrow in connection with the shareholder lawsuits. At the request of the special committee Mr. Adair joined the meeting. Mr. Adair stated that the Adairs would not fund an escrow to support an indemnity for the shareholder lawsuits. The special committee instructed its financial and legal advisors to continue negotiating other aspects of the transaction with Party A, and allowed Party A to continue its due diligence and negotiation of other agreement terms.

 

On November 9, 2006, on behalf of the Company, Baker Donelson provided Party A with comments to Party A’s mark-up of the merger agreement. Also, Dorsey forwarded to Skadden Arps the Company’s comments on various covenants then under negotiation in the Fremont Partners merger agreement. On November 10, 2006, Dorsey sent to Skadden Arps the Company’s draft disclosure schedule to the Fremont Partners merger agreement. On November 10, 2006, Dorsey and Baker Donelson received revisions to the Party A merger agreement from counsel to Party A. On November 12 and 13, 2006, Dorsey responded to Party A that the revised merger agreement did not address the concerns with Party A’s proposal that Dorsey had raised on behalf of the special committee. On November 13, 2006, Baker Donelson provided counsel to Party A a draft of the Company disclosure schedule to the Party A merger agreement, and on November 14, 2006, Dorsey provided Party A with written comments to the Party A merger agreement. On November 15, 2006, the Company reviewed and commented on Fremont Partners’ revisions to the representations and warranties in the Fremont Partners’ merger agreement. On November 16, 2006, the Company received and commenced review of agreements ancillary to the Fremont Partners’ merger agreement. Thereafter, throughout the remainder of November 2006, and until the definitive merger agreement was signed on December 4, 2006, management of, and legal advisors to, the Company and Fremont Partners engaged in frequent discussions and exchanges of revisions to the merger agreement.

 

On November 10, 2006, representatives of the Company and Fremont Partners made a presentation to representatives of the lending group that provides the credit facility to finance operations of the Company’s premium finance subsidiaries. The purpose was to discuss the potential impact of the proposed transaction

with Fremont Partners under the credit facility terms and explore with the lending group what it would require to consent to such a transaction.

 

On November 15, 2006, at the direction of the special committee, SunTrust Robinson Humphrey sent letters to Fremont Partners and Party A, requesting that Fremont Partners and Party A submit their final proposals no later than November 20, 2006.

 

On November 20, 2006, Fremont Partners contacted SunTrust Robinson Humphrey and confirmed that $21.25 was its best and final offer and that it would not increase it offer. Also, Fremont Partners informed the special committee that Texas Pacific Group would be joining as an equity investor in Parent. Also on November 20, 2006, Party A sent a letter to the special committee confirming its continued interest in acquiring the Company for $21.25 per share and including forms of a merger agreement, a voting agreement, a shareholder indemnification agreement and other documents.

 

Between November 10, 2006 and November 24, 2006, the special committee held seven meetings to discuss developments in discussions with Fremont Partners and Party A. Thereafter, between November 27, 2006 and November 29, 2006, the special committee held daily meetings to discuss developments in discussions with Fremont Partners and Party A.

 

At the special committee’s November 27 meeting, SunTrust Robinson Humphrey previewed for the special committee a preliminary draft of materials that had been prepared in connection with the preparation of the fairness opinion to be delivered by SunTrust Robinson Humphrey. The presentation contained various analyses that SunTrust Robinson Humphrey had undertaken in connection with the preparation of the fairness opinion. For a description of the analyses employed, see “The Merger — Opinion of Direct General’s Financial Advisor” and Annex B to this proxy statement.

 

In addition, during the period from November 20, 2006 through December 4, 2006, certain members of management, separate legal counsel for these members of management and Fremont Partners negotiated the terms of arrangements with these members of management that are described elsewhere in this proxy statement.

 

On November 27, 2006, legal counsel to Fremont Partners and the Company negotiated open issues in the Fremont Partners merger agreement by telephone conference. Also on November 27, 2006, representatives of Party A met in person with Mr. Adair and Ms. Tammy Adair at the Company’s offices in Memphis primarily to discuss the aspects of Party A’s proposal that, if a transaction with Party A were to occur, would potentially require the Adairs to incur personal obligations to Party A.

 

On November 28, 2006, representatives of and legal advisors to Fremont Partners and the Company negotiated open provisions in the Fremont Partners’ merger agreement and ancillary agreements by telephone conference.

 

On November 29, 2006, Party A sent a letter to the special committee confirming its continued interest in acquiring the Company and affirming its offer of $21.25 per share. Party A included with the letter revised draft forms of a merger agreement, a shareholder indemnification agreement and other documents. Also on November 29, 2006, the special committee held a meeting at which open issues regarding Fremont Partners’ proposed merger agreement were discussed.

 

On November 30, 2006, the special committee held a meeting at the Company’s headquarters in Nashville, Tennessee, to discuss the Fremont Partners and Party A proposals. The special committee discussed the letter and form of agreements received from Party A and noted that there continued to be substantial issues with Party A’s proposal that appeared to be irresolvable. The special committee then turned to the Fremont Partners proposal. SunTrust Robinson Humphrey described recent communications with Fremont Partners in which Fremont Partners had confirmed that $21.25 per common share was its best and final offer. Dorsey discussed with the special committee the open issues relating to Fremont Partners’ proposed merger agreement, and the special committee determined that these issues presented an unacceptable risk to closing. After discussion, the special committee concluded that it was not prepared to make a recommendation that the Company’s board of directors adopt the merger agreement proposed by Fremont Partners.

On November 30, 2006, immediately following the meeting of the special committee, the Company’s board of directors held a meeting at the Company’s headquarters. Representatives of SunTrust Robinson Humphrey, Dorsey and Baker Donelson participated in the meeting. The board was advised that the special committee did not have a recommendation at that time. The Company’s board discussed the open issues in the merger agreement proposed by Fremont Partners. SunTrust Robinson Humphrey presented a preliminary draft of the presentation it had prepared in connection with the potential delivery of its fairness opinion. The Company’s board of directors instructed management and legal counsel to continue discussions with Fremont Partners in an effort to resolve the outstanding open issues.

 

On December 1, 2006, Mr. Rohde spoke with Party A’s chief financial officer to discuss the remaining open issues with Party A’s recent proposal. Party A’s chief financial officer confirmed that it would not agree to modify its requirements concerning an indemnification escrow and resolution of the shareholder lawsuits.

 

On December 1, 2006, the special committee held a meeting to discuss the status of discussions with each of Party A and Fremont Partners. SunTrust Robinson Humphrey reported that there had been no change in Party A’s position regarding the other issues. SunTrust Robinson Humphrey and representatives of Dorsey reported to the special committee the progress made in negotiating the open issues in the Fremont Partners’ proposed merger agreement.

 

On December 2, 2006, Mr. Rohde spoke with Party A’s chief executive officer. Party A’s chief executive officer confirmed that Party A would not raise its offer nor would it drop its requirements regarding the shareholder lawsuits. Also, a representative of Fremont Partners again confirmed that Fremont Partners would not raise its price from $21.25 per common share in cash.

 

On December 2, 2006, the special committee held a meeting to discuss the status of the Fremont Partners proposal. Representatives of Dorsey briefed the special committee on recent developments in negotiating the final issues in the definitive transaction agreements. The special committee then discussed the valuation of the Fremont Partners proposal. The special committee noted the absence of a higher offer despite a rigorous process to solicit alternative proposals. The special committee also noted that Fremont Partners had on multiple occasions rejected the special committee’s request that Fremont Partners improve its offer. SunTrust Robinson Humphrey then updated the special committee on the presentation that it had prepared in connection with the preparation of its fairness opinion. After fielding questions from the special committee, SunTrust Robinson Humphrey advised that it was prepared to deliver to the special committee and the Company’s board of directors its oral opinion that, as of that date and subject to the factors and assumptions to be set forth in its written opinion, a price of $21.25 per share in cash to be received by the holders of common shares pursuant to the merger agreement was fair, from a financial point of view, to the holders of the Company’s common stock other than the continuing investors. Following additional discussion and deliberation, the special committee resolved by unanimous vote to recommend that the Company’s board of directors adopt the merger agreement, and approve the merger and other transactions contemplated by the merger agreement and recommend that the Company’s shareholders vote to approve the merger agreement.

 

On December 4, 2006, a meeting of the Company’s board of directors was held by teleconference. Representatives of SunTrust Robinson Humphrey, Dorsey and Baker Donelson participated in the meeting. The board was advised that the purpose of the meeting was to consider the special committee recommendation of a transaction whereby the Company would be acquired by merger with an entity to be owned by Fremont Partners and Texas Pacific Group, pursuant to which each of the holders of the Company’s common shares would receive a price of $21.25 per share in cash and to consider definitive approval of the transaction. The Company’s legal advisors advised the board as to its fiduciary duties under the circumstances. SunTrust Robinson Humphrey then reviewed the financial terms of the Fremont Partners proposal and the status of the Company’s process involving Party A. Following discussion, it was the consensus of the board that $21.25 per common share was a fair price, that Party A’s proposal continued to contain serious impediments to consummation, that Party A would not be able to enter into a definitive agreement within the near future, that

there was a significant risk of losing the Fremont Partners and Texas Pacific Group offer if the process were to be delayed, and that the Company’s relatively low termination fee would not preclude another bidder from making a superior offer in the manner to be permitted by the merger agreement. SunTrust Robinson Humphrey then delivered its oral opinion that, as of that date and subject to the factors and assumptions to be set forth in its written opinion, a price of $21.25 per share in cash to be received by the holders of common shares pursuant to the merger agreement was fair, from a financial point of view, to the holders of the Company’s common stock other than the continuing investors (see “The Merger — Opinion of Direct General’s Financial Advisor” and Annex B to this proxy statement). Baker Donelson then reviewed with the board the terms of the proposed definitive merger agreement and ancillary documents, including the resolution of several open issues in the merger agreement, in particular with respect to closing conditions, Parent’s agreement to pay to the Company a termination fee of $13.0 million as liquidated damages if the failure to close the merger was due to Parent’s inability to finance the transaction and the agreement of Fremont Partners and Texas Pacific Group to guarantee Parent’s obligation to pay the termination fee. Following additional discussion and deliberation, the board of directors adopted, by unanimous vote, the merger agreement, and approved the merger and other transactions contemplated by the merger agreement and recommended that the Company’s shareholders vote to approve the merger agreement.

 

Thereafter, Skadden Arps, Dorsey, Baker Donelson and the Company’s in-house counsel finalized the merger agreement and ancillary documents and SunTrust Robinson Humphrey delivered its written fairness opinion as described at the December 4 board meeting. Thereafter, the Company, Parent and Sub finalized and executed the merger agreement and ancillary documents, and the Company and Fremont Partners issued press releases announcing the transaction prior to the opening of trading on December 5, 2006.

 

The Special Committee

 

In reaching its decision to recommend that our board of directors approve the merger and the other transactions contemplated by the merger agreement and the limited guarantee, and that our board of directors authorize the Company to enter into the merger agreement and the limited guarantee, and recommending that our shareholders vote to approve the merger agreement, the special committee, in consultation with its financial and legal advisors, considered a number of potentially positive factors, including the following material factors:

 

 

 

 

The special committee also considered a number of factors relating to the procedural safeguards involved in the negotiation of the merger agreement, the limited guarantee and the related documents including those discussed below, each of which it believed supported its decision and provided assurance of the fairness of the merger to our shareholders:

 

 

 

The special committee also considered and balanced against the potentially positive factors a number of potentially negative factors concerning the merger, including the following material factors:

 

 

During its consideration of the transaction with the Fremont Partners, the special committee was also aware that certain of our directors and our executive officers have interests in the merger that are, or may be, different from, or in addition to, those of our shareholders generally, as described under “The Merger — Interests of Directors and Executive Officers in the Merger.”

 

After taking into account all of the factors set forth above, as well as others, the special committee determined that the potentially positive factors outweighed the potentially negative factors. Furthermore, the special committee determined that the merger agreement is advisable and that the terms of the merger and the other transactions to be performed or consummated by the Company are fair to and in the best interests of the Company and our shareholders. The special committee recommended that the board of directors adopt the merger agreement, the merger and the other transactions contemplated by the merger agreement and that the board of directors recommend that our shareholders vote to approve the merger agreement at the special meeting.

 

The special committee did not assign relative weights to the above factors or the other factors considered by it. In addition, the special committee did not reach any specific conclusion on each factor considered, but conducted an overall analysis of these factors. Individual members of the special committee may have given different weights to different factors.

 

Our Board of Directors

 

Our board of directors, acting in large part upon the unanimous recommendation of the special committee, and after careful deliberation, at a meeting described above on December 4, 2006, by unanimous vote (i) determined that the merger, the merger agreement and the transactions contemplated thereby, are advisable, fair to and in the best interests of the Company and the Company’s shareholders; (ii) adopted the merger agreement and approved the transactions contemplated thereby and (iii) recommended that our shareholders approve the merger agreement. In reaching these determinations, our board considered (i) the

financial presentation of SunTrust Robinson Humphrey that was prepared for the special committee and which was delivered to the board of directors at the request of the special committee, as well as the fact that the special committee and the board of directors received an opinion delivered by SunTrust Robinson Humphrey as to the fairness, from a financial point of view, to our shareholders, other than the continuing investors, of the merger consideration to be received by such shareholders in the merger and (ii) the unanimous recommendation and analysis of the special committee, as described above, and adopted such recommendation and analysis in reaching its determinations.

 

The foregoing discussion summarizes the material factors considered by our board of directors in its consideration of the merger. Our board of directors did not assign relative weights to the above factors or the other factors considered by it. In addition, the board of directors did not reach any specific conclusion on each factor considered, but conducted an overall analysis of these factors. Individual board members may have given different weights to different factors.

 

After careful consideration and upon unanimous recommendation of the special committee, our board of directors unanimously:

 

 

Our board of directors recommends that you vote “FOR” the proposal to approve the merger agreement and the transactions contemplated thereby, including the merger at the special meeting.

 

The special committee of the board of directors retained SunTrust Robinson Humphrey to act as its financial advisor in connection with the merger. In connection with SunTrust Robinson Humphrey’s engagement, the special committee requested that SunTrust Robinson Humphrey evaluate the fairness of the merger consideration, from a financial point of view, to Direct General’s shareholders other than affiliates of Parent or the continuing investors. On December 4, 2006, the special committee and the board of directors met to review the proposed merger and the terms of the proposed merger agreement. During this meeting, SunTrust Robinson Humphrey reviewed with the special committee and the board of directors certain financial analyses, as described below, and rendered its oral opinion to the special committee and the board of directors, which was subsequently confirmed in writing, that, as of December 4, 2006, and based upon and subject to the various considerations and assumptions described in the opinion, the merger consideration was fair, from a financial point of view, to Direct General’s shareholders other than affiliates of Parent or the continuing investors. If requested by the special committee, SunTrust Robinson Humphrey will issue a bring down fairness opinion prior to the mailing of the definitive proxy statement.

 

The full text of SunTrust Robinson Humphrey’s opinion, dated December 4, 2006, which sets forth the procedures followed, assumptions made, matters considered and limitations on the review undertaken, is attached as Annex B and is incorporated into this proxy statement by reference. Holders of Direct General common stock are encouraged to read this opinion carefully in its entirety. SunTrust Robinson Humphrey’s opinion was provided to the special committee and the board of directors in connection with its evaluation of the merger consideration to Direct General’s shareholders (other than affiliates of Parent or the continuing investors). It does not address any other aspect of the proposed merger, relates only to the fairness, from a financial point of view, of the merger consideration and does not constitute a recommendation to any shareholder as to how such shareholder should vote or act with

respect to any matters relating to the merger. The following is a summary of the SunTrust Robinson Humphrey opinion and is qualified by reference to the full text of the opinion attached as Annex B, which you are encouraged to read in its entirety.

 

In arriving at its opinion, SunTrust Robinson Humphrey, among other things:

 

 

In arriving at its opinion, SunTrust Robinson Humphrey assumed and relied upon, without independent verification, the accuracy and completeness of the financial and other information discussed with or reviewed by SunTrust Robinson Humphrey. With respect to the financial forecasts of Direct General provided to or discussed with SunTrust Robinson Humphrey, SunTrust Robinson Humphrey assumed, without independent verification or investigation, that such forecasts had been reasonably prepared on bases reflecting the best currently available information, estimates and judgments of the management of Direct General as to the future financial performance of Direct General. In arriving at its opinion, SunTrust Robinson Humphrey did not conduct a physical inspection of the properties and facilities of Direct General and did not make or obtain any evaluations or appraisals of the assets or liabilities (including any contingent, derivative or off-balance-sheet assets or liabilities), contingent or otherwise, of Direct General. SunTrust Robinson Humphrey was not furnished with any actuarial analyses or reports, except for certain analyses and reports prepared by Direct General’s actuarial advisors. SunTrust Robinson Humphrey is not an actuarial firm and its services did not include actuarial determinations or evaluations or an attempt to evaluate any actuarial assumptions. In that regard, SunTrust Robinson Humphrey made no analysis of, and expressed no opinion as to, the adequacy of Direct General’s losses and loss adjustment expense reserves. SunTrust Robinson Humphrey also assumed that the merger would be consummated in accordance with the terms of the merger agreement and related agreements. SunTrust Robinson Humphrey’s opinion was necessarily based upon market, economic and other conditions as they existed on, and could be evaluated as of, December 4, 2006. SunTrust Robinson Humphrey expressed no opinion as to the underlying valuation, future performance or long-term viability of Direct General. Developments occurring after December 4, 2006 may affect SunTrust Robinson Humphrey’s opinion, and SunTrust Robinson Humphrey did not assume any obligation to update or revise its opinion, other than to

issue a bring down fairness opinion prior to the mailing of the definitive proxy statement, if requested by the special committee.

 

The special committee retained SunTrust Robinson Humphrey to act as its financial advisor and render a fairness opinion in connection with the merger. The special committee selected SunTrust Robinson Humphrey based on SunTrust Robinson Humphrey’s qualifications, expertise and reputation. SunTrust Robinson Humphrey is a nationally recognized investment banking firm with substantial experience in transactions similar to the merger and is continuously engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, leveraged buyouts, negotiated underwritings, secondary distributions of listed and unlisted securities and private placements. SunTrust Robinson Humphrey and its affiliates, including SunTrust Banks, Inc., in the future may provide investment banking and other financial services to Direct General. In the ordinary course of SunTrust Robinson Humphrey’s trading and brokerage business, SunTrust Robinson Humphrey or its affiliates actively trade in the equity securities of Direct General for its own account and for the account of customers and, accordingly, may at any time hold a long or short position in such securities. SunTrust Robinson Humphrey provided brokerage services to Direct General in connection with its 2005 stock repurchase program. During the past two years, SunTrust Robinson Humphrey has not provided financial advisory and financing services to Direct General or its affiliates other than with respect to the services rendered in connection with the proposed merger.

 

Under the terms of its engagement letter entered into with the special committee, SunTrust Robinson Humphrey will receive a fee of $500,000 in connection with the delivery of its fairness opinion, which is not contingent on the consummation of the merger. SunTrust Robinson Humphrey is entitled to an additional fee of $410,000 contingent upon the consummation of the merger at the current price. SunTrust Robinson Humphrey would also earn additional compensation, subject to a maximum amount, if the merger is consummated at a price higher than the current merger price. SunTrust Robinson Humphrey also may receive a performance payment of up to $250,000, payable at the discretion of special committee. In addition, SunTrust Robinson Humphrey will receive a bring-down opinion fee of $250,000 if requested by the special committee to bring down the fairness opinion to a date prior to the mailing of the definitive proxy statement. Direct General has also agreed to reimburse SunTrust Robinson Humphrey for out-of-pocket fees and expenses, including attorney’s fees, incurred in connection with its engagement and to indemnify SunTrust Robinson Humphrey and related parties against certain liabilities, including certain liabilities under the federal securities laws, arising out of its engagement.

 

Financial Analyses

 

In preparing its opinion, SunTrust Robinson Humphrey performed a variety of financial and comparative analyses, a summary of which is described below. The summary of the analyses described below is not a complete description of the analyses underlying SunTrust Robinson Humphrey’s 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 and, therefore, a fairness opinion is not readily susceptible to partial analysis or summary description. In arriving at its opinion, SunTrust Robinson Humphrey made qualitative judgments as to the significance and relevance of each analysis and factor that it considered. SunTrust Robinson Humphrey arrived at its ultimate opinion based on the results of all analyses undertaken and assessed as a whole and did not draw, in isolation, conclusions from or with regard to any one factor or method of analysis. Accordingly, SunTrust Robinson Humphrey believes that its analyses must be considered as an integrated whole and that selecting portions of its analyses and factors, without considering all analyses and factors, could create a misleading or incomplete view of the processes underlying such analyses and SunTrust Robinson Humphrey’s opinion.

 

In performing its analyses, SunTrust Robinson Humphrey made numerous assumptions with respect to Direct General, industry performance and general business, economic, market and financial conditions, many of which are beyond the control of Direct General. No company, transaction or business used in SunTrust Robinson Humphrey’s analyses as a comparison is identical to Direct General, its business or the proposed merger, and an evaluation of the results of those analyses is not entirely mathematical. Rather, the analyses involve complex considerations and judgments concerning financial and operating characteristics and other

factors that could affect the acquisition, public trading or other values of the companies, business segments or transactions analyzed. The estimates contained in the analyses of SunTrust Robinson Humphrey and the valuation ranges resulting from any particular analysis are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by such analyses. In addition, analyses relating to the value of businesses or securities do not purport to be appraisals or to reflect the prices at which businesses or securities actually may be sold. Accordingly, these analyses and estimates are inherently subject to substantial uncertainty.

 

The merger consideration was determined through arm’s-length negotiations between the special committee and Fremont Partners and Texas Pacific Group and was recommended by the special committee for approval by Direct General’s board of directors and was approved by the board of directors. SunTrust Robinson Humphrey provided advice to the special committee. SunTrust Robinson Humphrey did not recommend any specific merger consideration to the special committee or that any specific merger consideration constituted the only appropriate merger consideration for the merger. The opinions and financial analyses of SunTrust Robinson Humphrey were only one of many factors considered by the special committee in its evaluation of the proposed merger and should not be viewed as determinative of the views of the special committee, the board of directors or management with respect to the merger or the merger consideration.

 

The following is a summary of the material financial analyses underlying the opinion of SunTrust Robinson Humphrey, the material substance of which were reviewed with the special committee on December 4, 2006. The financial analyses summarized below include information presented in tabular format. In order to fully understand SunTrust Robinson Humphrey’s financial analyses, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses. Considering the data in the tables below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of SunTrust Robinson Humphrey’s financial analyses.

 

Analysis of Transaction Price

 

SunTrust Robinson Humphrey analyzed the value of the consideration of $21.25 per share to be received pursuant to the merger agreement based on the premium to Direct General’s historical stock prices, including Direct General’s 52-week high and low closing stock price, and Direct General’s average stock price for the 10-day, 20-day and 30-day trading periods preceding December 5, 2006, the assumed announcement date of the merger. The results of this analysis are summarized below.

 

 

 

Market Analysis of Selected Publicly Traded Reference Companies

 

SunTrust Robinson Humphrey reviewed and compared publicly available financial data, market information and trading multiples for Direct General with other selected publicly traded reference companies that possess characteristics similar to Direct General’s with respect to industry of operation, product profile, size or financial results. These companies are:

 

Affirmative Insurance Holdings, Inc. (AFFM)

Bristol West Holdings, Inc. (BRW)

First Acceptance Corporation (FAC)

Infinity Property and Casualty Corporation (IPCC)

Kingsway Financial Services Inc. (KFS)

Mercury General Corporation (MCY)

Progressive Corporation (PGR)

State Auto Financial Corporation (STFC)

21^st Century Insurance Group (TW)

 

For the selected publicly traded companies, SunTrust Robinson Humphrey analyzed, among other things, equity value (or market capitalization) as a multiple of: total shareholders equity and total shareholders equity adjusted to exclude the impact of unrealized gains and losses on securities, which SunTrust Robinson Humphrey refers to as book value and book value (excl. FAS-115), respectively. SunTrust Robinson Humphrey also compared stock price as a multiple of last twelve months, which SunTrust Robinson Humphrey refers to as LTM, projected 2006 and projected 2007 operating earnings per share, which is calculated by adjusting earnings per share to exclude the net gain or loss on investment securities. All multiples were based on closing stock prices as of December 4, 2006. Historical results were based on financial information available in public filings. Projected operating earnings per share (EPS) estimates were based on research reports and consensus estimates provided by FactSet Research Systems Inc. or Thomson Financial. FactSet Research Systems Inc. and Thomson Financial are publishers of compilations of information including estimates of projected financial performance for publicly traded companies produced by equity research analysts at investment banking firms. The following table sets forth the median multiples indicated by the market analysis of selected publicly traded reference companies:

 

 

Based upon the multiples derived from this analysis, Direct General’s historical results and estimates of Direct General’s projected results provided by Direct General, SunTrust Robinson Humphrey calculated a range of implied equity values for Direct General between $17.22 and $22.19 per share, with an average equity value of $19.43 per share.

 

SunTrust Robinson Humphrey noted that none of the companies used in the market analysis of selected publicly traded reference companies was identical to Direct General and that, accordingly, the analysis necessarily involved complex considerations and judgments concerning differences in financial and operating characteristics of the companies reviewed and other factors that would affect the market values of the selected publicly traded reference companies.

Analysis of Selected Merger and Acquisition Reference Transactions

 

SunTrust Robinson Humphrey reviewed and analyzed the consideration paid and implied transaction multiples in 19 selected completed and pending mergers and acquisitions in the insurance sector since November 1996 that SunTrust Robinson Humphrey deemed relevant.

 

For the selected transactions, SunTrust Robinson Humphrey analyzed, among other things, equity value as a multiple of last twelve months net income, which SunTrust Robinson Humphrey refers to as LTM net income and total shareholders equity, which SunTrust Robinson Humphrey refers to as book value. LTM net income and book value values were based on historical financial information available in public filings or other publicly available information sources. The following table sets forth the multiples indicated by this analysis:

 

 

Based upon the multiples derived from this analysis, Direct General’s historical results, SunTrust Robinson Humphrey calculated a range of implied equity values for Direct General between $16.43 and $21.39 per share, with an average equity value of $18.91 per share.

 

SunTrust Robinson Humphrey noted that no transaction considered in the analysis of selected merger and acquisition reference transactions is identical to the merger. All multiples for the selected transactions were based on public information available at the time of announcement of such transaction, without taking into account differing market and other conditions during the period during which the selected transactions occurred.

 

Discounted Cash Flow Analysis

 

SunTrust Robinson Humphrey performed a discounted cash flow analysis of Direct General based upon projections provided by Direct General for the fiscal years ending December 31, 2007 through 2011 to estimate the net present equity value per share of Direct General. SunTrust Robinson Humphrey calculated a range of net present values for Direct General based on its free cash flow (net income adjusted to exclude interest expense from Direct General’s trust debentures minus capital expenditures and estimated increases to Direct General’s insurance subsidiaries capital) over the projected time period using a weighted average cost of capital for Direct General ranging between 14.0% and 16.0%, based on Direct General’s weighted-average cost of capital of 15.0% calculated by SunTrust Robinson Humphrey, and terminal value multiples of 2011E net income ranging from 10.5x to 11.5x, based on the foregoing analysis of selected merger and acquisition reference transactions. The analysis indicated the following per share equity valuations of Direct General:

 

 

Premiums Paid Analysis

 

SunTrust Robinson Humphrey analyzed the transaction premiums paid in all merger and acquisition transactions of publicly traded companies with deal values between $200 million and $700 million, announced since June 30, 2006, based on the target company’s stock price one day, five days and 30 days prior to public announcement of the transaction. Additionally, SunTrust Robinson Humphrey analyzed the transaction premiums paid in all transactions of publicly traded companies in the financial services sector with transaction values between $200 million and $700 million, announced since December 4, 2005, based on the target

company’s stock price one day, five days and 30 days prior to public announcement of the transaction. This analysis indicated the following premiums paid in the selected transactions:

 

 

Based upon the premiums paid for all transactions analysis and an announcement date of December 5, 2006, SunTrust Robinson Humphrey calculated a range of implied equity values for Direct General between $16.72 and $19.18 per share with an average implied equity value of $18.18 per share. Based upon the premiums paid for all transactions in the financial services sector analysis and an announcement date of December 5, 2006, SunTrust Robinson Humphrey calculated a range of implied equity values for Direct General between $16.35 and $19.07 per share with an average implied equity value of $18.04 per share.

 

Summary Valuation Analysis

 

The following table sets forth a summary of the values indicated by SunTrust Robinson Humphrey’s analyses:

 

 

Other Factors and Analyses

 

SunTrust Robinson Humphrey took into consideration various other factors and analyses, including historical market prices and trading volumes for Direct General’s common stock, movements in the common stock of selected publicly traded companies, movements in the S&P 500 Index and the S&P 500-P&C Insurance Index and an analysis of the weighted average cost of capital of Direct General.

 

Under the HSR Act and the rules promulgated thereunder by the FTC, the merger cannot be completed until we and Parent file a notification and report form under the HSR Act and the applicable waiting period has expired or been terminated. Direct General and Parent expect to file notification and report forms under the HSR Act with the FTC and the Antitrust Division of the Department of Justice on or about January 8, 2007. If we do not receive a request for additional information, the waiting period will expire in 30 days from the date of filing, if not terminated earlier. At any time before or after completion of the merger, notwithstanding the early termination of the waiting period under the HSR Act, the Antitrust Division or the FTC could take such action under the antitrust laws as it deems necessary or desirable in the public interest, including seeking to enjoin the completion of the merger or seeking divestiture of substantial assets of Direct General or Parent. At any time before or after the completion of the merger, and notwithstanding the early termination of the waiting period under the HSR Act, any state could take such action under its antitrust laws as it deems necessary or desirable in the public interest. Such action could include seeking to enjoin the completion of the merger or seeking divestiture of substantial assets of Direct General or Parent. Private parties may also seek to take legal action under the antitrust laws under certain circumstances.

 

While there can be no assurance that the merger will not be challenged by a governmental authority or private party on antitrust grounds, we and Parent believe that the merger can be effected in compliance with

federal and state antitrust laws. Under the terms of the merger agreement, however, Parent is not required to consummate the merger if there is any pending or threatened governmental action seeking to (i) prohibit or limit the operation or ownership by Direct General or Parent of any portion of its business or assets, (ii) compel Direct General or Parent to divest or hold separate any portion of its business or assets or (iii) impose any obligations on Direct General or Parent to maintain facilities, operations, places of business, employment levels, products or businesses. We cannot assure you that the merger agreement would not be terminated if Direct General or Parent were required to comply with any of the foregoing. See “The Merger Agreement — Efforts to Complete the Merger.”

 

The insurance laws and regulations of all the states in which we operate generally require that, prior to the acquisition of an insurance company, either through the acquisition of or merger with the insurance company or a holding company of that insurance company, domiciled in that jurisdiction, the acquiring company must obtain the approval of the insurance commissioner of that jurisdiction. In connection with this state approval process, the necessary applications have been or will be made with the insurance commissioners of Arkansas, Florida, Georgia, Louisiana, Mississippi, South Carolina, and Tennessee, the domiciliary (or “commercially domiciliary” in the case of Florida) states of Direct General’s insurance company subsidiaries. In addition, the insurance laws and regulations of Texas require the filing of a pre-acquisition notice and the expiration or termination of a waiting period prior to an acquiring company’s acquisition of an entity licensed to do business in Texas as an insurance agency. In connection with this requirement, the necessary filing has been or will be made with the insurance commissioner of Texas.

 

Our subsidiaries that carry out premium finance operations must obtain approval from or otherwise notify the regulators of the premium finance business in certain U.S. states of a change in control. In connection with that process, the necessary applications or notices have been or will be filed with the appropriate regulatory authorities in Florida, Louisiana, Mississippi, Missouri, Tennessee and Texas.

 

In addition, the applicable regulators in certain states in which we conduct our “payday loan” operations require that certain filings be made. Such notices and requests for approvals have been filed in Florida, Kentucky, Louisiana, Mississippi, Missouri, and Tennessee. The applicable regulators of our “payday loan” operations have significant authority in regulating and conditioning the continuation of such business upon the occurrence of a change in control.

 

Although we do not expect these regulatory authorities to raise any significant concerns in connection with their review of the merger, there is no assurance that we will obtain all required regulatory approvals, or that those approvals will not include terms, conditions or restrictions that may have an adverse effect on us.

 

Other than the filings described above, we are not aware of any regulatory approvals required to be obtained, or waiting periods to expire, to complete the merger. If we discover that other approvals or waiting periods are necessary, we will seek to obtain or comply with them. If any additional approval or action is needed, however, we may not be able to obtain it, as is also the case with respect to the other necessary approvals. Even if we could obtain all necessary approvals, and the merger agreement is approved by our shareholders, conditions may be placed on any such approval that could cause either Parent or us to abandon the merger.

 

The merger is being financed by equity, debt, and the issuance of trust preferred securities. The total merger consideration needed to pay our shareholders if the merger is completed is approximately $433,600,000. The financing methods described are not binding upon us if the merger agreement is not approved by our shareholders. Parent has received commitments for financing for up to approximately $479,565,000, including:

 

 

 

Conditions Precedent to the Senior Secured Credit Facilities.  The availability of the senior secured credit facilities are subject, among other things, to satisfaction that there shall not have occurred any “Material Adverse Effect” (as defined in the merger agreement), consummation of the merger in accordance with the merger agreement (without giving effect to any amendments or waivers by Parent that are materially adverse to the lenders under the senior credit facilities without the consent of Bear Stearns Corporate Lending Inc., as administrative agent), payment of required fees and expenses and the negotiation, execution and delivery of definitive documentation.

 

General.  The borrower under the senior secured credit facilities will be Sub initially, and the Company, upon consummation of the merger (the “Borrower”). The senior secured credit facilities will be comprised of a $75 million term loan facility with a term of seven years and a $20 million revolving loan facility with a term of five years. The revolving credit facility will include sublimits for the issuance of letters of credit and swingline loans and will be available in dollars. No alternative financing arrangements or alternative financing plans have been made in the event that the senior secured credit facilities are not available as anticipated. The senior secured credit facilities will permit the Borrower to add one or more incremental term loan facilities and/or increase commitments under the revolving loan facility in an aggregate amount up to $20 million.

 

Interest Rate and Fees.  Loans under the senior secured credit facilities are expected to bear interest, at the Borrower’s option, at a rate equal to the London interbank offer rate or base rate, in each case plus a spread. In addition, the Borrower will pay customary commitment fees and letter of credit fees under the senior secured credit facilities.

 

Prepayments and Amortization.  The Borrower will be permitted to make voluntary prepayments at any time, without premium or penalty, and will be required to make mandatory prepayments of term

loans under certain circumstances. The term loans are expected to be repaid in equal quarterly installments, commencing with the first quarter end to occur after the closing of the senior secured credit facilities, in an aggregate annual amount equal to 1% of the original principal amount thereof, with the balance payable on the final maturity date of the term loans.

 

Guarantors.  All obligations under the senior secured credit facilities will be unconditionally guaranteed by Parent and each of the existing and future domestic subsidiaries of Parent (other than Borrower, any subsidiary of Borrower that is an insurance company and which is prohibited from providing a guarantee under applicable regulations, and certain immaterial subsidiaries to be agreed upon).

 

Security.  The obligations of the Borrower and the guarantors under the senior secured credit facilities and the guarantees, and under any interest rate protection or other hedging arrangement entered into with a lender or any of its affiliates, will be secured, subject to permitted liens and other agreed upon exceptions, by all the capital stock of the Borrower and its subsidiaries (limited, in the case of foreign subsidiaries, to 65% of the capital stock of such subsidiaries) directly held by the Borrower or any guarantor and substantially all present and future assets of Parent, the Borrower and each subsidiary guarantor excluding vehicles and owned leased real property and subject to customary intercreditor arrangements, with an exception to allow security interests in respect of accounts receivable, among other things, under an existing facility of the Company which shall remain outstanding upon consummation of the merger.

 

Other Terms.  The senior secured credit facilities will contain customary representations and warranties and customary affirmative and negative covenants, including, among other things, restrictions on indebtedness, investments, sales of assets, mergers and consolidations, prepayments of subordinated indebtedness, liens and dividends and other distributions. The senior secured facilities will also include customary events of defaults, including a change of control to be defined.

 

In connection with the merger, we entered into a limited guarantee with the guarantors. Each of the guarantors has agreed to irrevocably and unconditionally guarantee, severally and not jointly, a portion of Parent’s obligation in the event that the merger agreement is terminated and Parent is obligated to pay a termination fee, as further explained in “The Merger Agreement — Termination Fees.” In the event that Parent is obligated to pay a termination fee, the guarantors have each guaranteed such guarantor’s pro rata portion of such obligation, such that the aggregate amount guaranteed by all guarantors shall be an amount up to $13.0 million. Each guarantee will remain in full force and effect until the earlier of (i) the effective time of the merger, (ii) the termination of the merger agreement in accordance with its terms by mutual consent or in a manner such that neither Parent nor Sub would have payment obligations thereunder, (iii) three months after the termination of the Merger Agreement in accordance with its terms, and (iv) December 4, 2008. Each guarantee will also immediately terminate in the event that Direct General or any of our subsidiaries challenges in any litigation, among other things, the validity of the limitations upon such guarantee and the liability of such guarantor thereunder. Other than for fraud in the inducement, each limited guarantee is the Company’s sole recourse against the respective guarantor.

 

The following is a summary of United States federal income tax consequences of the merger to U.S. shareholders whose shares of our common stock are converted into the right to receive cash in the merger. The discussion does not purport to consider all aspects of United States federal income taxation that might be relevant to our shareholders. The discussion is based on current law, which is subject to change, possibly with retroactive effect. The discussion applies only to shareholders who hold shares of our common stock as capital assets, and may not apply to shares of our common stock received in connection with the exercise, or the acceleration of vesting and cashing out, of employee stock options or otherwise as compensation, or to certain types of shareholders (such as insurance companies, banks, tax-exempt organizations, financial institutions and broker-dealers) who may be subject to special rules. This discussion also does

not address the tax consequences to any shareholder who, for United States federal income tax purposes, is a non-resident alien individual, foreign corporation, foreign partnership or foreign estate or trust, and does not address any aspect of state, local or foreign tax laws.

 

The exchange of cash for shares of our common stock in the merger will be a taxable transaction for United States federal income tax purposes and may be subject to tax under applicable state, local and other tax laws. In general, a shareholder whose shares of our common stock are converted into the right to receive cash in the merger will recognize capital gain or loss for United States federal income tax purposes equal to the difference, if any, between $21.25 and the shareholder’s adjusted tax basis in the shares of our common stock surrendered. Gain or loss will be determined separately for each block of shares (i.e., shares acquired at the same cost in a single transaction). Such gain or loss will be long-term capital gain or loss provided that a shareholder’s holding period for such shares is more than 12 months at the time of the consummation of the merger. Long-term capital gains of individuals are eligible for reduced rates of taxation. There are limitations on the deductibility of capital losses.

 

Backup withholding will apply to all cash payments to which a shareholder is entitled under the merger agreement, unless the shareholder or other payee provides a taxpayer identification number (social security number, in the case of individuals, or employer identification number, in the case of other shareholders), certifies that such number is correct, and otherwise complies with the backup withholding tax rules. Each of our shareholders should complete and sign the Substitute Form W-9 included as part of the letter of transmittal and return it to the paying agent, in order to provide the information and certification necessary to avoid backup withholding tax, unless an exemption applies and is established in a manner satisfactory to the paying agent.

 

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules will be allowable as a refund or a credit against a shareholder’s United States federal income tax liability provided the required information is furnished to the Internal Revenue Service.

 

The United States federal income tax consequences set forth above are not intended to constitute a complete description of all tax consequences relating to the merger. Because individual circumstances may differ, each shareholder should consult its tax advisor regarding the applicability of the rules discussed above to it and the particular tax effects to it of the merger, including shareholders subject to special rules (such as foreign persons, employees, insurance companies, etc.), as well as the application of state, local and foreign tax laws.

 

Certain members of our board of directors and our executive officers have various interests in the merger described in this section that may be in addition to, or different from, the interests of our shareholders generally. The members of our board of directors were aware of these interests and considered them at the time they adopted the merger agreement. You should keep this in mind when considering the recommendation of our board of directors for the proposal to approve the merger agreement.

 

Stock Options.  Upon consummation of the merger, all stock options held by our directors and executive officers (other than certain options held by certain members of management) will vest, and all vested and unexercised stock options will generally be cashed out in an amount equal to the excess (if any) of $21.25 over the option exercise price. Certain of our executive officers (such officers, together with such other employees who are permitted to invest in the Parent, are sometimes referred to herein collectively as the “continuing investors”) have also made commitments to rollover certain of their options into options to purchase common stock of Parent. Parent may also grant new stock options to certain of the continuing investors to purchase common stock of Parent.

The following table summarizes the vested and unvested options with exercises prices of less than $21.25 per share held by our executive officers as of December 29, 2006 that will be accelerated, vested and cancelled in exchange for the cash consideration pursuant to the merger agreement. Our non-employee directors do not hold any options.

 

 

Resignation and Restrictive Covenants Agreements.  William C. Adair, Jr., our Chairman and Chief Executive Officer, and Jacqueline C. Adair, one of our directors and our Executive Vice President and Chief Operating Officer, have entered into resignation and restrictive covenants agreements that will become effective upon the consummation of the merger, pursuant to which both Mr. Adair’s and Ms. Jacqueline Adair’s employment will terminate upon consummation of the merger. Mr. Adair will, however, remain a member of our board of directors following consummation of the merger. Pursuant to Mr. Adair’s resignation and restrictive covenants agreement, upon termination of his employment Mr. Adair will be entitled to receive severance in the amount of $41,666.67 per month for 24 months. Pursuant to Ms. Jacqueline Adair’s resignation and restrictive covenants agreement, upon termination of her employment, Ms. Jacqueline Adair will be entitled to receive severance in the amount of $17,250.00 per month for 24 months. In addition, upon termination of his or her employment, each will be entitled to receive payment of earned but unpaid annual bonus or incentive amounts, payment of bonus amounts that would have been paid in respect of the current year had each remained employed through the end of such year, pro-rated based on the actual number of days each worked prior to his or her termination of employment, payment of accrued and unused paid time off, and continued coverage under benefit plans and continued fringe benefits for 24 months to the extent such continued coverage complies with the Consolidated Omnibus Budget Reconciliation Act of 1986 (“COBRA”). In addition, under Mr. Adair’s resignation and restrictive covenants agreement, as a part of severance, he will be entitled to retain as his personal property both the 2004 Cadillac Deville DTS and the 2006 Ford F150 vehicles specifically identified in such agreement, as well as all cellular telephones initially provided by Direct General for Mr. Adair’s use during his employment. Similarly, Ms. Jacqueline Adair will be entitled to retain as her personal property the 2006 Lincoln Navigator specifically identified in her resignation and restrictive covenants agreement as well as any cellular phones provided to her by Direct General. Under Mr. Adair’s resignation and restrictive covenant agreement, he has agreed to waive severance payments to which he may have become entitled upon the termination of his employment in connection with a change of control of Direct General, pursuant to his existing employment agreement with Direct General. Under their respective resignation and restrictive covenants agreements, each of Mr. Adair and Ms. Jacqueline Adair are subject to a number of restrictive covenants, including non-solicitation, non-competition and non-interference with business covenants, in each case for a period of five years following termination of their employment.

 

Employment Agreements.  Tammy R. Adair, our President, J. Todd Hagely, our Senior Vice President and Chief Financial Officer, William J. Harter, our Senior Vice President — Corporate Development Banking and Finance and Brian G. Moore, our President of our premium finance subsidiaries, have each entered into employment and non-competition agreements with the Company that will become effective upon the consummation of the merger and at such time will supersede and replace each of their current employment agreements with the Company. Ms. Tammy Adair will be entitled to base salary in the amount of $300,000 per year, and Messrs. Hagely, Harter, and Moore will be entitled to base salary in the amount of $215,000, $200,000, and $125,000 per year, respectively. In addition, each will be eligible to participate in a company bonus plan and a Parent stock option plan, provided that in the event any of Ms. Tammy Adair or

Messrs. Hagely, Harter, and Moore exercises any options to purchase shares of Parent stock, at the time of such exercise he or she will be required to execute and be bound by a management stockholders’ agreement. Furthermore, in the event Direct General terminates any of their employment without cause (as defined in the employment and non-competition agreements) or any of Ms. Tammy Adair or Messrs. Hagely, Harter, and Moore terminates his or her employment for good reason (as defined in the employment and non-competition agreements), each would be entitled to the following: 12 months salary (24 months for Ms. Tammy Adair and 18 months for Mr. Hagely) payable in bi-weekly installments in accordance with Direct General’s regular payroll; a lump sum payment of the annual bonus to which the executive would have received had the executive remained employed through the end of the year, pro-rated based on the actual number of days the executive worked prior to his or her termination of employment; and 12 months (24 months for Ms. Tammy Adair and 18 months for Mr. Hagely) continuation of health insurance coverage or payment of the insurance premiums related to such health coverage. The executives are subject to non-competition, non-solicitation and non-interference restrictions for varying periods of time following termination of their employment.

 

Continuing Investors.  William J. Harter, our Senior Vice President — Corporate Development Banking and Finance, and a member of management who is not an executive officer have agreed to invest in Parent upon consummation of the merger. Mr. Harter and the member of management have agreed to purchase 200 and 50 shares of common stock of Parent, respectively, for $200,000 and $50,000, respectively.

 

In addition, each of Ms. Tammy Adair, Messrs. Hagely and Harter will rollover options to purchase 72,000, 50,000 and 18,000 shares of our common stock, respectively, into options to purchase common stock of Parent. These Parent options will be on substantially the same vesting terms and conditions as contained in the original grant instruments. The number of shares of common stock of Parent purchasable upon the exercise of the rolled over options will be equal to the number of shares of our common stock that were purchasable under the rolled over options, times 0.02125. The exercise price of the Parent options will be adjusted by dividing the per share exercise price of the rolled over options by 0.02125.

 

Indemnification and Insurance.  The merger agreement provides that the surviving corporation will fulfill and honor the obligations of Direct General regarding indemnity pursuant to our charter and bylaws as in effect as of December 4, 2006. Further, the merger agreement provides that the surviving corporation will fulfill and honor the indemnification agreements between Direct General and its directors and officers in effect as of December 4, 2006.

 

The merger agreement also requires Parent to cause the surviving corporation to maintain directors’ and officers’ liability insurance covering the persons who were covered by Direct General’s directors’ and officers’ liability insurance policies in effect as of December 4, 2006. The terms of such insurance must be on terms and conditions that are, in the aggregate, no less favorable to the insured than those applicable to the directors and officers under policies that we maintained as of December 4, 2006, provided that in no event shall the amount that Parent is obligated to expend in any one year in connection therewith exceed 225% of the annual premium currently paid by us for such coverage. Parent may satisfy its obligations by purchasing a tail policy that has an effective term of 6 years from the date of consummation of the merger and that has terms and conditions that are, in the aggregate, no less favorable to the insured than those applicable to the directors and officers under policies that we maintained as of December 4, 2006.

 

Shareholder Voting Agreement.  Although Direct General is not a party to the agreement, our President, Tammy R. Adair, solely in her capacity as trustee of the Trust, entered into a Shareholder Voting Agreement in connection with the transaction. Under the terms of the agreement, Ms. Tammy Adair must vote shares held by the Trust in favor of the merger with Parent and against any proposal that would impede or prevent approval of the merger agreement or consummation of the merger.

 

Subject to the terms and conditions set forth in the merger agreement and in accordance with Tennessee law, at the effective time of the merger, Sub, a wholly owned subsidiary of Parent formed for purposes of the merger, will be merged with and into Direct General, and Direct General will survive the merger as a subsidiary of Parent and will continue its corporate existence under Tennessee law.

 

If the merger is completed, our common stock will be delisted from the NASDAQ Global Select Market and will be deregistered under the Securities Exchange Act of 1934.

 

Our shareholders do not have a right to dissent under the Tennessee Business Corporation Act unless our common stock is delisted from the NASDAQ Global Select Market prior to consummation of the merger.

 

Direct General, our directors and certain of our officers were named in three federal shareholder derivative actions filed in the first quarter of 2005, which have been consolidated into one action entitled In Re: Direct General, Inc. Derivative Litigation, United States District Court for the Middle District of Tennessee, No. 3:05-0158. On December 6, 2006, the plaintiffs in this action filed a motion for leave to amend the complaint to, among other things, add Parent, Sub, Texas Pacific Group and Fremont Partners as defendants in the action. The amended complaint alleges, among other things, that the consideration to be paid in the merger is unfair and is the result of an unfair process and that the merger was agreed to by the directors and officers of the Company in order to discharge their alleged personal liability. The amended complaint further alleges that the directors and officers of Direct General breached their fiduciary duty by agreeing to a structure that is designed to deter higher offers from other bidders, for failing to obtain the highest and best price for Direct General’s shareholders and for structuring the merger so that the individuals would receive undeserved change in control benefits, including the immediate vesting of unvested options. The amended complaint further alleges that Parent, Sub, Fremont Partners and Texas Pacific Group aided and abetted the officers’ and directors’ breach of fiduciary duty. The amended complaint seeks, among other relief, with respect to the merger, class certification of the lawsuit, an injunction preventing consummation of the merger unless and until Direct General adopts a procedural process designed to obtain the highest price for shareholders, an order declaring that the officers and Directors have breached their fiduciary duty and declaring that the merger be void and rescission ordered if consummated, an award of money damages, punitive damages, attorneys’ fees and expenses and such other relief as the court might find just and proper. Direct General believes that the claims relating to the merger made in the amended complaint are without merit and intends to continue vigorously defending this amended lawsuit.

 

In the event that holders of a majority of shares of our common stock vote to approve the merger agreement, Direct General and the other defendants in the consolidated federal shareholder derivative actions may rely upon the approval of the merger agreement in defense of the claims related to the merger in any amended complaint. Specifically, Direct General and the other defendants may argue, among other things, that such approval operates as a ratification and acceptance of the merger related conduct challenged in the litigation, and a waiver by each Direct General shareholder of any and all claims that have been, or could have been, asserted in the litigation or any later-filed lawsuit (or amendment to any pending lawsuit) seeking damages relating to the merger agreement or the transactions related to the merger agreement.

 

Additional amendments to the pending shareholder lawsuits or new lawsuits pertaining to the merger could be filed in the future.

 

The closing sale price of our common stock on the NASDAQ Global Select Market on December 4, 2006, the last trading day prior to public announcement of the Merger, was $16.51 per share. The $21.25 per share to be paid for each share of Direct General common stock in the Merger represents a premium of approximately 29% over the closing price on December 4, 2006, and a premium of approximately 39% over the average closing price for the last 30 trading days ending December 4, 2006.

 

Other than as described above, there are no material relationships between Parent and Sub or any of their respective affiliates, on the one hand, and Direct General or any of its affiliates, on the other hand, other than in respect of the merger agreement. See “Interests of Directors and Executive Officers in the Merger.”

 

The merger agreement is the legal document that governs the merger. This section of the proxy statement describes the material provisions of the merger agreement but may not contain all of the information about the merger agreement that is important to you. The merger agreement is included as Annex A to this proxy statement and is incorporated into this proxy statement by reference. We encourage you to read the merger agreement in its entirety. The merger agreement is a commercial document that establishes and governs the legal relations between us and Parent and Sub with respect to the transactions described in this proxy statement. The representations, warranties and covenants made by us and Parent and Sub are qualified and subject to important limitations agreed to by us and Parent and Sub in connection with negotiating the terms of the merger agreement. Furthermore, the representations and warranties may be subject to standards of materiality applicable to us and Parent and Sub.

 

The merger agreement provides for the merger of Sub with and into Direct General upon the terms, and subject to the conditions, of the merger agreement. Direct General will survive the merger and continue to exist as a wholly owned subsidiary of Parent. The merger will become effective at the time the articles of merger are filed with the Secretary of State of the State of Tennessee. We expect to complete the merger as promptly as practicable after our shareholders approve the merger agreement and the transactions contemplated thereby.

 

We or Parent may terminate the merger agreement prior to the completion of the merger in some circumstances, whether before or after the approval of the merger agreement by shareholders. Additional details on termination of the merger agreement are described in “The Merger Agreement — Termination of the Merger Agreement.”

 

Each share of our common stock issued and outstanding immediately before the merger will automatically be cancelled and will cease to exist and will be converted into the right to receive $21.25 in cash, without interest and less applicable withholding tax. After the merger is effective, each holder of a certificate representing shares of our common stock will no longer have any rights with respect to the shares, except for the right to receive the merger consideration.

 

Upon consummation of the merger, all outstanding options to purchase our common stock will become fully vested and immediately exercisable, other than certain options held by certain members of management as described under “The Merger — Interests of Directors and Executive Officers in the Merger — Continuing Investors.” All such stock options, excluding certain options held by certain members of our management, will be cancelled in exchange for a cash payment of an amount equal to the excess of $21.25 over the exercise price per share of common stock subject to the option multiplied by the number of shares of common stock issuable upon exercise of the option, without interest and less any applicable withholding taxes.

 

Upon the effective time of the merger, Parent will designate a paying agent reasonably satisfactory to us to act as paying agent of the merger consideration. Upon the effective time of the merger, Parent will, or will

cause the surviving corporation to, make available to the paying agent the aggregate merger consideration payable to our shareholders pursuant to the merger agreement. All such consideration deposited will be held for the benefit of our shareholders as of immediately prior to the effective time of the merger.

 

Upon the effective time of the merger, we will close our stock ledger. After that time, there will be no further registration of transfer of shares of our common stock.

 

As soon as reasonably practicable following the effective time of the merger, Parent will instruct the paying agent to mail you a letter of transmittal and instructions advising you how to surrender your certificates in exchange for the merger consideration. Upon receipt of your certificates and such completed letter of transmittal and such other documents as may reasonably be required by the paying agent, the paying agent will pay you your merger consideration. Interest will not be paid or accrue in respect of the merger consideration. The surviving corporation will reduce the amount of any merger consideration paid to you by any applicable withholding taxes. YOU SHOULD NOT FORWARD YOUR STOCK CERTIFICATES TO THE PAYING AGENT WITHOUT A LETTER OF TRANSMITTAL, AND YOU SHOULD NOT RETURN YOUR STOCK CERTIFICATES WITH THE ENCLOSED PROXY.

 

If the paying agent is to pay some or all of your merger consideration to a person other than you, as the registered owner of a stock certificate, you must have your certificates properly endorsed or otherwise in proper form for transfer, and you must pay any transfer or other taxes payable by reason of the transfer or establish to the surviving corporation’s satisfaction that the taxes have been paid or are not required to be paid.

 

The transmittal instructions will tell you what to do if you have lost your certificate, or if it has been stolen or destroyed. You will have to provide an affidavit to that fact and, if required by Parent, deliver a bond in an amount that the surviving corporation reasonably directs as indemnity against any claim that may be made against it, us, or the paying agent with respect to the certificates alleged to have been lost, stolen or destroyed.

 

Upon completion of the merger, and unless otherwise determined by Parent prior to the effective time of the merger, or unless otherwise required by state insurance or premium finance regulatory laws, the directors of Sub immediately prior to the effective time of the merger will be the initial directors of the surviving corporation. In addition, unless otherwise determined by Parent prior to the effective time of the merger, the officers of Sub immediately prior to the effective time of the merger will hold the same offices with the surviving corporation.

 

In the merger agreement, we made certain customary representations and warranties to matters related to our business as of December 4, 2006. They are not intended to provide factual information about us and were made only for purposes of the merger agreement and as of specific dates. They were agreed to solely for the benefit of the parties to the merger agreement and may be subject to limitations agreed upon by the contracting parties, including being qualified by confidential disclosures exchanged between the parties in connection with the execution of the merger agreement or qualified as to materiality. Investors are not third-party beneficiaries under the merger agreement and should not rely on the representations and warranties or any descriptions thereof as characterizations of the actual state of facts or condition of us or Parent. By way of summary, we made representations and warranties concerning the following matters:

 

 

 

In addition, Parent and Sub made certain customary representations and warranties concerning the following matters:

 

 

We have agreed to conduct our business in the usual, regular and ordinary course between December 4, 2006 and the effectiveness of the merger. Specifically, we have agreed that, except as consented to in writing by Parent, we will:

 

 

 

In addition, we have agreed in the merger agreement that, until termination of the merger agreement or the effectiveness of the merger, we will not take or permit our subsidiaries to take certain actions. Except as expressly contemplated or permitted by the merger agreement, we will not, nor permit our subsidiaries to, without the prior written consent of Parent:

 

 

 

 

 

 

 

 

We have agreed to reasonably cooperate in connection with the arrangement of Parent’s financing of the merger as may be requested by Parent, provided that such requested cooperation does not unreasonably interfere with our ongoing operations. Specifically, we have agreed to:

 

 

 

Under the terms of the merger agreement, we have agreed to use all reasonable best efforts to take all actions and to assist and cooperate with Parent in doing all things necessary or advisable to consummate the merger in the most expeditious manner practicable. Specifically, we have agreed to:

 

 

In addition, we have agreed to use commercially reasonable efforts to obtain such material consents, waivers and approvals under any of our contracts and insurance contracts required to be obtained in connection with the consummation of the merger as may be reasonably requested by Parent after consultation with us. In connection with seeking such consents, waivers, and approvals, we will keep Parent informed of all material developments and shall, at Parent’s request, include Parent in any discussions or communications with any parties whose consent, waiver, and approval is sought.

 

In the event the Merger does not close for any reason, Parent shall not have any liability to us or our shareholders for any costs, claims, liabilities or damages resulting from our efforts to obtain such consents, waivers, and approvals.

 

The completion of the merger depends on the satisfaction of a number of conditions, including the following:

 

 

 

Our obligations to complete the merger are subject to the satisfaction of the following conditions at or prior to the closing date, unless waived by us:

 

 

The obligations of Parent and Sub to complete the merger are subject to the satisfaction of the following conditions at or prior to closing date, unless waived by Parent and Sub:

 

 

The merger agreement defines “material adverse effect” as to any entity as a change, event, violation, inaccuracy, circumstance or effect, individually or when taken together with all other such changes, events,

violations, inaccuracies, circumstances or effects that have occurred prior to the time of determination of whether a material adverse effect has occurred, that:

 

 

 

 

For the purposes of determining whether a material adverse effect has occurred with regard to us, any material adverse development with regard to the legal proceedings arising out of, or related to, the purported securities fraud class action lawsuit, the purported federal and state shareholder derivative action lawsuits and the purported Florida class action lawsuit alleging excessive premium finance charges and improper sales practices will be considered a change, event, violation, inaccuracy, circumstance or effect.

 

Under the terms of the merger agreement, we have agreed that none of our employees, officers or directors will solicit any inquiry with respect to the making of any acquisition proposal, participate in any discussions or take any other actions that would facilitate or encourage any inquiries or a third party to make an acquisition proposal, approve or recommend another acquisition proposal, withdraw or modify our recommendation that you vote in favor of the merger agreement, except as required by our board of directors’ fiduciary duties to our shareholders. Upon entering the merger agreement, we were required to cease all discussions or negotiations with any third parties with respect to any acquisition proposal.

 

If we receive an acquisition proposal or a request for nonpublic information or an inquiry that could reasonably be expected to lead to an acquisition proposal or from any person seeking to have discussion with us relating to a possible acquisition proposal, we must provide Parent with notice of such acquisition proposal and provide and update details of the acquisition proposal, including a copy of all written materials provided by the person that has made an acquisition proposal or inquiry.

 

Under certain circumstances we may provide nonpublic information to third parties making acquisition proposals and engage in negotiations with such persons, provided that we have complied with our obligations to not solicit acquisition proposals, entered into a confidentiality agreement with the third party, provided any information to Parent that is provided to the third party, and our board of directors determines in good faith, after consultation with our outside legal counsel, that the failure to provide such information or enter into such discussions or negotiations would result in a breach of our board of directors’ fiduciary duties to our shareholders.

Although our board of directors agreed to not withdraw or modify its recommendation that you vote in favor of the merger agreement, our board of directors may change its recommendation if we receive a superior offer and the following conditions are met:

 

 

If our board of directors changes its recommendation and Parent terminates the merger agreement, we must pay to Parent a termination fee of $13.0 million. See “The Merger Agreement — Termination Fees.”

 

The merger agreement may be terminated at any time prior to the effectiveness of the merger, whether before or after our shareholders have approved the merger agreement:

 

 

 

 

 

 

If the merger agreement is terminated, in some circumstances either Parent or Direct General must pay to the other party a termination fee of $13.0 million, which represents approximately 3% of the transaction equity value. The termination fee must be paid:

 

 

 

 

 

 

In the event that we hold the special meeting of our shareholders and our shareholders do not approve the merger agreement, we must pay Parent’s out-of-pocket expenses that it incurred while pursuing the transactions contemplated by the merger agreement in addition to the $13.0 million termination fee.

 

In no event other than for fraud in the inducement to enter into the merger agreement, regardless of whether we are entitled to seek injunctions or specific performance or if the merger agreement has been terminated, will we be entitled to monetary damages in excess of $13.0 million, including payment by Parent of the termination fee, if applicable, for all losses and damages arising from or in connection with breaches by Parent and Merger Sub of their obligations under the merger agreement or arising from any other claim or cause of action under the merger agreement.

 

Parent has agreed to provide or cause the surviving corporation, or its subsidiaries as the case may be, to provide to individuals that we employed immediately before the merger, for a one-year period commencing at the time of consummation of the merger, compensation and benefits that are in the aggregate not materially less favorable than those provided by us or our subsidiaries immediately prior to the effectiveness of the

merger. However, the merger agreement does not limit Parent or the surviving corporation’s, or their subsidiaries’, right to terminate the employment of any of our employees after consummation of the merger.

 

The parties may amend the merger agreement at any time, even after shareholder approval, by an action taken by each party’s board of directors. However, after we have obtained our shareholders’ approval of the merger, no amendment may be made that would require approval of our shareholders under law without such further shareholder approval.

 

At any time before the consummation of the merger, each of the parties to the merger agreement may, by written instrument authorized by such party’s board of directors:

 

 

OUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” THE PROPOSAL TO APPROVE THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE MERGER.

 

The following table sets forth information as of December 29, 2006 concerning the common stock of Direct General beneficially owned by (1) each person who is known to us to own beneficially more than 5% of our outstanding common stock, (2) each of our directors, (3) our chief executive officer and our four most highly compensated executive officers other than the chief executive officer , and (4) all officers and directors as a group. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. The number of shares beneficially owned includes shares of common stock that the named person has the right to acquire, through option exercise, within 60 days of December 29, 2006. Beneficial ownership calculations for 5% shareholders are based solely on publicly filed Schedule 13Ds or Schedule 13Gs that 5% shareholders are required to file with the Securities and Exchange Commission. The address of each of our directors and executive officers listed below is c/o Direct General Corporation, 1281 Murfreesboro Road, Nashville, Tennessee 37217.

 

 

 

 

 

The special meeting may be adjourned or postponed, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the merger agreement, as may be amended from time to time, and the transactions contemplated thereby. Any adjournment may be made without notice (if the adjournment is not for more than four months), other than by an announcement made at the special meeting of the time, date and place of the adjourned meeting. Regardless of whether a quorum exists, holders of a majority of the voting power of common stock present in person or represented by proxy at the special meeting and entitled to vote thereat may adjourn the special meeting. Any signed proxies received by us in which no voting instructions are provided on such matter will be voted “FOR” an adjournment or postponement of the special meeting, if necessary or appropriate, to solicit additional proxies. Any adjournment or postponement of the special meeting for the purpose of soliciting additional proxies will allow our shareholders who have already sent in their proxies to revoke them at any time prior to their use at the special meeting as adjourned or postponed.

 

OUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” THE ADJOURNMENT OF THE SPECIAL MEETING, IF NECESSARY OR APPROPRIATE, TO SOLICIT ADDITIONAL PROXIES.

 

As of the date of this proxy statement, our board of directors knows of no matters that will be presented for consideration at the special meeting other than as described in this proxy statement.

 

When considering a motion to adjourn or postpone the special meeting to another time and/or place (including, without limitation, for the purpose of soliciting additional proxies or allowing additional time for the satisfaction of conditions to the merger), the persons named in the enclosed form of proxy and acting by the authority in the proxy generally will have discretion to vote on adjournment or postponement using their best judgment. However, the persons named in the proxies will not use their discretionary authority to use proxies voting against the merger agreement to vote in favor of adjournment or postponement of the special meeting.

 

If the merger is consummated we will not have public shareholders, and there will be no public participation in any future meetings of shareholders. However, if the merger is not completed, we expect to hold a 2007 annual meeting of shareholders. Shareholders may present proposals for action at the 2007 annual meeting, if held, only if they comply with the requirements of the proxy rules established by the Securities and Exchange Commission and our bylaws. For a shareholder proposal to be presented at the 2007 annual meeting, if held, it must have been received by us at our principal executive offices not later than December 4, 2006, in order to be included in the proxy statement and proxy card for any such 2007 annual meeting.

 

We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission. You may read and copy any document we file at the Securities and Exchange Commission’s public reference room located at 100 F. Street, NE, Room 1580, Washington, D.C. 20549. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the public reference room. Our Securities and Exchange Commission filings are also available to the public at the Securities and Exchange Commission’s website at http://www.sec.gov. You also may obtain free copies of the documents that Direct General files with the Securities and Exchange Commission by clicking the “Investors” tab under the “Company Info” heading of our website at www.directgeneral.com which is provided as a textual reference only.

 

The Securities and Exchange Commission allows us to “incorporate by reference,” into this proxy statement documents we file with the Securities and Exchange Commission. This means that we can disclose important information to you by referring you to another document filed separately with the Securities and Exchange Commission. We incorporate by reference any documents that may be filed with the Securities and Exchange Commission between the date of this proxy statement and prior to the date of the special meeting of our shareholders. These include periodic reports, such as Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as proxy statements (except for information furnished to the Securities Exchange Commission that is not deemed to be “filed” for purposes of the Exchange Act). Information that we file later with the Securities Exchange Commission, prior to the closing of the merger, will automatically update and supersede the previously filed information and be incorporated by reference into this proxy statement.

Any person, including any beneficial owner, to whom this proxy statement is delivered, may request copies of such reports, proxy statements or other publicly available information concerning us, without charge, by written or telephonic request direct to:

 

Direct General Corporation
1281 Murfreesboro Road
Nashville, Tennessee 37217
Telephone: (615) 399-0600
Attention: Ronald F. Wilson

 

If you would like to request any such documents from us, please do so at least five business days before the date of the special meeting in order to receive timely delivery of those documents prior to the special meeting.

 

This proxy statement does not constitute the solicitation of a proxy in any jurisdiction to or from any person to whom or from whom it is unlawful to make such proxy solicitation in that jurisdiction. You should rely only on the information contained or incorporated by reference in this proxy statement to vote your shares at the special meeting. We have not authorized anyone to provide you with information that is different from what is contained in this proxy statement. This proxy statement is dated [ • ], 2007. You should not assume that the information contained in this proxy statement is accurate as of any date other than that date, and the mailing of this proxy statement to shareholders does not create any implication to the contrary.

 

ANNEX A

 

AGREEMENT AND PLAN OF MERGER

 

AGREEMENT AND PLAN OF MERGER
BY AND AMONG
ELARA HOLDINGS, INC.
ELARA MERGER CORPORATION
AND
DIRECT GENERAL CORPORATION
Dated as of December 4, 2006

 

TABLE OF CONTENTS

 

INDEX OF DEFINED TERMS