UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities and Exchange Act of 1934
For the Quarter Ended Commission File number
September 30, 1994 1-8233
USF&G CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 52-1220567
(State of incorporation) (IRS employer identification no.)
100 Light Street, Baltimore, Maryland 21202
(Address of principal executive offices and zip code)
(410) 547-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve (12) months, and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, Par Value $2.50; 89,531,268 shares outstanding as of
October 31, 1994.
Page 1 of 132
USF&G Corporation
Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Statement of Financial Position 3
Condensed Consolidated Statement of Operations 4
Condensed Consolidated Statement of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 8
Report of Independent Auditors 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 6. Exhibits and Reports on Form 8-K 27
Exhibit 10- Credit Agreement dated September 30, 1994 28
Exhibit 11- Computation of Earnings Per Share 129
Exhibit 12- Computation of Ratio of Consolidated Earnings
to Fixed Charges and Preferred Stock Dividends130
Exhibit 15- Letter Regarding Unaudited Interim Financial
Information 131
SIGNATURE 132
USF&G Corporation
Condensed Consolidated Statement of Financial Position
At September 30 At December 31
(dollars in millions) 1994 1993
Assets (Unaudited)
Investments:
Fixed maturities:
Held to maturity, at amortized cost
(market, 1994, $4,407; 1993, $4,796) $ 4,703 $ 4,661
Available for sale, at market (amortized
cost, 1994, $4,313; 1993, $4,681) 4,202 4,903
Common stocks, at market (cost, 1994, $86;
1993, $98) 77 87
Preferred stocks, at market (cost, 1994, $74;
1993, $48) 73 48
Short-term investments 252 322
Mortgage loans 348 302
Real estate 694 685
Other invested assets 342 369
Total investments 10,691 11,377
Cash 57 17
Accounts, notes, and other receivables 695 656
Reinsurance receivables 629 573
Servicing carrier receivables 661 719
Deferred policy acquisition costs 491 435
Other assets 617 558
Total assets $13,841 $14,335
Liabilities
Unpaid losses, loss expenses, and policy benefits $10,016 $10,302
Unearned premiums 952 917
Corporate debt 586 574
Real estate and other debt 41 44
Other liabilities 911 987
Total liabilities 12,506 12,824
Shareholders' Equity
Preferred stock, par value $50.00 (12,000,000
shares authorized; shares issued, 1994, 8,109,344;
1993, 9,099,910) 405 455
Common stock, par value $2.50 (240,000,000 shares
authorized; shares issued, 1994, 89,343,024;
1993, 85,009,482) 223 212
Paid-in capital 1,003 963
Net unrealized gains (losses) on investments (107) 190
Minimum pension liability (85) (85)
Retained earnings (deficit) (104) (224)
Total shareholders' equity 1,335 1,511
Total liabilities and shareholders' equity $13,841 $14,335
See Notes to Condensed Consolidated Financial Statements.
USF&G Corporation
Condensed Consolidated Statement of Operations (Unaudited)
Three Months Ended September 30
(dollars in millions except per share data) 1994 1993
Revenues
Premiums earned (net of premiums ceded,
1994, $115; 1993, $126) $ 615 $ 562
Net investment income 186 184
Other 10 9
Revenues before realized gains 811 755
Realized gains on investments - -
Total revenues 811 755
Expenses
Losses, loss expenses, and policy benefits
(net of losses ceded, 1994, $63; 1993, $5) 505 498
Underwriting, acquisition, and operating
expenses 259 229
Interest expense 10 10
Total expenses 774 737
Pretax income before cumulative effect of
adopting new accounting standards 37 18
Provision for income taxes (benefit) (37) (2)
Income before cumulative effect of adopting
new accounting standards 74 20
Income (loss) from cumulative effect of
adopting new accounting standards:
Income taxes - -
Postretirement benefits - -
Net income $ 74 $ 20
Preferred stock dividend requirements 12 12
Net income available to common stock $ 62 $ 8
Primary Earnings Per Common Share
Income before cumulative effect of adopting
new accounting standards $ .72 $ .10
Income (loss) from cumulative effect of
adopting new accounting standards:
Income taxes - -
Postretirement benefits - -
Net income $ .72 $ .10
Fully Diluted Earnings Per Common Share
Income before cumulative effect of adopting
new accounting standards $ .61 $ .10
Income (loss) from cumulative effect of
adopting new accounting standards:
Income taxes - -
Postretirement benefits - -
Net income $ .61 $ .10
Weighted average common shares outstanding
(000s):
Primary 85,598 84,898
Fully diluted 115,979 84,898
Dividends declared per common share $ .05 $ .05
See Notes to Condensed Consolidated Financial Statements.
USF&G Corporation
Condensed Consolidated Statement of Operations (Unaudited)
Nine Months Ended September 30
(dollars in millions except per share data)
1994 1993
Revenues
Premiums earned (net of premiums ceded,
1994, $359; 1993, $372) $ 1,774 $ 1,856
Net investment income 560 565
Other 28 28
Revenues before realized gains 2,362 2,449
Realized gains on investments 6 1
Total revenues 2,368 2,450
Expenses
Losses, loss expenses, and policy benefits
(net of losses ceded, 1994, $194;
1993, $79) 1,537 1,625
Underwriting, acquisition, and operating
expenses 706 728
Interest expense 26 31
Total expenses 2,269 2,384
Pretax income before cumulative effect of
adopting new accounting standards 99 66
Provision for income taxes (benefit) (71) (2)
Income before cumulative effect of
adopting new accounting standards 170 68
Income (loss) from cumulative effect of
adopting new accounting standards:
Income taxes - 90
Postretirement benefits - (52)
Net income $ 170 $ 106
Preferred stock dividend requirements 36 36
Net income available to common stock $ 134 $ 70
Primary Earnings Per Common Share
Income before cumulative effect of adopting
new accounting standards $ 1.56 $ .38
Income (loss) from cumulative effect of
adopting new accounting standards:
Income taxes - 1.06
Postretirement benefits - (.61)
Net income $ 1.56 $ .83
Fully Diluted Earnings Per Common Share
Income before cumulative effect of
adopting new accounting standards $ 1.41 $ .38
Income (loss) from cumulative effect of
adopting new accounting standards:
Income taxes - 1.06
Postretirement benefits - (.61)
Net income $ 1.41 $ .83
Weighted average common shares outstanding
(000s):
Primary 85,351 84,713
Fully diluted 114,175 84,713
Dividends declared per common share $ .15 $ .15
See Notes to Condensed Consolidated Financial Statements.
USF&G Corporation
Condensed Consolidated Statement of Cash Flows (Unaudited)
Three Months Ended September 30
(in millions) 1994 1993
Operating Activities
Net income $ 74 $ 20
Adjustments to reconcile net income to net
cash provided from (used in) operating
activities:
Cumulative effect of adopting new
accounting standards - -
Realized gains on investments - -
Change in insurance liabilities (22) (4)
Change in deferred policy acquisition costs (13) 5
Change in receivables 17 22
Change in other liabilities (1) (64)
Change in other assets (25) (27)
Other items, net 6 (1)
Net cash provided from (used in) operating
activities 36 (49)
Investing Activities
Net sales and maturities of short-term
investments 74 16
Purchases of fixed maturities held to
maturity (32) (20)
Sales of fixed maturities held to maturity 10 45
Maturities/repayments of fixed maturities
held to maturity 44 264
Purchases of fixed maturities available for
sale (90) (704)
Sales of fixed maturities available for sale 17 319
Repayments of fixed maturities available for
sale 82 94
Purchases of equities and other investments (49) (63)
Sales, maturities, or repayments of equities
and other investments 37 150
Purchases of property and equipment (10) (9)
Disposals of property and equipment - 1
Net cash provided from investing activities 83 93
Financing Activities
Deposits for universal life and investment
contracts 68 45
Withdrawals of universal life and investment
contracts (193) (64)
Net repayments of short-term debt - -
Long-term borrowings - -
Repayments of long-term borrowings - -
Issuances of common stock 7 2
Redemption of preferred stock (10) -
Cash dividends paid to shareholders (17) (16)
Net cash used in financing activities (145) (33)
Increase (decrease) in cash (26) 11
Cash at beginning of period 83 27
Cash at end of period $ 57 $ 38
See Notes to Condensed Consolidated Financial Statements.
USF&G Corporation
Condensed Consolidated Statement of Cash Flows (Unaudited)
Nine Months Ended September 30
(in millions)
1994 1993
Operating Activities
Net income $ 170 $ 106
Adjustments to reconcile net income to net
cash provided from operating activities:
Cumulative effect of adopting new
accounting standards - (38)
Realized gains on investments (6) (1)
Change in insurance liabilities 39 37
Change in deferred policy acquisition costs (56) 11
Change in receivables (51) 16
Change in other liabilities (78) (49)
Change in other assets (31) (57)
Other items, net 33 11
Net cash provided from operating
activities 20 36
Investing Activities
Net sales and maturities of short-term
investments 70 271
Purchases of fixed maturities held to
maturity (384) (1,581)
Sales of fixed maturities held to maturity 60 169
Maturities/repayments of fixed maturities
held to maturity 295 701
Purchases of fixed maturities available for
sale (206) (869)
Sales of fixed maturities available for sale 201 1,162
Repayments of fixed maturities available
for sale 369 216
Purchases of equities and other investments (302) (135)
Sales, maturities, or repayments of equities
and other investments 282 258
Purchases of property and equipment (24) (22)
Disposals of property and equipment 4 2
Net cash provided from investing activities 365 172
Financing Activities
Deposits for universal life and investment
contracts 174 115
Withdrawals of universal life and investment
contracts (459) (266)
Net repayments of short-term debt (160) -
Long-term borrowings 270 -
Repayments of long-term borrowings (121) -
Issuances of common stock 11 5
Redemption of preferred stock (10) -
Cash dividends paid to shareholders (50) (49)
Net cash used in financing activities (345) (195)
Increase in cash 40 13
Cash at beginning of period 17 25
Cash at end of period $ 57 $ 38
See Notes to Condensed Consolidated Financial Statements.
USF&G Corporation
Notes to Condensed Consolidated Financial Statements
1. BASIS OF ACCOUNTING
The condensed consolidated financial statements are prepared in accordance with
generally accepted accounting principles ("GAAP"). These statements include
the accounts of USF&G Corporation and its subsidiaries ("USF&G"). Intercompany
transactions are eliminated in consolidation. Certain 1993 amounts have been
reclassified to conform to the 1994 presentation. The interim financial
statements in this report should be read in conjunction with the consolidated
financial statements and notes thereto in USF&G's Annual Report to
Shareholders for the year ended December 31, 1993. In the opinion of
management, the accompanying unaudited condensed consolidated financial
statements contain the necessary adjustments, all of which are of a normal
recurring nature for interim period reporting purposes, for a fair presentation
of results for the interim periods.
2. REVIEW OF INDEPENDENT AUDITORS
USF&G's independent auditors, Ernst & Young LLP, have performed a review of the
condensed consolidated financial statements in this Form 10-Q as to the three
and nine month periods ended September 30, 1994 and 1993. Their limited
review in accordance with standards established by the American Institute of
Certified Public Accountants did not constitute an audit. Accordingly, they do
not express an opinion on this information.
3. EARNINGS PER COMMON SHARE
Primary earnings per common share are based on income, after deduction of
preferred stock dividends, and the weighted average number of common shares
outstanding during the periods. Common stock equivalents were not included as
they were insignificant. Fully diluted earnings per common share assume the
conversion of all securities whose contingent issuance would have a dilutive
effect on earnings. Refer to the computation in Exhibit 11.
4. RATIO OF CONSOLIDATED EARNINGS TO FIXED CHARGES
For purposes of computing the ratio of consolidated earnings to fixed charges
and preferred stock dividends, earnings consist of income before considering
income taxes, the cumulative effect of adopting new accounting standards, and
fixed charges. Fixed charges consist of interest, that portion of rentals that
is deemed to be an appropriate interest factor, and preferred stock dividend
requirements. Refer to the computation in Exhibit 12.
5. UNREALIZED GAINS (LOSSES) ON INVESTMENTS
At September 30, 1994, gross unrealized gains and gross unrealized losses
pertaining to equity securities totaled $3 million and $11 million,
respectively. In addition, gross unrealized gains and gross unrealized losses
on limited partnerships included in other investments totaled $4 million and
$2 million, respectively. At September 30, 1994, there were gross unrealized
gains of $2 million and gross unrealized losses of $112 million pertaining to
fixed maturities available for sale. There were also $10 million of gross
unrealized gains relating to a deferred policy acquisition cost ("DPAC")
adjustment. This DPAC adjustment was made to reflect assumptions about the
effect of potential asset sales of fixed maturities available for sale on
future DPAC amortization. The change in net unrealized gains (losses) on
investments amounted to a loss of $299 million during the nine months ended
September 30, 1994, compared with a gain of $26 million during the nine months
ended September 30, 1993.
6. PROCEEDS FROM SALES OF FIXED MATURITY INVESTMENTS
Proceeds on sales of fixed maturities held to maturity were $60 million for the
nine months ended September 30, 1994. Gross gains of less than $1 million and
gross losses of $1 million were realized on those sales. During the nine month
period ended September 30, 1993, proceeds from sales of fixed maturities held
to maturity were $169 million. Gross gains of $7 million and gross losses of
$5 million were realized on such sales in 1993. Proceeds from sales of fixed
maturities available for sale were $201 million for the nine months ended
September 30, 1994, compared with $1.2 billion for the same period in 1993.
Gross gains and gross losses of $2 million were realized on 1994 sales. Gross
gains of $64 million and gross losses of $2 million were realized on sales in
1993.
7. LEGAL CONTINGENCIES
7.1 General
USF&G's insurance subsidiaries are routinely engaged in litigation in the
normal course of their business, including defending claims for punitive
damages. As a liability insurer, they defend third-party claims brought
against their insureds. As an insurer, they defend themselves against coverage
claims. Additional information regarding contingencies that may arise from
insurance regulatory matters and regulatory litigation matters may be found in
the Regulation section of Management's Discussion and Analysis of Financial
Condition and Results of Operations.
In the opinion of management, such litigation and the litigation described
below is not expected to have a material adverse effect on USF&G's consolidated
financial position, although it is possible that the results of operations in a
particular quarter or annual period would be materially affected by an
unfavorable outcome.
7.2. North Carolina Workers Compensation Litigation
On November 24, 1993, N.C. Steel, Inc. and six other North Carolina employers
filed a class action in the General Court of Justice, Superior Court Division,
Wake County, North Carolina, against the National Council on Compensation
Insurance ("NCCI"), North Carolina Rate Bureau, USF&G and eleven other
insurance companies which served as servicing carriers for the North Carolina
involuntary workers compensation market. On January 20, 1994, the plaintiffs
filed an amended complaint seeking to certify a class of all employers who
purchased workers compensation insurance in the State of North Carolina after
November 24, 1989. The amended complaint, which is captioned N.C. Steel Inc.
et al., v. National Council on Compensation Insurance, et al., alleges that
the defendants conspired to suppress competition with respect to the North
Carolina voluntary and involuntary workers compensation business, thereby
artificially inflating the rates in such markets and the fees payable to the
insurers. The complaint also alleges that the carriers agreed to improperly
deny qualified companies from acting as servicing carriers, improperly
encourage agents to place employers in the assigned risk pool, and improperly
promote inefficient claims handling. USF&G has acted as a servicing carrier
in North Carolina since 1990. The plaintiffs are pursuing their claims under
various legal theories, including violations of the North Carolina antitrust
laws, unlawful conspiracy, breach of fiduciary duty, breach of implied
covenant of good faith and fair dealing, unfair competition, constructive
fraud, and unfair and deceptive trade practices. The plaintiffs seek
unspecified compensatory damages, punitive damages for the alleged constructive
fraud and treble damages under the North Carolina antitrust laws. USF&G
believes that it has meritorious defenses and has determined to defend the
action vigorously.
7.3. Texas Workers Compensation Litigation
On April 18, 1994, Mi-De-Pizza, Inc. and ten other Texas insureds filed an
amended class action in the District Court of Dallas County, Texas against the
NCCI and all insurance companies and certain insurance brokers that wrote
workers compensation insurance in Texas during the period 1987 to 1991. The
case, which was subsequently consolidated with another case to which USF&G was
not a party and is now captioned Weatherford Roofing Company, et al., v.
Employers National Insurance Company, et al., alleges that the defendants
utilized rates and forms that had the effect of charging premium rates in
excess of the rates approved by law. The plaintiffs are pursuing their claims
under various legal theories, including breach of contract, fraud, civil
conspiracy, violation of the Texas Insurance Code and the Texas Business and
Commerce Code. USF&G believes that it has meritorious defenses and has
determined to defend the action vigorously.
7.4. South Carolina Workers Compensation Litigation
On August 22, 1994, the Attorney General of the State of South Carolina filed
suit in the County of Greenville, South Carolina on behalf of South Carolina
employers that have allegedly been damaged as a result of alleged unfair and
deceptive trade practices. Specifically, the Attorney General alleges that
the NCCI, the National Workers' Compensation Reinsurance Pool, USF&G and seven
other insurance companies which served as servicing carriers for the South
Carolina involuntary workers compensation market, conspired to fix servicing
carrier fees at unreasonably high and noncompetitive levels in violation of the
South Carolina Uniform Trade Practices Act, allegedly causing inflated deficits
in the involuntary market and an excessive expansion of the residual market.
The Attorney General alleges that the conspiracy occurred for an unspecified
period of time prior to January 1994. The Attorney General has indicated that
he intends to pursue recovery on behalf of all South Carolina employers who
have suffered an ascertainable loss as a result of such alleged conduct, civil
penalties of $5,000 for each willful violation, and temporary and permanent
injunctive relief. USF&G believes that it has meritorious defenses and has
determined to defend the action vigorously.
7.5 Alabama Workers Compensation Litigation
On September 14, 1994, three Alabama employers filed a class action captioned
Four Way Plant Farm, Inc., et al., v. National Council on Compensation
Insurance, et al., in the Circuit Court of Bullock County, Alabama on behalf of
all Alabama employers that have allegedly been damaged as a result of an alleged
conspiracy by the NCCI, the National Workers' Compensation Reinsurance Pool,
USF&G and numerous other insurance companies which served as servicing carriers
for the Alabama involuntary workers compensation market, to fix servicing
carrier fees at unreasonably high and noncompetitive levels in violation of
Alabama law. The plaintiffs allege that the conspiracy occurred during the
period January 1, 1985 to January 1, 1994 and caused inflated deficits in the
involuntary market and an alleged excessive expansion of the workers
compensation residual market. The plaintiffs seek unspecified damages on
behalf of each member of the proposed class action. USF&G believes that it has
meritorious defenses and has determined to defend the action vigorously.
USF&G Corporation
Report of Independent Auditors
Board of Directors
USF&G Corporation
We have reviewed the accompanying condensed consolidated statement of financial
position of USF&G Corporation as of September 30, 1994, and the related
condensed consolidated statements of operations and cash flows for the three-
month and nine-month periods ended September 30, 1994 and 1993. These
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to financial data and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit conducted in accordance with generally accepted auditing standards,
which will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we
do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
referred to above for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated statement of financial position of USF&G
Corporation as of December 31, 1993, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year then ended (not
presented herein) and, in our report dated February 11, 1994, we expressed an
unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying condensed consolidated
statement of financial position as of December 31, 1993, is fairly stated in all
material respects in relation to the consolidated statement of financial
position from which it has been derived.
ERNST & YOUNG LLP
Baltimore, Maryland
November 10, 1994
USF&G Corporation
Management's Discussion and Analysis of Financial Condition and Results of
Operations
This section provides an assessment of financial results and material changes
in financial position for USF&G Corporation and its subsidiaries ("USF&G") and
explains the results of operations for the third quarter and nine month periods
ended September 30, 1994. The analysis focuses on the performance of USF&G's
business segments and its investment portfolio. This discussion updates the
"Management's Discussion and Analysis" in the 1993 Annual Report to Shareholders
and should be read in conjunction therewith. The results of operations for the
third quarter and nine months ended September 30, 1994, are compared with those
for the same period of 1993, unless otherwise noted. Financial position at
September 30, 1994, is compared with December 31, 1993. (Note: A glossary of
certain terms used in the discussion can be found at the end of this section.
The terms are capitalized the first time they appear in text.)
Index to Financial Information
1. Consolidated Results 11
2. Property/Casualty Insurance Operations 12
3. Life Insurance Operations 15
4. Parent and Noninsurance Operations 17
5. Investments 17
6. Financial Condition 21
7. Liquidity 21
8. Regulation 22
9. Glossary of Terms 26
1. CONSOLIDATED RESULTS
The table below shows the major components of net income.
Three Months Ended Nine Months Ended
September 30 September 30
(in millions) 1994 1993 1994 1993
Pretax income before realized gains
and cumulative effect of adopting
new accounting standards $ 37 $ 18 $ 93 $ 65
Realized gains on investments, net - - 6 1
Income tax (benefit) expense (37) (2) (71) (2)
Income (loss) from cumulative effect of
adopting new accounting standards:
Income taxes - - - 90
Postretirement benefits - - - (52)
Net income $ 74 $ 20 $ 170 $ 106
Net income for the third quarter and nine months ended September 30, 1994, was
favorably affected by continued improvement in property/casualty and life
insurance results as well as income tax benefits of $37 million and $71 million,
respectively. The income tax benefits were recognized as a result of reducing
the valuation allowance on net deferred tax assets related to Statement of
Financial Accounting Standards ("SFAS") No. 109. Management reviews the
valuation allowance on a quarterly basis. Based on the recent history of
quarterly profits, management believes it is more likely than not that the
company will generate sufficient future taxable income to utilize a larger
portion of the deferred tax asset. As of September 30, 1994, USF&G's tax-
effected net deferred tax asset (net of deferred tax liabilities) was $574
million. The net deferred tax asset is reduced by a valuation allowance of $377
million. The valuation allowance will be released as a component of income when
management's ongoing review of current evidence indicates that it is more likely
than not that the deferred tax asset will be utilized. Net income for the nine
month period ended September 30, 1993 included the initial impact of the
adoption of two new Statements of Financial Accounting Standards.
The table below shows the components of pretax income before realized gains and
cumulative effect of adopting new accounting standards by major business
segment.
Three Months Ended Nine Months Ended
September 30 September 30
(in millions) 1994 1993 1994 1993
Property/casualty insurance $ 54 $ 48 $ 140 $ 131
Life insurance 4 (4) 12 (4)
Parent and noninsurance (21) (26) (59) (62)
Pretax income before realized gains
and cumulative effect of adopting
new accounting standards $ 37 $ 18 $ 93 $ 65
Pretax income before accounting changes and realized gains and losses for the
property/casualty insurance segment increased $6 million and $9 million for the
quarter and nine months ended September 30, 1994, respectively, due primarily
to improved UNDERWRITING RESULTS. The life insurance segment's $8 million and
$16 million improvement for the quarter and nine month periods, respectively,
resulted mainly from the combined effects of higher product sales and improved
profit margins. The improvement in parent and noninsurance in the third
quarter of 1994 is primarily the result of dividend income from an investment in
an asset management company and improvements in other operating activities,
which were partially offset by losses incurred on long-term subleases.
2. PROPERTY/CASUALTY INSURANCE OPERATIONS
Property/casualty insurance operations, the principal business segment,
accounted for 84 percent of USF&G's revenues in the first three quarters of
1994 compared with 86 percent in the same period of 1993. Financial results for
this segment were as follows:
Three Months Ended Nine Months Ended
September 30 September 30
(in millions) 1994 1993 1994 1993
Premiums earned* $ 579 $ 535 $1,670 $1,777
Losses and loss expenses incurred (412) (403) (1,251) (1,351)
Underwriting expenses (209) (186) (574) (605)
Net underwriting loss (42) (54) (155) (179)
Net investment income 105 110 316 328
Other revenues and expenses, net (9) (8) (21) (18)
Pretax income before realized
gains and the cumulative effect
of adopting new accounting
standards $ 54 $ 48 $ 140 $ 131
*See Glossary of Terms
Improved underwriting results were the primary reason for the increase in
pretax income before realized gains and the cumulative effect of adopting new
accounting standards in the third quarter and first nine months of 1994 when
compared with the same periods of 1993. This improvement is attributed to
management's efforts over the last several years to improve the overall quality
of the book of business and to control expenses.
2.1. Premiums Earned
Premiums earned totaled $579 million and $1.7 billion for the third quarter and
first nine months of 1994, respectively, compared with $535 million and $1.8
billion for the same periods in 1993. The following tables show the major
components of premiums earned and PREMIUMS WRITTEN.
Premiums Earned Premiums Written
Three Months Ended Three Months Ended
September 30 September 30
(in millions) 1994 1993 1994 1993
Branch office voluntary production:
Direct $ 492 $ 490 $ 506 $ 486
Ceded reinsurance (36) (21) (33) (21)
Net branch office voluntary 456 469 473 465
Voluntary pools and associations 9 11 9 13
Involuntary pools and associations* 20 28 9 19
Other premium adjustments (2) - (7) -
Total primary* 483 508 484 497
Assumed reinsurance:
Finite risk 41 (13) 53 19
Traditional risk 55 40 67 55
Total assumed 96 27 120 74
Total $ 579 $ 535 $ 604 $ 571
*See Glossary of Terms
Premiums Earned Premiums Written
Nine Months Ended Nine Months Ended
September 30 September 30
(in millions) 1994 1993 1994 1993
Branch office voluntary production:
Direct $1,435 $1,461 $1,490 $1,461
Ceded reinsurance (109) (68) (121) (68)
Net branch office voluntary 1,326 1,393 1,369 1,393
Voluntary pools and associations 33 32 30 35
Involuntary pools and associations 56 122 45 99
Other premium adjustments (4) - (18) -
Total primary 1,411 1,547 1,426 1,527
Assumed reinsurance:
Finite risk 115 128 137 202
Traditional risk 144 102 160 120
Total assumed 259 230 297 322
Total $1,670 $1,777 $1,723 $1,849
Premiums earned for the quarter ended September 30, 1994, increased $44 million
compared with the same period in 1993. The increase is attributable to the
significant increase in assumed reinsurance earned premiums, which in the third
quarter of 1993 were reduced by the commutation of several large funded cover
assumed reinsurance contracts as ceding companies responded to accounting rule
changes under EITF 93-6. Premiums earned for the nine months ended September
30, 1994, decreased $107 million when compared to the same period of 1993. This
reduction is related in part to increased ceded reinsurance costs, as well as to
lower demand in the assumed finite risk reinsurance market. The most significant
factor is a decrease in premiums from involuntary pools and associations which
is due to reduced participation in such pools as a result of management actions
to reduce premium production in unprofitable markets and product lines.
Branch office direct voluntary premiums written in the third quarter and first
nine months of 1994 are 4% and 2% higher when compared with the corresponding
periods of 1993. Premiums from new business increased 11 percent in the third
quarter 1994 and 17% for the nine months ended September 30, 1994, and retention
ratios for both Commercial and Personal Lines improved when compared to the same
periods in 1993.
The tables below show premiums earned and the statutory LOSS RATIOS by lines of
property/casualty insurance.
Three Months Ended Three Months Ended
September 30, 1994 September 30, 1993
Premiums Statutory Premiums Statutory
(dollars in millions) Earned Loss Ratio Earned Loss Ratio
Commercial lines $306 76.7% $318 85.2%
Fidelity/Surety 35 37.6 35 43.8
Personal lines 142 68.9 155 66.8
Total primary 483 71.6 508 76.8
Assumed reinsurance 96 69.4 27 54.5
Total $579 71.2% $535 74.4%
Nine Months Ended Nine Months Ended
September 30, 1994 September 30, 1993
Premiums Statutory Premiums Statutory
(dollars in millions) Earned Loss Ratio Earned Loss Ratio
Commercial lines $ 891 77.3% $ 930 84.0%
Fidelity/Surety 93 33.3 89 48.0
Personal lines 427 80.7 528 73.2
Total primary 1,411 75.4 1,547 78.2
Assumed reinsurance 259 64.2 230 63.2
Total $1,670 73.7% $1,777 75.8%
The increase in the Personal Lines statutory loss ratio for the first nine
months of the year is primarily due to the high level of first quarter
catastrophes and other weather related losses not classified as CATASTROPHE
LOSSES. The Commercial Lines loss ratios were also negatively affected by
weather related losses; however, this was offset by improved core underwriting
performance and favorable results from reinsurance pools. The loss ratio for
assumed reinsurance increased in the third quarter of 1994 due primarily to
catastrophe losses incurred related to the February 1994 Los Angeles earthquake.
2.2. Underwriting Results
Underwriting results generally represent premiums earned less incurred losses,
loss adjustment expenses ("LAE"), and underwriting expenses. Property/casualty
insurance companies often have underwriting losses that are offset by
investment income.
Underwriting gains (losses) by major business category are as follows:
Three Months Ended Nine Months Ended
September 30 September 30
(in millions) 1994 1993 1994 1993
Commercial $(40) $ (59) $(122) $(170)
Fidelity/Surety - 2 10 (4)
Personal (13) (2) (73) (29)
Total primary (53) (59) (185) (203)
Assumed reinsurance 11 5 30 24
Net underwriting losses $(42) $ (54) $(155) $(179)
Voluntary pools $(30) $ (38) $(133) $(136)
Involuntary pools (12) (16) (22) (43)
Net underwriting losses $(42) $ (54) $(155) $(179)
Consolidated property/casualty GAAP and statutory underwriting ratios are as
follows:
Three Months Ended Nine Months Ended
September 30 September 30
1994 1993 1994 1993
GAAP underwriting ratios:
Loss ratio 71.3% 75.5% 74.9% 76.0%
Expense ratio* 35.9 34.6 34.4 34.1
Combined ratio 107.2 110.1 109.3 110.1
Statutory underwriting ratios:
Loss ratio 71.2 74.4 73.7 75.8
Expense ratio 35.4 34.2 35.2 34.0
Combined ratio 106.6 108.6 108.9 109.8
*See Glossary of Terms
Underwriting results improved by $12 million in the third quarter 1994 when
compared with the same period of 1993 despite higher catastrophe losses,
primarily due to improved Commercial Lines and assumed reinsurance results.
For the first nine months of 1994 over the same period 1993, Personal
Lines results were affected by higher reinsurance costs and higher than normal
first quarter weather related losses not designated as catastrophe losses. The
improved underwriting results from Commercial Lines for the first nine months
of 1994 was a result of the overall improvement in the quality and mix of
business and reduction of exposures to involuntary pools and associations.
Underwriting results in the third quarter and first nine months of 1994
included $15 million and $65 million, respectively, of net catastrophe losses
compared with $10 million and $64 million in the same periods of 1993. Gross
catastrophe losses were $21 million and $70 million in the third quarter and
first nine months of 1994, respectively, compared with $13 million and $75
million in the same periods of 1993. The catastrophe losses in the third
quarter of 1994 were primarily related to increasing reserves related to assumed
reinsurance business for the Los Angeles earthquake, which, along with severe
winter snow and ice storms in the first quarter of 1994, increased catastrophe
losses for the first nine months of 1994 compared to the same period of 1993.
Excluding catastrophe losses, the statutory loss ratio for the first nine months
of 1994 improved 2.5 points when compared with the same period of 1993.
Underwriting results showed improvement despite continuing competitive
pressures, the inflationary claims environment, and the adverse impact of
involuntary markets. Competitive pressures continue to effect underwriting
results, especially in the pricing of Commercial Lines products. Competitive
pressures include the historic cyclicality of the property/casualty insurance
industry pricing environment. These cycles have been evidenced by extended
periods of overcapacity that adversely affect premium rates, followed by periods
of undercapacity resulting in rising rates. The industry has experienced an
intense period of price competition since 1987, during which the industry
generally has been unable to charge rates sufficient to offset rising claim
costs. Some industry analysts are beginning to point to factors such as high
catastrophe and environmental losses, low interest rates, and reduced
reinsurance capacity as indications that the underwriting cycle has started to
improve. Other analysts believe, as the result of capital infusions and other
factors, that excess surplus capacity still exists in the industry and that
pricing pressure will continue. USF&G is unable to predict whether or when the
property/casualty insurance cycle will improve, but is continuing to manage long
term objectives that include continued underwriting improvements without
reliance on a significant cycle turn.
2.3. Losses Incurred And Loss Reserves
Losses and loss adjustment expenses incurred totaled $412 million and $1.2
billion for the three months and nine months ended September 30, 1994,
respectively. This compares with $403 million and $1.3 billion for the same
periods in 1993. The increase in the third quarter is attributable to higher
earned premium as well as to reinsured catastrophe losses related to the Los
Angeles earthquake and losses incurred in settlement of the New Jersey
involuntary pools, whereas the overall reductions in the first nine months of
1994 are a result of lower premium volume as well as actions taken by management
to better manage claims and claim costs and reduce exposures in undesirable
markets.
Reserves for unpaid losses and loss expenses totaled $6.1 billion at September
30, 1994, a decrease of $183 million from December 31, 1993, or only three
percent despite the six percent reduction in earned premiums for the first nine
months of 1994. Pending claims have been reduced by seven percent and new claims
have decreased nine percent since December 31, 1993.
USF&G categorizes environmental, product liability, other long term exposures
such as asbestos, and other types of exposures where multiple claims relate to a
similar cause of loss (excluding catastrophes) as "common circumstance claims."
USF&G does not believe it has material exposure to such claims because its
customer base generally consists of small and medium sized businesses and does
not include large manufacturing companies, which tend to incur most of the
known environmental and product liability exposure. Reserves for losses that
have been reported and certain legal expenses are established on the "case
basis." Common circumstance claims incurred but not reported ("IBNR") and
related adjustment expenses are included in the calculation of USF&G's bulk
reserves. Case reserves (exclusive of bulk reserves) outstanding for common
circumstance claims were $206 million at September 30, 1994 compared with $214
million at December 31, 1993. The primary reason for the decrease in the case
reserves relates to reinsurance recoverables and payments made during the
first nine months of 1994. Case reserves for these claims are approximately
three percent of the total reserves for unpaid losses and loss expense at both
September 30, 1994 and December 31, 1993.
The most significant common circumstance claim exposures include negligent
construction, environmental, and asbestos claims. Case reserves for these
exposures totaled $172 million or 83% of total common circumstance case
reserves at September 30, 1994. Other common circumstance claim categories stem
from a variety of situations such as lead paint, toxic fumes, breast implants,
sexual molestation and other disparate causes, provisions for which are included
in the total common circumstance case reserves. The table below sets forth
selected information for each of the three primary categories, net of ceded
reinsurance:
Negligent
(in millions) Construction Environmental Asbestos
Total case and
bulk reserves at
December 31, 1993 $74 $249 $125
Losses incurred (3) 58 12
Claims paid (6) (20) (20)
Total case and
bulk reserves at
September 30, 1994 $65 $287 $117
The level of loss reserves for both current and prior years' claims is
continually monitored and adjusted for changing economic, social, judicial, and
legislative conditions. Management believes that loss reserves are adequate,
but establishing appropriate reserves, particularly with respect to
environmental or other long term exposure claims which are the subject of
evolving legislative and judicial theories of liability, is highly judgmental
and an inherently uncertain process.
3. LIFE INSURANCE OPERATIONS
Life insurance operations ("F&G Life") represent 15 percent of USF&G's total
revenues for the first nine months of 1994 compared with 14 percent for the
same period of 1993. F&G Life's financial results were as follows:
Three Months Ended Nine Months Ended
September 30 September 30
(in millions) 1994 1993 1994 1993
Premiums $ 36 $ 27 $ 104 $ 79
Net investment income 77 78 241 240
Other income 2 - 2 1
Policy benefits (93) (95) (286) (274)
Underwriting and operating expenses (18) (14) (49) (50)
Pretax income before realized gains
and the cumulative effect of
adopting new accounting standards $ 4 $ (4) $ 12 $ (4)
Income for the quarter and nine months ended September 30, 1994 improved when
compared with the same periods of 1993 primarily as a result of continued
positive sales trends and improved profit margins. The increase in sales is
attributable to the new product initiatives and refocused distribution channels.
Profit margins improved during the first nine months of 1994 as current and
projected spreads between investment income and interest credited
to policyholders improved compared with 1993 levels. This resulted from lower
rates being credited to annuities where the guaranteed rate period has expired
and improved spread management on new and renewal business.
3.1. Sales
The following table shows life insurance and annuity sales (premiums and
deposits) by distribution system and product type.
Three Months Ended Nine Months Ended
September 30 September 30
(in millions) 1994 1993 1994 1993
Distribution System
Direct structured settlements $24 $14 $ 59 $ 39
Independent agencies/insurance
brokers 23 17 64 40
National wholesaler 22 12 50 21
Other 6 8 25 29
Total $75 $51 $198 $129
Product Type
Structured settlement annuities $24 $14 $ 59 $ 39
Single premium deferred annuities 21 12 54 22
Tax sheltered annuities 20 10 44 19
Other annuities 4 13 31 43
Life insurance 6 2 10 6
Total $75 $51 $198 $129
Sales in the third quarter and first nine months of 1994 continue to be
favorably affected by F&G Life's third quarter 1993 refocus on its marketing and
customer service operations. Variable cost distribution channels have replaced
high fixed cost marketing programs. New products introduced in the past year and
those scheduled to be introduced in the near future are designed to meet
the needs of the distributors and increase sales. Year-to-date sales, led by
single premium deferred annuities ("SPDAs"), tax sheltered annuities ("TSAs"),
and structured settlement annuities have increased 46 percent for the third
quarter and 53 percent for the first nine months over the same periods of 1993.
In its effort to continue the improvement in sales and profitability, F&G Life
intends to continue to concentrate on the expansion of its existing
distribution channels while also developing other marketing networks. F&G Life
is also continuing the development of selected market products and modifying
current product offerings to meet customer needs. There is no assurance,
however, that the improved sales trend will continue. Total life insurance in
force was $11.9 billion at September 30, 1994, compared with $12.1 billion at
December 31, 1993.
3.2. Policy Surrenders
Deferred annuities and universal life products are subject to surrender. Nearly
all of F&G Life's surrenderable annuity policies allow a refund of the cash
value balance less a surrender charge. The surrender charge varies by product.
Single premium deferred annuities, which represent 77 percent of surrenderable
business, have surrender charges that decline from six percent in the first
policy year to zero percent in the seventh and later policy years. Such
built-in surrender charges provide protection against premature policy
surrender.
Policy surrenders totaled $170 million and $388 million for the
quarter and nine months ended September 30, 1994, respectively. This compares
with $40 million and $135 million for the same periods of 1993. Surrender
activity has increased as a result of expiring surrender charges, especially on
SPDAs, as policyholders seek other investment alternatives.
Management has in place a conservation program that provides
policyholders with a competitive renewal option within F&G Life once their
surrender charge period has expired. Through September 30, 1994, approximately
30 percent of these eligible policyholders have elected this renewal option.
The total ACCOUNT VALUE of F&G Life's deferred annuities is $2.4 billion, with
only seven percent surrenderable at current account value (i.e., without
surrender charges). The surrender charge period on $1.9 billion of F&G Life's
single premium deferred annuity products expires through the end of 1997. The
surrender charge period on $203 million expires through the remainder of 1994.
The experience thus far for $494 million of SPDAs where the surrender charge
period expired in the fourth quarter of 1993 through the third quarter of 1994
indicates that on average, 50 percent of the expiring block may surrender;
however, in the future, a larger percentage may surrender should interest rates
continue their upward trend. This is likely to result in decreasing life
insurance assets, although, given the relatively high interest rates credited
when these annuities were issued, overall profit margins may continue to improve
as they surrender or rollover to new products. However, this potential
improvement in profit margin could be partially offset by acceleration of the
amortization of DPAC (see Deferred Policy Acquisition Cost section). F&G Life,
with a LIQUID ASSETS TO SURRENDER VALUE of surrenderable business of 122 percent
at September 30, 1994, continues to maintain a high degree of liquidity and has
the ability to meet surrender obligations for foreseeable future.
3.3. Deferred Policy Acquisition Costs
Costs to acquire and issue policies are generally deferred and amortized in
future periods in relationship to expected gross profits. The recoverability of
these amounts is regularly reviewed by management by the monitoring of surrender
experience, projected investment spreads and other criteria. During the nine
month period ended September 30, 1994, $19 million of current year expense has
been deferred compared with $7 million in the same period of 1993. The increase
in the deferral is due to the higher level of sales during the first nine
months of 1994 compared with the same period of 1993. Amortization of the
beginning DPAC balance was $15 million and $16 million in the first nine months
of 1994 and 1993, respectively. The rate of amortization in future periods would
be accelerated if surrender activity increases and/or product margins
permanently narrow.
4. PARENT AND NONINSURANCE OPERATIONS
Parent company interest and other unallocated expenses and net losses from
noninsurance operations were as follows:
Three Months Ended Nine Months Ended
September 30 September 30
(in millions) 1994 1993 1994 1993
Parent Company Expenses
Interest expense $ (9) $ (9) $(24) $(28)
Unallocated expense, net (16) (12) (37) (25)
Noninsurance Operations:
Management consulting - (1) - (2)
Other noninsurance investments 4 (4) 2 (7)
Pretax loss from operations
before realized gains $(21) $(26) $(59) $(62)
The results for the parent company and noninsurance operations for the third
quarter and first nine months of 1994 improved slightly from the same periods
of 1993. The improvement is primarily a result of $6 million of dividend
income from an investment in an asset management company as well as improvements
in management consulting operations and in certain real estate investments.
Unallocated expenses have increased due to a $9 million loss incurred on long-
term subleases. Interest expense in the third quarter of 1994 was relatively
consistent with the third quarter of 1993 after being comparatively lower in the
first half of the year, as a result of higher short-term interest rates and the
refinancing of a portion of USF&G's short-term credit facility with longer term
debt (see Financial Condition section).
5. INVESTMENTS
At September 30, 1994, USF&G's investment mix is comparable with year-end 1993.
Long-term fixed maturities comprise 83 percent of total investments at
September 30, 1994, compared with 84 percent at December 31, 1993. The table
below shows the distribution of USF&G's investment portfolio.
At September 30, 1994 At December 31, 1993
Total investments (in millions) $10,691 $11,377
Fixed maturities:
Held to maturity 44% 41%
Available for sale 39 43
Total fixed maturities 83 84
Common and preferred stocks 2 1
Short-term investments 3 3
Mortgage loans and real estate 9 9
Other invested assets 3 3
Total 100% 100%
5.1. Net Investment Income
The following table shows the components of net investment income.
Three Months Ended Nine Months Ended
September 30 September 30
(dollars in millions) 1994 1993 1994 1993
Net investment income from:
Fixed maturities $166 $179 $504 $546
Equity securities 11 7 18 9
Short-term investments 3 2 10 7
Real estate and mortgage loans 10 8 44 31
Other, less expenses (4) (12) (16) (28)
Total $186 $184 $560 $565
Average yields (annualized):
Total investments 7.0% 6.7% 6.9% 6.7%
Fixed maturities 7.4 7.6 7.3 7.7
Investment income from fixed maturities is lower for the first nine months of
1994 as compared with the same period of the prior year. This decline is a
result of reinvesting proceeds from sales and maturities of the fixed maturities
portfolio in a declining interest rate environment during 1993. The increase in
investment income from equity securities is due primarily to USF&G's share of
earnings from an investment in a reinsurance company and from recording
preferred dividends from an investment in an asset management company.
Real estate and mortgage loan investment income increased for the current year
as a result of the sale of the timberland investment, prepayment of a mortgage
loan and a new loan program whereby USF&G is investing a greater percentage of
capital into mortgage loans versus equity real estate. Other income less
expenses increased due to an adjustment to reduce the amount of interest expense
accrued on held ceded premiums not remitted to a reinsurance company.
5.2. Realized Gains (Losses)
The components of net realized gains (losses) include the following:
Three Months Ended Nine Months Ended
September 30 September 30
(in millions) 1994 1993 1994 1993
Net gains (losses) from sales:
Fixed maturities $ 1 $ 22 $ 4 $ 58
Equity securities - 7 - 4
Real estate and other - (5) 12 (5)
Total net gains 1 24 16 57
Provisions for impairment:
Fixed maturities - (5) (1) (10)
Equity securities - - - (8)
Real estate and other (1) (19) (9) (38)
Total provisions (1) (24) (10) (56)
Net realized gains $ - $ - $ 6 $ 1
The majority of the realized gains from real estate and other investments for
the first nine months of 1994 is the result of $6 million in gains from the sale
of timberland properties and USF&G's portion of realized gains from investments
in limited partnerships which amounted to $4 million. The $54 million reduction
in realized gains from fixed maturities in the first nine months of 1994 when
compared to the same period 1993 primarily relates to USF&G's 1993 repositioning
of a portion of its fixed maturity investments in its life insurance subsidiary.
To reflect impairments in the value of certain real estate and other
investments, USF&G made provisions for impairment of $9 million in 1994
compared with $38 million in 1993. Real estate provisions in 1994 primarily
related to specific properties whose recent appraisal values reflected other
than temporary impairments of the investments. Provisions for impairment on
equities and real estate were taken in 1993 relating to specific equity holdings
and properties which were subsequently sold.
5.3. Unrealized Gains (Losses)
The components of the changes in unrealized gains (losses) were as follows:
Three Months Ended Nine Months Ended
September 30 September 30
(in millions)
1994 1993 1994 1993
Fixed maturities available for sale $ (37) $ - $(334) $ -
Deferred policy acquisition
cost adjustment 6 - 40 -
Equity securities 2 (2) (1) 18
Other (3) - (4) 8
Total $ (32) $ (2) $(299) $26
USF&G adopted SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," in the fourth quarter of 1993. SFAS No. 115 requires the
portion of fixed maturity investments classified as "Available for Sale" to be
recorded at market value with the unrealized gains/losses reported as a
component of shareholders' equity. Prior to the adoption of SFAS No. 115,
fixed maturities were recorded at amortized cost with no effect on shareholders'
equity. An environment of rising interest rates during the first nine months of
1994 has resulted in a decrease in the unrealized gain on fixed maturities
available for sale from $222 million at December 31, 1993, to an unrealized
loss of $112 million at September 30, 1994. This was partially offset by a
related change in the DPAC adjustment from the prior year's unrealized loss of
$30 million to an unrealized gain of $10 million at September 30, 1994. This
adjustment is made to reflect assumptions about the effect of potential asset
sales of fixed maturities available for sale on future DPAC amortization. The
favorable change in unrealized gains in the first nine months of 1993 resulted
from appreciation in equities and the sale of a portion of foreign equities
that had an unrealized loss at year-end 1992.
5.4. Fixed Maturity Investments
The tables below detail the composition of the fixed maturity portfolio.
(dollars in millions) At September 30, 1994 At December 31, 1993
Corporate investment-grade bonds $5,069 56% $4,866 52%
Mortgage-backed securities 1,947 22 2,403 26
Asset-backed securities 1,033 11 1,149 12
U.S. Government bonds 278 3 308 3
High-yield bonds* 637 7 562 6
Tax-exempt bonds 45 1 48 1
Other 7 - 6 -
Total fixed maturities at
amortized cost $9,016 100% $9,342 100%
Total market value of fixed
maturities $8,609 $9,699
Net unrealized gains (losses) $ (407) $ 357
Percent market-to-amortized cost 95% 104%
*See Glossary of Terms
At September 30, 1994 At December 31, 1993
Net Net
Amortized Market Unrealized Amortized Market Unrealized
(in millions) Cost Value (Loss) Cost Value Gain
Fixed maturities:
Held to maturity $4,703 $4,407 $(296) $4,661 $4,796 $135
Available for sale 4,313 4,202 (111) 4,681 4,903 222
Total $9,016 $8,609 $(407) $9,342 $9,699 $357
Increasing interest rates, which resulted in declining bond prices, were
responsible for the nine percentage point decrease in the fixed maturity
portfolio's overall market-to-amortized cost ratio from December 31, 1993.
Investments in mortgage-backed securities declined 19 percent when compared with
holdings at December 31, 1993, due primarily to prepayments. While subject to
prepayment risk, credit risk related to USF&G's mortgage-backed securities
portfolio at September 30, 1994, is believed to be minimal as 99 percent of
such securities have AAA ratings or are collateralized by obligations of the
U.S. Government or its agencies. Asset-backed securities declined ten percent
since year-end 1993 as a result of sales and maturities. The proceeds from
sales, maturities, and prepayments are primarily being reinvested into corporate
investment-grade bonds. Debt obligations of the U.S. Government and its agencies
and other investment-grade bonds comprised 93 percent of the portfolio at
September 30, 1994 and 94 percent at December 31, 1993. The table below shows
the credit quality of the long-term fixed maturity portfolio as of
September 30, 1994.
Percent Market-
Amortized Market to-Amortized
(dollars in millions) Cost Percent Value Cost
U.S. Government and
U.S. Government Agencies $2,096 23% $2,013 96%
AAA 1,477 17 1,449 98
AA 1,308 15 1,200 92
A 2,472 27 2,354 95
BBB 1,026 11 975 95
Below BBB 637 7 618 97
Total $9,016 100% $8,609 95%
USF&G's holdings in high-yield bonds comprised seven percent of the total fixed
maturity portfolio at September 30, 1994 compared with six percent at December
31, 1993. Of the total high-yield bond portfolio, 72 percent is held by the
life insurance segment, representing 11 percent of F&G Life's total
investments.
The table below illustrates the credit quality of USF&G's high-yield bond
portfolio at September 30, 1994.
Percent Market-
Amortized Market to-Amortized
(dollars in millions) Cost Percent Value Cost
BB $394 62% $377 96%
B 245 38 236 96
CCC and lower 6 1 5 83
Valuation allowance (8) (1) - -
Total $637 100% $618 97%
The information on credit quality in the preceding two tables is based upon the
higher of the rating assigned to each issue of fixed-income maturities by
either Standard & Poor's or Moody's. Where neither Standard & Poor's nor
Moody's has assigned a rating to a particular fixed maturity issue,
classification is based on 1) ratings available from other recognized rating
services; 2) ratings assigned by the NAIC; or 3) an internal assessment of the
characteristics of the individual security, if no other rating is available.
At September 30, 1994, USF&G's five largest investments in high-yield bonds
totaled $91 million in amortized cost and had a market value of $81 million.
None of these investments individually exceeded $30 million. USF&G's largest
single high-yield bond exposure represented five percent of the high-yield
portfolio and .3 percent of the total fixed maturity portfolio.
5.5. Real Estate
The table below shows the components of USF&G's real estate portfolio:
(in millions) At September 30, 1994 At December 31, 1993
Mortgage loans $ 348 $ 302
Equity real estate 795 793
Reserves (101) (108)
Total $1,042 $ 987
The increase in mortgage loans reflects USF&G's strategy of maintaining a
generally consistent level of real estate assets while changing the mix to more
traditional mortgage loans and less real estate equity-type investments. This
strategy is designed to reduce risk and increase yields in the real estate
portfolio. The decrease in the reserves on real estate investments is related
to a decrease in the total of nonperforming real estate investments.
USF&G's real estate investment strategy emphasizes diversification by
geographic region and property type. The diversification of USF&G's mortgage
loan and real estate portfolio at September 30, 1994, is as follows:
Geographic Region Type of Property Development Stage
Pacific/Mountain 33% Office 35% Operating property 75%
Midwest 20 Land 25 Land Development 15
Southeast 18 Apartments 22 Land packaging 10
Mid-Atlantic 17 Retail/other 10
Southwest 8 Industrial 8
Northeast 4
Real estate investments are generally appraised at least once every three years.
Appraisals are obtained more frequently under certain circumstances such as
significant changes in property performance or market conditions. All of these
appraisals are performed by professionally certified appraisers.
At September 30, 1994, USF&G's five largest real estate investments had a book
value of $315 million. The largest single investment was a land development
located in San Diego, California with a book value of $92 million, or nine
percent of the total real estate portfolio.
Mortgage loans and real estate investments not performing in accordance with
contractual terms, or performing significantly below expectation, are
categorized as nonperforming. NONPERFORMING REAL ESTATE investments declined
eleven percent at September 30, 1994, when compared with December 31, 1993.
This decline in nonperforming real estate was a result of the combination of
the sale of a nonperforming real estate property, write-downs on other specific
properties, and the reclassifications to and from the nonperforming real estate
portfolio.
The book value of the components of nonperforming real estate are as follows:
(dollars in millions) At September 30, 1994 At December 31, 1993
Restructured loans and investments* $ - $ 4
Real estate held as in-substance
foreclosure* - 14
Real estate acquired through
foreclosure or deed-in-lieu of
foreclosure* 119 121
Land investments* 56 57
Nonperforming equity investments* 46 53
Total nonperforming real estate $221 $249
Real estate valuation allowance $101 $108
Reserves/nonperforming real estate 46% 43%
*See Glossary of Terms
Valuation allowances are established for impairments of mortgage loans and real
estate equity values based on periodic evaluations of the operating performance
of the properties and their exposure to declines in value. The allowance
totaled $101 million, or nine percent and $108 million, or ten percent of the
entire real estate portfolio at September 30, 1994 and December 31, 1993,
respectively. In light of USF&G's current plans with respect to the portfolio,
management believes the allowance at September 30, 1994 continues to adequately
reflect the current condition of the portfolio. Should deterioration occur in
the general real estate market or with respect to individual properties in the
future, additional reserves may be required. Prospectively, efforts will
continue to reduce risk and increase yields in the real estate portfolio by
selling equity real estate when it is advantageous to do so and reinvesting the
proceeds in medium-term mortgage loans.
6. FINANCIAL CONDITION
6.1. Assets
USF&G's assets totaled $13.8 billion at September 30, 1994, compared with $14.3
billion at December 31, 1993. The $494 million reduction is primarily due to a
$334 million reduction in the market value of the fixed maturity investments
classified as available for sale.
6.2. Debt
USF&G's debt totaled $627 million at September 30, 1994, compared with $618
million at December 31, 1993. The increase is mainly attributable to foreign
currency translation adjustments of $14 million from non-U.S. dollar denominated
debt. As a result of entering into offsetting currency swap agreements, there
was no effect on net income from translation of non-U.S. dollar denominated
debt. Real estate debt increased by $63 million as a result of the
restructuring of a real estate partnership where USF&G became a controlling
general partner. Shortly thereafter, $54 million of this partnership debt was
defeased reducing the amount that would otherwise have been consolidated as the
result of this restructuring to $9 million. This increase in real estate
debt was offset by $11 million as a result of a deed-in-lieu of
foreclosure whereby property that USF&G was in partnership with was conveyed
back to the lender. Also affecting the composition of USF&G's debt was $126
million of zero coupon convertible subordinated notes issued during the first
quarter with the proceeds used to redeem $119 million of higher interest
bearing medium and long-term notes. USF&G also issued $150 million 8 3/8%
Senior Notes due 2001 in the second quarter of 1994, the proceeds from which
were used to repay a portion of the short-term bank credit facility (see
Liquidity section).
6.3. Equity
USF&G's shareholders' equity totaled $1.3 billion at September 30, 1994,
compared with $1.5 billion at December 31, 1993. The decrease is primarily the
result of the $334 million decline in unrealized gain on fixed maturity
investments available for sale reduced by a $40 million change in the related
life insurance segment's DPAC adjustment. Net income of $170 million less
common and preferred dividends of $50 million partially offset the reduction in
equity.
6.4. Capital Strategy
Subject to capital market conditions, USF&G plans to refinance up to
approximately $200 million of debt over the next several years. In advance of
the expiration in March 1995 of the short term bank credit facility, a new $400
million three-year facility has been negotiated and replaced the prior facility
as of September 30, 1994. Portions of the $215 million balance outstanding
under this credit facility at September 30, 1994, may be refinanced over the
next year. On August 29, 1994, USF&G called for redemption 25% (950,000 shares)
of its series C preferred stock. This call, together with shares that were not
subject to the call but converted during the redemption period, resulted in the
conversion of 817,000 shares of series C preferred stock to common stock and the
redemption of 174,000 shares for redemption proceeds of $9,500,000, of which
$5,000,000 was funded through the sale of common stock to an unaffiliated
financial institution. An additional 1.4 million shares of series C preferred
stock have subsequently been called for redemption effective November 28, 1994.
As with the prior transaction, USF&G entered into an agreement with an
unaffiliated financial institution to place common stock to fund cash
redemptions, if necessary. Depending upon the market value of its common stock
and other factors, USF&G expects to continue to pursue strategies intended to
replace the balance of the series C preferred stock with common stock equity.
7. LIQUIDITY
Liquidity is a measure of an entity's ability to secure enough cash to meet its
contractual obligations and operating needs. USF&G requires cash primarily to
pay policyholders' claims and benefits, debt and dividend obligations, and
operating expenses. USF&G's sources of cash include cash flow from operations,
credit facilities, marketable securities, and sales of other assets.
Management believes that internal and external sources of cash will continue to
exceed USF&G's short-term and long-term needs. In January 1994, USF&G filed a
shelf registration statement with the Securities and Exchange Commission. As of
its effective date in February 1994, USF&G had $647 million in aggregate
unissued debt, preferred stock and common stock (and warrants to purchase debt
and equity securities) registered. These securities may be issued from time to
time, depending on market conditions. This shelf amount was reduced by $245
million from the zero coupon convertible subordinated notes issued in March 1994
and by $150 million from the 8 3/8% Senior Notes due 2001 issued in June 1994.
7.1. Cash Flow From Operations
USF&G had cash flow from operations of $36 million and $20 million for the
quarter and nine month period ended September 30, 1994, compared with negative
cash flow of $49 million and positive cash flow of $36 million for the same
periods in 1993. The improved cash flow in the third quarter of 1994 compared
with the same period in 1993 is due primarily to lower payments made on
reinsurance contracts in the property/casualty segment during 1994. The decline
in cash flow for the first nine months of 1994 generally resulted from a
reduction in premiums collected offset by a reduction in paid losses.
7.2. Credit Facilities
At September 30, 1994, USF&G maintained a $400 million committed credit
facility with a group of foreign and domestic banks. This represents the
renegotiation of a prior credit facility which was $700 million at December 31,
1993. Borrowings outstanding under the credit facility totaled $215 million at
September 30, 1994 and $375 million at December 31, 1993. The credit agreement
contains restrictive covenants, defined in the agreement, pertaining to
indebtedness and tangible net worth levels. USF&G was in compliance with these
covenants at September 30, 1994 and December 31, 1993.
7.3. Marketable Securities
USF&G's fixed-income, equity security, and short-term investment portfolios
are liquid and represent substantial sources of cash. The market value of its
fixed-income securities was $8.6 billion at September 30, 1994, which represents
95 percent of its amortized cost. At September 30, 1994, equity securities,
which are reported at market value on the balance sheet, totaled $150 million.
Short-term investments totaled $252 million.
7.4. Liquidity Restrictions
There are certain restrictions on payment of dividends by insurance
subsidiaries that may limit USF&G's ability to receive funds from its
subsidiaries. The Maryland Insurance Code requires the Maryland Insurance
Commissioner's prior approval for any dividend payments during a twelve month
period from a Maryland insurance subsidiary, such as USF&G Company, to its
holding company which exceeds 10 percent of policyholders' surplus as of the
prior calendar year end. In addition, notice of any other dividend must be
given to the Maryland Insurance Commissioner prior to payment, and the
Commissioner has the right to prevent payment of such dividend if it is
determined that such payment could impair the insurer's surplus or financial
condition. USF&G Company's policyholders' surplus at December 31, 1993, totaled
$1.5 billion. Dividends of approximately $154 million are available for payment
to USF&G from USF&G Company during 1994 without prior regulatory approval. Of
these available dividends, $78 million was paid during the nine months ended
September 30, 1994.
8. REGULATION
8.1. General
USF&G's insurance subsidiaries are subject to extensive regulatory oversight
in the jurisdictions where they do business. This regulatory structure, which
generally operates through state insurance departments, involves the licensing
of insurance companies and agents, limitations on the nature and amount of
certain investments, restrictions on the amount of single insured risks,
approval of policy forms and rates, setting of capital requirements, limitations
on dividends, limitations on the ability to withdraw from certain lines of
business such as Personal Lines and workers compensation, and other matters.
Recently, there has been increased scrutiny of the insurance regulatory
framework. A number of state legislatures have considered or enacted
legislation that alters and, in many cases, increases state authority to
regulate insurance companies. Proposals to adopt a federal regulatory framework
have also been discussed. It is not possible to predict the future impact of
increasing state or potential federal regulation on USF&G's operations.
8.2. Proposition 103
In November 1988, voters in the State of California passed Proposition 103,
which required insurers doing business in California to rollback most
property/casualty premium prices in effect between November 1988 and November
1989 to November 1987 levels, less an additional 20 percent discount, unless
an insurer could establish that such rate levels threatened its solvency. In
May 1989, the California Supreme Court ruled that an insurer does not have to
face insolvency in order to qualify for an exemption from the rollback
requirements and is entitled to a "fair and reasonable return."
The California Insurance Department's authority to establish regulations
setting forth a basis for determining what constitutes a "fair and reasonable
return" has been the subject of significant controversy; however, in August
1994, the California Supreme Court issued its opinion in 20th Century Insurance
Company v. Garamendi, affirming the California Insurance Department's authority
to establish a broad industry-wide formula for implementing Proposition 103.
The litigants in that case have indicated that they will seek review by the
United States Supreme Court.
It is not clear how the current regulations adopted by the California Insurance
Department will apply to USF&G, and there are many issues which remain
unsettled. The range of liability to USF&G could be from less than $10 million
up to approximately $31 million, including interest. The ultimate outcome of
this issue is not expected to have a material adverse effect on USF&G's results
of operations or financial position since any such liability is not expected to
materially exceed amounts reserved.
8.3. Maine "Fresh Start" Litigation
In 1987, the State of Maine adopted workers compensation reform legislation
which was intended to rectify historic rate inadequacies and encourage
insurance companies to reenter the Maine voluntary workers compensation market.
This legislation, which was popularly known as "Fresh Start", required the
Maine Superintendent of Insurance to annually determine whether the premiums
collected for policies written in the involuntary market and related investment
income were adequate on a policy-year basis. The Superintendent was required
to assess a surcharge on policies written in later policy years if it was
determined that rates were inadequate. Assessments were to be borne by workers
compensation policyholders, except that for policy years beginning in 1989 the
Superintendent could require insurance carriers to absorb up to 50 percent of
any deficits if the Superintendent found that insurance carriers failed to make
good faith efforts to expand the voluntary market and depopulate the residual
market. Insurance carriers which served as servicing carriers for the
involuntary market would be obligated to pay 90 percent of the insurance
industry's share. The Maine Fresh Start statute requires the Superintendent to
annually estimate each year's deficit for seven years before making a final
determination with respect to that year.
In March 1993, the Superintendent affirmed a prior Decision and Order (known as
the "1992 Fresh Start Order") in which he, among other things, found that there
were deficits for the 1988, 1989, and 1990 policy years, and that insurance
carriers had not made a good faith effort to expand the voluntary market and
consequently were required to bear 50 percent of any deficits relating to the
1989 and 1990 policy years. The Superintendent further found that a portion of
these deficits were attributable to servicing carrier inefficiencies and poor
investment practices and ordered that these costs be absorbed by insurance
carriers. Also, in May 1993 the Superintendent found that insurance carriers
would be liable for 50 percent of any deficits relating to the 1991 policy year
(the "1993 Fresh Start Order"), but indicated that he would make no further
determinations regarding the portions of any deficits attributable to alleged
servicing carrier inefficiencies and poor investment practices until his
authority to make such determinations was clarified in the various suits
involving prior Fresh Start orders.
USF&G was a servicing carrier for the Maine residual market in 1988, 1989,
1990, and 1991. USF&G withdrew from the Maine voluntary market and as a
servicing carrier effective December 31, 1991. USF&G joined in an appeal of the
1992 Fresh Start Order which was filed April 5, 1993, in the Maine Superior
Court. In addition to The Hartford Accident and Indemnity Company and USF&G,
the National Council of Compensation Insurance ("NCCI") and several other
insurance companies which were servicing carriers during this time frame have
instituted similar appeals. Similar appeals of the Superintendent's 1993 Fresh
Start Order have been filed by USF&G, the NCCI and several other servicing
carriers in the same court. The appeals of the 1993 Fresh Start Order will be
heard on a consolidated basis.
On October 17, 1994, the Superior Court of Maine upheld the Superintendent's
finding in the 1992 Fresh Start Order that the insurance carriers failed to
exercise their good faith best efforts to expand the voluntary market and
consequently were required to bear 50 percent of the deficit relating to the
1989 and 1990 policy years. The Superior Court also held that the
Superintendent improperly held that $40 million of the deficit should be
attributed to the carriers due to servicing carrier inefficiencies and prior
investment practices. USF&G and the other parties challenging the
Superintendent's order intend to appeal the Superior Court's ruling on the
carriers lack of good faith and the Superintendent may likewise appeal the
Superior Court ruling that it was improper to shift $40 million of the deficit
to carriers due to alleged inefficiencies and poor investment practices.
Estimates of the potential deficits vary widely and are continuously revised as
loss and claims data matures. If the Superintendent were to prevail on all
issues, then the range of liability for USF&G, based on the most recent
estimates provided by the Superintendent and the NCCI, respectively, could
range from approximately $12 million to approximately $21 million.
8.4. Involuntary Market Plans
Most states require insurers to provide coverage for less desirable risks
through participation in mandatory programs. USF&G's participation in assigned
risk pools and similar plans, mandated now or in the future, creates and is
expected to create downward pressure on earnings.
8.5. Withdrawal From Business Lines
Some states have adopted legislation or regulations restricting or otherwise
limiting an insurer's ability to withdraw from certain lines of business. Such
restrictions are most often found in Personal Lines and workers compensation
insurance and include prohibitions on mid-term cancellations and limiting
reasons based upon which an insurer may non-renew policies, requirements for
amendments to underwriting standards, rates, and policy forms to be approved by
state regulators, specifications of a maximum percentage of a book of business
which may be non-renewed within the state within any twelve month period and
prohibitions on exiting a single line of business within a state (thus
requiring an insurer to either continue an unprofitable line or give up all
lines of business and withdraw from a state entirely). Such restrictions limit
USF&G's ability to manage its exposure to unprofitable lines and adversely
affects earnings to the extent USF&G is required to continue writing
unprofitable business.
8.6. Guaranty Funds
Insurance guaranty fund laws have been adopted in most states to protect
policyholders in case of an insurer's insolvency. Insurers doing business in
those states can be assessed for certain obligations of insolvent companies to
policyholders and claimants. These assessments, under certain circumstances,
can be credited against future premium taxes. Net of such tax credits, USF&G
incurred $6 million of guaranty fund expense in the first nine months of 1994
and $9 million in the same period of 1993.
Financial difficulties of certain insurance companies over the past several
years are expected to result in additional assessments that would have a
negative impact on future earnings. State laws limit the amount of annual
assessments which are based on percentages (generally two percent) of
assessable annual premiums in the year of insolvency. The amount of these
assessments cannot be reasonably estimated and is not expected to have a
material adverse effect on USF&G's financial position.
8.7. NAIC Proposals
The National Association of Insurance Commissioners ("NAIC") has proposed
several model laws and regulations which are in varying stages of discussion.
The NAIC has adopted model regulations which establish minimum capitalization
requirements based on a "risk-based capital" formula. One version of this
model regulation is applicable for life insurers with respect to their
financial position as of December 31, 1993 and each calendar year thereafter. A
second version was adopted by the NAIC in December 1993 for implementation by
property/casualty insurers in 1995 with respect to their financial position as
of December 31, 1994, and each calendar year thereafter. The statutory "risk
adjusted" capital of USF&G Company and F&G Life as of December 31, 1993, were
such that no regulatory action would be required (assuming that the NAIC model
regulation applied to property/casualty insurers in 1993). The NAIC has also
proposed a Model Investment Law and amendments to the Model Holding Company
System Regulatory Act. These model acts address investments which are
permissible for property/casualty and life insurers to hold, and investments in
subsidiaries and affiliates, respectively. Adoption of these model laws is
targeted for 1995. It is not expected that the final adoption of these
regulations by the NAIC will result in any material adverse effect on USF&G's
liquidity or financial position.
8.8 National Health Care
President Clinton has presented a proposal to enact a comprehensive national
health care system. One component of this proposal would have coordinated the
medical payment system for workers compensation and the medical payments
component of automobile insurance within a reformed national health care
system. The Administration's bill also provides for a national commission to
study the possible merger of workers compensation and automobile medical
coverage into the reformed health care system. Although some form of national
health care may be enacted, it is unclear whether or to what extent such
legislation will address workers compensation or personal automobile insurance.
No reliable prediction can be made at this time as to the ultimate outcome of
the legislative deliberations regarding national health care reform or the
effect such legislation may have on USF&G.
8.9. Superfund
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), more commonly known as Superfund, is currently scheduled to be
reauthorized in 1995. Insurance companies, other businesses, environmental
groups and municipalities are advocating a variety of reform proposals to
revise the cleanup and liability provisions of CERCLA. No reliable prediction
can be made as to the ultimate outcome of the legislative deliberations
regarding the reauthorization of CERCLA or the effect such revisions may have
on USF&G.
8.10. Insurance Regulatory Information System
The NAIC's Insurance Regulatory Information System ("IRIS") ratios are
intended to assist state insurance departments in their review of the financial
condition of insurance companies operating within their respective states. IRIS
specifies eleven industry ratios and establishes a "usual range" for each
ratio. Significant departure from a number of ratios may lead to inquiries
from state insurance regulators. As of September 30, 1994, USF&G was within
the "usual range" for all IRIS ratios calculated on an interim year basis.
8.11. Taxation Of Deferred Annuities
From time to time various proposals have been considered by Congress, the
Office of Management and Budget, and the Department of the Treasury to include
within current taxable income all or a portion of the interest payments which
accrue on certain deferred annuity products, including some deferred annuity
products sold by F&G Life. Currently, such interest is not taxed until the time
of distribution. All such proposals have focused exclusively on deferred
annuities and have not included annuities issued in connection with structured
settlements of claims or on tax sheltered annuities. No reliable prediction can
be made at this time as to the outcome of any such proposals or the effect such
proposals may have on F&G Life.
8.12. Federal Antitrust Legislation
Congress has considered various proposals to revise the McCarran-Ferguson Act
of 1945. This act has historically provided the insurance industry with broad
antitrust exemptions. Various proposals have been made which would repeal many
of those exemptions, although "safe harbors" may be preserved for data
collection, loss development, common policy forms, residual market pooling
arrangements and other areas essential to the property/casualty insurance
industry. No reliable prediction can be made at this time as to the outcome of
any of these proposals or the effect they may have on USF&G.
9. GLOSSARY OF TERMS
Account value: Deferred annuity cash value available to policyholders before
the assessment of surrender charges.
Catastrophe losses: Property/casualty insurance claim losses resulting from a
sudden calamitous event, such as a severe storm, are categorized as
"catastrophes" when they meet certain severity and other criteria determined by
a national organization.
EITF: Emerging Issues Task Force of the Financial Accounting Standards Board.
Expense ratio: The ratio of underwriting expenses to net premiums written, if
determined in accordance with statutory accounting practices ("SAP"), or the
ratio of underwriting expenses (adjusted by deferred policy acquisition costs)
to earned premiums, if determined in accordance with GAAP.
GAAP: Generally Accepted Accounting Principles.
High-yield bonds: Fixed maturity investments with a credit rating below the
equivalent of Standard & Poor's "BBB". In addition, nonrated fixed maturities
that, in the judgment of USF&G, have credit characteristics similar to those
of a fixed maturity rated below BBB are considered high-yield bonds.
Involuntary business: Property/casualty insurance companies are required by
state laws to participate in a number of assigned risk pools, automobile
reinsurance facilities, and similar mandatory plans ("involuntary market
plans"). These plans generally require coverage of less desirable risks,
principally for workers compensation and automobile liability, that do not meet
the companies' normal underwriting standards. As mandated by legislative
authorities, insurers generally participate in such plans based upon their
shares of the total writings of certain classes of insurance.
Liquid assets to surrender value: GAAP liquid assets (publicly traded bonds,
stocks, cash, and short-term investments) divided by surrenderable policy
liabilities, net of surrender chargers. A measure of an insurance company's
ability to meet liquidity needs in case of policy surrenders.
Loss ratio: The ratio of incurred losses and loss adjustment expenses to
earned premiums, determined in accordance with SAP or GAAP, as applicable. The
difference between SAP and GAAP relates to deposit accounting for GAAP related
to financial reinsurance.
Nonperforming real estate: Mortgage loans and real estate investments that are
not performing in accordance with their contractual terms or that are
performing at an economic level significantly below expectations. Included in
the table of nonperforming real estate are the following terms:
Deed-in-lieu of foreclosure: Real estate to which title has been obtained
in satisfaction of a mortgage loan receivable in order to prevent
foreclosure proceedings.
In-substance foreclosure: Collateral for a mortgage loan is in-substance
foreclosed when the borrower has little or no equity in the collateral,
does not have the ability to repay the loan, and has effectively abandoned
control of the collateral to USF&G.
Land investments: Land investments that are held for future development
where, based on current market conditions, returns are projected to be
significantly below original expectations.
Nonperforming equity investments: Equity investments with cash and GAAP
return on book value less than five percent, but excluding land
investments.
Restructured loans and investments: Loans and investments whose terms have
been restructured as to interest rates, participation, and/or maturity date
such that returns are projected to be significantly below original
expectations.
Policyholders' surplus: The net assets of an insurer as reported to regulatory
agencies based on accounting practices prescribed or permitted by the National
Association of Insurance Commissioners and the state of domicile.
Premiums earned: The portion of premiums written applicable to the expired
period of policies, after the assumption and cession of reinsurance.
Premiums written: Premiums retained by an insurer, after the assumption and
cession of reinsurance.
Primary insurance: Branch office voluntary, voluntary pool and involuntary pool
experience, net of ceded reinsurance.
Underwriting results: Property/casualty pretax operating results excluding
investment results, policyholders' dividends, and noninsurance activities;
generally, premiums earned less losses and loss expenses incurred and
"underwriting" expenses incurred.
USF&G Corporation
Part II. Other Information
Item 1. Legal Proceedings
See Note 7.5 of the Notes to Condensed Consolidated Financial Statements and
section 8.3 in the Management's Discussion and Analysis of Financial Condition
and Results of Operations regarding the filing of a class action relating to
involuntary workers compensation insurance in Alabama and the Superior Court of
Maine's upholding of the 1992 Fresh Start Order.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit 10. Credit Agreement dated September 30, 1994.
Exhibit 11. Computation of Earnings per Share.
Exhibit 12. Computation of Ratio of Earnings to Fixed
Charges and Preferred Stock Dividends.
Exhibit 15. Letter Regarding Unaudited Interim Financial
Information.
(b) Reports on Form 8-K.
The registrant filed a Form 8-K on August 24, 1994, reporting under Item 5,
Other Events, certain information related to the California Supreme Court's
decision regarding the implementation of Proposition 103 adopted by the voters
of the State of California in November, 1988.
The registrant filed a Form 8-K on August 29, 1994, reporting under Item 5,
Other Events, certain information related to its call for redemption of 950,000
shares, or 25 percent, of its outstanding $5.00 Series C Cumulative Convertible
Preferred Stock.
The registrant filed a Form 8-K on October 28, 1994, reporting under Item 5,
Other Events, certain information related to its call for redemption of
approximately 1,400,000 shares, or 50 percent of its remaining outstanding
$5.00 Series C Cumulative Convertibles Preferred Stock.
USF&G Corporation
Exhibit 10 - Material Contracts
EXECUTION COPY
$400,000,000
CREDIT AGREEMENT
dated as of
September 30, 1994
among
USF&G Corporation
The Banks Listed Herein
and
Morgan Guaranty Trust Company of New York,
as Agent
TABLE OF CONTENTS
Page
ARTICLE I
DEFINITIONS
SECTION 1.01 Definitions. . . . . . . . . . . . . . . 1
SECTION 1.02 Accounting Terms and
Determinations . . . . . . . . . . . . . 14
SECTION 1.03 Types of Borrowings. . . . . . . . . . . 15
ARTICLE II
THE CREDITS
SECTION 2.01 Commitments to Lend. . . . . . . . . . . 15
SECTION 2.02 Notice of Committed Borrowing. . . . . . 15
SECTION 2.03 Money Market Borrowings. . . . . . . . . 16
SECTION 2.04 Notice to Banks; Funding of Loans. . . . 20
SECTION 2.05 Notes. . . . . . . . . . . . . . . . . . 21
SECTION 2.06 Maturity of Loans. . . . . . . . . . . . 22
SECTION 2.07 Interest Rates . . . . . . . . . . . . . 22
SECTION 2.08 Facility Fees. . . . . . . . . . . . . . 26
SECTION 2.09 Optional Termination or Reduction
of Commitments . . . . . . . . . . . . . 26
SECTION 2.10 Mandatory Termination of
Commitments. . . . . . . . . . . . . . . 27
SECTION 2.11 Optional Prepayments . . . . . . . . . . 27
SECTION 2.12 General Provisions as to Payments. . . . 27
SECTION 2.13 Funding Losses . . . . . . . . . . . . . 28
SECTION 2.14 Computation of Interest and Fees . . . . 28
ARTICLE III
CONDITIONS
SECTION 3.01 Closing. . . . . . . . . . . . . . . . . 29
SECTION 3.02 Borrowings . . . . . . . . . . . . . . . 29
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
SECTION 4.01 Corporate Existence and Power. . . . . . 30
SECTION 4.02 Corporate and Governmental
Authorization; No Contravention. . . . . 31
SECTION 4.03 Binding Effect . . . . . . . . . . . . . 31
SECTION 4.04 Financial Information. . . . . . . . . . 31
SECTION 4.05 Litigation . . . . . . . . . . . . . . . 32
SECTION 4.06 Compliance with ERISA. . . . . . . . . . 33
SECTION 4.07 Environmental Matters. . . . . . . . . . 33
SECTION 4.08 Taxes. . . . . . . . . . . . . . . . . . 33
SECTION 4.09 Subsidiaries . . . . . . . . . . . . . . 34
SECTION 4.10 Not an Investment Company. . . . . . . . 34
SECTION 4.11 Full Disclosure. . . . . . . . . . . . . 34
ARTICLE V
COVENANTS
SECTION 5.01 Information. . . . . . . . . . . . . . . 34
SECTION 5.02 Payment of Obligations . . . . . . . . . 37
SECTION 5.03 Maintenance of Property; Insurance . . . 37
SECTION 5.04 Conduct of Business and Maintenance
of Existence . . . . . . . . . . . . . . 38
SECTION 5.05 Compliance with Laws . . . . . . . . . . 38
SECTION 5.06 Negative Pledge. . . . . . . . . . . . . 38
SECTION 5.07 Consolidations, Mergers and Sales
of Assets; Ownership by USF&G
Corporation. . . . . . . . . . . . . . . 40
SECTION 5.08 Use of Proceeds. . . . . . . . . . . . . 40
SECTION 5.09 Ratio of Debt to Adjusted
Consolidated Tangible Net Worth. . . . . 40
SECTION 5.10 Minimum Consolidated Tangible Net
Worth. . . . . . . . . . . . . . . . . . 40
SECTION 5.11 Transactions with Affiliates . . . . . . 41
ARTICLE VI
DEFAULTS
SECTION 6.01 Events of Default. . . . . . . . . . . . 41
SECTION 6.02 Notice of Default. . . . . . . . . . . . 44
ARTICLE VII
THE AGENT
SECTION 7.01 Appointment and Authorization. . . . . . 44
SECTION 7.02 Agent and Affiliates . . . . . . . . . . 44
SECTION 7.03 Action by Agent. . . . . . . . . . . . . 44
SECTION 7.04 Consultation with Experts. . . . . . . . 45
SECTION 7.05 Liability of Agent . . . . . . . . . . . 45
SECTION 7.06 Indemnification. . . . . . . . . . . . . 45
SECTION 7.07 Credit Decision. . . . . . . . . . . . . 45
SECTION 7.08 Successor Agent. . . . . . . . . . . . . 46
SECTION 7.09 Agent's Fee. . . . . . . . . . . . . . . 46
ARTICLE VIII
CHANGE IN CIRCUMSTANCES
SECTION 8.01 Basis for Determining Interest Rate
Inadequate or Unfair . . . . . . . . . . 46
SECTION 8.02 Illegality . . . . . . . . . . . . . . . 47
SECTION 8.03 Increased Cost and Reduced Return. . . . 48
SECTION 8.04 Taxes. . . . . . . . . . . . . . . . . . 50
SECTION 8.05 Base Rate Loans Substituted for
Affected Fixed Rate Loans. . . . . . . . 52
ARTICLE IX
MISCELLANEOUS
SECTION 9.01 Notices. . . . . . . . . . . . . . . . . 52
SECTION 9.02 No Waivers . . . . . . . . . . . . . . . 53
SECTION 9.03 Expenses; Indemnification. . . . . . . . 53
SECTION 9.04 Sharing of Set-Offs. . . . . . . . . . . 54
SECTION 9.05 Amendments and Waivers . . . . . . . . . 54
SECTION 9.06 Successors and Assigns . . . . . . . . . 55
SECTION 9.07 Collateral . . . . . . . . . . . . . . . 57
SECTION 9.08 Governing Law; Submission to
Jurisdiction . . . . . . . . . . . . . . 57
SECTION 9.09 Counterparts; Integration;
Effectiveness. . . . . . . . . . . . . . 57
SECTION 9.10 WAIVER OF JURY TRIAL . . . . . . . . . . 57
SECTION 9.11 Existing Agreement . . . . . . . . . . . 57
Pricing Schedule
Schedule I
Exhibit A - Note
Exhibit B - Money Market Quote Request
Exhibit C - Invitation for Money Market Quotes
Exhibit D - Money Market Quote
Exhibit E - Opinion of the General Counsel of the Borrower
Exhibit F - Opinion of Counsel to the Borrower
Exhibit G - Opinion of Special Counsel for the
Agent
Exhibit H - Assignment and Assumption Agreement
CREDIT AGREEMENT
AGREEMENT dated as of September 30, 1994 among
USF&G CORPORATION, the BANKS listed on the signature pages
hereof and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as
Agent.
The parties hereto agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01. Definitions. The following terms,
as used herein, have the following meanings:
"Absolute Rate Auction" means a solicitation of
Money Market Quotes setting forth Money Market Absolute
Rates pursuant to Section 2.03.
"Adjusted CD Rate" has the meaning set forth in
Section 2.07(b).
"Adjusted Consolidated Tangible Net Worth" means
at any date the consolidated stockholders' equity of the
Borrower and its Consolidated Subsidiaries (1) plus any
unrealized holding losses (or less any unrealized holding
gains, net of relevant adjustments for deferred policy
acquisition costs) on account of available-for-sale debt
securities to the extent reflected therein (together with
other adjustments, all as determined in accordance with
Statement of Financial Accounting Standards No. 115 of the
Financial Accounting Standards Board, as amended from time
to time, or any successor provision thereto) and (2) less
their consolidated Intangible Assets, all determined as of
such date. For purposes of this definition "Intangible
Assets" means the amount (to the extent reflected in
determining such consolidated stockholders' equity) of (i)
all write-ups (other than write-ups resulting from foreign
currency translations, write-ups of assets of a going
concern business made within twelve months after the
acquisition of such business and changes made in accordance
with generally accepted accounting principles in the book
value of any Investments in Persons other than the Borrower
and its Consolidated Subsidiaries) subsequent to December
31, 1993 in the book value of any asset owned by the
Borrower or a Consolidated Subsidiary and (ii) all
unamortized debt discount and expense, unamortized deferred
charges, goodwill, patents, trademarks, service marks, trade
names, copyrights, organization or developmental expenses
and other intangible assets (other than deferred policy
acquisition costs and net deferred tax assets).
"Adjusted London Interbank Offered Rate" has the
meaning set forth in Section 2.07(c).
"Administrative Questionnaire" means, with respect
to each Bank, an administrative questionnaire in the form
prepared by the Agent and submitted to the Agent (with a
copy to the Borrower) duly completed by such Bank.
"Affiliate" means (i) any Person that directly, or
indirectly through one or more intermediaries, controls the
Borrower (a "Controlling Person") or (ii) any Person (other
than the Borrower or a Subsidiary) which is controlled by or
is under common control with a Controlling Person. As used
herein, the term "control" means possession, directly or
indirectly, of the power to direct or cause the direction of
the management or policies of a Person, whether through the
ownership of voting securities, by contract or otherwise.
"Agent" means Morgan Guaranty Trust Company of New
York in its capacity as agent for the Banks hereunder, and
its successors in such capacity.
"Applicable Lending Office" means, with respect to
any Bank, (i) in the case of its Domestic Loans, its
Domestic Lending Office, (ii) in the case of its Euro-Dollar
Loans, its Euro-Dollar Lending Office and (iii) in the case
of its Money Market Loans, its Money Market Lending Office.
"Assessment Rate" has the meaning set forth in
Section 2.07(b).
"Assignee" has the meaning set forth in Section
9.06(c).
"Bank" means each bank listed on the signature
pages hereof, each Assignee which becomes a Bank pursuant to
Section 9.06(c), and their respective successors.
"Base Rate" means, for any day, a rate per annum
equal to the higher of (i) the Prime Rate for such day and
(ii) the sum of 1/2 of 1% plus the Federal Funds Rate for
such day.
"Base Rate Loan" means a Committed Loan to be made
by a Bank as a Base Rate Loan in accordance with the
applicable Notice of Committed Borrowing or pursuant to
Article VIII.
"Benefit Arrangement" means at any time an
employee benefit plan within the meaning of Section 3(3) of
ERISA which is not a Plan or a Multiemployer Plan and which
is maintained or otherwise contributed to by any member of
the ERISA Group.
"Borrower" means USF&G Corporation, a Maryland
corporation, and its successors.
"Borrower's 1993 Form 10-K" means the Borrower's
annual report on Form 10-K for 1993, as filed with the
Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934.
"Borrower's Latest Form 10-Q" means the Borrower's
quarterly report on Form 10-Q for the quarter ended June 30,
1994, as filed with the Securities and Exchange Commission
pursuant to the Securities Exchange Act of 1934.
"Borrowing" has the meaning set forth in Section
1.03.
"CD Base Rate" has the meaning set forth in
Section 2.07(b).
"CD Loan" means a Committed Loan to be made by a
Bank as a CD Loan in accordance with the applicable Notice
of Committed Borrowing.
"CD Margin" has the meaning set forth in Section
2.07(b).
"CD Reference Banks" means The Bank of New York,
Deutsche Bank AG and Morgan Guaranty Trust Company of New
York.
"Closing Date" means the date on or after the
Effective Date on which the Agent shall have received the
documents specified in or pursuant to Section 3.01.
"Commitment" means, with respect to each Bank, the
amount set forth opposite the name of such Bank on the
signature pages hereof, as such amount may be reduced from
time to time pursuant to Sections 2.09 and 2.10.
"Committed Loan" means a loan made by a Bank
pursuant to Section 2.01.
"Consolidated Subsidiary" means at any date any
Subsidiary or other entity the accounts of which would be
consolidated with those of the Borrower in its consolidated
financial statements if such statements were prepared as of
such date.
"Debt" of any Person means at any date, without
duplication, (i) all obligations of such Person for borrowed
money, (ii) all obligations of such Person evidenced by
bonds, debentures, notes or other similar instruments, (iii)
all obligations of such Person to pay the deferred purchase
price of property or services, except trade accounts
payable, agents' commissions and other similar charges and
expenses arising in the ordinary course of business, (iv)
all obligations of such Person as lessee which are
capitalized in accordance with generally accepted accounting
principles, (v) all non-contingent obligations (and, for
purposes of Section 5.06 and the definitions of Material
Debt and Material Financial Obligations, all contingent
obligations) of such Person to reimburse any bank or other
Person in respect of amounts paid under a letter of credit
or similar instrument, (vi) all Debt secured by a Lien on
any asset of such Person, whether or not such Debt is
otherwise an obligation of such Person (but excluding any
such Debt to the extent such Debt exceeds the fair market
value of such assets (such fair market value to be
established by the Borrower to the reasonable satisfaction
of the Required Banks), unless such Debt is assumed), (vii)
all obligations of such Person to purchase securities (or
other property) which arise out of or in connection with the
sale of the same or substantially similar securities or
property and (viii) all Debt of others Guaranteed by such
Person, provided that obligations of any Person referred to
only in clauses (i) through (iii), inclusive, above shall
constitute Debt of such Person only to the extent that they
are, or are required to be, recorded on the financial
statements of such Person as a liability under generally
accepted accounting principles.
"Default" means any condition or event which
constitutes an Event of Default or which with the giving of
notice or lapse of time or both would, unless cured or
waived, become an Event of Default.
"Derivatives Obligations" of any Person means all
obligations (other than obligations incurred as a result of
writing futures, options, swaps or other derivative
transactions in respect of, or based upon, insurance
products or risks, including the futures and options
contracts relating to catastrophic losses traded on the
Chicago Board of Trade or otherwise) of such Person in
respect of any rate swap transaction, basis swap, forward
rate transaction, commodity swap, commodity option, equity
or equity index swap, equity or equity index option, bond
option, interest rate option, foreign exchange transaction,
cap transaction, floor transaction, collar transaction,
currency swap transaction, cross-currency rate swap
transaction, currency option or any other similar
transaction (including any option with respect to any of the
foregoing transactions) or any combination of the foregoing
transactions.
"Domestic Business Day" means any day except a
Saturday, Sunday or other day on which commercial banks in
New York City are authorized by law to close.
"Domestic Lending Office" means, as to each Bank,
its office located at its address set forth in its
Administrative Questionnaire (or identified in its
Administrative Questionnaire as its Domestic Lending Office)
or such other office as such Bank may hereafter designate as
its Domestic Lending Office by notice to the Borrower and
the Agent; provided that any Bank may so designate separate
Domestic Lending Offices for its Base Rate Loans, on the one
hand, and its CD Loans, on the other hand, in which case all
references herein to the Domestic Lending Office of such
Bank shall be deemed to refer to either or both of such
offices, as the context may require.
"Domestic Loans" means CD Loans or Base Rate
Loans or both.
"Domestic Reserve Percentage" has the meaning set
forth in Section 2.07(b).
"Effective Date" means the date this Agreement
becomes effective in accordance with Section 9.09.
"Environmental Laws" means any and all federal,
state, local and foreign statutes, laws, judicial decisions,
regulations, ordinances, rules, judgments, orders, decrees,
plans, injunctions, permits, concessions, grants,
franchises, licenses, agreements and other governmental
restrictions relating to the environment, the effect of the
environment on human health or to emissions, discharges or
releases of pollutants, contaminants, Hazardous Substances
or wastes into the environment including, without
limitation, ambient air, surface water, ground water, or
land, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport
or handling of pollutants, contaminants, Hazardous
Substances or wastes or the clean-up or other remediation
thereof.
"ERISA" means the Employee Retirement Income
Security Act of 1974, as amended, or any successor statute.
"ERISA Group" means the Borrower, any Subsidiary
and all members of a controlled group of corporations and
all trades or businesses (whether or not incorporated) under
common control which, together with the Borrower or any
Subsidiary, are treated as a single employer under Section
414 of the Internal Revenue Code.
"Euro-Dollar Business Day" means any Domestic
Business Day on which commercial banks are open for
international business (including dealings in dollar
deposits) in London.
"Euro-Dollar Lending Office" means, as to
each Bank, its office, branch or affiliate located at
its address set forth in its Administrative Questionnaire
(or identified in its Administrative Questionnaire as its
Euro-Dollar Lending Office) or such other office, branch or
affiliate of such Bank as it may hereafter designate as its
Euro-Dollar Lending Office by notice to the Borrower and the
Agent.
"Euro-Dollar Loan" means a Committed Loan to be
made by a Bank as a Euro-Dollar Loan in accordance with the
applicable Notice of Committed Borrowing.
"Euro-Dollar Margin" has the meaning set forth in
Section 2.07(c).
"Euro-Dollar Reference Banks" means the principal
London offices of The Bank of New York, Deutsche Bank AG and
Morgan Guaranty Trust Company of New York.
"Euro-Dollar Reserve Percentage" has the meaning
set forth in Section 2.07(c).
"Event of Default" has the meaning set forth in
Section 6.01.
"Excluded Subsidiary" means any Subsidiary other
than any (i) Insurance Company Subsidiary and (ii)
"Significant Subsidiary", as defined in Section 210.1-02(v)
of Regulation S-X, as amended from time to time, promulgated
by the Securities and Exchange Commission (17 C.F.R. Section
210.1-02(v)).
"Existing Agreement" means the Credit Agreement
dated as of March 20, 1990 among USF&G Corporation, the
banking institutions listed in Annex I thereto, Morgan
Guaranty Trust Company of New York and Swiss Bank
Corporation, New York Branch, as Co-arrangers, and Swiss
Bank Corporation, New York Branch, as Facility Agent, as
amended.
"Federal Funds Rate" means, for any day, the rate
per annum (rounded upward, if necessary, to the nearest
1/100th of 1%) equal to the weighted average of the rates on
overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers on
such day, as published by the Federal Reserve Bank of New
York on the Domestic Business Day next succeeding such day,
provided that (i) if such day is not a Domestic Business
Day, the Federal Funds Rate for such day shall be such rate
on such transactions on the next preceding Domestic Business
Day as so published on the next succeeding Domestic Business
Day, and (ii) if no such rate is so published on such next
succeeding Domestic Business Day, the Federal Funds Rate for
such day shall be the average rate quoted to Morgan Guaranty
Trust Company of New York on such day on such transactions
as determined by the Agent.
"Fixed Rate Loans" means CD Loans or Euro-Dollar
Loans or Money Market Loans (excluding Money Market LIBOR
Loans bearing interest at the Base Rate pursuant to Section
8.01(a)) or any combination of the foregoing.
"Guarantee" by any Person means any obligation,
contingent or otherwise, of such Person directly or
indirectly guaranteeing any Debt or other obligation of any
other Person and, without limiting the generality of the
foregoing, any obligation, direct or indirect, contingent or
otherwise, of such Person (i) to purchase or pay (or advance
or supply funds for the purchase or payment of) such Debt or
other obligation (whether arising by virtue of partnership
arrangements, by agreement to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to
maintain financial statement conditions or otherwise) or
(ii) entered into for the purpose of assuring in any other
manner the obligee of such Debt or other obligation of the
payment thereof or to protect such obligee against loss in
respect thereof (in whole or in part), provided that the
term Guarantee shall not include (i) endorsements for
collection or deposit in the ordinary course of business or
(ii) if such Person is an insurance company, surety bonds
and insurance contracts (including financial guarantee
insurance policies) in each case issued in the ordinary
course of such Person's business. The term "Guarantee" used
as a verb has a corresponding meaning.
"Hazardous Substances" means any toxic,
radioactive, caustic or otherwise hazardous substance,
including petroleum, its derivatives, by-products and other
hydrocarbons, or any substance having any constituent
elements displaying any of the foregoing characteristics.
"Indemnitee" has the meaning set forth in Section
9.03(b).
"Insurance Company Subsidiary" means any
Subsidiary domiciled in the United States of America
(including the District of Columbia) and its territories and
possessions or any State thereof and licensed or authorized
to do an insurance business in any of the foregoing.
"Interest Period" means: (1) with respect to each
Euro-Dollar Borrowing, the period commencing on the date of
such Borrowing and ending one, two, three or six months
thereafter, as the Borrower may elect in the applicable
Notice of Borrowing; provided that:
(a) any Interest Period which would otherwise end
on a day which is not a Euro-Dollar Business Day shall
be extended to the next succeeding Euro-Dollar Business
Day unless such Euro-Dollar Business Day falls in
another calendar month, in which case such Interest
Period shall end on the next preceding Euro-Dollar
Business Day;
(b) any Interest Period which begins on the last
Euro-Dollar Business Day of a calendar month (or on a
day for which there is no numerically corresponding day
in the calendar month at the end of such Interest
Period) shall, subject to clause (c) below, end on the
last Euro-Dollar Business Day of a calendar month; and
(c) any Interest Period which would otherwise end
after the Termination Date shall end on the Termination
Date.
(2) with respect to each CD Borrowing, the period
commencing on the date of such Borrowing and ending 30, 60,
90 or 180 days thereafter, as the Borrower may elect in the
applicable Notice of Borrowing; provided that:
(a) any Interest Period (other than an Interest
Period determined pursuant to clause (b) below) which
would otherwise end on a day which is not a Euro-Dollar
Business Day shall be extended to the next succeeding
Euro-Dollar Business Day;
(b) any Interest Period which would otherwise end
after the Termination Date shall end on the Termination
Date.
(3) with respect to each Base Rate Borrowing, the period
commencing on the date of such Borrowing and ending 30 days
thereafter; provided that:
(a) any Interest Period (other than an Interest
Period determined pursuant to clause (b) below) which
would otherwise end on a day which is not a Euro-Dollar
Business Day shall be extended to the next succeeding
Euro-Dollar Business Day; and
(b) any Interest Period which would otherwise end
after the Termination Date shall end on the Termination
Date.
(4) with respect to each Money Market LIBOR Borrowing, the
period commencing on the date of such Borrowing and ending
such whole number of months thereafter as the Borrower may
elect in accordance with Section 2.03; provided that:
(a) any Interest Period which would otherwise end
on a day which is not a Euro-Dollar Business Day shall
be extended to the next succeeding Euro-Dollar Business
Day unless such Euro-Dollar Business Day falls in
another calendar month, in which case such Interest
Period shall end on the next preceding Euro-Dollar
Business Day;
(b) any Interest Period which begins on the last
Euro-Dollar Business Day of a calendar month (or on a
day for which there is no numerically corresponding day
in the calendar month at the end of such Interest
Period) shall, subject to clause (c) below, end on the
last Euro-Dollar Business Day of a calendar month; and
(c) any Interest Period which would otherwise end
after the Termination Date shall end on the Termination
Date.
(5) with respect to each Money Market Absolute Rate
Borrowing, the period commencing on the date of such
Borrowing and ending such number of days thereafter (but not
less than seven days) as the Borrower may elect in
accordance with Section 2.03; provided that:
(a) any Interest Period which would otherwise end
on a day which is not a Euro-Dollar Business Day shall
be extended to the next succeeding Euro-Dollar Business
Day; and
(b) any Interest Period which would otherwise end
after the Termination Date shall end on the Termination
Date.
"Internal Revenue Code" means the Internal Revenue
Code of 1986, as amended, or any successor statute.
"Investment" means any investment in any Person,
whether by means of share purchase, capital contribution,
loan, time deposit or otherwise.
"LIBOR Auction" means a solicitation of Money
Market Quotes setting forth Money Market Margins based on
the London Interbank Offered Rate pursuant to Section 2.03.
"Lien" means, with respect to any asset, any
mortgage, lien, pledge, charge, security interest or
encumbrance of any kind, or any other type of preferential
arrangement that has the practical effect of creating a
security interest, in respect of such asset. For the
purposes of this Agreement, the Borrower or any Subsidiary
shall be deemed to own subject to a Lien any asset which it
has acquired or holds subject to the interest of a vendor or
lessor under any conditional sale agreement, capital lease
or other title retention agreement relating to such asset.
"Loan" means a Domestic Loan or a Euro-Dollar Loan
or a Money Market Loan and "Loans" means Domestic Loans or
Euro-Dollar Loans or Money Market Loans or any combination
of the foregoing.
"London Interbank Offered Rate" has the meaning
set forth in Section 2.07(c).
"Material Adverse Effect" means a material adverse
effect on the business, financial position, results of
operations or prospects of the Borrower and its Consolidated
Subsidiaries, considered as a whole.
"Material Debt" means Debt (other than the Notes)
of the Borrower and/or one or more of its Subsidiaries
(other than an Excluded Subsidiary), arising in one or more
related or unrelated transactions, in an aggregate principal
or face amount exceeding $30,000,000.
"Material Financial Obligations" means a principal
or face amount of Debt and/or the then-owed payment
obligations in respect of Derivatives Obligations of the
Borrower and/or one or more of its Subsidiaries (other than
an Excluded Subsidiary), arising in one or more related or
unrelated transactions, exceeding in the aggregate
$30,000,000.
"Material Plan" means at any time a Plan or Plans
having aggregate Unfunded Liabilities in excess of
$5,000,000.
"Money Market Absolute Rate" has the meaning set
forth in Section 2.03(d).
"Money Market Absolute Rate Loan" means a loan to
be made by a Bank pursuant to an Absolute Rate Auction.
"Money Market Lending Office" means, as to each
Bank, its Domestic Lending Office or such other office,
branch or affiliate of such Bank as it may hereafter
designate as its Money Market Lending Office by notice to
the Borrower and the Agent; provided that any Bank may from
time to time by notice to the Borrower and the Agent
designate separate Money Market Lending Offices for its
Money Market LIBOR Loans, on the one hand, and its Money
Market Absolute Rate Loans, on the other hand, in which case
all references herein to the Money Market Lending Office of
such Bank shall be deemed to refer to either or both of such
offices, as the context may require.
"Money Market LIBOR Loan" means a loan to be made
by a Bank pursuant to a LIBOR Auction (including such a loan
bearing interest at the Base Rate pursuant to Section
8.01(a)).
"Money Market Loan" means a Money Market LIBOR
Loan or a Money Market Absolute Rate Loan.
"Money Market Margin" has the meaning set forth in
Section 2.03(d).
"Money Market Quote" means an offer by a Bank to
make a Money Market Loan in accordance with Section 2.03.
"Multiemployer Plan" means at any time an employee
pension benefit plan within the meaning of Section
4001(a)(3) of ERISA to which any member of the ERISA Group
is then making or accruing an obligation to make
contributions or has within the preceding five plan years
made contributions, including for these purposes any Person
which ceased to be a member of the ERISA Group during such
five year period.
"Non-Recourse Debt" means Debt, secured only by
real property (including fixtures and personal property used
therein or thereon and the rents, profits and proceeds
arising therefrom), in respect of which the holder of such
Debt has no recourse against the Borrower or any Subsidiary
(other than a Subsidiary the only assets of which consist of
such real property (including fixtures and personal property
used therein or thereon and the rents, profits and proceeds
therefrom) or any asset of the Borrower or any Subsidiary
(except such real property (including fixtures and personal
property used therein or thereon and the rents, profits and
proceeds arising therefrom)), provided that if, at any time,
the aggregate amount of gross equity real estate Investments
of the Borrower and its Subsidiaries shall exceed
$826,657,000, the amount of such excess shall constitute
Debt other than Non-Recourse Debt to the extent that the
then existing aggregate principal amount of Non-Recourse
Debt shall exceed the sum of (i) $100,000,000 and (ii) the
amount of such Non-Recourse Debt, but not to exceed
$50,000,000, outstanding as of the date hereof.
"Notes" means promissory notes of the Borrower,
substantially in the form of Exhibit A hereto, evidencing
the obligation of the Borrower to repay the Loans, and
"Note" means any one of such promissory notes issued
hereunder.
"Notice of Borrowing" means a Notice of Committed
Borrowing (as defined in Section 2.02) or a Notice of Money
Market Borrowing (as defined in Section 2.03(f)).
"Officer's Certificate" means a certificate signed
by the President, any Vice-President responsible for
financial matters, the Treasurer or the Controller of the
Borrower.
"Parent" means, with respect to any Bank, any
Person controlling such Bank.
"Participant" has the meaning set forth in Section
9.06(b).
"PBGC" means the Pension Benefit Guaranty
Corporation or any entity succeeding to any or all of its
functions under ERISA.
"Person" means an individual, a corporation, a
partnership, an association, a trust or any other entity or
organization, including a government or political
subdivision or an agency or instrumentality thereof.
"Plan" means at any time an employee pension
benefit plan (other than a Multiemployer Plan) which is
covered by Title IV of ERISA or subject to the minimum
funding standards under Section 412 of the Internal Revenue
Code and either (i) is maintained, or contributed to, by any
member of the ERISA Group for employees of any member of the
ERISA Group or (ii) has at any time within the preceding
five years been maintained, or contributed to, by any Person
which was at such time a member of the ERISA Group for
employees of any Person which was at such time a member of
the ERISA Group.
"Pricing Schedule" means the Schedule attached
hereto identified as such.
"Prime Rate" means the rate of interest publicly
announced by Morgan Guaranty Trust Company of New York in
New York City from time to time as its Prime Rate.
"Reference Banks" means the CD Reference Banks or
the Euro-Dollar Reference Banks, as the context may require,
and "Reference Bank" means any one of such Reference Banks.
"Refunding Borrowing" means a Committed Borrowing
which, after application of the proceeds thereof, results in
no net increase in the outstanding principal amount of
Committed Loans made by any Bank.
"Regulation U" means Regulation U of the Board of
Governors of the Federal Reserve System, as in effect from
time to time.
"Required Banks" means at any time Banks having at
least 60% of the aggregate amount of the Commitments or, if
the Commitments shall have been terminated, holding Notes
evidencing at least 60% of the aggregate unpaid principal
amount of the Loans.
"Revolving Credit Period" means the period from
and including the Effective Date to and including the
Termination Date.
"Subsidiary" means, as to any Person, any
corporation or other entity of which securities or other
ownership interests having ordinary voting power to elect a
majority of the board of directors or other persons
performing similar functions are at the time directly or
indirectly owned by such Person; unless otherwise specified,
"Subsidiary" means a Subsidiary of the Borrower.
"Termination Date" means September 30, 1997 or, if
such day is not a Euro-Dollar Business Day, the next
preceding Euro-Dollar Business Day.
"Unfunded Liabilities" means, with respect to any
Plan at any time, the amount (if any) by which (i) the value
of all benefit liabilities under such Plan, determined on a
plan termination basis using the assumptions prescribed by
the PBGC for purposes of Section 4044 of ERISA, exceeds (ii)
the fair market value of all Plan assets allocable to such
liabilities under Title IV of ERISA (excluding any accrued
but unpaid contributions), all determined as of the then
most recent valuation date for such Plan, but only to the
extent that such excess represents a potential liability of
a member of the ERISA Group to the PBGC or any other Person
under Title IV of ERISA.
"United States" means the United States of
America, including the States and the District of Columbia,
but excluding its territories and possessions.
SECTION 1.02. Accounting Terms and
Determinations. Unless otherwise specified herein, all
accounting terms used herein shall be interpreted, all
accounting determinations hereunder shall be made, and all
financial statements required to be delivered hereunder
shall be prepared in accordance with generally accepted
accounting principles as in effect from time to time,
applied on a basis consistent (except for changes concurred
in by the Borrower's independent public accountants) with
the most recent audited consolidated financial statements of
the Borrower and its Consolidated Subsidiaries delivered to
the Banks; provided that, if the Borrower notifies the Agent
that the Borrower wishes to amend any covenant in Article V
to eliminate the effect of any change in generally accepted
accounting principles on the operation of such covenant (or
if the Agent notifies the Borrower that the Required Banks
wish to amend Article V for such purpose), then the
Borrower's compliance with such covenant shall be determined
on the basis of generally accepted accounting principles in
effect immediately before the relevant change in generally
accepted accounting principles became effective, until
either such notice is withdrawn or such covenant is amended
in a manner satisfactory to the Borrower and the Required
Banks.
SECTION 1.03. Types of Borrowings. The term
"Borrowing" denotes the aggregation of Loans of one or more
Banks to be made to the Borrower pursuant to Article II on a
single date and for a single Interest Period. Borrowings
are classified for purposes of this Agreement either by
reference to the pricing of Loans comprising such Borrowing
(e.g., a "Euro-Dollar Borrowing" is a Borrowing comprised of
Euro-Dollar Loans) or by reference to the provisions of
Article II under which participation therein is determined
(i.e., a "Committed Borrowing" is a Borrowing under Section
2.01 in which all Banks participate in proportion to their
Commitments, while a "Money Market Borrowing" is a Borrowing
under Section 2.03 in which the Bank participants are
determined on the basis of their bids in accordance
therewith).
ARTICLE II
THE CREDITS
SECTION 2.01. Commitments to Lend. During the
Revolving Credit Period, each Bank severally agrees, on the
terms and conditions set forth in this Agreement, to make
loans to the Borrower pursuant to this Section from time to
time in amounts such that the aggregate principal amount of
Committed Loans by such Bank at any one time outstanding
shall not exceed the amount of its Commitment. Each
Borrowing under this Section 2.01 shall be in an aggregate
principal amount of $10,000,000 or any larger multiple of
$5,000,000 (except that any such Borrowing may be in the
aggregate amount available in accordance with Section
3.02(c)) and shall be made from the several Banks ratably in
proportion to their respective Commitments. Within the
foregoing limits, the Borrower may borrow under this Section
2.01, repay, or to the extent permitted by Section 2.11,
prepay Loans and reborrow at any time during the Revolving
Credit Period under this Section 2.01.
SECTION 2.02. Notice of Committed Borrowing. The
Borrower shall give the Agent notice (a "Notice of Committed
Borrowing") not later than 10:30 A.M. (New York City time)
on (x) the date of each Base Rate Borrowing, (y) the second
Domestic Business Day before each CD Borrowing and (z) the
third Euro-Dollar Business Day before each Euro-Dollar
Borrowing, specifying:
(a) the date of such Borrowing, which shall be a
Domestic Business Day in the case of a Domestic
Borrowing or a Euro-Dollar Business Day in the case of
a Euro-Dollar Borrowing,
(b) the aggregate amount of such Borrowing,
(c) whether the Loans comprising such Borrowing
are to be CD Loans, Base Rate Loans or Euro-Dollar
Loans, and
(d) in the case of a Fixed Rate Borrowing, the
duration of the Interest Period applicable thereto,
subject to the provisions of the definition of Interest
Period.
SECTION 2.03. Money Market Borrowings.
(a) The Money Market Option. In addition to
Committed Borrowings pursuant to Section 2.01, the Borrower
may, as set forth in this Section, request the Banks during
the Revolving Credit Period to make offers to make Money
Market Loans to the Borrower. The Banks may, but shall have
no obligation to, make such offers and the Borrower may, but
shall have no obligation to, accept any such offers in the
manner set forth in this Section.
(b) Money Market Quote Request. When the
Borrower wishes to request offers to make Money Market Loans
under this Section, it shall transmit to the Agent by telex
or facsimile transmission a Money Market Quote Request
substantially in the form of Exhibit B hereto so as to be
received no later than 10:30 A.M. (New York City time) on
(x) the fifth Euro-Dollar Business Day prior to the date of
Borrowing proposed therein, in the case of a LIBOR Auction
or (y) the Domestic Business Day next preceding the date of
Borrowing proposed therein, in the case of an Absolute Rate
Auction (or, in either case, such other time or date as the
Borrower and the Agent shall have mutually agreed and shall
have notified to the Banks not later than the date of the
Money Market Quote Request for the first LIBOR Auction or
Absolute Rate Auction for which such change is to be
effective) specifying:
(i) the proposed date of Borrowing, which shall
be a Euro-Dollar Business Day in the case of a LIBOR
Auction or a Domestic Business Day in the case of an
Absolute Rate Auction,
(ii) the aggregate amount of such Borrowing, which
shall be $10,000,000 or a larger multiple of
$5,000,000,
(iii) the duration of the Interest Period
applicable thereto, subject to the provisions of the
definition of Interest Period, and
(iv) whether the Money Market Quotes requested are
to set forth a Money Market Margin or a Money Market
Absolute Rate.
The Borrower may request offers to make Money Market Loans
for more than one Interest Period in a single Money Market
Quote Request. No Money Market Quote Request shall be given
within five Euro-Dollar Business Days (or such other number
of days as the Borrower and the Agent may agree) of any
other Money Market Quote Request.
(c) Invitation for Money Market Quotes. Promptly
upon receipt of a Money Market Quote Request, the Agent
shall send to the Banks by telex or facsimile transmission
an Invitation for Money Market Quotes substantially in the
form of Exhibit C hereto, which shall constitute an
invitation by the Borrower to each Bank to submit Money
Market Quotes offering to make the Money Market Loans to
which such Money Market Quote Request relates in accordance
with this Section.
(d) Submission and Contents of Money Market
Quotes. (i) Each Bank may submit a Money Market Quote
containing an offer or offers to make Money Market Loans in
response to any Invitation for Money Market Quotes. Each
Money Market Quote must comply with the requirements of this
subsection (d) and must be submitted to the Agent by telex
or facsimile transmission at its offices specified in or
pursuant to Section 9.01 not later than (x) 2:00 P.M. (New
York City time) on the fourth Euro-Dollar Business Day prior
to the proposed date of Borrowing, in the case of a LIBOR
Auction or (y) 9:30 A.M. (New York City time) on the
proposed date of Borrowing, in the case of an Absolute Rate
Auction (or, in either case, such other time or date as the
Borrower and the Agent shall have mutually agreed and shall
have notified to the Banks not later than the date of the
Money Market Quote Request for the first LIBOR Auction or
Absolute Rate Auction for which such change is to be
effective); provided that Money Market Quotes submitted by
the Agent (or any affiliate of the Agent) in the capacity of
a Bank may be submitted, and may only be submitted, if the
Agent or such affiliate notifies the Borrower of the terms
of the offer or offers contained therein not later than (x)
one hour prior to the deadline for the other Banks, in the
case of a LIBOR Auction or (y) 15 minutes prior to the
deadline for the other Banks, in the case of an Absolute
Rate Auction. Subject to Articles III and VI, any Money
Market Quote so made shall be irrevocable except with the
written consent of the Agent given on the instructions of
the Borrower.
(ii) Each Money Market Quote shall be in
substantially the form of Exhibit D hereto and shall in any
case specify:
(A) the proposed date of Borrowing,
(B) the principal amount of the Money Market Loan
for which each such offer is being made, which
principal amount (w) may be greater than or less than
the Commitment of the quoting Bank, (x) must be
$5,000,000 or a larger multiple of $1,000,000, (y) may
not exceed the principal amount of Money Market Loans
for which offers were requested and (z) may be subject
to an aggregate limitation as to the principal amount
of Money Market Loans for which offers being made by
such quoting Bank may be accepted,
(C) in the case of a LIBOR Auction, the margin
above or below the applicable London Interbank Offered
Rate (the "Money Market Margin") offered for each such
Money Market Loan, expressed as a percentage (specified
to the nearest 1/10,000th of 1%) to be added to or
subtracted from such base rate,
(D) in the case of an Absolute Rate Auction, the
rate of interest per annum (specified to the nearest
1/10,000th of 1%) (the "Money Market Absolute Rate")
offered for each such Money Market Loan, and
(E) the identity of the quoting Bank.
A Money Market Quote may set forth up to five separate
offers by the quoting Bank with respect to each Interest
Period specified in the related Invitation for Money Market
Quotes.
(iii) Any Money Market Quote shall be disregarded
if it:
(A) is not substantially in conformity with
Exhibit D hereto or does not specify all of the
information required by subsection (d)(ii);
(B) contains qualifying, conditional or similar
language;
(C) proposes terms other than or in addition to
those set forth in the applicable Invitation for Money
Market Quotes; or
(D) arrives after the time set forth in
subsection (d)(i).
(e) Notice to Borrower. The Agent shall promptly
notify the Borrower of the terms (x) of any Money Market
Quote submitted by a Bank that is in accordance with
subsection (d) and (y) of any Money Market Quote that
amends, modifies or is otherwise inconsistent with a
previous Money Market Quote submitted by such Bank with
respect to the same Money Market Quote Request. Any such
subsequent Money Market Quote shall be disregarded by the
Agent unless such subsequent Money Market Quote is submitted
solely to correct a manifest error in such former Money
Market Quote. The Agent's notice to the Borrower shall
specify (A) the aggregate principal amount of Money Market
Loans for which offers have been received for each Interest
Period specified in the related Money Market Quote Request,
(B) the respective principal amounts and Money Market
Margins or Money Market Absolute Rates, as the case may be,
so offered and (C) if applicable, limitations on the
aggregate principal amount of Money Market Loans for which
offers in any single Money Market Quote may be accepted.
(f) Acceptance and Notice by Borrower. Not later
than 10:30 A.M. (New York City time) on (x) the third
Euro-Dollar Business Day prior to the proposed date of
Borrowing, in the case of a LIBOR Auction or (y) the
proposed date of Borrowing, in the case of an Absolute Rate
Auction (or, in either case, such other time or date as the
Borrower and the Agent shall have mutually agreed and shall
have notified to the Banks not later than the date of the
Money Market Quote Request for the first LIBOR Auction or
Absolute Rate Auction for which such change is to be
effective), the Borrower shall notify the Agent of its
acceptance or non-acceptance of the offers so notified to it
pursuant to subsection (e). In the case of acceptance, such
notice (a "Notice of Money Market Borrowing") shall specify
the aggregate principal amount of offers for each Interest
Period that are accepted. The Borrower may accept any Money
Market Quote in whole or in part; provided that:
(i) the aggregate principal amount of each Money
Market Borrowing may not exceed the applicable amount
set forth in the related Money Market Quote Request,
(ii) the principal amount of each Money Market
Borrowing must be $10,000,000 or a larger multiple of
$5,000,000,
(iii) acceptance of offers may only be made on the
basis of ascending Money Market Margins or Money Market
Absolute Rates, as the case may be, and
(iv) the Borrower may not accept any offer that is
described in subsection (d)(iii) or that otherwise
fails to comply with the requirements of this
Agreement.
(g) Allocation by Agent. If offers are made by
two or more Banks with the same Money Market Margins or
Money Market Absolute Rates, as the case may be, for a
greater aggregate principal amount than the amount in
respect of which such offers are accepted for the related
Interest Period, the principal amount of Money Market Loans
in respect of which such offers are accepted shall be
allocated by the Agent among such Banks as nearly as
possible (in multiples of $1,000,000, as the Agent may deem
appropriate) in proportion to the aggregate principal
amounts of such offers. Determinations by the Agent of the
amounts of Money Market Loans shall be conclusive in the
absence of manifest error.
SECTION 2.04. Notice to Banks; Funding of Loans.
(a) Upon receipt of a Notice of Borrowing, the
Agent shall promptly notify each Bank of the contents
thereof and of such Bank's share (if any) of such Borrowing
and such Notice of Borrowing shall not thereafter be
revocable by the Borrower.
(b) Not later than 12:00 Noon (New York City
time) on the date of each Borrowing, each Bank participating
therein shall (except as provided in subsection (c) of this
Section) make available its share of such Borrowing, in
Federal or other funds immediately available in New York
City, to the Agent at its address referred to in Section
9.01. Unless the Agent determines that any applicable
condition specified in Article III has not been satisfied,
the Agent will make the funds so received from the Banks
available to the Borrower at the Agent's aforesaid address.
(c) If any Bank makes a new Loan hereunder on a
day on which the Borrower is to repay all or any part of an
outstanding Loan from such Bank, such Bank shall apply the
proceeds of its new Loan to make such repayment and only an
amount equal to the difference (if any) between the amount
being borrowed and the amount being repaid shall be made
available by such Bank to the Agent as provided in
subsection (b), or remitted by the Borrower to the Agent as
provided in Section 2.12, as the case may be.
(d) Unless the Agent shall have received notice
from a Bank prior to the date of any Borrowing that such
Bank will not make available to the Agent such Bank's share
of such Borrowing, the Agent may assume that such Bank has
made such share available to the Agent on the date of such
Borrowing in accordance with subsections (b) and (c) of this
Section 2.04 and the Agent may, in reliance upon such
assumption, make available to the Borrower on such date a
corresponding amount. If and to the extent that such Bank
shall not have so made such share available to the Agent,
such Bank and the Borrower severally agree to repay to the
Agent forthwith on demand such corresponding amount together
with interest thereon, for each day from the date such
amount is made available to the Borrower until the date such
amount is repaid to the Agent, at (i) in the case of the
Borrower, a rate per annum equal to the higher of the
Federal Funds Rate and the interest rate applicable thereto
pursuant to Section 2.07 and (ii) in the case of such Bank,
the Federal Funds Rate. If such Bank shall repay to the
Agent such corresponding amount, such amount so repaid shall
constitute such Bank's Loan included in such Borrowing for
purposes of this Agreement. Nothing in this subsection (d)
shall be deemed to relieve any Bank from its obligation to
extend Loans hereunder or to prejudice any rights which the
Borrower may have against any Bank as a result of any
default by such Bank hereunder. The failure of any Bank to
make Loans hereunder shall not relieve any other Bank from
its obligation to make the Loans required to be made by it
hereunder.
SECTION 2.05. Notes. (a) The Loans of each Bank
shall be evidenced by a single Note payable to the order of
such Bank for the account of its Applicable Lending Office
in an amount equal to the aggregate unpaid principal amount
of such Bank's Loans.
(b) Each Bank may, by notice to the Borrower and
the Agent, request that its Loans of a particular type be
evidenced by a separate Note in an amount equal to the
aggregate unpaid principal amount of such Loans. Each such
Note shall be in substantially the form of Exhibit A hereto
with appropriate modifications to reflect the fact that it
evidences solely Loans of the relevant type. Each reference
in this Agreement to the "Note" of such Bank shall be deemed
to refer to and include any or all of such Notes, as the
context may require.
(c) Upon receipt of each Bank's Note pursuant to
Section 3.01(a), the Agent shall forward such Note to such
Bank. Each Bank shall record the date, amount, type and
maturity of each Loan made by it and the date and amount of
each payment of principal made by the Borrower with respect
thereto, and may, if such Bank so elects in connection with
any transfer or enforcement of its Note, endorse on the
schedule forming a part thereof appropriate notations to
evidence the foregoing information with respect to each such
Loan then outstanding; provided that the failure of any Bank
to make any such recordation or endorsement shall not affect
the obligations of the Borrower hereunder or under the
Notes. Each Bank is hereby irrevocably authorized by the
Borrower so to endorse its Note and to attach to and make a
part of its Note a continuation of any such schedule as and
when required.
SECTION 2.06. Maturity of Loans. Each Loan
included in any Borrowing shall mature, and the principal
amount thereof shall be due and payable, on the last day of
the Interest Period applicable to such Borrowing.
SECTION 2.07. Interest Rates. (a) Each Base
Rate Loan shall bear interest on the outstanding principal
amount thereof, for each day from the date such Loan is made
until it becomes due, at a rate per annum equal to the Base
Rate for such day. Such interest shall be payable for each
Interest Period on the last day thereof. Any overdue
principal of or interest on any Base Rate Loan shall bear
interest, payable on demand, for each day until paid at a
rate per annum equal to the sum of 2% plus the rate
otherwise applicable to Base Rate Loans for such day.
(b) Each CD Loan shall bear interest on the
outstanding principal amount thereof, for each day during
the Interest Period applicable thereto, at a rate per annum
equal to the sum of the CD Margin for such day plus the
Adjusted CD Rate applicable to such Interest Period;
provided that if any CD Loan or any portion thereof shall,
as a result of clause (2)(b) of the definition of Interest
Period, have an Interest Period of less than 30 days, such
portion shall bear interest during such Interest Period at
the rate applicable to Base Rate Loans during such period.
Such interest shall be payable for each Interest Period on
the last day thereof and, if such Interest Period is longer
than 90 days, at intervals of 90 days after the first day
thereof. Any overdue principal of or interest on any CD
Loan shall bear interest, payable on demand, for each day
until paid at a rate per annum equal to the sum of 2% plus
the higher of (i) the sum of the CD Margin for such day plus
the Adjusted CD Rate applicable to the Interest Period for
such Loan and (ii) the rate applicable to Base Rate Loans
for such day.
"CD Margin" means a rate per annum determined in
accordance with the Pricing Schedule.
The "Adjusted CD Rate" applicable to any Interest
Period means a rate per annum determined pursuant to the
following formula:
[ CDBR ]*
ACDR = [ ---------- ] + AR
[ 1.00 - DRP ]
ACDR = Adjusted CD Rate
CDBR = CD Base Rate
DRP = Domestic Reserve Percentage
AR = Assessment Rate
__________
* The amount in brackets being rounded upward, if
necessary, to the next higher 1/100 of 1%
The "CD Base Rate" applicable to any Interest
Period is the rate of interest determined by the Agent to be
the average (rounded upward, if necessary, to the next
higher 1/100 of 1%) of the prevailing rates per annum bid at
10:00 A.M. (New York City time) (or as soon thereafter as
practicable) on the first day of such Interest Period by two
or more New York certificate of deposit dealers of
recognized standing for the purchase at face value from each
CD Reference Bank of its certificates of deposit in an
amount comparable to the principal amount of the CD Loan of
such CD Reference Bank to which such Interest Period applies
and having a maturity comparable to such Interest Period.
"Domestic Reserve Percentage" means for any day
that percentage (expressed as a decimal) which is in effect
on such day, as prescribed by the Board of Governors of the
Federal Reserve System (or any successor) for determining
the maximum reserve requirement (including without
limitation any basic, supplemental or emergency reserves)
for a member bank of the Federal Reserve System in New York
City with deposits exceeding five billion dollars in respect
of new non-personal time deposits in dollars in New York
City having a maturity comparable to the related Interest
Period and in an amount of $100,000 or more. The Adjusted
CD Rate shall be adjusted automatically on and as of the
effective date of any change in the Domestic Reserve
Percentage.
"Assessment Rate" means for any day the annual
assessment rate in effect on such day which is payable by a
member of the Bank Insurance Fund classified as adequately
capitalized and within supervisory subgroup "A" (or a
comparable successor assessment risk classification) within
the meaning of 12 C.F.R. ' 327.3(e) (or any successor
provision) to the Federal Deposit Insurance Corporation (or
any successor) for such Corporation's (or such successor's)
insuring time deposits at offices of such institution in the
United States. The Adjusted CD Rate shall be adjusted
automatically on and as of the effective date of any change
in the Assessment Rate.
(c) Each Euro-Dollar Loan shall bear interest on
the outstanding principal amount thereof, for each day
during the Interest Period applicable thereto, at a rate per
annum equal to the sum of the Euro-Dollar Margin for such
day plus the Adjusted London Interbank Offered Rate
applicable to such Interest Period. Such interest shall be
payable for each Interest Period on the last day thereof
and, if such Interest Period is longer than three months, at
intervals of three months after the first day thereof.
"Euro-Dollar Margin" means a rate per annum
determined in accordance with the Pricing Schedule.
The "Adjusted London Interbank Offered Rate"
applicable to any Interest Period means a rate per annum
equal to the quotient obtained (rounded upward, if
necessary, to the next higher 1/100 of 1%) by dividing (i)
the applicable London Interbank Offered Rate by (ii) 1.00
minus the Euro-Dollar Reserve Percentage.
The "London Interbank Offered Rate" applicable to
any Interest Period means the average (rounded upward, if
necessary, to the next higher 1/16 of 1%) of the respective
rates per annum at which deposits in dollars are offered to
each of the Euro-Dollar Reference Banks in the London
interbank market at approximately 11:00 A.M. (London time)
two Euro-Dollar Business Days before the first day of such
Interest Period in an amount approximately equal to the
principal amount of the Euro-Dollar Loan of such Euro-Dollar
Reference Bank to which such Interest Period is to apply and
for a period of time comparable to such Interest Period.
"Euro-Dollar Reserve Percentage" means for any day
that percentage (expressed as a decimal) which is in effect
on such day, as prescribed by the Board of Governors of the
Federal Reserve System (or any successor) for determining
the maximum reserve requirement for a member bank of the
Federal Reserve System in New York City with deposits
exceeding five billion dollars in respect of "Eurocurrency
liabilities" (or in respect of any other category of
liabilities which includes deposits by reference to which
the interest rate on Euro-Dollar Loans is determined or any
category of extensions of credit or other assets which
includes loans by a non-United States office of any Bank to
United States residents). The Adjusted London Interbank
Offered Rate shall be adjusted automatically on and as of
the effective date of any change in the Euro-Dollar Reserve
Percentage.
(d) Any overdue principal of or interest on any
Euro-Dollar Loan shall bear interest, payable on demand, for
each day until paid at a rate per annum equal to the higher
of (i) the sum of 2% plus the Euro-Dollar Margin for such
day plus the Adjusted London Interbank Offered Rate
applicable to the Interest Period for such Loan and (ii) the
sum of 2% plus the Euro-Dollar Margin for such day plus the
quotient obtained (rounded upward, if necessary, to the next
higher 1/100 of 1%) by dividing (x) the average (rounded
upward, if necessary, to the next higher 1/16 of 1%) of the
respective rates per annum at which one day (or, if such
amount due remains unpaid more than three Euro-Dollar
Business Days, then for such other period of time not longer
than six months as the Agent may select) deposits in dollars
in an amount approximately equal to such overdue payment due
to each of the Euro-Dollar Reference Banks are offered to
such Euro-Dollar Reference Bank in the London interbank
market for the applicable period determined as provided
above by (y) 1.00 minus the Euro-Dollar Reserve Percentage
(or, if the circumstances described in clause (a) or (b) of
Section 8.01 shall exist, at a rate per annum equal to the
sum of 2% plus the rate applicable to Base Rate Loans for
such day).
(e) Subject to Section 8.01(a), each Money Market
LIBOR Loan shall bear interest on the outstanding principal
amount thereof, for the Interest Period applicable thereto,
at a rate per annum equal to the sum of the London Interbank
Offered Rate for such Interest Period (determined in
accordance with Section 2.07(c) as if the related Money
Market LIBOR Borrowing were a Committed Euro-Dollar
Borrowing) plus (or minus) the Money Market Margin quoted by
the Bank making such Loan in accordance with Section 2.03.
Each Money Market Absolute Rate Loan shall bear interest on
the outstanding principal amount thereof, for the Interest
Period applicable thereto, at a rate per annum equal to the
Money Market Absolute Rate quoted by the Bank making such
Loan in accordance with Section 2.03. Such interest shall
be payable for each Interest Period on the last day thereof
and, if such Interest Period is longer than three months, at
intervals of three months after the first day thereof. Any
overdue principal of or interest on any Money Market Loan
shall bear interest, payable on demand, for each day until
paid at a rate per annum equal to the sum of 2% plus the
Base Rate for such day.
(f) The Agent shall determine each interest rate
applicable to the Loans hereunder. The Agent shall give
prompt notice to the Borrower and the participating Banks of
each rate of interest so determined, and its determination
thereof shall be conclusive in the absence of manifest
error.
(g) Each Reference Bank agrees to use its best
efforts to furnish quotations to the Agent as contemplated
by this Section. If any Reference Bank does not furnish a
timely quotation, the Agent shall determine the relevant
interest rate on the basis of the quotation or quotations
furnished by the remaining Reference Bank or Banks or, if
none of such quotations is available on a timely basis, the
provisions of Section 8.01 shall apply.
SECTION 2.08. Facility Fees. The Borrower shall
pay to the Agent for the account of the Banks ratably a
facility fee at the Facility Fee Rate (determined daily in
accordance with the Pricing Schedule). Such facility fee
shall accrue (i) from and including the date of this
Agreement to but excluding the Termination Date (or earlier
date of termination of the Commitments in their entirety),
on the daily aggregate amount of the Commitments (whether
used or unused) and (ii) from and including the Termination
Date or such earlier date of termination to but excluding
the date the Loans shall be repaid in their entirety, on the
daily aggregate outstanding principal amount of the Loans.
Accrued fees under this Section shall be payable quarterly
on each March 31, June 30, September 30 and December 31 and
upon the date of termination of the Commitments in their
entirety (and, if later, the date the Loans shall be repaid
in their entirety).
SECTION 2.09. Optional Termination or Reduction
of Commitments. The Borrower may, upon at least three
Domestic Business Days' notice to the Agent, (i) terminate
the Commitments at any time, if no Loans are outstanding at
such time or (ii) ratably reduce from time to time by an
aggregate amount of $10,000,000 or any larger multiple of
$5,000,000, the aggregate amount of the Commitments in
excess of the aggregate outstanding principal amount of the
Loans.
SECTION 2.10. Mandatory Termination of
Commitments. The Commitments shall terminate on the
Termination Date, and any Loans then outstanding (together
with accrued interest thereon) shall be due and payable on
such date.
SECTION 2.11. Optional Prepayments. (a) Subject
in the case of any Fixed Rate Borrowing to Section 2.13, the
Borrower may, upon at least three Domestic Business Days'
notice to the Agent, prepay any Domestic Borrowing (or any
Money Market Borrowing bearing interest at the Base Rate
pursuant to Section 8.01(a)) or upon at least three Euro-
Dollar Business Days' notice to the Agent, prepay any Euro-
Dollar Borrowing, in each case in whole at any time, or from
time to time in part in amounts aggregating $10,000,000 or
any larger multiple of $5,000,000, by paying the principal
amount to be prepaid together with accrued interest thereon
to the date of prepayment. Each such optional prepayment
shall be applied to prepay ratably the Loans of the several
Banks included in such Borrowing.
(b) Except as provided in Section 2.11(a), the
Borrower may not prepay all or any portion of the principal
amount of any Money Market Loan prior to the maturity
thereof.
(c) Upon receipt of a notice of prepayment
pursuant to this Section, the Agent shall promptly notify
each Bank of the contents thereof and of such Bank's ratable
share (if any) of such prepayment and such notice shall not
thereafter be revocable by the Borrower.
SECTION 2.12. General Provisions as to Payments.
(a) The Borrower shall make each payment of principal of,
and interest on, the Loans and of fees hereunder, not later
than 12:00 Noon (New York City time) on the date when due,
in Federal or other funds immediately available in New York
City, to the Agent at its address referred to in Section
9.01. The Agent will promptly distribute to each Bank its
ratable share of each such payment received by the Agent for
the account of the Banks. Whenever any payment of principal
of, or interest on, the Domestic Loans or of fees shall be
due on a day which is not a Domestic Business Day, the date
for payment thereof shall be extended to the next succeeding
Domestic Business Day. Whenever any payment of principal
of, or interest on, the Euro-Dollar Loans shall be due on a
day which is not a Euro-Dollar Business Day, the date for
payment thereof shall be extended to the next succeeding
Euro-Dollar Business Day unless such Euro-Dollar Business
Day falls in another calendar month, in which case the date
for payment thereof shall be the next preceding Euro-Dollar
Business Day. Whenever any payment of principal of, or
interest on, the Money Market Loans shall be due on a day
which is not a Euro-Dollar Business Day, the date for
payment thereof shall be extended to the next succeeding
Euro-Dollar Business Day. If the date for any payment of
principal is extended by operation of law or otherwise,
interest thereon shall be payable for such extended time.
(b) Unless the Agent shall have received notice
from the Borrower prior to the date on which any payment is
due to the Banks hereunder that the Borrower will not make
such payment in full, the Agent may assume that the Borrower
has made such payment in full to the Agent on such date and
the Agent may, in reliance upon such assumption, cause to be
distributed to each Bank on such due date an amount equal to
the amount then due such Bank. If and to the extent that
the Borrower shall not have so made such payment, each Bank
shall repay to the Agent forthwith on demand such amount
distributed to such Bank together with interest thereon, for
each day from the date such amount is distributed to such
Bank until the date such Bank repays such amount to the
Agent, at the Federal Funds Rate.
SECTION 2.13. Funding Losses. If the Borrower
makes any payment of principal with respect to any Fixed
Rate Loan (pursuant to Article II, VI or VIII or otherwise)
on any day other than the last day of the Interest Period
applicable thereto, or the last day of an applicable period
fixed pursuant to Section 2.07(d), or if the Borrower fails
to borrow or prepay any Fixed Rate Loans after notice has
been given to any Bank in accordance with Section 2.04(a) or
2.11(c), the Borrower shall reimburse each Bank within 15
days after demand for any resulting loss or expense incurred
by it (or by an existing or prospective Participant in the
related Loan), including (without limitation) any loss
incurred in obtaining, liquidating or employing deposits
from third parties, but excluding loss of margin for the
period after any such payment or failure to borrow or
prepay, provided that such Bank shall have delivered to the
Borrower a certificate as to the amount of such loss or
expense, which certificate shall be conclusive in the
absence of manifest error.
SECTION 2.14. Computation of Interest and Fees.
Interest based on the Prime Rate hereunder shall be computed
on the basis of a year of 365 days (or 366 days in a leap
year) and paid for the actual number of days elapsed
(including the first day but excluding the last day). All
other interest and fees shall be computed on the basis of a
year of 360 days and paid for the actual number of days
elapsed (including the first day but excluding the last
day).
ARTICLE III
CONDITIONS
SECTION 3.01. Closing. The closing hereunder
shall occur upon receipt by the Agent of the following
documents, each dated the Closing Date unless otherwise
indicated:
(a) a duly executed Note for the account of each
Bank dated on or before the Closing Date complying with
the provisions of Section 2.05;
(b) an opinion of the General Counsel of the
Borrower, substantially in the form of Exhibit E hereto
and covering such additional matters relating to the
transactions contemplated hereby as the Required Banks
may reasonably request;
(c) an opinion of Piper & Marbury, counsel for
the Borrower, substantially in the form of Exhibit F
hereto and covering such additional matters relating to
the transactions contemplated hereby as the Required
Banks may reasonably request;
(d) an opinion of Davis Polk & Wardwell, special
counsel for the Agent, substantially in the form of
Exhibit G hereto and covering such additional matters
relating to the transactions contemplated hereby as the
Required Banks may reasonably request; and
(e) all documents the Agent may reasonably
request relating to the existence of the Borrower, the
corporate authority for and the validity of this
Agreement and the Notes, and any other matters relevant
hereto, all in form and substance satisfactory to the
Agent.
The Agent shall promptly notify the Borrower and the Banks
of the Closing Date, and such notice shall be conclusive and
binding on all parties hereto.
SECTION 3.02. Borrowings. The obligation of any
Bank to make a Loan on the occasion of any Borrowing is
subject to the satisfaction of the following conditions:
(a) the fact that the Closing Date shall have
occurred on or prior to October 17, 1994;
(b) receipt by the Agent of a Notice of Borrowing
as required by Section 2.02 or 2.03, as the case may
be;
(c) the fact that, immediately after such
Borrowing, the aggregate outstanding principal amount
of the Loans will not exceed the aggregate amount of
the Commitments;
(d) the fact that, immediately before and after
such Borrowing, no Default shall have occurred and be
continuing;
(e) the fact that the Existing Agreement shall
have been terminated and all of the obligations of the
Borrower thereunder shall have been paid and the Agent
shall have received written waivers of the notice
requirement contained in Section 4.03 of such Credit
Agreement from each "Bank" (as defined therein) which
is not a party hereto; and
(f) the fact that the representations and
warranties of the Borrower contained in this Agreement
(except, in the case of a Refunding Borrowing, the
representations and warranties set forth in Sections
4.04(c) and 4.05, as to any matter which has
theretofore been disclosed in writing by the Borrower
to the Banks, including items disclosed in writing by
the Borrower to the Banks by virtue of any information
provided pursuant to Section 5.01 of this Agreement)
shall be true on and as of the date of such Borrowing.
Each Borrowing hereunder shall be deemed to be a
representation and warranty by the Borrower on the date of
such Borrowing as to the facts specified in clauses (c),
(d), (e) and (f) of this Section.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants that:
SECTION 4.01. Corporate Existence and Power. The
Borrower is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of
Maryland, and has all corporate powers and all governmental
licenses, authorizations, consents and approvals required to
carry on its business as now conducted, other than such
licenses, authorizations, consents and approvals which, if
not held or obtained by the Borrower, do not, in the
aggregate, have a Material Adverse Effect.
SECTION 4.02. Corporate and Governmental
Authorization; No Contravention. The execution, delivery
and performance by the Borrower of this Agreement and the
Notes are within the Borrower's corporate powers, have been
duly authorized by all necessary corporate action, require
no action by or in respect of, or filing with, any
governmental body, agency or official and do not contravene,
or constitute a default under, any provision of applicable
law or regulation or of the articles of incorporation or
by-laws of the Borrower or of any agreement, judgment,
injunction, order, decree or other instrument binding upon
the Borrower or any of its Subsidiaries or result in the
creation or imposition of any Lien on any asset of the
Borrower or any of its Subsidiaries.
SECTION 4.03. Binding Effect. This Agreement
constitutes a valid and binding agreement of the Borrower
and each Note, when executed and delivered in accordance
with this Agreement, will constitute a valid and binding
obligation of the Borrower, in each case enforceable in
accordance with its terms.
SECTION 4.04. Financial Information.
(a) The consolidated statement of financial
position and shareholders' equity of the Borrower and its
Consolidated Subsidiaries as of December 31, 1993 and the
related consolidated statements of operations and cash flows
for the fiscal year then ended, reported on by Ernst & Young
and set forth in the Borrower's 1993 Form 10-K, a copy of
which has been delivered to each of the Banks, fairly
present, in conformity with generally accepted accounting
principles, the consolidated financial position of the
Borrower and its Consolidated Subsidiaries as of such date
and their consolidated results of operations and cash flows
for such fiscal year.
(b) The unaudited consolidated statement of
financial position and shareholders' equity of the Borrower
and its Consolidated Subsidiaries as of June 30, 1994 and
the related unaudited consolidated statements of operations
and cash flows for the six months then ended, set forth in
the Borrower's Latest Form 10-Q, a copy of which has been
delivered to each of the Banks, fairly present, in
conformity with generally accepted accounting principles
applied on a basis consistent with the financial statements
referred to in subsection (a) of this Section, the
consolidated financial position of the Borrower and its
Consolidated Subsidiaries as of such date and their
consolidated results of operations and cash flows for such
six month period (subject to normal year-end adjustments).
(c) Except as disclosed in the Borrower's latest
Form 10-Q or in any Form 8-K filed by the Borrower under the
Securities Exchange Act of 1934 after the Borrower's latest
Form 10-Q and provided to the Banks prior to the date of
this Agreement, since December 31, 1993 there has been no
material adverse change in the business, financial position,
results of operations or prospects of the Borrower and its
Consolidated Subsidiaries, considered as a whole.
(d) A copy of a duly completed and signed Annual
Statement or other similar report of or for each Insurance
Company Subsidiary in the form filed with the governmental
body, agency or official which regulates insurance companies
in the jurisdiction in which such Insurance Company
Subsidiary is domiciled for the year ended December 31, 1993
has been delivered to the Agent on behalf of each of the
Banks and fairly presents, in accordance with statutory
accounting principles, the information contained therein.
(e) A copy of a duly completed and signed
Quarterly Statement or other similar report of or for United
States Fidelity and Guaranty Company and Fidelity and
Guaranty Life Insurance Company in the form filed with the
governmental body, agency or official which regulates
insurance companies in the jurisdiction in which such
companies are respectively domiciled for the quarter ended
June 30, 1994 has been delivered to the Agent on behalf of
each of the Banks and fairly presents, in accordance with
statutory accounting principles, the information contained
therein.
SECTION 4.05. Litigation. Subject to matters
disclosed in the financial statements referred to in Section
4.04(a), there is no action, suit or proceeding pending
against, or to the knowledge of the Borrower threatened
against or affecting, the Borrower or any of its
Subsidiaries before any court or arbitrator or any
governmental body, agency or official in which there is a
reasonable expectation of an adverse decision which
reasonably could be expected to have a Material Adverse
Effect or which in any manner draws into question the
validity of this Agreement or the Notes.
SECTION 4.06. Compliance with ERISA. Each member
of the ERISA Group has fulfilled its obligations under the
minimum funding standards of ERISA and the Internal Revenue
Code with respect to each Plan and is in compliance in all
material respects with the presently applicable provisions
of ERISA and the Internal Revenue Code with respect to each
Plan. No member of the ERISA Group has (i) sought a waiver
of the minimum funding standard under Section 412 of the
Internal Revenue Code in respect of any Plan, (ii) failed to
make any contribution or payment to any Plan or
Multiemployer Plan or in respect of any Benefit Arrangement,
or made any amendment to any Plan or Benefit Arrangement,
which in either case would trigger the provisions of Section
412(n) or 401(a)(29) of the Internal Revenue Code (or any
corresponding provisions of ERISA) or (iii) incurred any
liability under Title IV of ERISA other than a liability to
the PBGC for premiums under Section 4007 of ERISA.
SECTION 4.07. Environmental Matters. In the
ordinary course of its business, the Borrower conducts an
ongoing review of the effect of Environmental Laws on the
business, operations and properties of the Borrower and its
Subsidiaries, in the course of which it identifies and
evaluates associated liabilities and costs (including,
without limitation, any capital or operating expenditures
required for clean-up or closure of properties presently or
previously owned, any capital or operating expenditures
required to achieve or maintain compliance with
environmental protection standards imposed by law or as a
condition of any license, permit or contract, any related
constraints on operating activities, including any periodic
or permanent shutdown of any facility or reduction in the
level of or change in the nature of operations conducted
thereat, any costs or liabilities in connection with
off-site disposal of wastes or Hazardous Substances, and any
actual or potential liabilities to third parties, including
employees, and any related costs and expenses). On the
basis of this review, the Borrower has reasonably concluded
that such associated liabilities and costs, including the
costs of compliance with Environmental Laws, are unlikely to
have a Material Adverse Effect.
SECTION 4.08. Taxes. The Borrower and its
Subsidiaries have filed all United States Federal income tax
returns and all other material tax returns which are
required to be filed by them and have paid all taxes due
pursuant to such returns or pursuant to any assessment
received by the Borrower or any Subsidiary, other than any
such assessments being contested in good faith by
appropriate proceedings and for which any reserves required
under generally accepted accounting principles have been
established. The charges, accruals and reserves on the
books of the Borrower and its Subsidiaries in respect of
taxes or other governmental charges are, in the opinion of
the Borrower, adequate in all material respects.
SECTION 4.09. Subsidiaries. Each of the
Borrower's corporate Subsidiaries is a corporation duly
incorporated, validly existing and in good standing under
the laws of its jurisdiction of incorporation, and has all
corporate powers and all material governmental licenses,
authorizations, consents and approvals required to carry on
its business as now conducted.
SECTION 4.10. Not an Investment Company. The
Borrower is not an "investment company" within the meaning
of the Investment Company Act of 1940, as amended.
SECTION 4.11. Full Disclosure. All information
heretofore furnished by the Borrower to the Agent or any
Bank for purposes of or in connection with this Agreement or
any transaction contemplated hereby is, and all such
information hereafter furnished by the Borrower to the Agent
or any Bank will be, true and accurate in all material
respects on the date as of which such information is stated
or certified. The Borrower has disclosed to the Banks in
writing any and all facts which materially and adversely
affect or may affect (to the extent the Borrower can now
reasonably foresee), the business, operations or financial
condition of the Borrower and its Consolidated Subsidiaries,
taken as a whole, or the ability of the Borrower to perform
its obligations under this Agreement.
ARTICLE V
COVENANTS
The Borrower agrees that, so long as any Bank has
any Commitment hereunder or any amount payable under any
Note remains unpaid:
SECTION 5.01. Information. The Borrower will
deliver to each of the Banks:
(a) as soon as available and in any event within
95 days after the end of each fiscal year of the
Borrower, a consolidated statement of financial
position and shareholders' equity of the Borrower and
its Consolidated Subsidiaries as of the end of such
fiscal year and the related consolidated statements of
operations and cash flows for such fiscal year, setting
forth in each case in comparative form the figures for
the previous fiscal year, all reported on in a manner
acceptable to the Securities and Exchange Commission by
Ernst & Young or other independent public accountants
of nationally recognized standing;
(b) as soon as available and in any event within
60 days after the end of each of the first three
quarters of each fiscal year of the Borrower, a
consolidated statement of financial position and
shareholders' equity of the Borrower and its
Consolidated Subsidiaries as of the end of such quarter
and the related consolidated statements of operations
and cash flows for such quarter and for the portion of
the Borrower's fiscal year ended at the end of such
quarter, setting forth in the case of such consolidated
statements of operations and cash flows in comparative
form the figures for the corresponding quarter and the
corresponding portion of the Borrower's previous fiscal
year, all certified (subject to normal year-end
adjustments) as to fairness of presentation, generally
accepted accounting principles and consistency by the
chief financial officer or the chief accounting officer
of the Borrower;
(c) simultaneously with the delivery of each set
of financial statements referred to in clauses (a) and
(b) above, an Officer's Certificate (i) setting forth
in reasonable detail the calculations required to
establish whether the Borrower was in compliance with
the requirements of Sections 5.09 and 5.10 on the date
of such financial statements and (ii) stating whether
any Default exists on the date of such certificate and,
if any Default then exists, setting forth the details
thereof and the action which the Borrower is taking or
proposes to take with respect thereto;
(d) simultaneously with the delivery of each set
of financial statements referred to in clause (a)
above, a statement of the firm of independent public
accountants which reported on such statements (i)
whether anything has come to their attention in the
course of their examination of the financial statements
of the Borrower and its Subsidiaries to cause them to
believe that any Default existed on the date of such
statements and (ii) confirming the calculations set
forth in the officer's certificate delivered
simultaneously therewith pursuant to clause (c) above;
(e) within five days after any officer of the
Borrower obtains knowledge of any Default, if such
Default is then continuing, an Officer's Certificate
setting forth the details thereof and the action which
the Borrower is taking or proposes to take with respect
thereto;
(f) within 120 days after the end of each fiscal
year of each Insurance Company Subsidiary, a copy of a
duly completed and signed Annual Statement (or any
successor form thereto) required to be filed by such
Insurance Company Subsidiary with the governmental
body, agency or official which regulates insurance
companies in the jurisdiction in which such Insurance
Company Subsidiary is domiciled, in the form submitted
to such governmental body, agency or official;
(g) within 60 days after the end of the second
fiscal quarter of United States Fidelity and Guaranty
Company and Fidelity and Guaranty Life Insurance
Company, respectively, a copy of a duly completed and
signed Quarterly Statement (or any successor form
thereto) required to be filed by each such company with
the governmental body, agency or official which
regulates insurance companies in the jurisdiction in
which such company is domiciled, in the form submitted
to such governmental body, agency or official;
(h) promptly upon the mailing thereof to the
shareholders of the Borrower generally, copies of all
financial statements, reports and proxy statements so
mailed;
(i) promptly upon the filing thereof, copies of
all registration statements (other than the exhibits
thereto and any registration statements on Form S-8 or
its equivalent) and reports on Forms 10-K, 10-Q and 8-K
(or their equivalents) which the Borrower shall have
filed with the Securities and Exchange Commission;
(j) if and when any member of the ERISA Group (i)
gives or is required to give notice to the PBGC of any
"reportable event" (as defined in Section 4043 of
ERISA) with respect to any Plan, other than a
reportable event for which 30-day notice to the PBGC
has been waived, or knows that the plan administrator
of any Plan has given or is required to give notice of
any such reportable event, a copy of the notice of such
reportable event given or required to be given to the
PBGC; (ii) receives notice of complete or partial
withdrawal liability under Title IV of ERISA or notice
that any Multiemployer Plan is in reorganization, is
insolvent or has been terminated, a copy of such
notice; (iii) receives notice from the PBGC under Title
IV of ERISA of an intent to terminate, impose liability
(other than for premiums under Section 4007 of ERISA)
in respect of, or appoint a trustee to administer any
Plan, a copy of such notice; (iv) applies for a waiver
of the minimum funding standard under Section 412 of
the Internal Revenue Code, a copy of such application;
(v) gives notice of intent to terminate any Plan under
Section 4041(c) of ERISA, a copy of such notice and
other information filed with the PBGC; (vi) gives
notice of withdrawal from any Plan pursuant to Section
4063 of ERISA, a copy of such notice; or (vii) fails to
make any payment or contribution to any Plan or
Multiemployer Plan or in respect of any Benefit
Arrangement or makes any amendment to any Plan or
Benefit Arrangement which in either case would trigger
the provisions of Section 412(n) or 401(a)(29) of the
Internal Revenue Code (or any corresponding provisions
of ERISA), a certificate of the chief financial officer
or the chief accounting officer of the Borrower setting
forth details as to such occurrence and action, if any,
which the Borrower or applicable member of the ERISA
Group is required or proposes to take; and
(k) from time to time such additional information
regarding the financial position or business of the
Borrower and its Subsidiaries as the Agent, at the
request of any Bank, may reasonably request.
SECTION 5.02. Payment of Obligations. The
Borrower will pay and discharge, and will cause each
Subsidiary (other than an Excluded Subsidiary) to pay and
discharge, at or before maturity, all their respective
material obligations and liabilities, including, without
limitation, tax liabilities, except where the same may be
contested in good faith by appropriate proceedings, and will
maintain, and will cause each Subsidiary to maintain, in
accordance with generally accepted accounting principles,
appropriate reserves for the accrual of any of the same.
SECTION 5.03. Maintenance of Property; Insurance.
(a) The Borrower will keep, and will cause each Subsidiary
to keep, all property useful and necessary in its business
in good working order and condition, ordinary wear and tear
excepted.
(b) The Borrower will maintain or cause to be
maintained with financially sound and reputable insurers or
through self-insurance programs appropriate to the type and
amount of the risk insured, insurance with respect to its
properties and business, and the properties and business of
its Subsidiaries, against loss or damage of the kinds
customarily insured against by reputable companies in the
same or similar businesses, such insurance to be of such
types and in such amounts (with such deductible amounts) as
is customary for such companies under similar circumstances.
The Borrower will furnish to the Banks, upon request from
the Agent, information presented in reasonable detail as to
the insurance so carried.
SECTION 5.04. Conduct of Business and Maintenance
of Existence. The Borrower will continue, and will cause
each Subsidiary (other than any Excluded Subsidiary) to
continue, to engage in all material respects in business of
the same general type as now conducted by the Borrower and
its Subsidiaries, and will preserve, renew and keep in full
force and effect, and will cause each Subsidiary (other than
any Excluded Subsidiary) to preserve, renew and keep in full
force and effect, their respective corporate existence and
their respective rights, privileges and franchises necessary
or desirable in the normal conduct of business, other than
such corporate existences, rights, privileges and franchises
which, if not preserved, renewed or kept in force, will not
have, in the aggregate, a Material Adverse Effect.
SECTION 5.05. Compliance with Laws. The Borrower
will comply, and cause each Subsidiary to comply, with all
applicable laws, ordinances, rules, regulations, and
requirements of governmental authorities (including, without
limitation, Environmental Laws and ERISA and the rules and
regulations thereunder) except where the necessity of
compliance therewith is contested in good faith by
appropriate proceedings or where the failure to comply with
such laws, ordinances, rules, regulations and requirements
will not, in the aggregate, have a Material Adverse Effect.
SECTION 5.06. Negative Pledge. Neither the
Borrower nor any Subsidiary will create, assume or suffer to
exist any Lien on any asset now owned or hereafter acquired
by it, except:
(a) Liens existing on the date of this Agreement
securing Debt outstanding on the date of this Agreement
in an aggregate principal or face amount not exceeding
$100,000,000 and identified on Schedule I hereto;
(b) any Lien existing on any asset of any
corporation at the time such corporation becomes a
Subsidiary and not created in contemplation of such
event;
(c) any Lien on any asset securing Debt incurred
or assumed for the purpose of financing all or any part
of the cost of acquiring such asset, provided that such
Lien attaches to such asset concurrently with or within
90 days after the acquisition thereof;
(d) any Lien on any asset of any corporation
existing at the time such corporation is merged or
consolidated with or into the Borrower or a Subsidiary
and not created in contemplation of such event;
(e) any Lien existing on any asset prior to the
acquisition thereof by the Borrower or a Subsidiary and
not created in contemplation of such acquisition;
(f) any Lien arising out of the refinancing,
extension, renewal or refunding of any Debt secured by
any Lien permitted by any of the foregoing clauses or
clause (j) below of this Section, provided that such
Debt is not increased and is not secured by any
additional assets;
(g) Liens arising in the ordinary course of its
business (including Liens arising in the ordinary
course of its insurance business) which (i) do not
secure Debt or Derivatives Obligations, (ii) do not
secure any obligation (except obligations arising in
the ordinary course of its insurance business) in an
amount exceeding $50,000,000 and (iii) do not in the
aggregate materially detract from or impair the use or
value of the asset or assets subject thereto in the
operation of its business;
(h) Liens on cash and cash equivalents securing
Derivatives Obligations, provided that the aggregate
amount of cash and cash equivalents subject to such
Liens may at no time exceed $25,000,000;
(i) Liens securing obligations of the type
referred to in clause (vii) of the definition of Debt
as long as such Liens arise in the ordinary course of
the Borrower's or the Subsidiary's, as the case may be,
business and such Liens are in amounts and otherwise
are on terms consistent with then existing practices in
the repurchase business;
(j) Liens securing Non-Recourse Debt (including
Non-Recourse Debt constituting Debt (other than Non-
Recourse Debt) as provided in the proviso to the
definition of Non-Recourse Debt);
(k) Liens on securities or cash of any Insurance
Company Subsidiary which secure its obligations as a
reinsurer (as opposed to a ceding insurance company)
under reinsurance contracts entered into with Persons
which are licensed or authorized to do an insurance
business in any jurisdiction; and
(l) Liens not otherwise permitted by the
foregoing clauses of this Section securing Debt in an
aggregate principal or face amount at any date not to
exceed 5% of Adjusted Consolidated Tangible Net Worth.
SECTION 5.07. Consolidations, Mergers and Sales
of Assets; Ownership by USF&G Corporation. The Borrower
will not (i) consolidate or merge with or into any other
Person, other than a merger in which the Borrower is the
surviving corporation or a merger solely for the purpose of
reincorporating the Borrower in another jurisdiction, in
each case provided no Default shall exist at, or immediately
after, such merger, or (ii) sell, lease or otherwise
transfer, directly or indirectly, all or substantially all
of the assets of the Borrower and its Subsidiaries, taken as
a whole, to any other Person. The Borrower will at all
times own all of the outstanding voting securities of United
States Fidelity and Guaranty Company.
SECTION 5.08. Use of Proceeds. The proceeds of
the Loans made under this Agreement will be used by the
Borrower for general corporate purposes. None of such
proceeds will be used, directly or indirectly, for the
purpose, whether immediate, incidental or ultimate, of
buying or carrying any "margin stock" within the meaning of
Regulation U.
SECTION 5.09. Ratio of Debt to Adjusted
Consolidated Tangible Net Worth. The aggregate amount of
Debt (other than Non-Recourse Debt) of the Borrower and its
Subsidiaries shall at no time exceed 55% of Adjusted
Consolidated Tangible Net Worth.
SECTION 5.10. Minimum Consolidated Tangible Net
Worth. Adjusted Consolidated Tangible Net Worth will at no
time be less than the sum of (i) $1,050,000,000 plus (ii)
50% of the consolidated net income of the Borrower and its
Consolidated Subsidiaries for the period commencing on July
1, 1994 and ending at the end of the Borrower's then most
recent fiscal quarter (treated for this purpose as a single
accounting period). For purposes of this Section, if
consolidated net income of the Borrower and its Consolidated
Subsidiaries for any period shall be less than zero, the
amount calculated pursuant to clause (ii) above for such
period shall be zero.
SECTION 5.11. Transactions with Affiliates. The
Borrower will not, and will not permit any Subsidiary to,
directly or indirectly, pay any funds to or for the account
of, make any investment (whether by acquisition of stock or
indebtedness, by loan, advance, transfer of property,
guarantee or other agreement to pay, purchase or service,
directly or indirectly, any Debt, or otherwise) in, lease,
sell, transfer or otherwise dispose of any assets, tangible
or intangible, to, or participate in, or effect any
transaction in connection with any joint enterprise or other
joint arrangement with, any Affiliate unless such payment,
investment, lease, sale, transfer, disposition,
participation or transaction is on terms and conditions at
least as favorable to the Borrower or such Subsidiary as the
terms and conditions which would apply in a similar
transaction with a Person not an Affiliate; provided,
however, that the foregoing provisions of this Section shall
not prohibit the Borrower from declaring or paying any
lawful dividend or distribution so long as, after giving
effect thereto, no Default shall have occurred and be
continuing.
ARTICLE VI
DEFAULTS
SECTION 6.01. Events of Default. If one or more
of the following events ("Events of Default") shall have
occurred and be continuing:
(a) the Borrower shall fail to pay when due any
principal of any Loan or shall fail to pay within five
days of the due date thereof any interest on any Loan
or any fees or any other amount (other than the
principal of any Loan) payable hereunder;
(b) the Borrower shall fail to observe or perform
any covenant contained in Sections 5.06 to 5.11,
inclusive;
(c) the Borrower shall fail to observe or perform
any covenant or agreement contained in this Agreement
(other than those covered by clause (a) or (b) above)
for 30 days after notice thereof has been given to the
Borrower by the Agent at the request of any Bank;
(d) any representation, warranty, certification
or statement made by the Borrower in this Agreement or
in any certificate, financial statement or other
document delivered pursuant to this Agreement shall
prove to have been incorrect in any material respect
when made (or deemed made);
(e) the Borrower or any Subsidiary shall fail to
make any payment owed by it in respect of any Material
Financial Obligations when due or within any applicable
grace period;
(f) any event or condition shall occur which
results in the acceleration of the maturity of any
Material Debt or enables (or, with the giving of notice
or lapse of time or both, would enable) the holder of
such Debt or any Person acting on such holder's behalf
to accelerate the maturity thereof;
(g) the Borrower or any Subsidiary (other than an
Excluded Subsidiary) shall commence a voluntary case or
other proceeding seeking rehabilitation, dissolution,
conservation, liquidation, reorganization or other
relief with respect to itself or its debts under any
bankruptcy, insolvency or other similar law now or
hereafter in effect or seeking the appointment of a
trustee, receiver, liquidator, rehabilitator,
dissolver, conservator, custodian or other similar
official of it or any substantial part of its property,
or shall consent to any such relief or to the
appointment of or taking possession by any such
official in an involuntary case or other proceeding
commenced against it, or shall make a general
assignment for the benefit of creditors, or shall fail
generally to pay its debts as they become due, or shall
take any corporate action to authorize any of the
foregoing;
(h) an involuntary case or other proceeding shall
be commenced against the Borrower or any Subsidiary
(other than an Excluded Subsidiary) seeking
rehabilitation, dissolution, conservation, liquidation,
reorganization or other relief with respect to it or
its debts under any bankruptcy, insolvency or other
similar law now or hereafter in effect or seeking the
appointment of a trustee, receiver, liquidator,
rehabilitator, dissolver, conservator, custodian or
other similar official of it or any substantial part of
its property, and such involuntary case or other
proceeding shall remain undismissed and unstayed for a
period of 60 days; or an order for relief shall be
entered against the Borrower or any Subsidiary (other
than an Excluded Subsidiary) under the federal
bankruptcy laws as now or hereafter in effect; or any
governmental body, agency or official shall apply for,
or commence a case or other proceeding to seek, an
order for the rehabilitation, conservation, dissolution
or other liquidation of the Borrower or any Subsidiary
(other than an Excluded Subsidiary) or of the assets or
any substantial part thereof of the Borrower or any
such Subsidiary or any other similar remedy;
(i) any member of the ERISA Group shall fail to
pay when due an amount or amounts aggregating in excess
of $5,000,000 which it shall have become liable to pay
under Title IV of ERISA; or notice of intent to
terminate a Material Plan shall be filed under Title IV
of ERISA by any member of the ERISA Group, any plan
administrator or any combination of the foregoing; or
the PBGC shall institute proceedings under Title IV of
ERISA to terminate, to impose liability (other than for
premiums under Section 4007 of ERISA) in respect of, or
to cause a trustee to be appointed to administer any
Material Plan; or a condition shall exist by reason of
which the PBGC would be entitled to obtain a decree
adjudicating that any Material Plan must be terminated;
or there shall occur a complete or partial withdrawal
from, or a default, within the meaning of Section
4219(c)(5) of ERISA, with respect to, one or more
Multiemployer Plans which could cause one or more
members of the ERISA Group to incur a current payment
obligation in excess of $5,000,000;
(j) enforceable judgments or orders for the
payment of money in excess of $10,000,000 in the
aggregate shall be rendered and entered against the
Borrower or any Subsidiary (other than an Excluded
Subsidiary) and such judgments or orders shall continue
unsatisfied and unstayed for a period of 30 days; or
(k) any person or group of persons (within the
meaning of Section 13 or 14 of the Securities Exchange
Act of 1934, as amended) shall have acquired beneficial
ownership (within the meaning of Rule 13d-3 promulgated
by the Securities and Exchange Commission under said
Act) of 30% or more of the outstanding shares of common
stock of the Borrower; or, during any period of twelve
consecutive calendar months, individuals who were
directors of the Borrower on the first day of such
period shall cease to constitute a majority of the
board of directors of the Borrower;
then, and in every such event, the Agent shall (i) if
requested by Banks having more than 50% in aggregate amount
of the Commitments, by notice to the Borrower terminate the
Commitments and they shall thereupon terminate, and (ii) if
requested by Banks holding Notes evidencing more than 50% in
aggregate principal amount of the Loans, by notice to the
Borrower declare the Notes (together with accrued interest
thereon) to be, and the Notes shall thereupon become,
immediately due and payable without presentment, demand,
protest or other notice of any kind, all of which are hereby
waived by the Borrower; provided that, in the case of any of
the Events of Default specified in clause (g) or (h) above
with respect to the Borrower, without any notice to the
Borrower or any other act by the Agent or the Banks, the
Commitments shall thereupon terminate and the Notes
(together with accrued interest thereon) shall become
immediately due and payable without presentment, demand,
protest or other notice of any kind, all of which are hereby
waived by the Borrower.
SECTION 6.02. Notice of Default. The Agent shall
give notice to the Borrower under Section 6.01(c) promptly
upon being requested to do so by any Bank and shall
thereupon notify all the Banks thereof.
ARTICLE VII
THE AGENT
SECTION 7.01. Appointment and Authorization.
Each Bank irrevocably appoints and authorizes the Agent to
take such action as agent on its behalf and to exercise such
powers under this Agreement and the Notes as are delegated
to the Agent by the terms hereof or thereof, together with
all such powers as are reasonably incidental thereto.
SECTION 7.02. Agent and Affiliates. Morgan
Guaranty Trust Company of New York shall have the same
rights and powers under this Agreement as any other Bank and
may exercise or refrain from exercising the same as though
it were not the Agent, and Morgan Guaranty Trust Company of
New York and its affiliates may accept deposits from, lend
money to, and generally engage in any kind of business with
the Borrower or any Subsidiary or affiliate of the Borrower
as if it were not the Agent hereunder.
SECTION 7.03. Action by Agent. The obligations
of the Agent hereunder are only those expressly set forth
herein. Without limiting the generality of the foregoing,
the Agent shall not be required to take any action with
respect to any Default, except as expressly provided in
Article VI.
SECTION 7.04. Consultation with Experts. The
Agent may consult with legal counsel (who may be counsel for
the Borrower), independent public accountants and other
experts selected by it and shall not be liable for any
action taken or omitted to be taken by it in good faith in
accordance with the advice of such counsel, accountants or
experts.
SECTION 7.05. Liability of Agent. Neither the
Agent nor any of its affiliates nor any of their respective
directors, officers, agents or employees shall be liable for
any action taken or not taken by it in connection herewith
(i) with the consent or at the request of the Required Banks
or (ii) in the absence of its own gross negligence or
willful misconduct. Neither the Agent nor any of its
affiliates nor any of their respective directors, officers,
agents or employees shall be responsible for or have any
duty to ascertain, inquire into or verify (i) any statement,
warranty or representation made in connection with this
Agreement or any borrowing hereunder; (ii) the performance
or observance of any of the covenants or agreements of the
Borrower; (iii) the satisfaction of any condition specified
in Article III, except receipt of items required to be
delivered to the Agent; or (iv) the validity, effectiveness
or genuineness of this Agreement, the Notes or any other
instrument or writing furnished in connection herewith. The
Agent shall not incur any liability by acting in reliance
upon any notice, consent, certificate, statement, or other
writing (which may be a bank wire, telex, facsimile
transmission or similar writing) believed by it to be
genuine or to be signed by the proper party or parties.
SECTION 7.06. Indemnification. Each Bank shall,
ratably in accordance with its Commitment, indemnify the
Agent, its affiliates and their respective directors,
officers, agents and employees (to the extent not reimbursed
by the Borrower) against any cost, expense (including
counsel fees and disbursements), claim, demand, action, loss
or liability (except such as result from such indemnitees'
gross negligence or willful misconduct) that such
indemnitees may suffer or incur in connection with this
Agreement or any action taken or omitted by such indemnitees
hereunder.
SECTION 7.07. Credit Decision. Each Bank
acknowledges that it has, independently and without reliance
upon the Agent or any other Bank, and based on such
documents and information as it has deemed appropriate, made
its own credit analysis and decision to enter into this
Agreement. Each Bank also acknowledges that it will,
independently and without reliance upon the Agent or any
other Bank, and based on such documents and information as
it shall deem appropriate at the time, continue to make its
own credit decisions in taking or not taking any action
under this Agreement.
SECTION 7.08. Successor Agent. The Agent may
resign at any time by giving notice thereof to the Banks and
the Borrower. Upon any such resignation, the Required Banks
shall have the right to appoint a successor Agent. If no
successor Agent shall have been so appointed by the Required
Banks, and shall have accepted such appointment, within 30
days after the retiring Agent gives notice of resignation,
then the retiring Agent may, on behalf of the Banks, appoint
a successor Agent, which shall be a commercial bank
organized or licensed under the laws of the United States of
America or of any State thereof and having a combined
capital and surplus of at least $50,000,000. Upon the
acceptance of its appointment as Agent hereunder by a
successor Agent, such successor Agent shall thereupon
succeed to and become vested with all the rights and duties
of the retiring Agent, and the retiring Agent shall be
discharged from its duties and obligations hereunder. After
any retiring Agent's resignation hereunder as Agent, the
provisions of this Article shall inure to its benefit as to
any actions taken or omitted to be taken by it while it was
Agent.
SECTION 7.09. Agent's Fee. The Borrower shall
pay to the Agent for its own account fees in the amounts and
at the times previously agreed upon between the Borrower and
the Agent.
ARTICLE VIII
CHANGE IN CIRCUMSTANCES
SECTION 8.01. Basis for Determining Interest Rate
Inadequate or Unfair. If on or prior to the first day of
any Interest Period for any Fixed Rate Borrowing:
(a) the Agent is advised by the Reference Banks
that deposits in dollars (in the applicable amounts)
are not being offered to the Reference Banks in the
relevant market for such Interest Period, or
(b) in the case of a Committed Borrowing, Banks
having 50% or more of the aggregate amount of the
Commitments advise the Agent that the Adjusted CD Rate
or the Adjusted London Interbank Offered Rate, as the
case may be, as determined by the Agent will not
adequately and fairly reflect the cost to such Banks of
funding their CD Loans or Euro-Dollar Loans, as the
case may be, for such Interest Period,
the Agent shall forthwith give notice thereof to the
Borrower and the Banks, whereupon until the Agent notifies
the Borrower that the circumstances giving rise to such
suspension no longer exist, the obligations of the Banks to
make CD Loans or Euro-Dollar Loans, as the case may be,
shall be suspended. Unless the Borrower notifies the Agent
at least two Domestic Business Days before the date of any
Fixed Rate Borrowing for which a Notice of Borrowing has
previously been given that it elects not to borrow on such
date, (i) if such Fixed Rate Borrowing is a Committed
Borrowing, such Borrowing shall instead be made as a Base
Rate Borrowing and (ii) if such Fixed Rate Borrowing is a
Money Market LIBOR Borrowing, the Money Market LIBOR Loans
comprising such Borrowing shall bear interest for each day
from and including the first day to but excluding the last
day of the Interest Period applicable thereto at the Base
Rate for such day.
SECTION 8.02. Illegality. If, on or after the
date of this Agreement, the adoption of any applicable law,
rule or regulation, or any change in any applicable law,
rule or regulation, or any change in the interpretation or
administration thereof by any governmental authority,
central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by
any Bank (or its Euro-Dollar Lending Office) with any
request or directive after the date of this Agreement
(whether or not having the force of law) of any such
authority, central bank or comparable agency shall make it
unlawful or impossible for any Bank (or its Euro-Dollar
Lending Office) to make, maintain or fund its Euro-Dollar
Loans and such Bank shall so notify the Agent, the Agent
shall forthwith give notice thereof to the other Banks and
the Borrower, whereupon until such Bank notifies the
Borrower and the Agent that the circumstances giving rise to
such suspension no longer exist, the obligation of such Bank
to make Euro-Dollar Loans shall be suspended. Before giving
any notice to the Agent pursuant to this Section, such Bank
shall designate a different Euro-Dollar Lending Office if
such designation will avoid the need for giving such notice
and will not, in the judgment of such Bank, be otherwise
disadvantageous to such Bank. If such Bank shall determine
in good faith that it may not lawfully continue to maintain
and fund any of its outstanding Euro-Dollar Loans to
maturity and shall so specify in such notice, the Borrower
shall immediately prepay in full the then outstanding
principal amount of each such Euro-Dollar Loan, together
with accrued interest thereon. Concurrently with prepaying
each such Euro-Dollar Loan, the Borrower shall borrow a Base
Rate Loan in an equal principal amount from such Bank (on
which interest and principal shall be payable
contemporaneously with the related Euro-Dollar Loans of the
other Banks), and such Bank shall make such a Base Rate
Loan.
SECTION 8.03. Increased Cost and Reduced Return.
(a) If on or after (x) the date hereof, in the case of any
Committed Loan or any obligation to make Committed Loans or
(y) the date of the related Money Market Quote, in the case
of any Money Market Loan, the adoption of any applicable
law, rule or regulation, or any change in any applicable
law, rule or regulation, or any change in the interpretation
or administration thereof by any governmental authority,
central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by
any Bank (or its Applicable Lending Office) with any request
or directive after such date (whether or not having the
force of law) of any such authority, central bank or
comparable agency shall impose, modify or deem applicable
any reserve (including, without limitation, any such
requirement imposed by the Board of Governors of the Federal
Reserve System, but excluding (i) with respect to any CD
Loan any such requirement included in an applicable Domestic
Reserve Percentage and (ii) with respect to any Euro-Dollar
Loan any such requirement included in an applicable
Euro-Dollar Reserve Percentage), special deposit, insurance
assessment (excluding, with respect to any CD Loan, any such
requirement reflected in an applicable Assessment Rate) or
similar requirement against assets of, deposits with or for
the account of, or credit extended by, any Bank (or its
Applicable Lending Office) or shall impose on any Bank (or
its Applicable Lending Office) or on the United States
market for certificates of deposit or the London interbank
market any other condition affecting its Fixed Rate Loans,
its Note or its obligation to make Fixed Rate Loans and the
result of any of the foregoing is to increase the cost to
such Bank (or its Applicable Lending Office) of making or
maintaining any Fixed Rate Loan, or to reduce the amount of
any sum received or receivable by such Bank (or its
Applicable Lending Office) under this Agreement or under its
Note with respect thereto, by an amount deemed by such Bank
to be material, then, within 15 days after demand by such
Bank (with a copy to the Agent), the Borrower shall pay to
such Bank such additional amount or amounts as will
compensate such Bank for such increased cost or reduction.
(b) If any Bank shall have determined in good
faith that, after the date hereof, the adoption of any
applicable law, rule or regulation regarding capital
adequacy, or any change in any such law, rule or regulation,
or any change in the interpretation or administration
thereof by any governmental authority, central bank or
comparable agency charged with the interpretation or
administration thereof, or any request or directive after
the date hereof regarding capital adequacy (whether or not
having the force of law) of any such authority, central bank
or comparable agency, has or would have the effect of
reducing the rate of return on capital of such Bank (or its
Parent) as a consequence of such Bank's obligations
hereunder to a level below that which such Bank (or its
Parent) could have achieved but for such adoption, change,
request or directive (taking into consideration its policies
with respect to capital adequacy) by an amount deemed by
such Bank to be material, then from time to time, within 15
days after demand by such Bank (with a copy to the Agent),
the Borrower shall pay to such Bank such additional amount
or amounts as will compensate such Bank (or its Parent) for
such reduction.
(c) Each Bank will promptly notify the Borrower
and the Agent of any event of which it has knowledge,
occurring after the date hereof, which will entitle such
Bank to compensation pursuant to this Section and will
designate a different Applicable Lending Office if such
designation will avoid the need for, or reduce the amount
of, such compensation and will not, in the judgment of such
Bank, be otherwise disadvantageous to such Bank. A
certificate of any Bank claiming compensation under this
Section and setting forth the additional amount or amounts
to be paid to it hereunder shall, if submitted in good
faith, be conclusive in the absence of manifest error;
provided that any certificate delivered pursuant to this
Section 8.03(c) shall (i) in the case of a certificate in
respect of amounts payable pursuant to Section 8.03(a), set
forth in reasonable detail the basis for and the calculation
of such amounts, and (ii) in the case of a certificate in
respect of amounts payable pursuant to Section 8.03(b), set
forth at least the same amount of detail in respect of the
calculation of such amounts as such Bank provides in similar
circumstances to other similarly situated borrowers and also
include a statement by such Bank that it has allocated to
its Commitment or outstanding Loans no greater than a
substantially proportionate amount of any reduction of the
rate of return on such Bank's capital due to the matters
described in Section 8.03(b) as it has allocated to each of
its other commitments to lend or any outstanding loans to
similarly situated borrowers that are affected similarly by
such adoption or change. Subject to the foregoing, in
determining such amount, such Bank may use any reasonable
averaging and attribution methods.
SECTION 8.04. Taxes. (a) For purposes of this
Section 8.04, the following terms have the following
meanings:
"Taxes" means any and all present or future taxes,
duties, levies, imposts, deductions, charges or withholdings
with respect to any payment by the Borrower pursuant to this
Agreement or under any Note, and all liabilities with
respect thereto, excluding (i) in the case of each Bank and
the Agent, taxes imposed on its income, and franchise or
similar taxes imposed on it, by a jurisdiction under the
laws of which such Bank or the Agent (as the case may be) is
organized or in which its principal executive office is
located or, in the case of each Bank, in which its
Applicable Lending Office is located, or, in the case of the
Agent and each Bank, such taxes which would not have been
imposed on the Agent or such Bank but for any present or
former connection between the Agent or such Bank and the
jurisdiction imposing such tax (other than any such
connection arising from the Agent or the Bank having
executed, delivered or performed its obligations or received
a payment under, or enforced, this Agreement or the Notes)
and (ii) in the case of each Bank, any United States
withholding tax imposed on such payments but only to the
extent that such Bank (a) is subject to United States
withholding tax at the time such Bank first becomes a party
to this Agreement or (b) subsequently becomes subject to
United States withholding tax solely by reason of the change
of its Applicable Lending Office by such Bank.
"Other Taxes" means any present or future stamp or
documentary taxes and any other excise or property taxes, or
similar charges or levies (other than franchise taxes or
taxes imposed on the net income of a Bank or the Agent),
which arise from any payment made pursuant to this Agreement
or under any Note or from the execution or delivery of, or
otherwise with respect to, this Agreement or any Note.
(b) Any and all payments by the Borrower to or
for the account of any Bank or the Agent hereunder or under
any Note shall be made without deduction for any Taxes or
Other Taxes; provided that, if the Borrower shall be
required by law to deduct any Taxes or Other Taxes from any
such payments, (i) the sum payable shall be increased as
necessary so that after making all required deductions
(including deductions applicable to additional sums payable
under this Section 8.04) such Bank or the Agent (as the case
may be) receives an amount equal to the sum it would have
received had no such deductions been made, (ii) the Borrower
shall make such deductions, (iii) the Borrower shall pay the
full amount deducted to the relevant taxation authority or
other authority in accordance with applicable law and
(iv) the Borrower shall furnish to the Agent, at its address
referred to in Section 9.01, the original or a certified
copy of a receipt evidencing payment thereof.
(c) The Borrower agrees to indemnify each Bank
and the Agent for the full amount of Taxes or Other Taxes
(including, without limitation, any Taxes or Other Taxes
imposed or asserted by any jurisdiction on amounts payable
under this Section 8.04) paid by such Bank or the Agent (as
the case may be) and any liability (including penalties,
interest and expenses) arising therefrom or with respect
thereto. This indemnification shall be paid within 15 days
after such Bank or the Agent (as the case may be) makes
demand therefor.
(d) Each Bank organized under the laws of a
jurisdiction outside the United States, on or prior to the
date of its execution and delivery of this Agreement in the
case of each Bank listed on the signature pages hereof and
on or prior to the date on which it becomes a Bank in the
case of each other Bank, and from time to time thereafter if
requested in writing by the Borrower (but only so long as
such Bank remains lawfully able to do so), shall provide the
Borrower with Internal Revenue Service form 1001 or 4224, as
appropriate, or any successor form prescribed by the
Internal Revenue Service, certifying that such Bank is
entitled to benefits under an income tax treaty to which the
United States is a party which exempts the Bank from United
States withholding tax or reduces the rate of withholding
tax on payments of interest for the account of such Bank or
certifying that the income receivable pursuant to this
Agreement is effectively connected with the conduct of a
trade or business in the United States.
(e) For any period with respect to which a Bank
has failed to provide the Borrower with the appropriate form
pursuant to Section 8.04(d) (unless such failure is due to a
change in treaty, law or regulation occurring subsequent to
the date on which such form originally was required to be
provided), such Bank shall not be entitled to
indemnification under Section 8.04(b) or (c) with respect to
Taxes imposed by the United States; provided that if a Bank,
which is otherwise exempt from or subject to a reduced rate
of withholding tax, becomes subject to Taxes because of its
failure to deliver a form required hereunder, the Borrower
shall take such steps as such Bank shall reasonably request
to assist such Bank to recover such Taxes.
(f) If the Borrower is required to pay additional
amounts to or for the account of any Bank pursuant to this
Section 8.04, then such Bank will change the jurisdiction of
its Applicable Lending Office if, in the judgment of such
Bank, such change (i) will eliminate or reduce any such
additional payment which may thereafter accrue and (ii) is
not otherwise disadvantageous to such Bank.
SECTION 8.05. Base Rate Loans Substituted for
Affected Fixed Rate Loans. If (i) the obligation of any
Bank to make Euro-Dollar Loans has been suspended pursuant
to Section 8.02 or (ii) any Bank has demanded compensation
under Section 8.03 or 8.04 with respect to its CD Loans or
Euro-Dollar Loans and the Borrower shall, by at least five
Euro-Dollar Business Days' prior notice to such Bank through
the Agent, have elected that the provisions of this Section
shall apply to such Bank, then, unless and until such Bank
notifies the Borrower that the circumstances giving rise to
such suspension or demand for compensation no longer exist:
(a) all Loans which would otherwise be made by
such Bank as CD Loans or Euro-Dollar Loans, as the case
may be, shall be made instead as Base Rate Loans (on
which interest and principal shall be payable
contemporaneously with the related Fixed Rate Loans of
the other Banks), and
(b) after each of its CD Loans or Euro-Dollar
Loans, as the case may be, has been repaid, all
payments of principal which would otherwise be applied
to repay such Fixed Rate Loans shall be applied to
repay its Base Rate Loans instead.
ARTICLE IX
MISCELLANEOUS
SECTION 9.01. Notices. All notices, requests and
other communications to any party hereunder shall be in
writing (including bank wire, telex, facsimile transmission
or similar writing) and shall be given to such party: (x)
in the case of the Borrower or the Agent, at its address,
facsimile number or telex number set forth on the signature
pages hereof, (y) in the case of any Bank, at its address,
facsimile number or telex number set forth in its
Administrative Questionnaire or (z) in the case of any
party, such other address, facsimile number or telex number
as such party may hereafter specify for the purpose by
notice to the Agent and the Borrower. Each such notice,
request or other communication shall be effective (i) if
given by telex, when such telex is transmitted to the telex
number specified in this Section and the appropriate
answerback is received, (ii) if given by facsimile
transmission, when transmitted to the facsimile number
specified in this Section and confirmation of receipt is
received, (iii) if given by mail, 72 hours after such
communication is deposited in the mails with first class
postage prepaid, addressed as aforesaid or (iv) if given by
any other means, when delivered at the address specified in
this Section; provided that notices to the Agent under
Article II or Article VIII shall not be effective until
received.
SECTION 9.02. No Waivers. No failure or delay by
the Agent or any Bank in exercising any right, power or
privilege hereunder or under any Note shall operate as a
waiver thereof nor shall any single or partial exercise
thereof preclude any other or further exercise thereof or
the exercise of any other right, power or privilege. The
rights and remedies herein provided shall be cumulative and
not exclusive of any rights or remedies provided by law.
SECTION 9.03. Expenses; Indemnification. (a) The
Borrower shall pay (i) all out-of-pocket expenses of the
Agent, including the reasonable fees and disbursements of
special counsel for the Agent, in connection with the
preparation and administration of this Agreement, any waiver
or consent hereunder or any amendment hereof or any Default
or alleged Default hereunder and (ii) if an Event of Default
occurs, all out-of-pocket expenses incurred by the Agent and
each Bank, including (without duplication) the reasonable
fees and disbursements of outside counsel in connection with
such Event of Default and collection, bankruptcy, insolvency
and other enforcement proceedings resulting therefrom.
(b) The Borrower agrees to indemnify the Agent
and each Bank, their respective affiliates and the
respective directors, officers, agents and employees of the
foregoing (each an "Indemnitee") and hold each Indemnitee
harmless from and against any and all liabilities, losses,
damages, costs and expenses of any kind, including, without
limitation, the reasonable fees and disbursements of
counsel, which may be incurred by such Indemnitee in
connection with any investigative, administrative or
judicial proceeding (whether or not such Indemnitee shall be
designated a party thereto) brought or threatened relating
to or arising out of this Agreement or any actual or
proposed use of proceeds of Loans hereunder; provided that
no Indemnitee shall have the right to be indemnified
hereunder for such Indemnitee's own gross negligence or
willful misconduct as determined by a court of competent
jurisdiction and provided, further, that no Bank shall have
the right to be indemnified hereunder in any such proceeding
wherein the parties thereto are only such Bank and any other
Person to whom such Bank shall have granted a participation
in, or assigned all or a proportionate part of, its
Commitment or its Loans or Notes or its rights or
obligations hereunder or under its Notes.
SECTION 9.04. Sharing of Set-Offs. Each Bank
agrees that if it shall, by exercising any right of set-off
or counterclaim or otherwise, receive payment of a
proportion of the aggregate amount of principal and interest
due with respect to any Note held by it which is greater
than the proportion received by any other Bank in respect of
the aggregate amount of principal and interest due with
respect to any Note held by such other Bank, the Bank
receiving such proportionately greater payment shall
purchase such participations in the Notes held by the other
Banks, and such other adjustments shall be made, as may be
required so that all such payments of principal and interest
with respect to the Notes held by the Banks shall be shared
by the Banks pro rata; provided that nothing in this Section
shall impair the right of any Bank to exercise any right of
set-off or counterclaim it may have and to apply the amount
subject to such exercise to the payment of indebtedness of
the Borrower other than its indebtedness hereunder. The
Borrower agrees, to the fullest extent it may effectively do
so under applicable law, that any holder of a participation
in a Note, whether or not acquired pursuant to the foregoing
arrangements, may exercise rights of set-off or counterclaim
and other rights with respect to such participation as fully
as if such holder of a participation were a direct creditor
of the Borrower in the amount of such participation.
SECTION 9.05. Amendments and Waivers. Any
provision of this Agreement or the Notes may be amended or
waived if, but only if, such amendment or waiver is in
writing and is signed by the Borrower and the Required Banks
(and, if the rights or duties of the Agent are affected
thereby, by the Agent); provided that no such amendment or
waiver shall, unless signed by all the Banks, (i) increase
or decrease the Commitment of any Bank (except for a ratable
decrease in the Commitments of all Banks) or subject any
Bank to any additional obligation, (ii) reduce the principal
of or rate of interest on any Loan or any fees hereunder,
except as provided below, (iii) postpone the date fixed for
any payment of principal of or interest on any Loan or any
fees hereunder or for any reduction or termination of any
Commitment and (iv) change the percentage of the Commitments
or of the aggregate unpaid principal amount of the Notes, or
the number of Banks, which shall be required for the Banks
or any of them to take any action under this Section or any
other provision of this Agreement.
SECTION 9.06. Successors and Assigns. (a) The
provisions of this Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective
successors and assigns, except that the Borrower may not
assign or otherwise transfer any of its rights under this
Agreement without the prior written consent of all Banks.
(b) Any Bank may at any time grant to one or more
banks or other institutions (each a "Participant")
participating interests in its Commitment or any or all of
its Loans. In the event of any such grant by a Bank of a
participating interest to a Participant, whether or not upon
notice to the Borrower and the Agent, such Bank shall remain
responsible for the performance of its obligations
hereunder, and the Borrower and the Agent shall continue to
deal solely and directly with such Bank in connection with
such Bank's rights and obligations under this Agreement.
Any agreement pursuant to which any Bank may grant such a
participating interest shall provide that such Bank shall
retain the sole right and responsibility to enforce the
obligations of the Borrower hereunder including, without
limitation, the right to approve any amendment, modification
or waiver of any provision of this Agreement; provided that
such participation agreement may provide that such Bank will
not agree to any modification, amendment or waiver of this
Agreement described in clause (i), (ii) or (iii) of Section
9.05 without the consent of the Participant. The Borrower
agrees that each Participant shall, to the extent provided
in its participation agreement, be entitled to the benefits
of Article VIII with respect to its participating interest.
An assignment or other transfer which is not permitted by
subsection (c) or (d) below shall be given effect for
purposes of this Agreement only to the extent of a
participating interest granted in accordance with this
subsection (b).
(c) Any Bank may at any time assign to one or
more banks or other financial institutions (each an
"Assignee") all, or a proportionate part (equivalent to an
initial Commitment of not less than $10,000,000, and
provided that after giving effect thereto the Commitment of
the assigning Bank is equivalent to an initial Commitment of
not less than $10,000,000) of all, of its rights and
obligations under this Agreement and the Notes, and such
Assignee shall assume such rights and obligations, pursuant
to an Assignment and Assumption Agreement in substantially
the form of Exhibit H hereto executed by such Assignee and
such transferor Bank, with (and subject to) the subscribed
consent of the Borrower, which shall not be unreasonably
withheld, and the Agent; provided that if an Assignee is an
affiliate of such transferor Bank or was a Bank immediately
prior to such assignment, no such consent shall be required;
and provided further that such assignment may, but need not,
include rights of the transferor Bank in respect of
outstanding Money Market Loans. Upon execution and delivery
of such instrument and payment by such Assignee to such
transferor Bank of an amount equal to the purchase price
agreed between such transferor Bank and such Assignee, such
Assignee shall be a Bank party to this Agreement and shall
have all the rights and obligations of a Bank with a
Commitment as set forth in such instrument of assumption,
and the transferor Bank shall be released from its
obligations hereunder to a corresponding extent, and no
further consent or action by any party shall be required.
Upon the consummation of any assignment pursuant to this
subsection (c), the transferor Bank, the Agent and the
Borrower shall make appropriate arrangements so that, if
required, a new Note is issued to the Assignee. In
connection with any such assignment, the transferor Bank
shall pay to the Agent an administrative fee for processing
such assignment in the amount of $2,500. If the Assignee is
not incorporated under the laws of the United States of
America or a state thereof, it shall deliver to the Borrower
and the Agent certification as to exemption from deduction
or withholding of any United States federal income taxes in
accordance with Section 8.04.
(d) Any Bank may at any time assign all or any
portion of its rights under this Agreement and its Note to a
Federal Reserve Bank. No such assignment shall release the
transferor Bank from its obligations hereunder.
(e) No Assignee, Participant or other transferee
of any Bank's rights shall be entitled to receive any
greater payment under Section 8.03 or 8.04 than such Bank
would have been entitled to receive with respect to the
rights transferred, unless such transfer is made with the
Borrower's prior written consent or by reason of the
provisions of Section 8.02, 8.03 or 8.04 requiring such Bank
to designate a different Applicable Lending Office under
certain circumstances or at a time when the circumstances
giving rise to such greater payment did not exist.
SECTION 9.07. Collateral. Each of the Banks
represents to the Agent and each of the other Banks that it
in good faith is not relying upon any "margin stock" (as
defined in Regulation U) as collateral in the extension or
maintenance of the credit provided for in this Agreement.
SECTION 9.08. Governing Law; Submission to
Jurisdiction. This Agreement and each Note shall be
governed by and construed in accordance with the laws of the
State of New York. The Borrower hereby submits to the
nonexclusive jurisdiction of the United States District
Court for the Southern District of New York and of any New
York State court sitting in New York City for purposes of
all legal proceedings arising out of or relating to this
Agreement or the transactions contemplated hereby. The
Borrower irrevocably waives, to the fullest extent permitted
by law, any objection which it may now or hereafter have to
the laying of the venue of any such proceeding brought in
such a court and any claim that any such proceeding brought
in such a court has been brought in an inconvenient forum.
SECTION 9.09. Counterparts; Integration;
Effectiveness. This Agreement may be signed in any number
of counterparts, each of which shall be an original, with
the same effect as if the signatures thereto and hereto were
upon the same instrument. This Agreement constitutes the
entire agreement and understanding among the parties hereto
and supersedes any and all prior agreements and
understandings, oral or written, relating to the subject
matter hereof. This Agreement shall become effective upon
receipt by the Agent of counterparts hereof signed by each
of the parties hereto (or, in the case of any party as to
which an executed counterpart shall not have been received,
receipt by the Agent in form satisfactory to it of
telegraphic, telex, facsimile or other written confirmation
from such party of execution of a counterpart hereof by such
party).
SECTION 9.10. WAIVER OF JURY TRIAL. EACH OF THE
BORROWER, THE AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES
ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING
ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY.
SECTION 9.11. Existing Agreement. Each Bank which
is a party hereto and to the Existing Agreement hereby
waives the notice required to be given pursuant to Section
9.03 thereof in order to terminate the "Commitments" (as
defined therein).
IN WITNESS WHEREOF, the parties hereto have caused
this Agreement to be duly executed by their respective
authorized officers as of the day and year first above
written.
USF&G CORPORATION
By DAN L. HALE
Title:
100 Light Street
Baltimore, MD 21202
Facsimile number: (410) 234-2056
Commitments
$40,000,000 MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By___________________________
Title:
$35,000,000 THE BANK OF NEW YORK
By___________________________
Title:
$35,000,000 DEUTSCHE BANK AG, NEW YORK BRANCH
AND/OR CAYMAN ISLAND BRANCHES
By___________________________
Title:
$35,000,000 FIRST INTERSTATE BANK OF
CALIFORNIA
By___________________________
Title:
$30,000,000 MELLON BANK, N.A.
By___________________________
Title:
$25,000,000 ABN AMRO BANK N.V.,
NEW YORK BRANCH
By___________________________
Title:
By___________________________
Title:
$25,000,000 CIBC INC.
By___________________________
Title:
$25,000,000 CREDIT LYONNAIS NEW YORK BRANCH
By___________________________
Title:
$25,000,000 FIRST NATIONAL BANK OF MARYLAND
By___________________________
Title:
$25,000,000 NATIONSBANK, N.A.
By___________________________
Title:
$20,000,000 CREDIT SUISSE
By___________________________
Title:
$20,000,000 SWISS BANK CORPORATION
By___________________________
Title:
$15,000,000 THE CHASE MANHATTAN BANK N.A.
By___________________________
Title:
$15,000,000 THE FUJI BANK, LIMITED,
NEW YORK BRANCH
By___________________________
Title:
$15,000,000 MERCANTILE-SAFE DEPOSIT &
TRUST COMPANY
By___________________________
Title:
$15,000,000 SIGNET BANK/MARYLAND
By___________________________
Title:
_________________
Total Commitments
$400,000,000
=================
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, as Agent
By___________________________
Title:
60 Wall Street
New York, New York 10260-0060
Attention: Patricia Merritt
Telex number: 177615
Facsimile number: (212) 648-5249
PRICING SCHEDULE
The "Euro-Dollar Margin", "Base Rate Margin", "CD
Margin", and "Facility Fee Rate" for any day are the
respective percentages set forth below in the applicable row
under the column corresponding to the Status that exists on
such day:
Euro-Dollar
Status Margin
Level I 0.35%
Level II 0.35%
Level III 0.40%
Level IV 0.55%
Level V 1.375%
Base Rate
Margin
Level I 0.0%
Level II 0.0%
Level III 0.0%
Level IV 0.0%
Level V 1.00%
CD Margin
Level I 0.475%
Level II 0.475%
Level III 0.525%
Level IV 0.675%
Level V 1.50%
Facility Fee
Rate
Level I 0.20%
Level II 0.25%
Level III 0.25%
Level IV 0.45%
Level V 0.625%
For purposes of this Schedule, the following terms
have the following meanings:
"Level I Status" exists at any date if, at such
date, the Borrower's long-term debt is rated BBB or higher
by S&P and Baa2 or higher by Moody's.
"Level II Status" exists at any date if, at such
date, (i) the Borrower's long-term debt is rated BBB- or
higher by S&P and Baa3 or higher by Moody's and (ii) Level I
Status does not exist.
"Level III Status" exists at any date if, at such
date, (i) the Borrower's long-term debt is rated BBB- or
higher by S&P or Baa3 or higher by Moody's and (ii) neither
Level I Status nor Level II Status exists.
"Level IV Status" exists at any date if, at such
date, (i) the Borrower's long-term debt is rated BB or
higher by S&P and Ba2 or higher by Moody's and (ii) none of
Level I Status, Level II Status and Level III Status exists.
"Level V Status" exists at any date if, at such
date, no other Status exists.
"Moody's" means Moody's Investors Service, Inc.
"S&P" means Standard & Poor's Ratings Group.
"Status" refers to the determination of which of
Level I Status, Level II Status, Level III Status, Level IV
Status or Level V Status exists at any date.
The credit ratings to be utilized for purposes of
this Schedule are those assigned to the senior unsecured
long-term debt securities of the Borrower without third-
party credit enhancement (the "Long-Term Securities"), and
any rating assigned to any other debt security of the
Borrower shall be disregarded. The rating in effect at any
date is that in effect at the close of business on such
date. For purposes of determining Status: (i) if at any
date the rating of the Long-Term Securities by Moody's shall
be higher or lower than the comparable rating by S&P by one
rating level (it being understood that for these purposes an
S&P rating of A+ is comparable to a Moody's rating of A1, an
S&P rating of A is comparable to a Moody's rating of A2, and
so forth), then the rating of the Long-Term Securities by
each of Moody's and S&P shall be deemed to be the higher of
the two ratings; and (ii) if at any date the rating of the
Long-Term Securities by Moody's shall be higher or lower
than the comparable rating by S&P by two or more rating
levels (it being understood that for these purposes an S&P
rating of A+ is comparable to a Moody's rating of A1, an S&P
rating of A is comparable to a Moody's rating of A2, and so
forth), then the rating of the Long-Term Securities by each
of Moody's and S&P shall be deemed to be the comparable S&P
and Moody's ratings at the midpoint between the two actual
ratings, or, if there shall be no rating at the midpoint,
the next higher rating from the midpoint between the two
actual ratings. For example, if the Long-Term Securities
are rated BBB by S&P and Ba1 by Moody's, the Long-Term
Securities shall be deemed to be rated BBB- by S&P and Baa3
by Moody's; and if the Long-Term Securities are rated BBB+
by S&P and Ba1 by Moody's, the Long-Term Securities shall be
deemed to be rated BBB by S&P and Baa2 by Moody's.
SCHEDULE I
The following amounts of debt are outstanding and such debt is secured by
various liens:
Amount Transaction
$13,000,000 Chancellor Capital Holdings
10,995,000 Norwest
1,445,000 Oklahoma Mortgage
7,585,000 Orangewood
6,685,000 Northmark
4,979,000 Breezewood Mews
460,000 Charleston
9,800,000 Laurel Village
45,000,000 Others
Certain of the foregoing items included in this Schedule I may also be
permitted under other provisions of Section 5.06.
EXHIBIT A
NOTE
New York, New York
, 19
For value received, USF&G CORPORATION, a Maryland
corporation (the "Borrower"), promises to pay to the order
of (the "Bank"), for the
account of its Applicable Lending Office, the unpaid
principal amount of each Loan made by the Bank to the
Borrower pursuant to the Credit Agreement referred to below
on the last day of the Interest Period relating to such
Loan. The Borrower promises to pay interest on the unpaid
principal amount of each such Loan on the dates and at the
rate or rates provided for in the Credit Agreement. All
such payments of principal and interest shall be made in
lawful money of the United States in Federal or other
immediately available funds at the office of Morgan Guaranty
Trust Company of New York, 60 Wall Street, New York, New
York.
All Loans made by the Bank, the respective types
and maturities thereof and all repayments of the principal
thereof shall be recorded by the Bank and, if the Bank so
elects in connection with any transfer or enforcement
hereof, appropriate notations to evidence the foregoing
information with respect to each such Loan then outstanding
may be endorsed by the Bank on the schedule attached hereto,
or on a continuation of such schedule attached to and made a
part hereof; provided that the failure of the Bank to make
any such recordation or endorsement shall not affect the
obligations of the Borrower hereunder or under the Credit
Agreement.
This note is one of the Notes referred to in the
Credit Agreement dated as of September 30, 1994 among the
Borrower, the banks listed on the signature pages thereof
and Morgan Guaranty Trust Company of New York, as Agent (as
the same may be amended from time to time, the "Credit
Agreement"). Terms defined in the Credit Agreement are used
herein with the same meanings. Reference is made to the
Credit Agreement for provisions for the prepayment hereof
and the acceleration of the maturity hereof.
USF&G CORPORATION
By________________________
Title:
Note (cont'd)
LOANS AND PAYMENTS OF PRINCIPAL
_________________________________________________________________________
Amount of
Amount of Type of Principal Maturity Notation
Date Loan Loan Repaid Date Made By
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
EXHIBIT B
Form of Money Market Quote Request
[Date]
To: Morgan Guaranty Trust Company of New York
(the "Agent")
From: USF&G Corporation
Re: Credit Agreement (the "Credit Agreement")
dated as of September 30, 1994 among the
Borrower, the Banks listed on the signature
pages thereof and the Agent
We hereby give notice pursuant to Section 2.03 of
the Credit Agreement that we request Money Market Quotes for
the following proposed Money Market Borrowing(s):
Date of Borrowing: __________________
Principal Amount Interest Period
$
Such Money Market Quotes should offer a Money
Market [Margin] [Absolute Rate]. [The applicable base rate
is the London Interbank Offered Rate.]
Terms used herein have the meanings assigned to
them in the Credit Agreement.
USF&G CORPORATION
By________________________
Title:
EXHIBIT C
Form of Invitation for Money Market Quotes
To: [Name of Bank]
Re: Invitation for Money Market Quotes to
USF&G Corporation (the "Borrower")
Pursuant to Section 2.03 of the Credit Agreement
dated as of September 30, 1994 among the Borrower, the Banks
parties thereto and the undersigned, as Agent, we are
pleased on behalf of the Borrower to invite you to submit
Money Market Quotes to the Borrower for the following
proposed Money Market Borrowing(s):
Date of Borrowing: __________________
Principal Amount Interest Period
$
Such Money Market Quotes should offer a Money
Market [Margin] [Absolute Rate]. [The applicable base rate
is the London Interbank Offered Rate.]
Please respond to this invitation by no later than
[2:00 P.M.] [9:30 A.M.] (New York City time) on [date].
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By______________________
Authorized Officer
EXHIBIT D
Form of Money Market Quote
To: Morgan Guaranty Trust Company of New York,
as Agent
Re: Money Market Quote to USF&G Corporation
(the "Borrower")
In response to your invitation on behalf of the
Borrower dated September 30, 1994, we hereby make the
following Money Market Quote on the following terms:
1. Quoting Bank: ________________________________
2. Person to contact at Quoting Bank:
_____________________________
3. Date of Borrowing: ____________________*
4. We hereby offer to make Money Market Loan(s) in the
following principal amounts, for the following Interest
Periods and at the following rates:
Principal Interest Money Market
Amount** Period*** [Margin****] [Absolute Rate*****]
$
$
[Provided, that the aggregate principal amount of Money
Market Loans for which the above offers may be accepted
shall not exceed $____________.]**
__________
* As specified in the related Invitation.
** Principal amount bid for each Interest Period may not
exceed principal amount requested. Specify aggregate
limitation if the sum of the individual offers exceeds the
amount the Bank is willing to lend. Bids must be made for
$5,000,000 or a larger multiple of $1,000,000.
(notes continued on following page)
We understand and agree that the offer(s) set
forth above, subject to the satisfaction of the applicable
conditions set forth in the Credit Agreement dated as of
September 30, 1994 among the Borrower, the Banks listed on
the signature pages thereof and yourselves, as Agent,
irrevocably obligates us to make the Money Market Loan(s)
for which any offer(s) are accepted, in whole or in part.
Very truly yours,
[NAME OF BANK]
Dated:_______________ By:__________________________
Authorized Officer
__________
*** Not less than one month or not less than 7 days, as
specified in the related Invitation. No more than five bids
are permitted for each Interest Period.
**** Margin over or under the London Interbank Offered Rate
determined for the applicable Interest Period. Specify
percentage (to the nearest 1/10,000 of 1%) and specify
whether "PLUS" or "MINUS".
***** Specify rate of interest per annum (to the nearest
1/10,000th of 1%).
EXHIBIT E
OPINION OF THE
GENERAL COUNSEL OF THE BORROWER
To the Banks and the Agent
Referred to Below
c/o Morgan Guaranty Trust Company
of New York, as Agent
60 Wall Street
New York, New York 10260
Dear Sirs:
I am General Counsel for USF&G Corporation (the
"Borrower") and have acted in such capacity in connection
with the Credit Agreement (the "Credit Agreement") dated as
of September 30, 1994 among the Borrower, the banks listed
on the signature pages thereof and Morgan Guaranty Trust
Company of New York, as Agent. Terms defined in the Credit
Agreement are used herein as therein defined. This opinion
is being rendered to you at the request of my client
pursuant to Section 3.01(b) of the Credit Agreement.
I have examined originals or copies, certified or
otherwise identified to our satisfaction, of such documents,
corporate records, certificates of public officials and
other instruments and have conducted such other
investigations of fact and law as I have deemed necessary or
advisable for purposes of this opinion.
Upon the basis of the foregoing, I am of the
opinion that:
1. The Borrower has all governmental licenses,
authorizations, consents and approvals required to carry on
its business as now conducted, other than such licenses,
authorizations, consents and approvals which, if not held or
obtained by the Borrower, do not, in the aggregate, have a
Material Adverse Effect.
2. To the best of my knowledge after responsible
inquiry, the execution, delivery and performance by the
Borrower of the Credit Agreement and the Notes do not
contravene, or constitute a default under, any provision of
any material agreement, judgment, injunction, order, decree
or other instrument binding upon the Borrower or any of its
Subsidiaries or result in the creation or imposition of any
material Lien on any asset of the Borrower or any of its
Subsidiaries.
3. To the best of my knowledge after responsible
inquiry, there is no action, suit or proceeding pending or
threatened against or affecting the Borrower or any of its
Subsidiaries before any court or arbitrator or any
governmental body, agency or official, in which there is a
reasonable possibility of an adverse decision which could
materially adversely affect the business, consolidated
financial position or consolidated results of operations of
the Borrower and its Consolidated Subsidiaries, considered
as a whole or which in any manner draws into question the
validity of the Credit Agreement or the Notes, except as may
have been disclosed in the financial statements referred to
in Section 4.04(a) of the Credit Agreement.
4. Each of the Borrower's corporate Subsidiaries
is a corporation validly existing and in good standing under
the laws of its jurisdiction of incorporation, and has all
corporate powers and all material governmental licenses,
authorizations, consents and approvals required to carry on
its business as now conducted, other than such licenses,
authorizations, consents and approvals which, if not held or
obtained by the Borrower, do not, in the aggregate, have a
Material Adverse Effect.
Very truly yours,
EXHIBIT F
OPINION OF
COUNSEL FOR THE BORROWER
To the Banks and the Agent
Referred to Below
c/o Morgan Guaranty Trust Company
of New York, as Agent
60 Wall Street
New York, New York 10260
Dear Sirs:
We have acted as counsel for USF&G Corporation
(the "Borrower") in connection with the Credit Agreement
(the "Credit Agreement") dated as of September 30, 1994
among the Borrower, the banks listed on the signature pages
thereof and Morgan Guaranty Trust Company of New York, as
Agent. Terms defined in the Credit Agreement are used
herein as therein defined. This opinion is being rendered
to you at the request of our client pursuant to Section
3.01(c) of the Credit Agreement.
We have examined originals or copies, certified or
otherwise identified to our satisfaction, of such documents,
corporate records, certificates of public officials and
other instruments and have conducted such other
investigations of fact and law as we have deemed necessary
or advisable for purposes of this opinion.
Upon the basis of the foregoing, we are of the
opinion that:
1. The Borrower is a corporation validly existing
and in good standing under the laws of Maryland, and has all
corporate powers required to carry on its business as now
conducted.
2. The execution, delivery and performance by the
Borrower of the Credit Agreement and the Notes are within
the Borrower's corporate powers, have been duly authorized
by all necessary corporate action, require no action by the
Borrower by or in respect of, or filing by the Borrower
with, any governmental body, agency or official and do not
contravene, or constitute a default under, any provision of
applicable law or regulation or of the certificate of
incorporation or by-laws of the Borrower.
3. The Credit Agreement constitutes a valid and
binding agreement of the Borrower and each Note constitutes
a valid and binding obligation of the Borrower, in each case
enforceable in accordance with its terms, except as the same
may be limited by bankruptcy, insolvency or similar laws
affecting creditors' rights generally and by general
principles of equity (including public policy limitations on
the indemnification provisions thereof).
Very truly yours,
EXHIBIT G
OPINION OF
DAVIS POLK & WARDWELL, SPECIAL COUNSEL
FOR THE AGENT
To the Banks and the Agent
Referred to Below
c/o Morgan Guaranty Trust Company
of New York, as Agent
60 Wall Street
New York, New York 10260
Dear Sirs:
We have participated in the preparation of the
Credit Agreement (the "Credit Agreement") dated as of
September 30, 1994 among USF&G Corporation, a Maryland
corporation (the "Borrower"), the banks listed on the
signature pages thereof (the "Banks") and Morgan Guaranty
Trust Company of New York, as Agent (the "Agent"), and have
acted as special counsel for the Agent for the purpose of
rendering this opinion pursuant to Section 3.01(d) of the
Credit Agreement. Terms defined in the Credit Agreement are
used herein as therein defined.
We have examined originals or copies, certified or
otherwise identified to our satisfaction, of such documents,
corporate records, certificates of public officials and
other instruments and have conducted such other
investigations of fact and law as we have deemed necessary
or advisable for purposes of this opinion.
Upon the basis of the foregoing, we are of the
opinion that the Credit Agreement constitutes a valid and
binding agreement of the Borrower and each Note constitutes
a valid and binding obligation of the Borrower, in each case
enforceable in accordance with its terms, except as the same
may be limited by bankruptcy, insolvency or similar laws
affecting creditors' rights generally and by general
principles of equity.
We are members of the Bar of the State of New York
and the foregoing opinion is limited to the laws of the
State of New York and the federal laws of the United States
of America. In giving the foregoing opinion, we express no
opinion as to the effect (if any) of any law of any
jurisdiction (except the State of New York) in which any
Bank is located which limits the rate of interest that such
Bank may charge or collect. Insofar as the foregoing
opinion involves matters governed by the laws of Maryland,
we have relied, without independent investigation, upon the
opinion of [counsel for the Borrower], a copy of which has
been delivered to you.
This opinion is rendered solely to you in
connection with the above matter. This opinion may not be
relied upon by you for any other purpose or relied upon by
any other person without our prior written consent.
Very truly yours,
EXHIBIT H
ASSIGNMENT AND ASSUMPTION AGREEMENT
AGREEMENT dated as of _________, 19__ among
[ASSIGNOR] (the "Assignor"), [ASSIGNEE] (the "Assignee"),
[BORROWER] (the "Borrower") and MORGAN GUARANTY TRUST
COMPANY OF NEW YORK, as Agent (the "Agent").
W I T N E S S E T H
WHEREAS, this Assignment and Assumption Agreement
(the "Agreement") relates to the Credit Agreement dated as
of September 30, 1994 among the Borrower, the Assignor and
the other Banks party thereto, as Banks, and the Agent (the
"Credit Agreement");
WHEREAS, as provided under the Credit Agreement,
the Assignor has a Commitment to make Loans to the Borrower
in an aggregate principal amount at any time outstanding not
to exceed $__________;
WHEREAS, Committed Loans made to the Borrower by
the Assignor under the Credit Agreement in the aggregate
principal amount of $__________ are outstanding at the date
hereof; and
WHEREAS, the Assignor proposes to assign to the
Assignee all of the rights of the Assignor under the Credit
Agreement in respect of a portion of its Commitment
thereunder in an amount equal to $__________ (the "Assigned
Amount"), together with a corresponding portion of its
outstanding Committed Loans, and the Assignee proposes to
accept assignment of such rights and assume the
corresponding obligations from the Assignor on such terms;
NOW, THEREFORE, in consideration of the foregoing
and the mutual agreements contained herein, the parties
hereto agree as follows:
SECTION 1. Definitions. All capitalized terms not
otherwise defined herein shall have the respective meanings
set forth in the Credit Agreement.
SECTION 2. Assignment. The Assignor hereby
assigns and sells to the Assignee all of the rights of the
Assignor under the Credit Agreement to the extent of the
Assigned Amount, and the Assignee hereby accepts such
assignment from the Assignor and assumes all of the
obligations of the Assignor under the Credit Agreement to
the extent of the Assigned Amount, including the purchase
from the Assignor of the corresponding portion of the
principal amount of the Committed Loans made by the Assignor
outstanding at the date hereof. Upon the execution and
delivery hereof by the Assignor, the Assignee[, the Borrower
and the Agent] and the payment of the amounts specified in
Section 3 required to be paid on the date hereof (i) the
Assignee shall, as of the date hereof, succeed to the rights
and be obligated to perform the obligations of a Bank under
the Credit Agreement with a Commitment in an amount equal to
the Assigned Amount, and (ii) the Commitment of the Assignor
shall, as of the date hereof, be reduced by a like amount
and the Assignor released from its obligations under the
Credit Agreement to the extent such obligations have been
assumed by the Assignee. The assignment provided for herein
shall be without recourse to the Assignor.
SECTION 3. Payments. As consideration for the
assignment and sale contemplated in Section 2 hereof, the
Assignee shall pay to the Assignor on the date hereof in
Federal funds the amount heretofore agreed between them.
It is understood that commitment and/or facility fees
accrued to the date hereof are for the account of the
Assignor and such fees accruing from and including the date
hereof are for the account of the Assignee. Each of the
Assignor and the Assignee hereby agrees that if it receives
any amount under the Credit Agreement which is for the
account of the other party hereto, it shall receive the same
for the account of such other party to the extent of such
other party's interest therein and shall promptly pay the
same to such other party.
[SECTION 4. Consent of the Borrower and the
Agent. This Agreement is conditioned upon the consent of
the Borrower and the Agent pursuant to Section 9.06(c) of
the Credit Agreement. The execution of this Agreement by
the Borrower and the Agent is evidence of this consent.
Pursuant to Section 9.06(c) the Borrower agrees to execute
and deliver a Note payable to the order of the Assignee to
evidence the assignment and assumption provided for herein.]
SECTION 5. Non-Reliance on Assignor. The
Assignor makes no representation or warranty in connection
with, and shall have no responsibility with respect to, the
solvency, financial condition, or statements of the
Borrower, or the validity and enforceability of the
obligations of the Borrower in respect of the Credit
Agreement or any Note. The Assignee acknowledges that it
has, independently and without reliance on the Assignor, and
based on such documents and information as it has deemed
appropriate, made its own credit analysis and decision to
enter into this Agreement and will continue to be
responsible for making its own independent appraisal of the
business, affairs and financial condition of the Borrower.
SECTION 6. Governing Law. This Agreement shall
be governed by and construed in accordance with the laws of
the State of New York.
SECTION 7. Counterparts. This Agreement may be
signed in any number of counterparts, each of which shall be
an original, with the same effect as if the signatures
thereto and hereto were upon the same instrument.
IN WITNESS WHEREOF, the parties have caused this
Agreement to be executed and delivered by their duly
authorized officers as of the date first above written.
[ASSIGNOR]
By_________________________
Title:
[ASSIGNEE]
By__________________________
Title:
[BORROWER]
By__________________________
Title:
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By__________________________
Title:
USF&G Corporation
Exhibit 11 - Computation of Earnings Per Share (Unaudited)
Nine Months Ended September 30
(dollars in millions except per share data)
1994 1993
Net Income Available to Common Stock
Primary:
Income before cumulative effect of
adopting new accounting standards $ 170 $ 68
Less preferred stock dividend requirements 36 36
Income before cumulative effect of
adopting new accounting standards
available to common stock 134 32
Income (loss) from cumulative effect of
accounting standards:
Income taxes - 90
Postretirement benefits - (52)
Net income available to common
stock $ 134 $ 70
Fully Diluted:
Income before cumulative effect of
adopting new accounting standards $ 170 $ 68
Less preferred stock dividend requirements (12) (36)
Add interest expense on convertible notes 3 -
Income before cumulative effect of
adopting new accounting standards
available to common stock 161 32
Income (loss) from cumulative effect of
adopting new accounting standards:
Income taxes - 90
Postretirement benefits - (52)
Net income available to common
stock $ 161 $ 70
Weighted Average Shares Outstanding
Primary Common Shares 85,351,495 84,712,728
Fully Diluted:
Common shares 85,351,495 84,712,728
Assumed conversion of preferred stock 22,492,437 -
Assumed exercise of stock options 710,365 1,434,215
Assumed conversion of zero coupon
convertible subordinated notes 5,621,198 -
Total 114,175,495 86,146,943
Earnings Per Common Share
Primary (A):
Income before cumulative effect
of adopting new accounting standards $ 1.56 $ .38
Income (loss) from cumulative effect of
adopting new accounting standards:
Income taxes - 1.06
Postretirement benefits - (.61)
Net income $ 1.56 $ .83
Fully Diluted (B):
Income before cumulative effect
of adopting new accounting standards $ 1.41 $ .38
Income (loss) from cumulative effect of
adopting new accounting standards:
Income taxes - 1.06
Postretirement benefits - (.61)
Net income $ 1.41 $ .83
(A) Shares issuable under stock options (710,365 shares in 1994 and 1,434,215
in 1993) have not been used as common stock equivalents in the computation of
primary earnings per common share presented on the face of the Condensed
Consolidated Statement of Operations because the dilutive effect is not
material.
(B) Fully diluted earnings per common share amounts are calculated assuming the
conversion of all securities whose contingent issuance would have a dilutive
effect on earnings. The 1994 calculation assumes the conversion of preferred
stock series B and C and the zero coupon convertible subordinated notes.
USF&G Corporation
Exhibit 12 - Computation of Ratio of Consolidated Earnings to Fixed Charges and
Preferred Stock Dividends
Nine Months Ended September 30
(dollars in millions) 1994 1993
Fixed Charges
Interest expense $ 26 $ 31
Portion of rents representative of interest 20 21
Total fixed charges 46 52
Preferred stock dividend requirements (A) 36 36
Combined Fixed Charges and Preferred Stock
Dividends $ 82 $ 88
Consolidated Earnings Available for Fixed
Charges and Preferred Stock Dividends
Pretax income before cumulative effect of
adopting new accounting standards $ 99 $ 66
Adjustments:
Fixed charges 46 52
Consolidated earnings available for fixed
charges and preferred stock dividends $145 $118
Ratio of Consolidated Earnings to Fixed Charges 3.1 2.3
Ratio of Consolidated Earnings to Combined Fixed
Charges and Preferred Stock Dividends 1.8 1.3
(A) Preferred stock dividend requirements of $36 million in 1994 and 1993
divided by 100% less the effective income tax rate of 0% in 1994 and 1993.
USF&G Corporation
Exhibit 15 - Letter Regarding Unaudited Interim Financial Information
USF&G Corporation
We are aware of the incorporation by reference in the Registration Statement
Numbers 33-20449, 33-9405, 33-33271, 33-21132, 33-50825, and 33-51859 on
Form S-3 and Numbers 2-61626, 2-72026, 2-98232, 33-16111, 33-35095, 33-38113,
33-43132, 33-45664, 33-45665, 33-61965, 33-55667, 33-55669, and 33-55671 on Form
S-8, of our report on the unaudited condensed consolidated interim financial
statements of USF&G Corporation which is included in its Form 10-Q for the
quarter ended September 30, 1994.
Pursuant to Rule 436(c) of the Securities Act of 1933, our report is not a
part of the registration statements prepared or certified by accountants within
the meaning of Section 7 or 11 of the Securities Act of 1933.
ERNST & YOUNG LLP
Baltimore, Maryland
November 10, 1994
USF&G Corporation
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
USF&G Corporation
By DAN L. HALE
Dan L. Hale
Executive Vice President and
Chief Financial Officer
Dated at Baltimore, Maryland
November 10, 1994
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