<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 13, 1995
REGISTRATION NO. 33-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
USF&G CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
MARYLAND 6331 52-1220567
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
------------------------
100 LIGHT STREET, BALTIMORE, MD 21202, (410) 547-3000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------
JOHN A. MACCOLL, ESQ.
Senior Vice President -- General Counsel
USF&G Corporation
100 Light Street
Baltimore, MD 21202
(410) 547-3000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
Copies to:
MICHAEL G. MARKS, ESQ. DOUGLAS E. HAAS, ESQ.
Willkie Farr & Gallagher Benesch, Friedlander, Coplan & Aronoff
One Citicorp Center 2300 BP America Building
153 East 53rd Street 200 Public Square
New York, NY 10022-4677 Cleveland, OH 44114-2378
(212) 821-8000 (216) 363-4500
------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective and the
effective date of the proposed merger (the "Merger") of a subsidiary of USF&G
Corporation ("USF&G" or the "Registrant") and Victoria Financial Corporation
("Victoria"), as described in the Amended and Restated Agreement and Plan of
Merger, dated as of February 9, 1995 (the "Merger Agreement"), attached as Annex
I to the Proxy Statement/Prospectus forming a part of this Registration
Statement.
If the securities being registered on this Form are to be offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=========================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
AMOUNT OFFERING AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE PRICE PER OFFERING REGISTRATION
TO BE REGISTERED REGISTERED(2) SHARE PRICE (3) FEE(3)(4)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $2.50 per
share(1)............................. 4,620,000 shares N.A. $56,703,380 $19,553.02
==========================================================================================================
<FN>
- --------------
(1) Associated with the common stock, par value $2.50 per share ("USF&G Common
Stock"), are Preferred Share Purchase Rights that will not be exercisable or
evidenced separately from the USF&G Common Stock prior to the occurrence of
certain events.
(2) Based upon the sum of (a) the product of (i) 4,000,724, the number of
outstanding shares of common stock, par value $.01 per share of Victoria
("Victoria Common Stock"), and (ii) 1.092, the maximum Exchange Rate (as
defined in the Merger Agreement) permitted by the Merger Agreement and (b)
an estimate of the number of shares of USF&G Common Stock anticipated to be
issuable in the Merger to holders of options to acquire Victoria Common
Stock.
(3) Estimated solely for the purposes of calculating the registration fee
pursuant to Section 6(b) of the Securities Act of 1933, as amended (the
"Securities Act"), and computed pursuant to Rule 457(f) under the Securities
Act by multiplying (i) $12.875, the average of the high and low sales price
of a share of Victoria Common Stock quoted on the National Association of
Securities Dealers Automated Quotations System National Market System, on
April 11, 1995 as reported in published financial sources, and (ii)
4,404,146, the number of outstanding shares of Victoria Common Stock,
assuming the exercise of all options to acquire Victoria Common Stock
(whether or not currently exercisable).
(4) Pursuant to Rule 457(b) under the Securities Act and Section 14(g) of the
Securities Exchange Act of 1934, as amended, and Rule 0-11 thereunder, the
total registration fee of $19,553.02 is offset by the filing fee of
$11,010.37 previously paid by Victoria in connection with the filing of
preliminary proxy materials on February 13, 1995. Accordingly, the fee
payable upon the filing of this Registration Statement is $8,542.65.
</TABLE>
------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE> 2
<TABLE>
USF&G CORPORATION
CROSS-REFERENCE SHEET SHOWING LOCATIONS IN THE PROXY STATEMENT/PROSPECTUS
OF THE RESPONSES TO THE ITEMS OF FORM S-4
(PURSUANT TO ITEM 501(B) OF REGULATION S-K)
<CAPTION>
FORM S-4 LOCATION IN PROXY
ITEM NUMBER AND CAPTION STATEMENT/PROSPECTUS
----------------------------------------- -----------------------------------------------
<S> <C> <C>
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of the Registration Statement
and Outside Front Cover Page of
Prospectus............................ Facing Page of the Registration Statement;
Cross-Reference Sheet; Outside Front Cover Page
of Proxy Statement/Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus................... Available Information; Incorporation of Certain
Documents by Reference; Table of Contents
3. Risk Factors, Ratio of Earnings to
Fixed Charges, and Other Information.. Summary; Selected Historical Consolidated
Financial Information; Comparative Per Share
Data; Comparative Market Price Information;
Certain Considerations
4. Terms of the Transaction.............. Summary; The Merger; The Merger Agreement;
Description of USF&G Capital Stock; Comparison
of Rights of Holders of USF&G Capital Stock and
Victoria Capital Stock
5. Pro Forma Financial Information....... Not Applicable
6. Material Contacts with Company Being
Acquired.............................. The Merger
7. Additional Information Required for
Reoffering by Persons and Parties
Deemed to be Underwriters............. Not Applicable
8. Interests of Named Experts and
Counsel............................... Legal Matters; Independent Auditors
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities........................... Not Applicable
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3
Registrants.......................... Available Information; Incorporation of Certain
Documents by Reference; Summary; Selected
Historical Consolidated Financial Information;
Comparative Per Share Data; Certain
Considerations; Description of USF&G and Merger
Sub
11. Incorporation of Certain Information
by Reference......................... Available Information; Incorporation of Certain
Documents by Reference
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
FORM S-4 LOCATION IN PROXY
ITEM NUMBER AND CAPTION STATEMENT/PROSPECTUS
----------------------------------------- -----------------------------------------------
<S> <C> <C>
12. Information with Respect to S-2 or
S-3 Registrants...................... Not Applicable
13. Incorporation of Certain Information
by Reference......................... Not Applicable
14. Information with Respect to
Registrants Other Than S-3 or S-2
Registrants.......................... Not Applicable
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information with Respect to S-3
Companies............................ Not Applicable
16. Information with Respect to S-2 or
S-3 Companies........................ Available Information; Incorporation of Certain
Documents by Reference; Summary; Selected
Historical Consolidated Financial Information;
Comparative Per Share Data; Comparative Market
Price Information; Certain Considerations;
Description of Victoria; Management's
Discussion and Analysis of Financial Condition
and Results of Operations; Index to Victoria's
Consolidated Financial Statements
17. Information with Respect to Companies
Other Than S-2 or S-3 Companies...... Not Applicable
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or
Authorizations Are to be Solicited... Outside Front Cover Page of Proxy
Statement/Prospectus; Available Information;
Incorporation of Certain Documents by
Reference; Summary; The Special Meeting; The
Merger; Description of Victoria
19. Information if Proxies, Consents or
Authorizations Are Not to be
Solicited, or in an Exchange Offer... Not Applicable
</TABLE>
<PAGE> 4
VICTORIA FINANCIAL CORPORATION
5915 LANDERBROOK DRIVE
CLEVELAND, OHIO 44124-4058
April 13, 1995
Dear Shareholders:
You are cordially invited to attend a Special Meeting of Shareholders of
Victoria Financial Corporation ("Victoria") to be held on May 22, 1995 at 10:00
a.m. (local time) at 5915 Landerbrook Drive, Cleveland, Ohio.
At this Special Meeting, you will be asked to consider and vote upon a
proposal to approve and adopt the Amended and Restated Agreement and Plan of
Merger, dated as of February 9, 1995 (the "Merger Agreement"), among USF&G
Corporation ("USF&G"), Queensland, Inc., a wholly-owned subsidiary of USF&G
("Merger Sub"), and Victoria. Pursuant to the Merger Agreement, Merger Sub will
be merged with and into Victoria (the "Merger"), and Victoria will become a
wholly-owned subsidiary of USF&G. In the Merger, outstanding shares of common
stock of Victoria will be converted into the right to receive common stock of
USF&G, on the terms and subject to the conditions set forth in the Merger
Agreement, all as more fully described in the attached Proxy
Statement/Prospectus.
You should read carefully the accompanying Notice of Special Meeting of
Shareholders and the Proxy Statement/Prospectus for details of the Merger and
additional related information.
VICTORIA'S BOARD OF DIRECTORS HAS DETERMINED THAT THE MERGER IS FAIR TO,
AND IN THE BEST INTERESTS OF, VICTORIA AND ITS SHAREHOLDERS, HAS UNANIMOUSLY
APPROVED THE MERGER AGREEMENT AND RECOMMENDS THAT VICTORIA'S SHAREHOLDERS VOTE
FOR THE PROPOSAL TO APPROVE AND ADOPT THE MERGER AGREEMENT.
The affirmative vote of the holders of two-thirds of the outstanding shares
of common stock of Victoria is necessary to approve the Merger Agreement.
We urge you to complete, sign, date and return the enclosed proxy card as
soon as possible, whether or not you plan to attend the Special Meeting in
person and regardless of the number of shares which you may own. You may, of
course, attend the Special Meeting and vote in person even if you have
previously returned your proxy card.
Please do not send any stock certificates with the proxy card.
Sincerely,
KENNETH R. ROSEN
President
<PAGE> 5
VICTORIA FINANCIAL CORPORATION
5915 LANDERBROOK DRIVE
CLEVELAND, OHIO 44124-4058
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 22, 1995
To the Shareholders of
VICTORIA FINANCIAL CORPORATION:
Notice is hereby given that a Special Meeting of Shareholders (the "Special
Meeting") of Victoria Financial Corporation, a Delaware corporation
("Victoria"), will be held on Monday, May 22, 1995, at 10:00 a.m. (local time)
at 5915 Landerbrook Drive, Cleveland, Ohio for the following purposes:
To consider and vote upon a proposal to approve and adopt the Amended
and Restated Agreement and Plan of Merger dated as of February 9, 1995 (the
"Merger Agreement") among Victoria, USF&G Corporation, a Maryland
corporation ("USF&G"), and Queensland, Inc., a Delaware corporation and a
wholly-owned subsidiary of USF&G ("Merger Sub") and the transactions
contemplated thereby (such proposal being referred to herein as the "Merger
Proposal"). Pursuant to the Merger Agreement, Merger Sub will be merged
with and into Victoria (the "Merger") and Victoria will become a
wholly-owned subsidiary of USF&G. In the Merger, each outstanding share of
common stock, par value $.01 per share, of Victoria ("Victoria Common
Stock") (other than shares held by Victoria as treasury shares and shares
held by USF&G or any subsidiary of Victoria or USF&G, all of which will be
cancelled) will be converted into the right to receive shares of common
stock, par value $2.50 per share, of USF&G ("USF&G Common Stock") on the
terms and subject to the conditions set forth in the Merger Agreement, all
as more fully described in the accompanying Proxy Statement/Prospectus. A
copy of the Merger Agreement is attached as Annex I to the accompanying
Proxy Statement/Prospectus.
To transact such other matters as may properly come before the Special
Meeting or any adjournments or postponements thereof.
Shareholders of record at the close of business on April 12, 1995, the
record date for the Special Meeting, are entitled to notice of, and to vote at,
the Special Meeting and any adjournment or postponement thereof. Victoria has
retained D.F. King & Co., Inc., a proxy solicitation firm, for assistance in
connection with the Special Meeting.
The affirmative vote of the holders of two-thirds of the outstanding shares
of Victoria Common Stock is necessary to approve the Merger Proposal.
Holders of Victoria Common Stock will not be entitled to appraisal rights
as a result of the Merger. Under Delaware law, appraisal rights are unavailable
to holders of Victoria Common Stock because Victoria Common Stock was, on the
record date, designated as a national market system security by the National
Association of Securities Dealers, Inc. and will be converted into USF&G Common
Stock, which on the effective date of the Merger will be listed on the New York
Stock Exchange. See "The Merger -- No Appraisal Rights" in the accompanying
Proxy Statement/Prospectus.
<PAGE> 6
The Board of Directors of Victoria has determined that the Merger is fair
to, and in the best interests of, Victoria and its shareholders, has unanimously
approved the Merger Proposal and recommends a vote FOR the approval and adoption
of the Merger Proposal.
All shareholders are cordially invited to attend the Special Meeting in
person. However, to ensure your representation at the Special Meeting, you are
urged to complete, sign and date the enclosed proxy card and return it as
promptly as possible in the enclosed postage-prepaid envelope.
By Order of the Board of Directors
RICHARD D. MARGOLIS
Secretary
Cleveland, Ohio
April 13, 1995
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE,
SIGN AND DATE YOUR PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED
POSTAGE-PREPAID ENVELOPE. YOU MAY REVOKE YOUR PROXY IN THE MANNER DESCRIBED IN
THE PROXY STATEMENT/PROSPECTUS AT ANY TIME BEFORE THE PROXY HAS BEEN VOTED AT
THE SPECIAL MEETING.
------------------------------
DO NOT SEND ANY STOCK CERTIFICATES WITH THE ENCLOSED PROXY CARD. IF THE
MERGER IS CONSUMMATED, YOU WILL BE SENT INSTRUCTIONS REGARDING THE SURRENDER OF
YOUR STOCK CERTIFICATES.
<PAGE> 7
VICTORIA FINANCIAL CORPORATION
PROXY STATEMENT
------------------------------
USF&G CORPORATION
PROSPECTUS
This Proxy Statement/Prospectus is being furnished to holders of common
stock, par value $.01 per share, of Victoria Financial Corporation ("Victoria
Common Stock"), a Delaware corporation ("Victoria"), in connection with the
solicitation of proxies by the Board of Directors of Victoria (the "Victoria
Board") for use at a Special Meeting of Victoria shareholders to be held on
Monday, May 22, 1995 at 10:00 a.m. (local time) at 5915 Landerbrook Drive,
Cleveland, Ohio, and at any adjournment or postponement thereof (the "Special
Meeting").
At the Special Meeting, holders of Victoria Common Stock will be asked to
consider and vote upon a proposal to approve and adopt the Amended and Restated
Agreement and Plan of Merger, dated as of February 9, 1995 (the "Merger
Agreement"), among Victoria, USF&G Corporation, a Maryland corporation
("USF&G"), and Queensland, Inc., a Delaware corporation and a wholly-owned
subsidiary of USF&G ("Merger Sub"), and the transactions contemplated thereby
(such proposal being referred to herein as the "Merger Proposal"). A copy of the
Merger Agreement is attached hereto as Annex I.
Pursuant to the Merger Agreement, Merger Sub will be merged with and into
Victoria (the "Merger") and Victoria will become a wholly-owned subsidiary of
USF&G. In the Merger, each outstanding share of Victoria Common Stock (other
than shares held by Victoria as treasury shares and shares held by USF&G or by
subsidiaries of Victoria or USF&G, all of which will be cancelled) will be
converted into the right to receive the number of shares of common stock, par
value $2.50 per share, of USF&G ("USF&G Common Stock") equal to the "Exchange
Rate" (including the corresponding number of associated USF&G Rights (defined
below)). The "Exchange Rate" means: (A) the quotient of (a) $13.959 divided by
(b) the average closing price of USF&G Common Stock on the New York Stock
Exchange (the "NYSE") Composite Tape during the period comprising the twenty
consecutive trading days immediately preceding the third business day
immediately preceding the effective date of the Merger (the "Final Price"), if
and only if the Final Price is greater than $14.556; or (B) .959, if and only if
the Final Price is both (a) less than or equal to $14.556 and (b) greater than
$13.556; or (C) the quotient of (a) $13 divided by (b) the Final Price, if and
only if the Final Price is both (x) less than or equal to $13.556 and (y)
greater than or equal to $11.90; or (D) 1.092, if and only if the Final Price is
less than $11.90. In the event that the Final Price is less than $11.90,
Victoria may, at any time on or prior to the Effective Date (defined below),
terminate the Merger Agreement without any further obligations thereunder.
Outstanding options to purchase Victoria Common Stock ("Victoria Options") will
be converted into the right to receive shares of USF&G Common Stock, on the
terms and subject to the conditions set forth in the Merger Agreement, as more
fully described in this Proxy Statement/Prospectus.
THE CONSIDERATION TO BE RECEIVED BY VICTORIA SHAREHOLDERS IN THE MERGER
WILL BE BASED UPON A FORMULA AND CANNOT PRECISELY BE DETERMINED PRIOR TO THE
CLOSE OF BUSINESS ON THE FOURTH BUSINESS DAY IMMEDIATELY PRECEDING THE EFFECTIVE
DATE. The consideration will depend upon the Final Price, which establishes the
Exchange Rate. BECAUSE THE FINAL PRICE, THE EXCHANGE RATE AND THE MARKET PRICE
OF USF&G COMMON STOCK AS OF THE EFFECTIVE DATE ARE NOT DETERMINABLE AS OF THE
DATE OF THIS PROXY STATEMENT/PROSPECTUS AND AS OF THE DATE OF THE SPECIAL
MEETING, THE EXACT CONSIDERATION PER SHARE TO BE RECEIVED IN EXCHANGE FOR THE
OUTSTANDING VICTORIA COMMON STOCK IS NOT CURRENTLY DETERMINABLE. Victoria
shareholders will be entitled to receive not more than 1.092 shares nor less
than .959 shares of USF&G Common Stock for each share of Victoria Common Stock
(except if the Final Price exceeds $14.556, in which event Victoria shareholders
will be entitled to receive for each share of Victoria Common Stock that number
of shares of USF&G Common Stock with a value, based on the Final Price (but not
necessarily the market price as of the Effective Date), of
<PAGE> 8
$13.959). Had the Merger been consummated on April 12, 1995, the Final Price
would have been $13.994, and each share of Victoria Common Stock outstanding
would have been converted into .959 shares of USF&G Common Stock (together with
any related USF&G Rights). The closing price of USF&G Common Stock on that date,
as reported on the NYSE-Composite Tape, was $14.50 per share. In fact, the Final
Price may be greater than or less than $13.994, and the price at which USF&G
Common Stock will be trading on the NYSE on and after the Effective Date may be
greater than or less than the Final Price.
No fractional shares of USF&G Common Stock will be issued in the Merger. In
lieu of any such fractional shares, each holder of Victoria Common Stock and
each holder of Victoria Options who otherwise would be entitled to receive a
fractional share of USF&G Common Stock pursuant to the Merger will be paid an
amount in cash equal to such fractional interest multiplied by the Final Price.
This Proxy Statement/Prospectus also constitutes the prospectus of USF&G,
with respect to up to 4,620,000 shares of USF&G Common Stock to be issued in
connection with the Merger. USF&G Common Stock is traded on the NYSE under the
symbol "FG." USF&G Common Stock is also listed on the Pacific Stock Exchange,
the London Stock Exchange and the Swiss Exchanges in Basle, Geneva and Zurich,
Switzerland. On April 12, 1995, the closing price for USF&G Common Stock as
reported on the NYSE - Composite Tape was $14.50 per share. See "The Merger
Agreement -- Terms of the Merger."
Holders of record of shares of Victoria Common Stock at the close of
business on April 12, 1995, the record date for the Special Meeting, are
entitled to notice of and to vote at the Special Meeting. Consummation of the
Merger is subject to various conditions, including the approval of two-thirds of
the outstanding shares of Victoria Common Stock.
SEE "CERTAIN CONSIDERATIONS" FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED CAREFULLY BY VICTORIA SHAREHOLDERS IN CONSIDERING WHETHER
TO VOTE FOR THE APPROVAL AND ADOPTION OF THE MERGER PROPOSAL.
All information contained in this Proxy Statement/Prospectus with respect
to Victoria prior to the Merger has been provided by Victoria. All information
contained in this Proxy Statement/Prospectus with respect to USF&G (and of
Victoria after the Merger) has been provided by USF&G.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
FOR NORTH CAROLINA INVESTORS: THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE COMMISSIONER OF INSURANCE FOR THE STATE OF NORTH CAROLINA,
NOR HAS THE COMMISSIONER OF INSURANCE RULED UPON THE ACCURACY OR THE ADEQUACY OF
THIS DOCUMENT.
------------------------------
THIS PROXY STATEMENT/PROSPECTUS AND THE ACCOMPANYING FORM OF PROXY ARE
FIRST BEING MAILED TO SHAREHOLDERS OF VICTORIA ON OR ABOUT APRIL 14, 1995.
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS APRIL 13, 1995.
2
<PAGE> 9
AVAILABLE INFORMATION
Victoria and USF&G are each subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). The reports, proxy
statements and other information filed by Victoria and USF&G with the Commission
can be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Regional Offices of the Commission located at 7 World
Trade Center, New York, New York 10048 and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such information also can be obtained by mail
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Victoria Common Stock is quoted on
the Nasdaq National Market System. Such reports, proxy statements and other
information filed by Victoria can also be inspected at the offices of the
National Association of Securities Dealers, Inc., Market Listing Section, 1735 K
Street, N.W., Washington, D.C. 20006. USF&G Common Stock is listed on the NYSE,
the Pacific Stock Exchange, the London Stock Exchange and the Swiss Exchanges in
Basle, Geneva and Zurich, Switzerland. Such reports, proxy statements and other
information filed by USF&G can also be inspected at the offices of the New York
Stock Exchange, Inc., 20 Broad Street, New York, New York 10005, and the Pacific
Stock Exchange, Inc., 301 Pine Street, San Francisco, California 94104 and 233
South Beaudry Avenue, Los Angeles, California 90012.
USF&G has filed with the Commission a Registration Statement on Form S-4
(together with any amendments thereto, the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), of which this Proxy
Statement/Prospectus is a part, with respect to the shares of USF&G Common Stock
to be issued pursuant to the Merger Agreement. This Proxy Statement/Prospectus
does not contain all the information set forth in the Registration Statement.
Such additional information may be obtained from the Commission's principal
office in Washington, D.C. Statements contained in this Proxy
Statement/Prospectus or in any document incorporated by reference in this Proxy
Statement/Prospectus as to the contents of any contract or other document
referred to herein or therein are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement or attached as an annex hereto or such
other document, each such statement being qualified in all respects by such
reference.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER THAN
EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY
REFERENCE) ARE AVAILABLE, UPON WRITTEN OR ORAL REQUEST, WITHOUT CHARGE, TO ANY
PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS PROXY STATEMENT/PROSPECTUS
IS DELIVERED. REQUESTS FOR SUCH COPIES SHOULD BE DIRECTED TO: (I) IN THE CASE OF
DOCUMENTS RELATING TO VICTORIA, VICTORIA FINANCIAL CORPORATION, 5915 LANDERBROOK
DRIVE, CLEVELAND, OHIO 44124-4058 (TELEPHONE NUMBER (216) 461-3461), ATTENTION:
IVAN KRAMER, GENERAL COUNSEL, OR (II) IN THE CASE OF DOCUMENTS RELATING TO
USF&G, USF&G CORPORATION, 100 LIGHT STREET, BALTIMORE, MARYLAND 21202 (TELEPHONE
NUMBER (410) 547-3000), ATTENTION: JOHN F. HOFFEN, JR., SECRETARY. IN ORDER TO
ENSURE TIMELY DELIVERY OF THE REQUESTED DOCUMENTS PRIOR TO THE SPECIAL MEETING,
ANY REQUESTS SHOULD BE MADE PRIOR TO MAY 15, 1995.
3
<PAGE> 10
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission are
incorporated by reference in this Proxy Statement/Prospectus:
(a) Victoria's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 (File No. 0-1217);
(b) USF&G's Annual Report on Form 10-K for the year ended December 31,
1994 (File No. 1-8233);
(c) USF&G's Current Reports on Form 8-K, dated January 12, 1995,
January 20, 1995 and January 25, 1995 (File No. 1-8233); and
(d) the description of USF&G Common Stock and Rights Plan (defined
below) contained in USF&G's Registration Statements filed pursuant to
Section 12 of the Exchange Act and any amendment or report filed for the
purpose of updating those descriptions.
All documents and reports subsequently filed by Victoria and USF&G pursuant
to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Proxy Statement/Prospectus and prior to the date of the Special Meeting shall be
deemed to be incorporated by reference in this Proxy Statement/Prospectus and to
be part hereof from the date of filing of each such document or report. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Proxy Statement/Prospectus to the extent that a statement contained herein
or in any other document subsequently filed with the Commission which also is or
is deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Proxy
Statement/Prospectus.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS IN
CONNECTION WITH THE SOLICITATION OF PROXIES OR THE OFFERING OF SECURITIES MADE
HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY VICTORIA, USF&G OR ANY OTHER PERSON.
THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES, OR THE SOLICITATION OF A PROXY,
IN ANY JURISDICTION TO OR FROM ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE ANY
SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF VICTORIA OR USF&G SINCE THE DATE HEREOF OR THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
4
<PAGE> 11
<TABLE>
TABLE OF CONTENTS
<CAPTION>
PAGE
---------
<S> <C>
AVAILABLE INFORMATION............................................................ 3
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.................................. 4
INDEX OF DEFINED TERMS........................................................... 8
SUMMARY.......................................................................... 10
The Companies............................................................... 10
The Special Meeting......................................................... 10
The Merger and the Merger Agreement......................................... 11
Interests of Certain Persons in the Merger.................................. 15
Certain Considerations...................................................... 16
Surrender of Certificates................................................... 16
Shareholder Rights.......................................................... 16
SELECTED HISTORICAL CONSOLIDATED
FINANCIAL INFORMATION............................................................ 17
COMPARATIVE PER SHARE DATA....................................................... 19
COMPARATIVE MARKET PRICE INFORMATION............................................. 19
CERTAIN CONSIDERATIONS........................................................... 21
Effect of Stock Price on Merger Consideration............................... 21
Differences in Risks of Businesses Conducted by Victoria and USF&G.......... 21
THE SPECIAL MEETING.............................................................. 26
General; Date and Place of the Special Meeting.............................. 26
Purpose of the Special Meeting.............................................. 26
Shareholders Entitled to Vote; Requisite Approval........................... 26
Proxies..................................................................... 27
THE MERGER....................................................................... 28
Background of the Merger.................................................... 28
Victoria's Reasons for the Merger; Recommendation of the Victoria Board..... 30
USF&G's Reasons for the Merger.............................................. 30
Opinion of Financial Advisor to the Victoria Board.......................... 31
Interests of Certain Persons in the Merger.................................. 34
Employee Benefits........................................................... 36
Management and Operations of Victoria after the Merger...................... 36
Anticipated Accounting Treatment............................................ 36
Certain Federal Income Tax Consequences..................................... 37
Regulatory Approvals........................................................ 38
Resale of USF&G Stock; Affiliates........................................... 39
New York Stock Exchange Listing............................................. 40
No Appraisal Rights......................................................... 40
</TABLE>
5
<PAGE> 12
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
THE MERGER AGREEMENT............................................................. 41
The Merger.................................................................. 41
Effective Date.............................................................. 41
Terms of the Merger......................................................... 41
Surrender and Payment....................................................... 44
Representations and Warranties.............................................. 44
Conduct of Business by Victoria Pending the Merger.......................... 45
Certain Covenants........................................................... 46
No Solicitation............................................................. 46
Indemnification............................................................. 46
Conditions.................................................................. 47
Termination; Fees and Expenses.............................................. 48
Amendment and Waiver........................................................ 50
DESCRIPTION OF USF&G AND MERGER SUB.............................................. 50
USF&G....................................................................... 50
Merger Sub.................................................................. 53
DESCRIPTION OF VICTORIA.......................................................... 53
General..................................................................... 53
Nonstandard Private Passenger Automobile Insurance Industry................. 54
Competition................................................................. 54
Reinsurance................................................................. 54
Loss and LAE Reserves....................................................... 54
Investments................................................................. 56
Government Regulation....................................................... 57
Employees................................................................... 58
Properties.................................................................. 58
Legal Proceedings........................................................... 58
Ownership of Victoria Common Stock.......................................... 58
Directors and Executive Officers............................................ 60
Executive Compensation...................................................... 61
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............................................. 63
Overview.................................................................... 63
Results of Operations -- Year ended December 31, 1994 versus year ended
December 31, 1993...................................................... 64
Results of Operations -- Year ended December 31, 1993 versus year ended
December 31, 1992...................................................... 65
Liquidity and Capital Resources............................................. 67
</TABLE>
6
<PAGE> 13
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
DESCRIPTION OF USF&G CAPITAL STOCK............................................... 70
General..................................................................... 70
Common Stock................................................................ 70
Preferred Stock............................................................. 70
Outstanding Preferred Stock................................................. 71
USF&G Rights Plan........................................................... 73
COMPARISON OF RIGHTS OF HOLDERS OF USF&G CAPITAL STOCK AND
VICTORIA CAPITAL STOCK........................................................... 73
Business Combinations....................................................... 73
Appraisal Rights............................................................ 74
State Takeover Legislation.................................................. 74
USF&G Rights Plan........................................................... 76
Amendments to Charters...................................................... 76
Amendments to Bylaws........................................................ 76
Preemptive Rights........................................................... 77
Redemption of Capital Stock................................................. 77
Dividend Sources............................................................ 77
Duration of Proxies......................................................... 78
Shareholder Action.......................................................... 78
Special Shareholder Meetings................................................ 78
Cumulative Voting........................................................... 78
Number and Election of Directors............................................ 79
Removal of Directors........................................................ 79
Vacancies................................................................... 79
Indemnification of Directors and Officers................................... 80
Limitation of Personal Liability of Directors............................... 81
LEGAL MATTERS.................................................................... 82
INDEPENDENT AUDITORS............................................................. 82
SHAREHOLDER PROPOSALS............................................................ 82
INDEX TO VICTORIA'S CONSOLIDATED FINANCIAL STATEMENTS............................ F-1
ANNEXES
Amended and Restated Agreement and Plan of Merger........................... Annex I
Opinion of McDonald & Company Securities, Inc............................... Annex II
</TABLE>
7
<PAGE> 14
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
"Acquisition Proposal"............................................................... 46
"Affiliates"......................................................................... 39
"A.M. Best".......................................................................... 23
"Antitrust Division"................................................................. 38
"CCM"................................................................................ 60
"Certificates"....................................................................... 44
"Claims"............................................................................. 46
"Code"............................................................................... 14
"Commission"......................................................................... 3
"Company"............................................................................ 53
"Consulting Period".................................................................. 35
"Credit Agreement"................................................................... 67
"DGCL"............................................................................... 14
"Debentures"......................................................................... 71
"Delaware Business Combination Law".................................................. 74
"Discount Factor".................................................................... 43
"Duff & Phelps"...................................................................... 22
"Effective Date"..................................................................... 14
"Employment Agreement"............................................................... 15
"Employment Period".................................................................. 34
"Exchange Act"....................................................................... 3
"Exchange Agent"..................................................................... 44
"Exchange Rate"...................................................................... Cover
"Existing Employment Agreement"...................................................... 35
"FASB"............................................................................... 69
"F&G Life"........................................................................... 10
"FTC"................................................................................ 38
"Final Price"........................................................................ Cover
"First Chicago Trust"................................................................ 70
"HSR Act"............................................................................ 13
"IAS"................................................................................ 10
"Indemnified Parties"................................................................ 46
"Insurance Subsidiary"............................................................... 10
"IBNR"............................................................................... 54
"Junior Preferred Stock"............................................................. 70
"Kidder"............................................................................. 28
"LAE"................................................................................ 54
"Landerbrook Lease".................................................................. 35
"Landerbrook Partnership"............................................................ 35
"Leader"............................................................................. 59
"MFA"................................................................................ 60
"MGCL"............................................................................... 73
"McDonald & Company"................................................................. 12
"Merger"............................................................................. Cover
"Merger Agreement"................................................................... Cover
"Merger Proposal".................................................................... Cover
"Merger Sub"......................................................................... Cover
"Moody's"............................................................................ 22
"NAIC"............................................................................... 25
"NYSE"............................................................................... Cover
</TABLE>
8
<PAGE> 15
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
"ORC"................................................................................ 13
"Parity Stock"....................................................................... 71
"RBC"................................................................................ 25
"Reference Rate"..................................................................... 67
"Registration Statement"............................................................. 3
"Rights Plan"........................................................................ 73
"SFAS No. 115"....................................................................... 69
"Securities Act"..................................................................... 3
"Series A Preferred Stock"........................................................... 70
"Series B Preferred Stock"........................................................... 70
"Series B Preferred Stock 1995"...................................................... 72
"Series B Preferred Stock 1996"...................................................... 72
"Series B Preferred Stock 1997"...................................................... 72
"Series C Preferred Stock"........................................................... 53
"Service"............................................................................ 37
"Special Meeting".................................................................... Cover
"Standard & Poor's".................................................................. 22
"Superintendent"..................................................................... 13
"Third Party"........................................................................ 49
"Third Party Acquisition"............................................................ 49
"Trust".............................................................................. 59
"USF&G".............................................................................. Cover
"USF&G Board"........................................................................ 12
"USF&G By-laws"...................................................................... 70
"USF&G Charter"...................................................................... 70
"USF&G Common Stock"................................................................. Cover
"USF&G Company"...................................................................... 10
"USF&G Preferred Stock".............................................................. 70
"USF&G Right"........................................................................ 73
"Victoria"........................................................................... Cover
"Victoria Board"..................................................................... Cover
"Victoria Board Fiduciary Duties".................................................... 46
"Victoria Common Stock".............................................................. Cover
"Victoria Options"................................................................... Cover
</TABLE>
9
<PAGE> 16
SUMMARY
The following is a brief summary of certain information contained elsewhere
in this Proxy Statement/Prospectus. This summary does not contain a complete
description of all material information relating to the Merger and the
transactions related thereto. Reference is made to, and this summary is
qualified in its entirety by, the more detailed information and financial
statements and notes thereto contained, or incorporated by reference, in this
Proxy Statement/Prospectus and the Annexes hereto. Unless otherwise defined
herein, capitalized terms used in this summary have the respective meanings
ascribed to them elsewhere in this Proxy Statement/Prospectus. Shareholders of
Victoria are urged to read this Proxy Statement/Prospectus and the Annexes
hereto in their entirety.
All share and per share data in this Proxy Statement/Prospectus reflect all
previous stock splits of Victoria Common Stock and USF&G Common Stock.
THE COMPANIES
Victoria. Victoria is an insurance holding company, which, through its
wholly-owned subsidiaries, primarily Victoria Fire & Casualty Company (the
"Insurance Subsidiary"), specializes in the marketing and issuance of
nonstandard private passenger automobile insurance policies. Victoria was formed
in Cleveland, Ohio in 1976 to market credit-life and related insurance products
and entered the nonstandard private passenger automobile insurance market in
January 1986. Nonstandard private passenger automobile insurance currently
accounts for over 99% of Victoria's direct written premiums. Victoria operates
in 11 states and has acquired licenses to issue insurance policies in 18 other
states and the District of Columbia. On July 1, 1994, Victoria acquired
Insurance Automation Systems, Inc. of Beachwood, Ohio ("IAS"), in exchange for
421,600 shares of Victoria Common Stock. IAS is an insurance rating software
specialist, with revenues in 1994 of $6.1 million. Victoria is a Delaware
corporation, its principal executive offices are located at 5915 Landerbrook
Drive, Cleveland, Ohio 44124-4058 and its telephone number is (216) 461-3461.
See "Description of Victoria."
USF&G. USF&G is a holding company whose principal subsidiaries are engaged
in writing property-casualty insurance, life insurance and annuities.
Property-casualty insurance is written primarily by United States Fidelity and
Guaranty Company ("USF&G Company"), founded in 1896, and is sold through
independent agents supported by its underwriting, marketing, administrative and
claim services offices located throughout the United States. Life insurance and
annuities are written primarily by Fidelity and Guaranty Life Insurance Company
("F&G Life"), founded in 1959, and are sold throughout the United States through
independent agents. USF&G is incorporated in Maryland, its principal executive
offices are located at 100 Light Street, Baltimore, Maryland 21202 and its
telephone number is (410) 547-3000. See "Description of USF&G And Merger Sub --
USF&G."
Merger Sub. Merger Sub is a Delaware corporation recently formed by USF&G
for the sole purpose of facilitating the Merger. Merger Sub is a wholly-owned
subsidiary of USF&G with no assets (other than those received in connection with
its initial capitalization) or liabilities (other than those incurred in
connection with its incorporation and the Merger Agreement). The principal
executive offices of Merger Sub are located at c/o USF&G Corporation, 100 Light
Street, Baltimore, Maryland 21202 and its telephone number is (410) 547-3000.
See "Description of USF&G And Merger Sub -- Merger Sub."
THE SPECIAL MEETING
Date and Place of the Special Meeting. The Special Meeting will be held on
Monday, May 22, 1995 at 10:00 a.m. (local time), at 5915 Landerbrook Drive,
Cleveland, Ohio. See "The Special Meeting -- General; Date and Place of the
Special Meeting."
Purpose of the Special Meeting. The purpose of the Special Meeting is to
consider and vote upon a proposal to approve and adopt the Merger Proposal. See
"The Special Meeting -- Purpose of the Special Meeting."
10
<PAGE> 17
Shareholders Entitled to Vote; Requisite Approval. Holders of record of
shares of Victoria Common Stock at the close of business on April 12, 1995, are
entitled to notice of, and to vote at, the Special Meeting. At such date, there
were 4,000,724 shares of Victoria Common Stock outstanding, each of which will
be entitled to one vote on each matter to be acted upon at the Special Meeting.
The affirmative vote of holders of two-thirds of the outstanding shares of
Victoria Common Stock is required for the approval of the Merger Proposal. See
"The Special Meeting -- Shareholders Entitled to Vote; Requisite Approval."
THE MERGER AND THE MERGER AGREEMENT
General. Pursuant to the Merger Agreement, Merger Sub will be merged with
and into Victoria and Victoria will become a wholly-owned subsidiary of USF&G. A
copy of the Merger Agreement is attached hereto as Annex I.
In the Merger, each outstanding share of Victoria Common Stock (other than
shares held by Victoria as treasury shares and shares held by USF&G or any
subsidiary of Victoria or USF&G, all of which will be cancelled) will be
converted into the number of shares of USF&G Common Stock equal to the "Exchange
Rate." The "Exchange Rate" means: (A) the quotient of (a) $13.959 divided by (b)
the average closing price of USF&G Common Stock on the NYSE-Composite Tape
during the period comprising the twenty consecutive trading days immediately
preceding the third business day immediately preceding the effective date of the
Merger (the "Final Price"), if and only if the Final Price is greater than
$14.556; or (B) .959, if and only if the Final Price is both (a) less than or
equal to $14.556 and (b) greater than $13.556; or (C) the quotient of (a) $13
divided by (b) Final Price, if and only if the Final Price is both (x) less than
or equal to $13.556 and (y) greater than or equal to $11.90; or (D) 1.092, if
and only if the Final Price is less than $11.90. In the event that the Final
Price is less than $11.90, Victoria may, at any time on or prior to the
Effective Date, terminate the Merger Agreement without any further obligations
thereunder. Each of the Victoria Options, whether vested or unvested,
outstanding as of the Effective Date will be converted without any action on the
part of the holder thereof into the right to receive, as of the Effective Date,
USF&G Common Stock (or cash in lieu of fractional shares as described below).
The number of shares of USF&G Common Stock that the holder of a Victoria Option
will be entitled to receive is a number determined by dividing (i) the product
of (x) the value of such Victoria Option as determined by the Black Scholes
Model (an option valuation model which incorporates such factors as volatility
of the security's return, the price of the option, the relationship of the
underlying stock's price to the exercise price of the option, and the time
remaining until the option expires) and (y) a discount factor (which is based
upon such factors as whether the option is vested or unvested, whether the
holder is still an employee of the Company (defined below) and the length of
time until the option vests) by (ii) the Final Price. No fractional shares of
USF&G Common Stock will be issued in the Merger. In lieu of any such fractional
shares, each holder of Victoria Common Stock and each holder of Victoria Options
who otherwise would be entitled to receive a fractional share of USF&G Common
Stock pursuant to the Merger will be paid an amount in cash equal to such
fractional interest multiplied by the Final Price. Additionally, each share of
USF&G Common Stock issued pursuant to the Merger will include a USF&G Right. See
"The Merger Agreement -- Terms of the Merger."
By way of example (but in each instance subject to payment of cash in lieu
of fractional shares): if the Final Price of USF&G Common Stock is $13.00, the
Exchange Rate will be 1.000 and each share of Victoria Common Stock will entitle
the holder thereof to receive one share of USF&G Common Stock. If the Final
Price of USF&G Common Stock is $14.00, the Exchange Rate will be .959 and each
share of Victoria Common Stock will entitle the holder thereof to receive .959
shares of USF&G Common Stock. If the Final Price of USF&G Common Stock is
$15.00, the Exchange Rate will be .931 and each share of Victoria Common Stock
will entitle the holder thereof to receive .931 shares of USF&G Common Stock. If
the Final Price of USF&G Common Stock is $12.00, the Exchange Rate will be 1.083
and each share of Victoria Common Stock will entitle the holder thereof to
receive 1.083 shares of USF&G Common Stock. If the Final Price of USF&G Common
Stock is less than $11.90, the Exchange Rate will be 1.092 and each share of
Victoria Common Stock will entitle the holder thereof to receive 1.092 shares of
USF&G Common Stock.
11
<PAGE> 18
THE CONSIDERATION TO BE RECEIVED BY VICTORIA SHAREHOLDERS IN THE MERGER
WILL BE BASED UPON A FORMULA AND CANNOT PRECISELY BE DETERMINED PRIOR TO THE
CLOSE OF BUSINESS ON THE FOURTH BUSINESS DAY IMMEDIATELY PRECEDING THE EFFECTIVE
DATE. The consideration will depend upon the Final Price, which establishes the
Exchange Rate. BECAUSE THE FINAL PRICE, THE EXCHANGE RATE AND THE MARKET PRICE
OF USF&G COMMON STOCK AS OF THE EFFECTIVE DATE ARE NOT DETERMINABLE AS OF THE
DATE OF THIS PROXY STATEMENT/PROSPECTUS AND AS OF THE DATE OF THE SPECIAL
MEETING, THE EXACT CONSIDERATION PER SHARE TO BE RECEIVED IN EXCHANGE FOR THE
OUTSTANDING VICTORIA COMMON STOCK IS NOT CURRENTLY DETERMINABLE. Victoria
shareholders will be entitled to receive not more than 1.092 shares nor less
than .959 shares of USF&G Common Stock for each share of Victoria Common Stock
(except if the Final Price exceeds $14.556, in which event Victoria shareholders
will be entitled to receive for each share of Victoria Common Stock that number
of shares of USF&G Common Stock with a value, based on the Final Price (but not
necessarily the market price as of the Effective Date) of $13.959). Had the
Merger been consummated on April 12, 1995, the Final Price would have been
$13.994, and each share of Victoria Common Stock outstanding would have been
converted into .959 shares of USF&G Common Stock (together with any related
USF&G Rights). The closing price of USF&G Common Stock on that date, as reported
on the NYSE-Composite Tape, was $14.50 per share. In fact, the Final Price may
be greater than or less than $13.994, and the price at which USF&G Common Stock
will be trading on the NYSE on and after the Effective Date may be greater than
or less than the Final Price. See "The Merger Agreement -- Terms of the Merger."
Based upon the capitalization of USF&G and Victoria as of April 12, 1995
(and assuming the issuance of 5,359,906 shares of USF&G Common Stock anticipated
to be issued prior to the Effective Date in connection with the acquisition by
USF&G of Discover Re Managers, Inc.), the latest practicable date prior to the
date hereof, assuming the Final Price is $13.994, taking into account Victoria
Options outstanding as of that date, the shareholders and option holders of
Victoria will own approximately 3.8% of the outstanding shares of USF&G Common
Stock immediately following consummation of the Merger.
Victoria's Reasons for the Merger; Recommendation of the Victoria
Board. The Victoria Board has determined that the Merger is fair to, and in the
best interests of, Victoria and its shareholders, has unanimously approved the
Merger Proposal and recommends that Victoria's shareholders vote FOR the
approval and adoption of the Merger Proposal. The Victoria Board believes that
the Merger will provide significant value to all Victoria shareholders and
offers Victoria opportunities for growth using the additional capital, expertise
and distribution channels available from USF&G. In reaching its decision to
approve the Merger Proposal, the Victoria Board considered several factors,
including: (a) the market value of USF&G Common Stock to be received in the
Merger by Victoria shareholders; (b) the active trading market and dividend
history of USF&G Common Stock; (c) the enhanced long-term value to Victoria of a
strategic merger with a larger, more diversified insurance company; (d) the
opinion of McDonald & Company Securities, Inc. ("McDonald & Company") to the
effect that, as of December 18, 1994, the Exchange Rate was fair to the Victoria
shareholders from a financial point of view; (e) the present intention of USF&G
to keep Victoria's headquarters in Cleveland, Ohio; and (f) the Merger provides
for the exchange of Victoria Common Stock for USF&G Common Stock in a tax-free
transaction. See "The Merger -- Victoria's Reasons for the Merger;
Recommendation of the Victoria Board."
Opinion of Financial Advisor to the Victoria Board. McDonald & Company,
which was engaged by the Victoria Board to serve as its financial advisor,
delivered its oral opinion to the Victoria Board on December 16, 1994, which
opinion was confirmed in writing on December 18, 1994, stating that, as of
December 18, 1994, the Exchange Rate was fair to the holders of Victoria Common
Stock from a financial point of view. The full text of the written opinion of
McDonald & Company, which sets forth the assumptions made, procedures followed,
matters considered and limits of the review, updated as of the date hereof, is
attached hereto as Annex II and is incorporated herein by reference. Holders of
Victoria Common Stock are urged to, and should, read such opinion in its
entirety. See "The Merger -- Opinion of Financial Advisor to the Victoria
Board."
USF&G's Reasons for the Merger. The USF&G Board of Directors (the "USF&G
Board") believes that the Merger is in the best interests of USF&G and USF&G
shareholders because it represents an attractive opportunity for USF&G to
broaden its personal lines product offerings with nonstandard automobile
insurance
12
<PAGE> 19
on a basis that does not require expenditure of USF&G's cash resources or the
borrowing of funds. The USF&G Board further believes that the Merger will
benefit USF&G by (a) allowing USF&G to leverage its insurance expertise and
agency franchise in a related insurance business and (b) helping USF&G to meet
the needs of its existing customers and agents within the market that Victoria
serves. See "The Merger -- USF&G's Reasons for the Merger."
Conditions to the Merger. The obligations of Victoria and USF&G to
consummate the Merger are subject to the satisfaction or waiver (where
permissible) of certain conditions, including, but not limited to, obtaining
requisite Victoria shareholder approval, obtaining approval for listing on the
NYSE, upon official notice of issuance, of the USF&G Common Stock to be issued
pursuant to the Merger Agreement and the absence of any preliminary or permanent
injunction which prevents the consummation of the Merger. See "The Merger
Agreement -- Conditions."
Amendment and Waiver. At any time prior to the Effective Date, Victoria,
USF&G and Merger Sub may (i) extend the time for performance of any of the
obligations or other acts of the parties, (ii) waive any inaccuracies in the
representations and warranties contained in the Merger Agreement or in any
documents delivered pursuant thereto and (iii) waive compliance with any of the
agreements or conditions contained in the Merger Agreement; provided, however,
that no such waiver shall materially adversely affect the rights of Victoria's
and USF&G's shareholders. The Merger Agreement may be amended by the parties
thereto, by or pursuant to action taken by their Boards of Directors, at any
time before or after approval thereof by the shareholders of Victoria, but,
after such approval, no amendment may be made which changes the ratios at which
Victoria Common Stock is to be converted into USF&G Common Stock as provided in
the Merger Agreement or which in any way materially adversely affects the rights
of such shareholders, without the further approval of such shareholders.
Victoria does not intend to resolicit shareholder approval in connection with
any amendment or waiver of the terms of the Merger Agreement except as would be
required by the foregoing terms of the Merger Agreement. See "The Merger
Agreement -- Amendment and Waiver."
Regulatory Approvals. The consummation of the Merger is also subject to the
parties obtaining certain regulatory approvals, including expiration of the
relevant waiting period under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended (the "HSR Act"). A request for early termination of such
waiting period was granted effective February 3, 1995. In addition, it is a
condition to the consummation of the Merger that the Superintendent of Insurance
of Ohio (the "Superintendent") approve the Merger under Section 3901.321(F) of
the Ohio Revised Code ("ORC"). See "The Merger -- Regulatory Approvals."
No Solicitation. The Merger Agreement provides that, subject to the
Victoria Board's fiduciary duties to shareholders, Victoria will not, nor will
any of its subsidiaries, take any action to (i) encourage, solicit or initiate
the submission of any Acquisition Proposal (defined below), (ii) enter into any
agreement with respect to an Acquisition Proposal, or (iii) participate in
discussions or negotiations, furnish information to or otherwise facilitate
inquiries of any person in connection with an Acquisition Proposal. See "The
Merger Agreement -- No Solicitation."
Termination; Fees and Expenses. The Merger Agreement may be terminated (i)
by mutual written consent of Victoria and USF&G, (ii) by either Victoria or
USF&G if the Merger is not consummated on or before July 31, 1995, and (iii)
under certain other circumstances. See "The Merger Agreement -- Termination;
Fees and Expenses."
Under certain circumstances, either Victoria or USF&G may be required to
reimburse the other party for its expenses if the Merger Agreement is
terminated. In addition to payment of expenses, Victoria may be required to pay
USF&G an additional $2,500,000 upon the occurrence of certain events, which
generally relate to (i) an acquisition of control of, or a significant equity
interest in or significant assets of, Victoria by a third party, or certain
proposals or offers with respect thereto, (ii) the withdrawal or material
modification of the recommendation of the Victoria Board with respect to the
Merger, or (iii) the termination of the Merger Agreement by USF&G as a result of
Victoria's breach thereof and within twelve months after termination the
acquisition of Victoria by a party with whom it had contact after the date of
the Merger Agreement and prior to the date of termination. None of such events
has occurred as of the date of mailing of this Proxy Statement/Prospectus.
Certain aspects of this fee arrangement could have the effect of discouraging a
third
13
<PAGE> 20
party from pursuing an acquisition transaction involving Victoria even if such
third party were prepared to pay a higher price per share of Victoria Common
Stock than provided for in the Merger Agreement. See "The Merger Agreement --
Termination; Fees and Expenses."
Management and Operations of Victoria after the Merger. After the Merger,
Victoria will be a wholly-owned subsidiary of USF&G. Victoria will operate as
one of USF&G's business units, and USF&G currently intends to retain Victoria's
corporate headquarters in Cleveland, Ohio. After the Merger, Victoria will have
access to resources generally available to USF&G's other business units and will
operate under the direction and guidance of USF&G's senior management and the
USF&G Board. See "The Merger -- Management and Operations of Victoria after the
Merger."
Employee Benefits. Under the Merger Agreement, USF&G has agreed, for a
period of one year from and after the Effective Date, to cause Victoria to
either (a) maintain all employee benefits of Victoria existing on the Effective
Date or (b) provide benefits to employees and former employees of Victoria that
are, taken as a whole, substantially equivalent to or better than the benefits
presently offered by Victoria; provided, however, that neither USF&G nor
Victoria will be required to maintain any plan or arrangement providing for the
sale of USF&G Common Stock or common stock of Victoria. See "The Merger --
Employee Benefits."
Anticipated Accounting Treatment. The Merger is intended to qualify as a
pooling of interests for accounting and financial reporting purposes. The
qualification of the Merger as a pooling of interests is not a condition to the
Merger. See "The Merger -- Anticipated Accounting Treatment."
Certain Federal Income Tax Consequences. The Merger is intended to qualify
as a tax-free reorganization within the meaning of Sections 368(a)(1)(A) and
368(a)(2)(E) of the Internal Revenue Code of 1986, as amended (the "Code"). All
Victoria shareholders should read carefully the section of this Proxy
Statement/Prospectus entitled "The Merger -- Certain Federal Income Tax
Consequences" for a discussion of the anticipated tax consequences of the
Merger.
Listing of the USF&G Common Stock. USF&G has agreed to cause the USF&G
Common Stock to be issued to Victoria shareholders and holders of Victoria
Options pursuant to the Merger Agreement to be authorized for listing on the
NYSE, upon official notice of issuance. Such authorization for listing is a
condition to the obligations of USF&G, Merger Sub and Victoria to consummate the
Merger. See "The Merger -- New York Stock Exchange Listing."
Effective Date of the Merger. The Merger will be consummated and become
effective after the requisite approval of Victoria's shareholders has been
obtained and all other conditions to the Merger have been satisfied or waived
(where permissible) and upon the filing by Merger Sub and Victoria of a properly
executed Certificate of Merger with the Secretary of State of the State of
Delaware or at such time thereafter as is provided in the Certificate of Merger
(the "Effective Date"). It is anticipated that, assuming all conditions are met,
the Merger will occur on or about May 22, 1995. See "The Merger Agreement --
Effective Date."
In the event that Victoria's shareholders do not approve the Merger
Proposal or if the Merger is not consummated for any other reason, Victoria
intends to continue as an independent company, operating on a basis consistent
with its historical operations. Victoria would continue to market and issue
nonstandard private passenger automobile insurance policies, and intends to
continue its selective geographic expansion, seeking to spread geographic risk
and to enhance its sales volume.
No Appraisal Rights. Holders of shares of Victoria Common Stock are not
entitled to dissenters' appraisal rights under the Delaware General Corporation
Law (the "DGCL") in connection with the Merger. Under the DGCL, dissenters'
appraisal rights are not available to Victoria shareholders because (a) Victoria
Common Stock was quoted on the Nasdaq National Market System on the record date
for the Special Meeting and (b) the USF&G Common Stock to be issued pursuant to
the Merger will be listed on the NYSE as of the Effective Date, upon official
notice of issuance. See "The Merger -- No Appraisal Rights."
14
<PAGE> 21
INTERESTS OF CERTAIN PERSONS IN THE MERGER
General. In considering the recommendation of the Victoria Board with
respect to the Merger Proposal, Victoria shareholders should be aware that
certain members of the Victoria Board and management have interests in the
Merger that are in addition to or different from the interests of Victoria
shareholders generally. In connection with the Merger, USF&G has agreed to
provide employment and severance benefits to certain officers and employees of
Victoria in the manner described below and to treat Victoria Options and
outstanding Victoria stock appreciation rights in the manner described below.
The Victoria Board granted certain bonuses to key officers in connection with
the Merger as described in "The Merger -- Background of the Merger" and "The
Merger Agreement -- Terms of the Merger."
Beneficial Ownership of Victoria Common Stock by Directors and Officers of
Victoria. As of April 12, 1995, directors and executive officers of Victoria and
their affiliates may be deemed to be beneficial owners of approximately 17.5% of
the outstanding Victoria Common Stock. Each of the directors and executive
officers of Victoria has advised Victoria that he intends to vote or direct the
vote of all the outstanding Victoria Common Stock over which he has voting
control in favor of approval of the Merger Proposal. The directors and executive
officers of Victoria will not receive any benefit in their capacities as
shareholders of Victoria Common Stock that differs from or is in addition to the
benefit received by all other shareholders of Victoria Common Stock. See
"Description of Victoria -- Ownership of Victoria Common Stock."
Kenneth R. Rosen Employment Agreement. In connection with the Merger
Agreement, Kenneth R. Rosen, President and Chief Executive Officer of Victoria,
and USF&G entered into a letter agreement (the "Employment Agreement") dated
December 18, 1994. Under the terms of the Employment Agreement, Mr. Rosen will
be employed for one and one-half years following the Effective Date as a Senior
Executive Officer of Victoria. At the expiration of such period, Mr. Rosen has
agreed to serve as a consultant to Victoria in the area of nonstandard
automobile insurance and related matters for an additional period of two and
one-half years. During the term of the Employment Agreement, Mr. Rosen will
serve as Chairman of the Board of Victoria at the discretion of USF&G.
Severance Arrangements. Under the Merger Agreement, USF&G has agreed to use
reasonable efforts to enter into, or to cause Victoria to enter into, in each
case, on or prior to the Effective Date, severance agreements with certain
officers and employees of Victoria. The severance agreements will provide for,
in the event of termination of employment of any such persons by Victoria for
any reason other than for cause prior to the first anniversary of the Effective
Date, salary equivalent severance payments for a period equal to the greater of
six months or two weeks per year of service to Victoria. Victoria may require a
release of all claims relating to employment matters as consideration for such
severance payments and any such payments under the severance agreement will be
in lieu of other severance benefits under Victoria's current plans, policies or
arrangements.
Treatment of Victoria Options and Stock Appreciation Rights. Each of the
Victoria Options outstanding as of the Effective Date, whether vested or
unvested, will be converted without any action on the part of the holder thereof
into the right to receive, as of the Effective Date, USF&G Common Stock (or cash
in lieu of fractional shares as described below). At or prior to the Effective
Date, Victoria and USF&G will take all action necessary to cause the assumption
by USF&G as of the Effective Date of the stock appreciation rights outstanding
under Victoria's Amended and Restated Key Executive Stock Option and Stock
Appreciation Rights Plan. Mr. Rosen holds 18,000 stock appreciation rights and
Victoria's directors and executive officers hold Victoria Options to purchase
239,022 shares of Victoria Common Stock in the aggregate. See "The Merger
Agreement -- Terms of the Merger" and "Description of Victoria -- Ownership of
Victoria Common Stock" and "--Executive Compensation."
Victoria Lease Renewal. Victoria leases its corporate headquarters pursuant
to a ten year lease with a partnership in which Victoria owns a 19.9% limited
partnership interest and Jeffrey A. Cole, Chairman of the Victoria Board, is a
limited partner and owns more than one-half of its equity. Victoria has options
to extend the term of this lease for three extension periods of three years
each. Pursuant to the Merger Agreement, USF&G has acknowledged that Victoria may
enter into a three year extension of this lease prior to the Effective Date, and
Victoria intends to do so.
15
<PAGE> 22
Indemnification. Pursuant to the terms of the Merger Agreement, from and
after the Effective Date, USF&G will indemnify, defend and hold harmless the
officers, directors and employees of Victoria and its subsidiaries, against all
losses, expenses, claims, damages or liabilities based in whole or in part on
the fact that such person is or was such officer, director or employee of
Victoria or its subsidiaries, to the fullest extent permitted or required under
applicable law. In addition, USF&G has agreed that all rights to indemnification
existing in favor of the directors, officers or employees of Victoria as
provided in Victoria's or its subsidiaries' organizational documents shall
survive the Merger for a period of not less than six years. USF&G has agreed to
unconditionally guarantee the satisfaction of such rights. See "The Merger
Agreement -- Indemnification."
In connection with the foregoing, see generally "The Merger -- Background
of the Merger," "-- Interests of Certain Persons in the Merger" and "-- Employee
Benefits."
CERTAIN CONSIDERATIONS
For a discussion of certain factors that should be considered carefully by
Victoria shareholders in considering whether to vote in favor of the Merger
Proposal, see "Certain Considerations."
SURRENDER OF CERTIFICATES
Promptly after the Effective Date, USF&G's Exchange Agent will mail a
transmittal form and exchange instructions to each holder of record of Victoria
Common Stock. CERTIFICATES FOR SHARES OF VICTORIA COMMON STOCK SHOULD NOT BE
SURRENDERED UNTIL SUCH TRANSMITTAL FORM AND EXCHANGE INSTRUCTIONS ARE RECEIVED.
Holders of Victoria Options outstanding as of the Effective Date will be
entitled to receive certificates for shares of USF&G Common Stock upon delivery
for cancellation of their option award agreement or other satisfactory evidence
of termination of the option, together with a duly executed transmittal form.
See "The Merger Agreement -- Surrender and Payment."
SHAREHOLDER RIGHTS
See "Comparison of Rights of Holders of USF&G Capital Stock and Victoria
Capital Stock" for a summary of the material differences between the rights of
holders of Victoria Common Stock and USF&G Common Stock.
16
<PAGE> 23
SELECTED HISTORICAL CONSOLIDATED
FINANCIAL INFORMATION
The following tables set forth selected historical consolidated financial
data for Victoria and USF&G and their respective subsidiaries for the periods
indicated. The selected consolidated statements of operations and financial
position data, at or for each of the periods presented below, were derived from
the consolidated financial statements of Victoria and USF&G, respectively. In
the case of Victoria financial statements, annual financial statements were
audited by KPMG Peat Marwick LLP, Victoria's independent auditors, and in the
case of USF&G financial statements, annual financial statements were audited by
Ernst & Young LLP, USF&G's independent auditors. The tables should be read in
conjunction with the consolidated financial statements of Victoria and USF&G,
related notes thereto and other financial information included in this Proxy
Statement/Prospectus or incorporated herein by reference.
<TABLE>
VICTORIA HISTORICAL
(dollars in millions except per share data)
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1994 1993 1992 1991 1990
----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS:
Premiums Earned........................................... $ 51 $ 49 $ 38 $ 24 $ 19
Net Investment Income..................................... 3 2 2 1 1
Realized Gains (Losses) and Other Revenues................ 5 2 1 1 --
----- ----- ----- ----- ------
Total Revenues.......................................... 59 53 41 26 20
----- ----- ----- ----- ------
Losses, Loss Expenses, and Policy Benefits................ 35 34 26 15 12
Underwriting, Acquisition and Operating Expenses.......... 21 16 13 9 8
Interest Expense.......................................... -- -- 1 1 --
Restructuring Charges..................................... -- -- -- -- --
----- ----- ----- ----- ------
Total Expenses.......................................... 57 50 40 25 20
----- ----- ----- ----- ------
Pretax Income (Loss) from Continuing Operations before
Cumulative Effect of Adopting New Accounting
Standards............................................... 2 3 1 1 --
Provision for Income Taxes (Benefit)...................... -- 1 -- -- --
----- ----- ----- ----- ------
Income (Loss) from Continuing Operations before Cumulative
Effect of Adopting New Accounting Standards............. 2 2 1 1 --
Income (Loss) from Discontinued Operations................ -- -- -- -- --
Cumulative Effect of Adopting New Accounting Standards.... -- -- -- -- --
Extraordinary Item........................................ -- -- -- -- --
----- ----- ----- ----- ------
Net Income (Loss)......................................... 2 2 1 1 --
Preferred Stock Dividends................................. -- -- -- -- --
----- ----- ----- ----- ------
Net Income (Loss) Available to Common Shareholders........ $ 2 $ 2 $ 1 $ 1 $ --
===== ===== ===== ===== ======
PER SHARE DATA:
Income (Loss) from Continuing Operations before Cumulative
Effect of Adopting New Accounting Standards............. $0.44 $0.78 $0.96 $0.39 $(0.11)
Loss from Discontinued Operations......................... -- -- -- -- --
Cumulative Effect of Adopting New Accounting Standards.... -- -- -- -- --
Net Income (Loss)1........................................ $0.44 $0.78 $0.96 $0.39 $(0.11)
Dividends Declared........................................ -- -- -- -- --
CONSOLIDATED STATEMENT OF FINANCIAL POSITION:
Total Investments......................................... $ 62 $ 57 $ 43 $ 28 $ 19
Total Assets.............................................. 95 84 69 42 29
Unpaid Losses, Loss Expenses and Policy Benefits.......... 25 22 17 9 6
Unearned Premiums......................................... 22 23 21 13 9
Corporate Debt............................................ 12 6 9 11 7
Real Estate and Other Debt................................ -- -- -- -- --
Total Liabilities......................................... 68 59 57 38 25
Shareholders' Equity...................................... 27 25 12 4 4
Statutory Surplus (Victoria Fire & Casualty Company)...... 23 21 15 10 7
<FN>
- ---------------
1 For the years ended December 31, 1991 and December 31, 1992, fully-diluted net
income per share was $0.37 and $0.66, respectively. In other periods shown,
there was no difference between primary and fully-diluted net income (loss)
per share.
</TABLE>
17
<PAGE> 24
<TABLE>
USF&G HISTORICAL
(dollars in millions except per share data)
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1994 1993 1992 1991 1990
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS:
Premiums Earned........................................... $ 2,435 $ 2,456 $ 2,637 $ 3,187 $ 3,516
Net Investment Income..................................... 743 749 817 877 929
Realized Gains (Losses) and Other Revenues................ 43 44 206 108 (274)
------- ------- ------- ------- -------
Total Revenues.......................................... 3,221 3,249 3,660 4,172 4,171
------- ------- ------- ------- -------
Losses, Loss Expenses, and Policy Benefits................ 2,079 2,153 2,465 2,982 3,188
Underwriting, Acquisition and Operating Expenses.......... 971 956 1,069 1,225 1,326
Interest Expense.......................................... 37 41 40 46 54
Restructuring Charges..................................... -- -- 51 60 34
Facilities Exit Costs..................................... 183 -- -- -- --
------- ------- ------- ------- -------
Total Expenses.......................................... 3,270 3,150 3,625 4,313 4,602
------- ------- ------- ------- -------
Pretax Income (Loss) from Continuing Operations before
Cumulative Effect of Adopting New Accounting
Standards............................................... (49) 99 35 (141) (431)
Provision for Income Taxes (Benefit)...................... (281) (28) -- 3 2
------- ------- ------- ------- -------
Income (Loss) from Continuing Operations before Cumulative
Effect of Adopting New Accounting Standards............. 232 127 35 (144) (433)
Income (Loss) from Discontinued Operations................ -- -- (7) (32) (136)
Cumulative Effect of Adopting New Accounting Standards.... -- 38 -- -- --
Extraordinary Item........................................ -- -- -- -- --
------- ------- ------- ------- -------
Net Income (Loss)......................................... 232 165 28 (176) (569)
Preferred Stock Dividends................................. 46 48 48 37 16
------- ------- ------- ------- -------
Net Income (Loss) Available to Common Shareholders........ $ 186 $ 117 $ (20) $ (213) $ (585)
======== ======== ======== ======== ========
PER SHARE DATA:
Income (Loss) from Continuing Operations before Cumulative
Effect of Adopting New Accounting Standards............. $ 2.14 $ 0.93 $ (0.16) $ (2.15) $ (5.37)
Loss from Discontinued Operations......................... -- -- $ (0.08) $ (0.38) $ (1.62)
Cumulative Effect of Adopting New Accounting Standards.... -- $ 0.45 -- -- --
Net Income (Loss)1........................................ $ 2.14 $ 1.38 $ (0.24) $ (2.53) $ (6.99)
Dividends Declared........................................ $ 0.20 $ 0.20 $ 0.20 $ 0.20 $ 2.44
CONSOLIDATED STATEMENT OF FINANCIAL POSITION:
Total Investments......................................... $10,421 $11,377 $11,346 $12,167 $11,221
Total Assets.............................................. 13,774 14,335 13,134 14,486 13,902
Unpaid Losses, Loss Expenses and Policy Benefits.......... 9,904 10,302 9,436 9,477 9,554
Unearned Premiums......................................... 931 917 770 981 1,091
Corporate Debt............................................ 586 574 574 617 659
Real Estate and Other Debt................................ 30 44 42 60 120
Total Liabilities......................................... 12,405 12,824 11,864 13,163 12,697
Shareholders' Equity...................................... 1,369 1,511 1,270 1,323 1,205
Statutory Surplus (USF&G Company)......................... 1,566 1,541 1,467 1,404 1,352
<FN>
- ---------------
1 For the twelve months ended December 31, 1993 and 1994, fully-diluted net
income per share was $1.32 and $1.86, respectively. In other periods shown,
there was no difference between primary and fully-diluted net income (loss)
per share.
</TABLE>
18
<PAGE> 25
COMPARATIVE PER SHARE DATA
The following tables set forth certain unaudited historical per share data
of Victoria and USF&G and combined per share data on an unaudited pro forma
basis after giving effect to the Merger on a pooling of interests basis. This
data should be read in conjunction with the selected historical consolidated
financial data, and the separate historical consolidated financial statements of
Victoria and USF&G included elsewhere in this Proxy Statement/Prospectus or
incorporated herein by reference. The unaudited pro forma combined financial
data presented below is not necessarily indicative of the operating results that
would have been achieved had the transaction been in effect as of the beginning
of the periods presented and should not be construed as representative of future
operations.
<TABLE>
<CAPTION>
1994 1993
------------------------------------------- -------------------------------------------
VICTORIA VICTORIA
PRO FORMA PRO FORMAM
HISTORICAL PRO FORMA COMBINED HISTORICAL PRO FORMA COMBINED
USF&G VICTORIA COMBINED EQUIVALENT USF&G VICTORIA COMBINED EQUIVALENTS
------ -------- --------- ---------- -------- -------- --------- ----------
(NOTE 1) (NOTE 2) (NOTE 1) (NOTE 2)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BOOK VALUE PER SHARE........... $10.17 $ 6.80 $ 10.03 $ 9.62 $11.66 $ 7.01 $ 11.40 $ 10.94
======= ======= ========= ========== ======= ======= ========= ==========
CASH DIVIDENDS DECLARED PER
SHARE........................ $ 0.20 -- $ 0.20 $ 0.19 $ 0.20 -- $ 0.20 $ 0.19
======= ======= ========= ========== ======= ======= ========= ==========
INCOME (LOSS) PER SHARE FROM
CONTINUING OPERATIONS:
PRIMARY........................ $ 2.14 $ 0.44 $ 2.07 $ 1.98 $ 0.93 $ 0.78 $ 0.91 $ 0.88
======= ======= ========= ========== ======= ======= ========= ==========
FULLY DILUTED.................. $ 1.86 $ 0.44 $ 1.81 $ 1.74 $ 0.98 $ 0.78 $ 0.97 $ 0.93
======= ======= ========= ========== ======= ======= ========= ==========
<CAPTION>
1992
-------------------------------------------
VICTORIA
PRO FORMA
HISTORICAL PRO FORMA COMBINED
USF&G VICTORIA COMBINED EQUIVALENT
------ -------- --------- -----------
(NOTE 1) (NOTE 2)
<S> <C> <C> <C> <C>
BOOK VALUE PER SHARE........... $ 8.87 $ 4.62 $ 8.60 $ 8.25
======= ======= ========= ==========
CASH DIVIDENDS DECLARED PER
SHARE........................ $ 0.20 -- $ 0.20 $ 0.19
======= ======= ========= ==========
INCOME (LOSS) PER SHARE FROM
CONTINUING OPERATIONS:
PRIMARY........................ $(0.16) $ 0.96 $ (0.14) $ (0.13)
======= ======= ========= ==========
FULLY DILUTED.................. $(0.16) $ 0.66 $ (0.13) $ (0.13)
======= ======= ========= ==========
<FN>
- ---------------
(1) An Exchange Rate of .959 is assumed for purposes of determining the number
of shares of USF&G Common Stock outstanding on a pro forma combined basis.
The assumed Exchange Rate of .959 is based on an assumed Final Price of
$13.994, which whould have been the Final Price had the Merger been
consummated on April 12, 1995, the latest practicable date prior to the
printing of this Proxy Statement/Prospectus. The actual Exchange Rate and
Final Price may be different from those assumed for these purposes and will
be determined based on the average closing price of USF&G Common Stock on
the NYSE - Composite Tape during the period comprising the twenty
consecutive trading days immediately preceding the third business day
immediately preceding the Effective Date.
(2) Victoria pro forma combined equivalents are determined by multiplying pro
forma combined per share amounts for book value, cash dividends and income
(loss) from continuing operations on a primary and fully diluted basis by
the assumed Exchange Rate of .959. See Note (1) above.
</TABLE>
COMPARATIVE MARKET PRICE INFORMATION
Victoria Common Stock is traded on the Nasdaq National Market System under
the symbol "VICF", and USF&G Common Stock is listed on the NYSE under the symbol
"FG". Prior to August 2, 1993, Victoria Common Stock was traded on the Nasdaq
Small-Cap Market, which made "real-time" sale price information available
beginning in the third quarter of 1992.
19
<PAGE> 26
The table below sets forth, for the calendar quarters indicated, the
reported high and low sale prices of Victoria Common Stock (with high and low
bid and ask prices for the first two quarters of 1992) and USF&G Common Stock as
reported on their respective market trading systems, in each case based on
published financial sources. The table also sets forth the cash dividends
declared on the USF&G Common Stock in each quarter presented. No dividends have
been declared on the Victoria Common Stock for the periods presented.
<TABLE>
<CAPTION>
VICTORIA USF&G
COMMON STOCK COMMON STOCK
---------------------------------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
DIVIDENDS
HIGH LOW HIGH LOW DECLARED
------ ------ ------ ------ ---------
1992 BID ASK BID ASK
--- --- --- ---
First Quarter.......... $6.56 $ 7.81 $3.75 $5.63 $10.25 $ 7.13 $ .05
Second Quarter......... 8.75 10.00 5.94 7.19 14.50 8.00 .05
Third Quarter.......... 13.13 9.38 15.00 10.00 .05
Fourth Quarter......... 11.25 8.75 14.13 9.88 .05
---------
Total............... $ .20
=========
1993
First Quarter.......... 14.06 9.38 17.63 11.13 $ .05
Second Quarter......... 14.06 11.88 19.63 15.75 .05
Third Quarter.......... 17.50 11.00 19.63 13.88 .05
Fourth Quarter......... 14.75 8.00 15.25 12.38 .05
---------
Total............... $ .20
=========
1994
First Quarter.......... 9.50 7.50 16.13 13.00 $ .05
Second Quarter......... 8.25 6.75 14.00 11.69 .05
Third Quarter.......... 7.75 6.75 14.00 12.13 .05
Fourth Quarter......... 12.00 6.00 14.63 12.63 .05
---------
Total............... $ .20
=========
1995
First Quarter.......... 13.00 11.50 15.50 13.38 $ .05
Second Quarter (through
April 12)........... 13.13 12.50 14.50 13.75 --
</TABLE>
On December 16, 1994, the last full trading day prior to the execution and
delivery of the Merger Agreement and the public announcement thereof, the last
reported sales price of Victoria Common Stock on the Nasdaq National Market
System was $8.00 per share and the closing price of USF&G Common Stock on the
NYSE -- Composite Tape was $13.63 per share.
On April 12, 1995, the most recent practicable date prior to the printing
of this Proxy Statement/Prospectus, the last reported sales price of Victoria
Common Stock on the Nasdaq National Market System was $13.00 per share and the
closing price of USF&G Common Stock on the NYSE was $14.50 per share. There were
approximately 34,300 shareholders of USF&G Common Stock of record as of December
31, 1994.
USF&G has paid cash dividends on the USF&G Common Stock in every quarter
since it was formed as a holding company in 1981. While USF&G intends to
continue to pay dividends, the decision to do so is made quarterly by the USF&G
Board and is dependent upon the earnings of USF&G, management's assessment of
future capital needs and other factors. As a holding company, USF&G's ability to
pay dividends to its shareholders is dependent upon dividends from its
subsidiaries. The ability of its principal subsidiary, USF&G Company, to
distribute dividends is subject to regulation under Maryland law. See "Certain
Considerations -- Differences in Risks of Businesses Conducted by Victoria --
Holding Company Structure; Dividend Restrictions."
20
<PAGE> 27
CERTAIN CONSIDERATIONS
The following factors should be considered carefully by holders of Victoria
Common Stock in evaluating whether to approve the Merger Proposal and thereby
become holders of USF&G Common Stock. These factors should be considered in
conjunction with the other information included and incorporated by reference in
this Proxy Statement/Prospectus.
EFFECT OF STOCK PRICE ON MERGER CONSIDERATION
THE CONSIDERATION TO BE RECEIVED BY VICTORIA SHAREHOLDERS IN THE MERGER
WILL BE BASED UPON A FORMULA AND CANNOT PRECISELY BE DETERMINED PRIOR TO THE
CLOSE OF BUSINESS ON THE FOURTH BUSINESS DAY IMMEDIATELY PRECEDING THE EFFECTIVE
DATE. The consideration will depend upon the Final Price, which establishes the
Exchange Rate. BECAUSE THE FINAL PRICE, THE EXCHANGE RATE AND THE MARKET PRICE
OF USF&G COMMON STOCK AS OF THE EFFECTIVE DATE ARE NOT DETERMINABLE AS OF THE
DATE OF THIS PROXY STATEMENT/PROSPECTUS AND AS OF THE DATE OF THE SPECIAL
MEETING, THE EXACT CONSIDERATION PER SHARE TO BE RECEIVED IN EXCHANGE FOR THE
OUTSTANDING VICTORIA COMMON STOCK IS NOT CURRENTLY DETERMINABLE. In considering
the Merger Proposal, Victoria shareholders should take into account the
following: (a) fluctuations in the stock price of USF&G Common Stock may affect
the Exchange Rate, and (b) the fact that the price of USF&G Common Stock at the
Effective Date may vary from the Final Price and the prices as of the date of
this Proxy Statement/Prospectus and the date on which Victoria shareholders vote
on the Merger. Such fluctuations may be due to changes in the business,
operations or prospects of USF&G, market assessments of the likelihood that the
Merger will be consummated and the time thereof, general market and economic
conditions, and other factors. See "The Merger Agreement -- Terms of the Merger"
and "Comparative Market Price Information."
DIFFERENCES IN RISKS OF BUSINESSES CONDUCTED BY VICTORIA AND USF&G
Victoria's principal line of business is nonstandard private passenger
automobile insurance. It currently operates in 11 states and has been writing
private passenger automobile insurance since 1986. In contrast, USF&G Company,
which has been operating since 1896, conducts business in all 50 states, the
District of Columbia and outside of the United States. USF&G Company and its
subsidiaries write multiple lines of business, including commercial and
personal, property, auto, inland marine, workers' compensation, general and
umbrella liability, fidelity/surety, reinsurance, life and annuities. As a
result, USF&G Company is subject to certain reserving, catastrophe, reinsurance,
rating, investment, regulatory and other risks which are different from those to
which Victoria is subject. Holders of Victoria Common Stock should consider
carefully the following additional factors, which describe some of the
differences in the risks of the businesses conducted by Victoria and USF&G,
respectively, in evaluating whether to approve the Merger Proposal:
Adequacy of Property-Casualty Loss Reserves. USF&G Company maintains
property and casualty loss reserves to cover its estimated ultimate liability
for losses and loss adjustment expenses with respect to reported claims and
claims incurred but not yet reported. Reserves do not represent an exact
calculation of liabilities, but rather are estimates of what USF&G Company
expects the ultimate settlement and administration of claims will cost based on
facts and circumstances then known, estimates of future trends in claims
frequency and severity, judgments regarding judicial theories of liability
(which include punitive damages), and other factors. The inherent uncertainties
of estimating insurance reserves are generally greater for liability coverages
(particularly workers' compensation, environmental and product liability) than
for property coverages, due to the longer period of time that elapses before a
definitive determination of ultimate loss can be made. These estimating
uncertainties are particularly significant for common circumstance claims, which
include 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. Although establishment of reserves for nonstandard private
passenger automobile insurers such as Victoria is uncertain, it is generally
subject to better estimation than the reserves established for liabilities
underwritten by multi-line insurers such as USF&G Company, since these
liabilities may, among other factors, involve multiple products, higher coverage
limits, longer tails, and claims arising from environmental, product liability,
workers' compensation, and general liability coverages which may be more
difficult to estimate or resolve.
21
<PAGE> 28
USF&G Company regularly reviews its reserving techniques, overall reserve
position and reinsurance arrangements. In light of present facts and current
legal interpretations, management of USF&G Company believes that adequate
provision has been made for loss reserves. However, establishment of appropriate
reserves is an inherently uncertain process, and there can be no assurance that
ultimate losses will not exceed USF&G Company's loss reserves and have a
material adverse effect on USF&G Company's results of operations or financial
condition.
Catastrophes. Property-casualty insurers are subject to claims arising out
of catastrophes, which may have a significant impact on their results of
operations and financial condition. USF&G Company has experienced, and can be
expected in the future to experience, material catastrophe losses. Catastrophes
can be caused by various events including hurricanes, windstorms, earthquakes,
floods, hail, winter storms, explosions, fires and civil disorders, and the
incidence and severity of catastrophes are inherently unpredictable. The extent
of losses from a catastrophe is a function of both the total amount of insured
exposure in the area affected by the event and the severity of the event. Many
catastrophes are restricted to relatively small geographical areas; however,
earthquakes, hurricanes and other storms, in particular, may produce significant
damage in large, heavily populated areas. Applicable accounting principles do
not permit an insurer to establish reserves for catastrophes or other losses
before they actually occur. The multiple lines of business written by USF&G
Company, particularly property insurance and reinsurance coverage both in and
outside of the United States, make USF&G Company more subject to claims arising
out of catastrophes than an insurer such as Victoria, which solely writes
automobile insurance in a limited geographic area.
USF&G Company seeks to reduce its catastrophe exposure through risk
selection and the purchase of reinsurance. While USF&G Company attempts to limit
its exposure to acceptable levels, it is possible that a catastrophic event or
multiple catastrophic events could produce losses which result in a material
adverse effect on USF&G Company's results of operations or financial condition.
Reinsurance Considerations. Reinsurance is used to limit the amount of
risk retained under policies written. The availability and cost of reinsurance
are subject to prevailing market conditions, both in terms of price and
available capacity, which can affect USF&G's business volume and profitability.
USF&G also is subject to credit risk with respect to its ability to recover
amounts due from its reinsurers, since the ceding of risk to its reinsurers does
not relieve USF&G of liability to its insureds. There can be no assurance that
USF&G's reinsurance programs will effectively limit its overall exposure for
policy claims.
Ratings. Ratings have become an increasingly important factor in
establishing the competitive position of insurance companies. Ratings
organizations review the financial performance and condition of insurers,
including that of USF&G and its insurance subsidiaries. Both USF&G and its
insurance subsidiaries have ratings below those of most of their major
competitors. Any reductions in USF&G's senior debt ratings could adversely
impact USF&G's financial flexibility by limiting USF&G's access to capital or
increasing its borrowing costs. Any reductions in F&G Life's insurance ratings
could result in its products being less attractive to consumers and the
acceleration of policy surrenders. Further, insurance ratings are important to
certain consumers of property-casualty coverages, particularly in USF&G
Company's fidelity/surety and reinsurance operations.
USF&G's senior debt is rated by three rating organizations: Standard &
Poor's Corporation ("Standard & Poor's"), Moody's Investors Service, Inc.
("Moody's") and Duff & Phelps Credit Rating Company ("Duff & Phelps"). Debt
ratings are the rating organization's current assessment of the creditworthiness
of an obligor
22
<PAGE> 29
with respect to a specific obligation. Each rating organization has its own
scale which is generally described below:
<TABLE>
<S> <C> <C> <C>
Class 1: Highest Quality (Investment Grade) Class 4: Low Quality (Non-Investment Grade)
Standard & Poor's.... AAA, AA+, AA, AA-, Standard & Poor's.... B+, B, B-
A+, A, A-
Moody's.............. Aaa, Aa1, Aa2, Aa3, A1, Moody's.............. B1, B2, B3
A2, A3
Duff & Phelps........ AAA, AA+, AA, AA-, Duff & Phelps........ B+, B, B-
A+, A, A-
Class 2: High Quality (Investment Grade) Class 5: Low Quality (Non-Investment Grade)
Standard & Poor's.... BBB+, BBB, BBB- Standard & Poor's.... CCC+, CCC, CCC-, CC, C
Moody's.............. Baa1, Baa2, Baa3 Moody's.............. Caa, Ca, C
Duff & Phelps........ BBB+, BBB, BBB- Duff & Phelps........ CCC
Class 3: Medium Quality (Non-Investment Grade) Class 6: Bonds In or Near Default
(Non-Investment Grade)
Standard & Poor's.... BB+, BB, BB- Standard & Poor's.... D
Moody's.............. Ba1, Ba2, Ba3 Moody's.............. Caa, Ca, C
Duff & Phelps........ BB+, BB, BB- Duff & Phelps........ CCC
</TABLE>
USF&G's senior debt ratings are "BBB-", "Ba1" and "BBB" from Standard & Poor's,
Moody's and Duff & Phelps, respectively.
USF&G Company and F&G Life also maintain insurance ratings from Standard &
Poor's, Moody's and Duff & Phelps and also from A.M. Best Company Inc. ("A.M.
Best"). Insurance ratings are opinions of the rating organization on the ability
of insurance companies to punctually meet policyholder claims and obligations.
Standard & Poor's ratings range from "AAA" (Superior) to "R" (Regulatory
action); Moody's ratings range from "Aaa" (Exceptional) to "C" (Extremely poor);
Duff & Phelps ratings range from "AAA" (Highest) to "DD" (Liquidation); and A.M.
Best ratings range from "A++" (Superior) to "F" (Liquidation). USF&G Company and
F&G Life, respectively, currently maintain insurance ratings of "A-" (meaning
good financial security, but capacity to meet policyholder obligations is
somewhat susceptible to adverse economic and underwriting conditions) and "BBB+"
(meaning adequate financial security, but capacity to meet policyholder
obligations is susceptible to adverse economic and underwriting conditions) from
Standard & Poor's; "Baa2" and "Baa3" (both meaning adequate financial security;
however, certain protective elements may be lacking or may be characteristically
unreliable over any great length of time) from Moody's; "A" and "A" (meaning
high claims paying ability; protection factors are average and there is an
expectation of variability in risk over time due to economic and/or underwriting
conditions) from Duff & Phelps; and "A-" and "A-" (meaning excellent; assigned
to companies which have a strong ability to meet their obligations to
policyholders over a long period of time) from A.M. Best.
Real Estate Investments. USF&G's investment portfolio consists primarily of
investment grade debt securities. However, as of December 31, 1994, $760 million
was invested in equity real estate and $349 million was invested in commercial
mortgages, together aggregating 10% of USF&G's investment portfolio, net of
reserves. Real estate values have generally fallen within the last several years
and restructuring and foreclosures of mortgages have increased substantially in
recent periods. In addition, real estate equity and mortgage investments are
generally less liquid and carry a greater risk of significant investment losses
than do investment grade fixed-income securities. USF&G's strategy, which is
designed to reduce risk and increase yields in the real estate portfolio, is to
maintain a generally consistent level of real estate assets while changing the
mix to more traditional commercial mortgage loans and less equity real estate.
At December 31, 1994, the aggregate amount of USF&G's non-performing real estate
investments (mortgage loans and real estate investments that are not performing
in accordance with their contractual terms, or are performing significantly
below expectations) was $208 million, representing 2.0% of USF&G's total
investments. As of December 31,
23
<PAGE> 30
1994, Victoria had $87,000 invested in equity real estate and no investments in
commercial mortgages. None of Victoria's real estate investments are classified
as non-performing.
The real estate market remains depressed. Although USF&G anticipates that
any sales of real estate will be in an orderly fashion as and when market
conditions permit, if USF&G was required to dispose of a significant portion of
its real estate in the near term, it is likely that it would recover amounts
substantially less than the related carrying values. The current value of
USF&G's commercial mortgage loans also has been adversely affected by depressed
real estate market conditions. There can be no assurance whether or when the
markets for real estate assets will recover, or that the recent investment
performance of these assets will not persist or worsen.
USF&G had real estate reserves totaling $98 million at December 31, 1994.
The establishment of appropriate reserves requires numerous forecasts and the
exercise of a significant degree of judgment, and is inherently a subjective
process. Although USF&G believes its reserves are adequate in light of its
current plans for the portfolio, no assurance can be given that substantial
additional reserves will not be required in the future. 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 commercial mortgage loans.
Cyclicality of the Property-Casualty Insurance Industry. Historically, the
property-casualty insurance industry has been cyclical, generally characterized
by extended periods of overcapacity that adversely affect premium rates,
followed by periods of undercapacity resulting in higher rates. The industry has
been in a protracted downturn in recent years, due primarily to premium rate
competition, which has adversely affected underwriting results. Premium rate
levels are affected by the availability of insurance coverage which is generally
affected by the level of surplus in the industry. Increases in surplus have
generally been accompanied by increased price competition among
property-casualty insurers. The industry's profitability can be affected
significantly by volatile and unpredictable developments, including
catastrophes, interest rate fluctuations and other changes in the investment
environment which affect market prices of and income from insurance company
investments, inflationary pressures that affect the size of losses and judicial
decisions affecting insurers' liabilities. The demand for property-casualty
insurance can also vary significantly, generally rising as the overall level of
economic activity increases and falling as such activity decreases. Many of the
factors which have resulted in the current downturn in the property-casualty
insurance industry continue, and USF&G cannot predict if or when the general
market conditions for the property-casualty industry will improve. Although
private passenger automobile carriers such as Victoria may be affected by these
cycles, writers of commercial lines and reinsurance products such as USF&G
historically have been more sensitive to these cycles of under- and
overcapacity.
Holding Company Structure; Dividend Restrictions. USF&G is a holding
company whose principal asset is the stock of USF&G Company. USF&G Company, in
turn, owns the stock of F&G Life and USF&G's other principal subsidiaries. Since
USF&G is a holding company, its rights to participate in the assets of any
subsidiary upon the latter's liquidation or recapitalization generally will be
subject to the prior claims of the subsidiary's creditors (including, in the
case of an insurance subsidiary, its policyholders). In addition, there are
certain regulatory limitations on the payment of dividends and on loans and
other transfers of funds to USF&G by its subsidiaries.
Because the operations of USF&G are conducted through its subsidiaries,
USF&G is dependent on dividends from its subsidiaries to meet its obligations,
among other things, for payment of dividends to shareholders. Approval of the
Maryland Insurance Commissioner is required for dividend payments from a
Maryland insurance subsidiary to its holding company during a twelve month
period in excess of 10% of the subsidiary's statutory policyholders' surplus as
of the prior calendar year end. In addition, notice of any 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. As of January 1, 1995, approximately $157 million in dividends are
available for payment to USF&G from its insurance subsidiaries during 1995
without prior approval from the
24
<PAGE> 31
Maryland Insurance Commissioner. Victoria is subject to similar limitations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
From time to time, the National Association of Insurance Commissioners
("NAIC") and various state insurance regulators have considered, and may in the
future consider, proposals to further restrict dividend payments that may be
made by an insurance company without regulatory approval. If the ability of
USF&G's subsidiaries to pay dividends or make other payments to USF&G is
materially restricted by regulatory requirements, it could affect USF&G's
ability to pay dividends. No assurance can be given that there will not be any
further regulatory action restricting the ability of USF&G's subsidiaries to pay
dividends.
Regulation. USF&G's insurance subsidiaries are subject to extensive
regulation and supervision in the states and other jurisdictions in which they
do business. This regulatory oversight includes, for example, matters relating
to: licensing and examination, rate setting, trade practices, policy forms,
restrictions on underwriting standards, cancellation and nonrenewal of insurance
policies, withdrawal from a market, claims practices and mandated participation
in involuntary pools and guaranty funds. The insurance laws of these states and
other jurisdictions also regulate the nature and amount of permitted
investments, reserve adequacy, insurer solvency and transactions between
affiliates. Such regulation and supervision are primarily for the benefit and
protection of policyholders and are not for the benefit of investors.
In recent years, the state insurance regulatory framework has come under
increased scrutiny and many state legislatures have considered or enacted laws
that regulate insurance companies and insurance holding company systems.
Further, the NAIC and state insurance regulators are reexamining existing laws
and regulations, specifically focusing on issues relating to insurance company
investments, the solvency of insurance companies and risk-based capital ("RBC")
guidelines. In addition, Congress and certain federal government agencies are
investigating the current condition of the insurance industry to determine
whether federal regulation is warranted. Finally, while current federal income
tax law permits the tax-deferred accumulation of earnings on the premiums paid
by an annuity owner and holders of certain savings oriented life insurance
products, no assurance can be given that future tax laws will continue to allow
such tax deferrals. If such deferrals were not allowed, consumer demand for the
affected products could be substantially reduced. It is not possible to predict
the outcome of any of these matters and there can be no assurance that future
legislation and regulation will not have a material adverse effect on USF&G.
USF&G Company is required by state law to participate in various
involuntary pools principally involving workers' compensation and automobile
insurance. From time to time, such pools assess charges on their participants to
reflect claims which have been made against such pools. USF&G has withdrawn from
certain jurisdictions and has taken steps in other jurisdictions to reduce its
risk to these exposures, although it continues to face potential assessments,
even in states where it has withdrawn, related to its prior participation in
such markets. There can be no assurance that any such charges, if assessed, will
not have a material adverse effect on USF&G. Victoria is also subject to certain
regulatory considerations. See "Description of Victoria -- Government
Regulation."
Legal Proceedings. Various regulatory, governmental and other legal
actions are currently pending involving or affecting USF&G and specific aspects
of its businesses. Additionally, USF&G's insurance subsidiaries are defendants
in numerous governmental and legal actions and proceedings of a character
normally incident to their businesses. The aggregate dollar amounts involved in
these regulatory, governmental and other legal proceedings cannot be determined
with certainty. However, in the opinion of USF&G's management, these proceedings
are not expected to have a material adverse effect on USF&G's consolidated
financial position, although it is possible that USF&G's results of operations
in a particular quarterly or annual period would be materially affected.
Victoria is also subject to certain legal proceedings. See "Description of
Victoria -- Legal Proceedings."
Competition. The property-casualty and life insurance businesses are
highly competitive. USF&G's insurance subsidiaries compete with domestic and
foreign insurers, many of which have significantly greater financial resources
than USF&G Company or F&G Life.
25
<PAGE> 32
Pricing is a primary means of competition in the property-casualty
industry. The industry is currently in a period of significant price
competition, which adversely affects USF&G Company's profitability. Availability
and quality of products, quality and speed of service (including claims
service), financial strength, distribution systems and technical expertise are
also important elements of competition. In personal and other lines offered by
USF&G Company, significant price competition is experienced from direct-writing
companies that do not use independent agents and generally have lower policy
acquisition costs.
In the life insurance industry, interest crediting rates, policy features,
financial stability and service quality are important competitive factors. F&G
Life's products compete not only with those offered by other life insurance
companies, but also with other income accumulation-oriented products offered by
financial institutions. F&G Life has experienced considerable competitive
pressure in recent periods as a result of its relatively lower credit ratings.
Competitive pressures for agency business also have intensified in recent years
because of an increase in the variety of products available in the market and
efforts of competitors to expand their market shares. Victoria is also subject
to certain competitive pressures. See "Description of Victoria -- Competition."
THE SPECIAL MEETING
GENERAL; DATE AND PLACE OF THE SPECIAL MEETING
This Proxy Statement/Prospectus is being furnished to holders of Victoria
Common Stock in connection with the solicitation of proxies by the Victoria
Board for use at the Special Meeting to be held on Monday, May 22, 1995 at 10:00
a.m. (local time) at 5915 Landerbrook Drive, Cleveland, Ohio and at any
adjournment or postponement thereof.
This Proxy Statement/Prospectus and the accompanying forms of proxy are
first being mailed to shareholders of Victoria on or about April 14, 1995.
PURPOSE OF THE SPECIAL MEETING
At the Special Meeting, holders of Victoria Common Stock will consider and
vote upon a proposal to approve and adopt the Merger Proposal.
The Victoria Board has determined that the Merger is fair to, and in the
best interests of, Victoria and its shareholders, has unanimously approved the
Merger Proposal and recommends that Victoria's shareholders vote FOR the
approval and adoption of the Merger Proposal. See "The Merger -- Victoria's
Reasons for the Merger; Recommendation of the Victoria Board."
SHAREHOLDERS ENTITLED TO VOTE; REQUISITE APPROVAL
The Board of Directors has fixed April 12, 1995 as the record date for the
determination of the Victoria shareholders entitled to notice of, and to vote
at, the Special Meeting. Accordingly, only holders of record of Victoria Common
Stock on the record date will be entitled to notice of, and to vote at, the
Special Meeting. As of April 12, 1995, there were 4,000,724 shares of Victoria
Common Stock outstanding and entitled to vote, which shares were held by
approximately 457 holders of record. Each holder of record of Victoria Common
Stock on the record date is entitled to cast one vote per share, exercisable in
person or by properly executed proxy, at the Special Meeting. The presence, in
person or by properly executed proxy, of the holders of a majority of the
outstanding shares of Victoria Common Stock entitled to vote at the Special
Meeting is necessary to constitute a quorum at the Special Meeting.
The affirmative vote of the holders of two-thirds of the outstanding shares
of Victoria Common Stock is necessary to approve the Merger Proposal.
As of April 12, 1995, directors and executive officers of Victoria and
their affiliates may be deemed to be beneficial owners of approximately 17.5% of
the outstanding shares of Victoria Common Stock. Each of
26
<PAGE> 33
the directors and executive officers of Victoria has advised Victoria that he
intends to vote or direct the vote of the Victoria Common Stock over which he
has voting control for approval of the Merger Proposal.
AT THE SPECIAL MEETING, ALTHOUGH ABSTENTIONS AND BROKER NON-VOTES WILL NOT
BE COUNTED FOR PURPOSES OF DETERMINING THE PRESENCE OF A QUORUM, ABSTENTIONS AND
BROKER NON-VOTES WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE MERGER PROPOSAL
WITH RESPECT TO DETERMINING WHETHER THE PROPOSAL TO APPROVE THE MERGER PROPOSAL
HAS RECEIVED THE REQUISITE NUMBER OF AFFIRMATIVE VOTES.
PROXIES
This Proxy Statement/Prospectus is being furnished to Victoria shareholders
in connection with the solicitation of proxies by and on behalf of the Victoria
Board for use at the Special Meeting.
All shares of Victoria Common Stock which are entitled to vote and are
represented at the Special Meeting by properly executed proxies received prior
to or at the Special Meeting, and not revoked, will be voted at the Special
Meeting in accordance with the instructions indicated on such proxies. IF NO
INSTRUCTIONS ARE INDICATED (OTHER THAN IN THE CASE OF BROKER NON-VOTES), SUCH
PROXIES WILL BE VOTED FOR APPROVAL AND ADOPTION OF THE MERGER PROPOSAL.
If a motion to adjourn the Special Meeting to another time and/or place
(including, without limitation, for the purpose of soliciting additional
proxies) is properly presented for consideration at the Special Meeting, the
persons named in the enclosed forms of proxy and acting thereunder will have
discretion to vote on such matter in accordance with their best judgment. Shares
represented by proxies which direct a vote against the approval and adoption of
the Merger Proposal will not be voted by such persons in favor of adjourning the
Special Meeting.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (a) filing
with the General Counsel of Victoria at or before the taking of the vote at the
Special Meeting a written notice of revocation bearing a later date than the
proxy, (b) duly executing a later dated proxy relating to the same shares and
delivering it to the General Counsel of Victoria before the taking of the vote
at the Special Meeting or (c) attending the Special Meeting and voting in person
(although attendance at the Special Meeting will not in and of itself constitute
a revocation of a proxy). Any written notice of revocation or subsequent proxy
should be sent so as to be delivered to Victoria Financial Corporation, 5915
Landerbrook Drive, Cleveland, Ohio 44124-4058, Attention: General Counsel, or
hand delivered to the General Counsel of Victoria, at or before the taking of
the vote of the Special Meeting.
All expenses of this solicitation, including the cost of preparing and
mailing this Proxy Statement/Prospectus, will be borne by Victoria; provided
that USF&G has agreed to pay one-half of the printing expenses incurred in
connection with this Proxy Statement/Prospectus and one-half of the fees and
expenses of the proxy solicitors retained by Victoria. In addition to
solicitation by use of the mails, proxies may be solicited by directors,
officers and employees of Victoria in person or by telephone, telegram,
facsimile or other means of communication. Such directors, officers and
employees will not be additionally compensated for, but may be reimbursed for
reasonable out-of-pocket expenses in connection with, such solicitation.
Victoria has retained D.F. King & Co., Inc., a proxy solicitation firm, for
assistance in connection with the Special Meeting at a cost of approximately
$5,000 plus reasonable out-of-pocket expenses. Arrangements will be made with
custodians, nominees and fiduciaries for the forwarding of proxy solicitation
materials to beneficial owners of shares held of record by such custodians,
nominees and fiduciaries, and Victoria will reimburse such custodians, nominees
and fiduciaries for their reasonable expenses incurred in connection therewith.
Notwithstanding the foregoing, under certain circumstances set forth in the
Merger Agreement, either Victoria or USF&G may be required to reimburse the
other party if the Merger Agreement is terminated.
Victoria shareholders should not send any stock certificates with their
proxy cards.
27
<PAGE> 34
THE MERGER
BACKGROUND OF THE MERGER
In July 1994, USF&G requested that representatives of Kidder, Peabody & Co.
Incorporated ("Kidder") contact management of Victoria about a possible
acquisition proposal. In August 1994, Kenneth R. Rosen, President and Chief
Executive Officer of Victoria, was contacted by and met with representatives of
Kidder, who proposed the possibility of an acquisition of Victoria. The proposal
was unsolicited and Mr. Rosen indicated that, although Victoria was not then
considering a merger, he and other members of the Victoria Board had a
responsibility to Victoria's shareholders to consider the terms of a serious
offer. Mr. Rosen also explained that the last public offering price of Victoria
Common Stock was $12.00 per share and that any serious offer would need to be at
a premium above that price. In August 1994, Victoria Common Stock was trading at
prices ranging from $6.75 to $7.50 per share.
On September 16, 1994, representatives of USF&G and Victoria met. At that
meeting, members of Victoria's management made a presentation regarding private
labeling nonstandard automobile insurance through USF&G and marketing USF&G
products through IAS distribution methods and Victoria's agency base and
systems. In addition, representatives of USF&G indicated that USF&G was
interested in a strategic business combination with Victoria. Discussions
continued into early November 1994. Norman P. Blake, Jr., Chairman of the Board,
President and Chief Executive Officer of USF&G, met with Mr. Rosen on November
3, 1994 in Cleveland to continue discussions regarding the proposed business
combination. Mr. Blake indicated that USF&G did not offer a nonstandard
automobile insurance product and that he believed that Victoria presented an
opportunity for USF&G to expand its personal lines insurance products. On
November 9, 1994, Mr. Rosen met with certain members of the Victoria Board to
inform them of the discussions and to obtain their views. Later that day, Mr.
Rosen met with Mr. Blake and representatives of USF&G in Baltimore to discuss
further the possible merger. The USF&G representatives suggested that an
appropriate per share valuation of Victoria Common Stock was in the range of
$10.00 to $12.00 payable in USF&G Common Stock, and Mr. Rosen emphasized that,
in his opinion, an appropriate range was $14.00 to $16.00 per share. Following
that meeting, representatives of USF&G indicated to Mr. Rosen that USF&G would
consider an exchange rate equivalent to approximately $13.00 per share as an
appropriate valuation for Victoria. From September 1994 through November 1994,
Victoria Common Stock was trading generally in the range of $6.00 to $7.75 per
share.
Victoria and USF&G entered into a confidentiality agreement dated November
14, 1994 pursuant to which USF&G agreed to keep confidential all non-public
information concerning Victoria acquired in connection with discussions with
members of management of Victoria and USF&G's due diligence review, which
commenced on that date.
Mr. Rosen made an informal presentation regarding the status of discussions
with USF&G at the meeting of the Victoria Board held on November 21, 1994. The
Victoria Board authorized senior management of Victoria to explore further the
possibility of a strategic merger between Victoria and USF&G and the value to be
realized in such a combination by shareholders of Victoria.
From mid-November 1994 until mid-December 1994, members of senior
management of both Victoria and USF&G, together with their legal and financial
advisors, including Donaldson, Lufkin & Jenrette Securities Corporation, which
firm was hired in October 1994 as USF&G's financial advisor in connection with
the transaction, engaged in a series of discussions regarding the possible
merger and the preliminary terms thereof, and USF&G conducted its due diligence
review of Victoria. Members of senior management of Victoria also reviewed
certain matters and materials concerning USF&G. USF&G and Victoria entered into
a confidentiality agreement dated December 12, 1994 pursuant to which Victoria
agreed to keep confidential all non-public information obtained by it concerning
USF&G. On December 12, 1994, members of senior management of USF&G made a
presentation to the Victoria Board regarding USF&G.
On December 8, 1994, Victoria engaged McDonald & Company to act as its
financial advisor in connection with the possible merger, specifically to render
its opinion as to whether or not the proposed Exchange Rate was fair, from a
financial point of view, to Victoria's shareholders. The Victoria Board selected
28
<PAGE> 35
McDonald & Company based on several factors, including McDonald & Company's
familiarity with Victoria and the insurance industry (having been co-underwriter
for Victoria's most recent public offering of stock approximately one year
earlier and having maintained security analyst review of Victoria since that
offering), McDonald & Company's experience in similar engagements and the fact
that McDonald & Company was located in the same city as Victoria (resulting in
time and cost savings). The Victoria Board believed that prompt analysis was
important to maintain the confidentiality of the potential transaction and to
facilitate a timely yet informed decision by the Victoria Board. Based on
McDonald & Company's prior recent engagement by Victoria and its location,
McDonald & Company was deemed by the Victoria Board to be uniquely able to
provide intensive yet prompt analysis and expertise. In light of the foregoing,
the Victoria Board did not consider other potential candidates.
On December 10, 1994, USF&G provided to Victoria a preliminary draft of a
merger agreement which did not contain certain significant terms, including
pricing terms. Thereafter, USF&G and Victoria, as well as their respective legal
counsel, negotiated the proposed structure and other principal terms of the
proposed merger agreement.
From early November 1994 to the date of signing of the Merger Agreement,
USF&G was also engaged in discussions with Mr. Rosen respecting the terms of his
employment arrangement with USF&G and the transition management of Victoria.
USF&G had indicated that an acceptable employment arrangement with Mr. Rosen was
a condition to USF&G's willingness to consummate the transaction. Any such
employment arrangement would be effective only upon the acquisition of Victoria
by USF&G.
On December 16, 1994, USF&G made a formal offer to Victoria. This offer was
considered on the same day at a special meeting of the Victoria Board. In
particular, management and counsel for Victoria reviewed with the Victoria
Board, and responded to inquiries of the Victoria Board regarding: (a) the
Exchange Rate; (b) the treatment of outstanding Victoria Options; (c) the
conditions to the consummation of the Merger and the impact on Victoria in the
event the Merger was not consummated after the public announcement thereof; (d)
alternatives available to Victoria; and (e) the impact on Victoria shareholder
value. McDonald & Company then presented its analysis of the Exchange Rate,
responded to questions from the Victoria Board and delivered its oral opinion to
the effect that, as of such date, the Exchange Rate, as set forth in the
proposed merger agreement, was fair to the holders of Victoria Common Stock from
a financial point of view.
At the December 16, 1994 Victoria Board meeting, the Victoria Board
approved the Merger Proposal and authorized management to execute and deliver
the Merger Agreement. Also at the December 16, 1994 meeting, as compensation for
Mr. Rosen's extraordinary efforts in structuring and negotiating the Merger, the
Victoria Board awarded Mr. Rosen a bonus in connection with the execution of the
Merger Agreement of $125,000, paid in 1994, and a bonus of $500,000, payable if
and when the Merger is consummated. The Victoria Board also approved a bonus of
$25,000 paid in 1995 to Tab A. Keplinger, Vice President and Chief Financial
Officer of Victoria, for his extraordinary commitment to Victoria, including his
efforts in connection with the merger negotiations. These bonuses were in
addition to Mr. Rosen's and Mr. Keplinger's regular compensation, including Mr.
Rosen's regular 1994 bonus of $150,000 which was approved at the December 16,
1994 Victoria Board meeting in connection with Victoria's performance in 1994
and the acquisition of IAS and Mr. Keplinger's 1994 bonus of $105,000, which was
approved at a meeting of the Victoria Board on February 28, 1995, relating to
Victoria's performance in 1994, the acquisition of IAS, and Mr. Keplinger's
assuming responsibilities of Victoria's former senior vice president. Also at
this meeting, the Victoria Board was advised of and considered the terms of the
employment arrangement between USF&G and Mr. Rosen, the intention of USF&G to
continue Victoria's operations in Cleveland, Ohio and Victoria's ability, under
the Merger Agreement to extend the lease for its principal office with the
partnership owned, in part, by Jeffrey A. Cole, Chairman of the Board of
Victoria. See "The Merger -- Interests of Certain Persons in the Merger."
On December 18, 1994, the parties executed the Merger Agreement. The
McDonald & Company opinion delivered orally at the December 16, 1994 meeting was
confirmed in writing to the Victoria Board on December 18, 1994 and updated as
of the date of this Proxy Statement/Prospectus. On February 9, 1995, the parties
amended and restated the Merger Agreement to make certain technical changes.
29
<PAGE> 36
VICTORIA'S REASONS FOR THE MERGER; RECOMMENDATION OF THE VICTORIA BOARD
The Victoria Board has determined that the Merger is fair to, and in the
best interests of, Victoria and its shareholders, has unanimously approved the
Merger Proposal and recommends that Victoria's shareholders vote FOR the
approval and adoption of the Merger Proposal.
From time to time over the last several years, Victoria has reviewed and
reexamined its business strategy and prospects. In the course of doing so, it
has considered possible alliances, combinations and transactions with various
industry participants, including companies both smaller and larger than
Victoria. Its acquisition in July 1994 of IAS was the result of such a review
and the identification of an opportunity to expand the operations and business
of Victoria.
Although Victoria was not soliciting offers from third parties concerning a
possible merger, upon the receipt of initial expressions of interest by USF&G
and its representatives, Victoria's management believed that such a strategic
merger, if on terms and conditions acceptable to the Victoria Board and
Victoria's shareholders, could present a valuable opportunity to enhance the
shareholders' investment in Victoria as well as an opportunity to support the
continued growth of Victoria's business. The terms of the Merger and the Merger
Agreement, including the Exchange Rate, were the result of arms'-length
negotiations between Victoria and USF&G and their respective representatives.
The Victoria Board consulted with its legal and financial advisors and
management of Victoria. After careful review and consideration, the Victoria
Board has determined that the Merger will provide significant value to all
Victoria shareholders.
In reaching its decision to approve the Merger Proposal, the Victoria Board
considered several factors, including the benefits of remaining independent,
and, without assigning any relative or specific weights, the Board deemed the
following factors to be persuasive:
(a) the market value of USF&G Common Stock to be received by Victoria
shareholders ($13.00 at December 18, 1994) based on the Exchange Rate in
relation to the book value per share ($6.81 at September 30, 1994),
earnings per share ($.31 for the nine months ended September 30, 1994) and
the then market value of the Victoria Common Stock ($8.00 per share at
December 15, 1994);
(b) the Merger offered Victoria shareholders the prospect of holding
shares in a company that has historically paid cash dividends and for which
there is a more active and liquid trading market;
(c) the perception that, in light of the Victoria Board's assessment
of the competitive environment, a strategic merger with a large insurance
company, with an established base of agency relationships and diverse
product offerings, could provide significant long term value to Victoria
based upon improved opportunities for growth;
(d) the presentation of Victoria's financial advisor, McDonald &
Company, and the opinion of McDonald & Company to the effect that, as of
December 18, 1994, the Exchange Rate was fair to holders of Victoria Common
Stock from a financial point of view;
(e) the acknowledgement by USF&G of its present intention to keep
Victoria's headquarters in Cleveland, Ohio; and
(f) the Merger provides for the exchange of Victoria Common Stock for
USF&G Common Stock in a tax-free transaction.
USF&G'S REASONS FOR THE MERGER
The USF&G Board believes that the Merger is in the best interests of USF&G
and USF&G shareholders because it represents an attractive opportunity for USF&G
to broaden its personal lines product offerings with nonstandard automobile
insurance on a basis that does not require expenditure of USF&G's cash resources
or the borrowing of funds. The USF&G Board further believes that the Merger will
benefit USF&G by (a) allowing USF&G to leverage its insurance expertise and
agency franchise in a related insurance business and (b) helping USF&G meet the
needs of its existing customers and agents within the market that Victoria
serves.
30
<PAGE> 37
In view of the variety of factors considered in connection with its
evaluation of the Merger, the USF&G Board did not find it practicable to, and
did not, quantify or otherwise assign relative weights to the specific factors
considered in reaching its determination.
OPINION OF FINANCIAL ADVISOR TO THE VICTORIA BOARD
Victoria has retained McDonald & Company as its financial advisor to render
its opinion with respect to the fairness, from a financial point of view, to the
holders of Victoria Common Stock, of the Exchange Rate. McDonald & Company
rendered its oral opinion to the Victoria Board on December 16, 1994, which it
subsequently confirmed in writing dated December 18, 1994 that, as of the date
of such opinion, the Exchange Rate was fair, from a financial point of view, to
the holders of Victoria Common Stock.
THE FULL TEXT OF THE OPINION OF MCDONALD & COMPANY UPDATED AS OF THE DATE
OF THIS PROXY STATEMENT/PROSPECTUS, WHICH SETS FORTH CERTAIN QUALIFICATIONS AND
ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEWS UNDERTAKEN,
IS ATTACHED AS ANNEX II TO THIS PROXY STATEMENT/PROSPECTUS, AND SHOULD BE READ
IN ITS ENTIRETY. THE SUMMARY OF THE OPINION OF MCDONALD & COMPANY SET FORTH IN
THIS PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
OPINION. MCDONALD & COMPANY'S OPINION SHOULD NOT BE CONSTRUED BY HOLDERS OF
VICTORIA COMMON STOCK AS A RECOMMENDATION AS TO HOW SUCH HOLDERS SHOULD VOTE AT
THE SPECIAL MEETING. THE INFORMATION SET FORTH BELOW WAS PROVIDED TO VICTORIA BY
MCDONALD & COMPANY AND DESCRIBES, AMONG OTHER THINGS, FACTORS WHICH WERE
CONSIDERED BY MCDONALD & COMPANY IN ARRIVING AT ITS OPINION.
In arriving at its opinion, McDonald & Company reviewed, among other
things, the Merger Agreement, together with exhibits and schedules thereto,
certain publicly available information relating to the business, financial
condition and operations of Victoria and USF&G as well as certain other
non-public information, primarily financial in nature, furnished to it by
Victoria and USF&G relating to the respective businesses, earnings, assets and
prospects of Victoria and USF&G. McDonald & Company also held discussions with
members of senior management of Victoria and USF&G concerning their respective
businesses, assets, financial forecasts and prospects. With respect to financial
forecasts used in its analysis, McDonald & Company has assumed that such
forecasts have been reasonably prepared on a basis reflecting the best currently
available estimates and judgments of the management of Victoria as to the future
performance of Victoria. McDonald & Company also received consensus security
analysts earnings estimates for USF&G, and discussed those estimates with
management of USF&G. McDonald & Company also reviewed certain publicly available
information concerning the trading of, and the trading market for, Victoria
Common Stock and USF&G Common Stock and certain publicly available information
concerning comparable companies and transactions, all as more fully set forth in
McDonald & Company's opinion. McDonald & Company also took into account its
assessment of general economic, market and financial conditions.
McDonald & Company was not engaged to and did not conduct a physical
inspection of any of the assets, properties or facilities of either Victoria or
USF&G, and was not engaged to and has not made, obtained or been furnished with
any independent evaluation or appraisal of any of such assets, properties or
facilities or any of the liabilities of Victoria or USF&G. McDonald & Company
has assumed and relied upon, without independent investigation, the accuracy and
completeness of the financial and other information provided to it or publicly
available, has relied upon the representations and warranties of Victoria and
USF&G contained in the Merger Agreement, and was not engaged to and has not
independently attempted to verify any of such information. McDonald & Company
has also assumed that all of the conditions to the Merger as set forth in the
Merger Agreement, including the tax-free treatment of the Merger to the holders
of Victoria Common Stock, would be satisfied and that the Merger would be
consummated on a timely basis in the manner contemplated by the Merger
Agreement. No limitations were imposed by Victoria upon McDonald & Company with
respect to the scope of its investigation nor were any specific instructions
given to McDonald & Company in connection with its fairness opinion.
In connection with rendering its opinion dated December 18, 1994, McDonald
& Company advised Victoria that it considered a variety of financial analyses,
as summarized below. The discussion of such analyses does not purport to be a
complete description of the analyses underlying McDonald & Company's
31
<PAGE> 38
opinion. The preparation of a fairness opinion is a complex analytical process
involving various determinations as to the most appropriate and relevant methods
of financial analyses and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. In arriving at its opinion, McDonald & Company did not
attribute any particular weight to any analysis or factor considered by it (with
the exception of the fact that McDonald & Company placed relatively less weight
on the analysis of selected comparable merger transactions), but rather made
qualitative judgments as to the significance and relevance of each analysis and
factor. Accordingly, McDonald & Company believes that its analyses must be
considered as a whole and that selecting portions of such analyses and of the
factors considered by McDonald & Company without considering all such analyses
and factors may create a misleading or incomplete view of the analytical process
underlying McDonald & Company's opinion. In its analyses, McDonald & Company
made numerous assumptions with respect to industry performance, business and
economic conditions, and other matters. In particular, McDonald & Company
assumed that there would be no material competitive or market changes affecting
the property-casualty insurance industry in general or the nonstandard
automobile insurance business in particular, that the United States would
experience moderate economic growth over the next five years and that interest
rates would remain relatively steady. Any estimates contained in McDonald &
Company's analyses are not necessarily indicative of future results or values,
which may be significantly more or less favorable than such estimates. In
addition, analyses relating to the value of businesses or securities do not
purport to be appraisals or to reflect the prices at which businesses or
securities actually may be sold. Accordingly, such analyses and estimates are
inherently subject to substantial uncertainty.
The following is a summary discussion of selected analyses considered and
prepared by McDonald & Company and discussed with the Victoria Board in
connection with McDonald & Company's oral opinion rendered December 16, 1994 and
its written opinion dated December 18, 1994:
Comparison with Selected Companies. McDonald & Company compared the
financial performance and stock market valuation of Victoria with corresponding
data for the following selected companies: American Premier Underwriters, Inc.,
Guaranty National Corporation, Integon Corporation, Midland Financial Group,
Inc., Omni Insurance Group and The Progressive Corporation. In addition,
McDonald & Company compared such data of USF&G with the following selected
companies: Aetna Life and Casualty Co., American International Group, Inc., The
Chubb Corporation, Cigna Corporation, Cincinnati Financial Corporation, CNA
Financial Corporation, Continental Corporation, Lincoln National Corporation,
Ohio Casualty Corporation, SAFECO Corporation, and the St. Paul Companies, Inc.
Contribution Analysis. McDonald & Company analyzed the contribution of
each of Victoria and USF&G to, among other things, the pre-tax operating income,
after-tax net income and after-tax net operating income of the pro forma
combined company. This analysis showed that, for the nine months ended September
30, 1994, among other factors, Victoria would have contributed 1.7% of the
pre-tax operating income of the pro forma combined company, 0.6% of the pro
forma net income and 1.0% of the pro forma after-tax net operating income
compared with a proposed ownership, assuming the exercise of options on Victoria
Common Stock, of 3.5% of the combined company to be owned by holders of Victoria
Common Stock.
Pro Forma Merger Analysis. McDonald & Company analyzed the changes in the
per share amount of net operating income, tangible book value and indicated
dividend represented by one share of Victoria Common Stock after the Merger. The
analysis was performed on the basis of financial information for both companies
as of and for the nine months ended September 30, 1994 and the twelve month
periods ended December 31, 1993 and 1992. The analysis indicated, among other
things, that exchanging one share of Victoria Common Stock at an assumed
exchange rate of 0.9541 for shares of USF&G Common Stock on a pro forma basis
would have resulted in a 100.9% increase in net operating income per share for
each share of Victoria Common Stock for the nine months ended September 30,
1994, a 34.3% increase in tangible book value per share for each share of
Victoria Common Stock as of September 30, 1994, and an increase in dividends per
share from zero to $.19 for each share of Victoria Common Stock based on
Victoria's and USF&G's indicated annual dividend rate as of December 16, 1994.
32
<PAGE> 39
Analysis of Selected Merger Transactions. McDonald & Company reviewed and
analyzed selected recent comparable property-casualty insurance acquisitions,
including the acquisition of Milbank Insurance Company by State Auto Financial,
the acquisition of Armco's Financial Services Group by Vik Brothers Insurance,
the acquisition of Bankers and Shippers Insurance by Integon Corporation and the
acquisition of Continental Corporation by CNA Financial Corporation. For the
comparable transactions, the respective means and medians for selected pricing
ratios as compared to the Victoria ratios are as follows:
<TABLE>
<CAPTION>
PRICE/ PRICE/ PRICE/ PRICE/
BOOK STATUTORY NET PRICE/ PREMIUM
VALUE SURPLUS INCOME NOI EARNED
------ --------- ------ ------ -------
<S> <C> <C> <C> <C> <C>
MEAN: 1.0 1.3 10.6 9.9 0.6
MEDIAN: 1.0 1.1 10.6 9.7 0.7
VICTORIA: 1.9 2.5 32.0 27.7 1.1
</TABLE>
Due to the limited number of comparable merger transactions, McDonald &
Company placed relatively less weight on this portion of its analysis than on
certain other portions of its analysis.
No company or transaction used in the above analyses as a comparison is
identical to Victoria, USF&G or the Merger. Accordingly, an analysis of the
results of the foregoing necessarily involves complex considerations and
judgments concerning the differences in financial and operating characteristics
of the companies and other factors that could affect the acquisition values of
the companies to which they are being compared. Mathematical analysis (such as
determining the mean or median) is not, in itself, a meaningful method of using
comparable transaction data.
Discounted Cash Flow Analysis. Using discounted cash flow analysis,
McDonald & Company estimated the present value of the future streams of
after-tax earnings that Victoria could produce over a five year period from 1995
through 1999, under various assumptions, which were discussed with Victoria's
management. McDonald & Company estimated the terminal value of Victoria after
the five year period by projecting a perpetual growth rate of the terminal
year's after-tax cash flows which resulted in an implied exit multiple. The cash
flow streams and terminal values were then discounted to present values using
different discount rates and exit multiples chosen to reflect different
assumptions regarding the required rates of return of a prospective buyer of
Victoria. Discount rate assumptions ranged from 14.0% to 18.0% and implied exit
multiples ranged from 6.0x to 10.0x earnings. On the basis of such varying
assumptions, this discounted cash flow analysis indicated a reference range of
$8.40 to $13.20 per share of Victoria Common Stock. This analysis was based upon
management projections including variations and subjective assumptions made by
McDonald & Company which included adjustments to reflect the anticipated effects
of potential merger related cost savings. Management's projections are based
upon many factors and assumptions, many of which are beyond the control of
Victoria.
In performing its analyses, McDonald & Company made numerous assumptions,
described above, with respect to industry performance, general business and
economic conditions and other matters. The analyses performed by McDonald &
Company are not necessarily indicative of actual values, which may be
significantly more or less favorable than the values suggested by such analyses.
Such analyses were prepared solely as part of McDonald & Company's opinion. The
term "fair from a financial point of view" is a standard phrase contained in
investment banker fairness opinions and refers to the fact that McDonald &
Company's opinion as to the fairness of the Exchange Rate is addressed solely to
the financial attributes of the Exchange Rate. The analyses do not purport to be
appraisals or to reflect the prices at which a company might actually be sold.
In addition, as described above, McDonald & Company's opinion (and the related
presentation to the Victoria Board) was one of many factors taken into
consideration by the Victoria Board in making its determination to approve the
Merger Agreement. Consequently, the McDonald & Company analyses described above
should not be viewed as determinative of the Victoria Board's conclusions with
respect to the value of Victoria or of the decision of the Victoria Board to
agree to the Exchange Rate.
In connection with its opinion based as of the date of this Proxy
Statement/Prospectus, McDonald & Company performed procedures to update certain
of its analyses and reviewed the assumptions on which such
33
<PAGE> 40
analyses were based and the factors considered in connection therewith. McDonald
& Company's opinion is based on economic and market conditions and other
circumstances existing on, and information made available as of, the date of the
opinion.
McDonald & Company's opinion does not address Victoria's underlying
business decision to effect the Merger or any other terms of the Merger.
McDonald & Company was not asked to consider and its opinion does not address
the relative merits of the Merger as compared to any alternative business
strategies that might exist for Victoria or the effect of any other transaction
in which Victoria might engage. In addition, although McDonald & Company
evaluated the financial terms of the Merger, McDonald & Company was not asked to
and did not recommend the specific consideration to be paid by USF&G in the
Merger. McDonald & Company's opinion does not represent its opinion as to what
the value of Victoria Common Stock or USF&G Common Stock may be at the Effective
Date.
McDonald & Company, as part of its investment banking business, is
customarily engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. McDonald & Company has
extensive experience with the valuation of financial services companies.
McDonald & Company is not affiliated with either Victoria or USF&G.
In the ordinary course of business, McDonald & Company may actively trade
securities of Victoria and USF&G for its own account and for the accounts of its
customers. Accordingly, at any time McDonald & Company may hold a long or short
position in such securities. In addition, McDonald & Company co-managed a public
offering of common stock for Victoria in 1993 for which it received customary
compensation.
For its services as financial advisor, Victoria has paid McDonald & Company
a retainer of $25,000 and a fee of $37,500 upon delivery of the December 18,
1994 opinion. Victoria has agreed to pay McDonald & Company $37,500 upon the
rendering of an updated opinion as of a date reasonably proximate to the date of
this Proxy Statement/Prospectus. Victoria has also agreed to reimburse McDonald
& Company for its reasonable out-of-pocket expenses and to indemnify McDonald &
Company, its officers, directors and controlling persons against certain
liabilities, including certain liabilities under federal securities laws.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
General. In considering the recommendation of the Victoria Board with
respect to the Merger Agreement, Victoria shareholders should be aware that
certain members of the Victoria Board and management have interests in the
Merger that are in addition to or different from the interests of Victoria
shareholders generally. In connection with the Merger, USF&G has agreed to
provide employment benefits and severance benefits to certain officers and
employees of Victoria in the manner described below and to treat Victoria
Options and outstanding Victoria stock appreciation rights in the manner
described below. The Victoria Board granted certain bonuses to key officers in
connection with the Merger as described in "Background of the Merger" and "The
Merger Agreement -- Terms of the Merger."
Beneficial Ownership of Victoria Common Stock by Directors and Officers of
Victoria. As of April 12, 1995, directors and executive officers of Victoria
and their affiliates may be deemed to be beneficial owners of approximately
17.5% of the outstanding Victoria Common Stock. Each of the directors and
executive officers of Victoria has advised Victoria that he intends to vote or
direct the vote of all the outstanding Victoria Common Stock over which he has
voting control in favor of approval of the Merger Proposal. The directors and
executive officers of Victoria will not receive any benefit in their capacities
as shareholders of Victoria Common Stock that differs from or is in addition to
the benefit received by all other shareholders of Victoria Common Stock. See
"Description of Victoria -- Ownership of Victoria Common Stock."
Kenneth R. Rosen Employment Agreement. In connection with the Merger,
USF&G and Kenneth R. Rosen, President and Chief Executive Officer of Victoria,
entered into the Employment Agreement on December 18, 1994. Under the terms of
the Employment Agreement, Mr. Rosen will be employed for one and one-half years
following the Effective Date (the "Employment Period") as a Senior Executive
Officer of
34
<PAGE> 41
Victoria, performing various duties including assisting with the integration of
Victoria's operations into the USF&G insurance group, developing business
strategies and marketing opportunities, assisting in the distribution of
Victoria's products through USF&G's agents, and exploring new business ventures
and opportunities. Under the Employment Agreement, USF&G has the right, but not
an obligation, to invest in any new business ventures or opportunities
identified by Mr. Rosen. Under the terms of the Employment Agreement, Mr. Rosen
will be paid $850,000 for the first year of the Employment Period and $450,000
for the last six months of the Employment Period. Mr. Rosen also will be
entitled to benefits similar to those he is receiving currently from Victoria.
At the expiration of the Employment Period, Mr. Rosen has agreed to serve as a
consultant to Victoria in the area of nonstandard automobile insurance and
related matters for an additional period of two and one-half years (the
"Consulting Period"). In his capacity as a consultant, Mr. Rosen will perform
similar duties to those he will perform during the employment period, except in
an advisory capacity. During the first eighteen months of the Consulting Period,
Mr. Rosen will be paid $350,000 per year and, for the last twelve months of the
Consulting Period, will be paid $275,000.
During the entire term of the Employment Agreement, Mr. Rosen will serve as
Chairman of the Board of Victoria at the discretion of USF&G. The Employment
Agreement precludes Mr. Rosen from competing in the business of nonstandard
automobile insurance and imposes other restraints on Mr. Rosen's activities for
a period of three years following the Effective Date and obligates Mr. Rosen to
maintain the confidentiality of Victoria's and USF&G's proprietary information.
USF&G has the right to terminate the Employment Agreement for "cause," as
defined in the Employment Agreement, at which time USF&G is no longer obligated
to make further payments thereunder. It is a condition to USF&G's obligations to
consummate the Merger that the Employment Agreement be in full force and effect
on the Effective Date.
As compensation for Mr. Rosen's extraordinary efforts in structuring and
negotiating the Merger, the Victoria Board awarded Mr. Rosen a bonus in
connection with the execution of the Merger Agreement of $125,000, payable in
1994, and a bonus of $500,000, payable if and when the Merger is consummated.
These bonuses are in addition to Mr. Rosen's regular compensation and 1994 bonus
of $150,000 in connection with Victoria's performance in 1994 and the
acquisition of IAS.
Mr. Rosen presently is a party to an Employment Agreement with Victoria
dated November 1, 1990 (the "Existing Employment Agreement"). The Existing
Employment Agreement, which will be replaced by the Employment Agreement upon
the consummation of the Merger, provides for the employment of Mr. Rosen as
President and Chief Executive Officer until the date twelve months from the date
of written notice of termination from Victoria's Board of Directors. The
Existing Employment Agreement, in addition to Mr. Rosen's base compensation and
bonuses, provides for certain standard benefits and salary continuation in the
event of death or permanent disability.
Severance Arrangements. USF&G has agreed to use its reasonable efforts to
enter into, or to cause Victoria on the Effective Date to enter into, severance
agreements with certain officers and employees of Victoria on or prior to the
Effective Date. The severance agreements will provide for, in the event of
termination of any such persons by Victoria for any reason other than for cause
prior to the first anniversary of the Effective Date, salary equivalent
severance payments for a period equal to the greater of six months or two weeks
per year of service to Victoria. USF&G or Victoria may require a release of all
claims relating to employment matters and any such payments under the severance
agreement will be in lieu of other severance benefits under Victoria's current
plans, policies or arrangements.
Victoria Lease Renewal. Victoria leases its corporate headquarters
pursuant to a ten year lease dated as of July 11, 1989 (the "Landerbrook Lease")
with Landerbrook Place Limited Partnership (the "Landerbrook Partnership").
Victoria owns a 19.9% limited partnership interest in the Landerbrook
Partnership. Jeffrey A. Cole, Chairman of the Board of Victoria, is a limited
partner of the Landerbrook Partnership and owns more than one-half of its
equity. Victoria has options to extend the term of the Landerbrook Lease for
three extension periods of three years each. Under the Merger Agreement, USF&G
has acknowledged that Victoria may, prior to the Effective Date, exercise its
first option to extend the Landerbrook Lease for a period of three years at the
rental amount established for the extension set forth in the Landerbrook Lease.
Victoria intends to exercise this option.
35
<PAGE> 42
Victoria Options and Stock Appreciation Rights. Each of the Victoria
Options outstanding as of the Effective Date, whether vested or unvested, will
be converted without any action on the part of the holder thereof into the right
to receive, as of the Effective Date, USF&G Common Stock (or cash in lieu of
fractional shares as described below). At or prior to the Effective Date,
Victoria and USF&G will take all action necessary to cause the assumption by
USF&G as of the Effective Date of the stock appreciation rights outstanding
under Victoria's Amended and Restated Key Executive Stock Option and Stock
Appreciation Rights Plan. Mr. Rosen holds 18,000 stock appreciation rights and
Victoria's directors and executive officers hold Victoria Options to purchase
239,022 shares of Victoria Common Stock in the aggregate. For additional
information regarding Victoria Options and stock appreciation rights held by
Victoria's directors and executive officers, see "Description of
Victoria -- Ownership of Victoria Common Stock" and "-- Executive Compensation."
Other than the assumption of existing stock appreciation rights, no stock
options, stock appreciation rights or similar rights will be received by
Victoria's directors and executive officers as a result of the Merger, although
USF&G has advised Victoria that USF&G may, in the ordinary course, grant options
to acquire shares of USF&G Common Stock to executive officers and other
employees of Victoria who continue as employees of Victoria after it becomes a
subsidiary of USF&G. See "The Merger Agreement -- Terms of the Merger" regarding
the treatment of existing Victoria Options and stock appreciation rights in the
Merger.
Indemnification. Pursuant to the terms of the Merger Agreement, from and
after the Effective Date, USF&G will indemnify, defend and hold harmless the
officers, directors and employees of Victoria and its subsidiaries, against all
losses, expenses, claims, damages or liabilities based in whole or in part on
the fact that such person is or was such officer, director or employee of
Victoria or its subsidiaries, to the fullest extent permitted or required under
applicable law. In addition, USF&G has agreed that all rights to indemnification
existing in favor of the directors, officers or employees of Victoria as
provided in Victoria's or its subsidiaries' organizational documents shall
survive the Merger for a period of not less than six years. USF&G has agreed to
unconditionally guarantee the satisfaction of such rights. See "The Merger
Agreement -- Indemnification."
EMPLOYEE BENEFITS
Under the Merger Agreement, USF&G has agreed, for a period of one year from
and after the Effective Date, to cause Victoria to either (a) maintain all
employee benefits of Victoria existing on the Effective Date or (b) provide
benefits to employees and former employees of Victoria that are, taken as a
whole, substantially equivalent to or better than the benefits presently offered
by Victoria; provided, however, that neither USF&G nor Victoria will be required
to maintain any plan or arrangement providing for the sale of USF&G Common Stock
or common stock of Victoria.
MANAGEMENT AND OPERATIONS OF VICTORIA AFTER THE MERGER
Victoria will be the surviving corporation in the Merger and, following the
Merger, will be a wholly-owned subsidiary of USF&G. Victoria will operate as one
of USF&G's business units, and USF&G currently intends to retain Victoria's
corporate headquarters in Cleveland, Ohio. See "The Merger -- Interests of
Certain Persons in the Merger." Following the consummation of the Merger,
Victoria will have access to resources generally available to USF&G's other
business units, will participate in appropriate activities with other USF&G
business units and will operate under the direction of USF&G's senior management
and the USF&G Board.
ANTICIPATED ACCOUNTING TREATMENT
The Merger is intended to qualify as a pooling of interests for accounting
and financial reporting purposes. Under this method of accounting, the recorded
assets and liabilities of Victoria will be carried forward to USF&G at their
recorded amounts, income of USF&G will include income of Victoria for the entire
fiscal year in which the Merger occurs and the reported income of Victoria for
prior periods will be combined with and included as income of USF&G. The
qualification of the Merger as a pooling of interests is not a condition to the
consummation of the Merger.
36
<PAGE> 43
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of the material tax consequences of the
Merger. The Merger is intended to qualify as a tax-free reorganization within
the meaning of Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code. In this
regard, the Merger Agreement contains a covenant by USF&G that it will not take
any action, nor will it cause Victoria to take any action, following the
Effective Date, that would jeopardize the characterization of the Merger as a
reorganization within the meaning of Sections 368(a)(1)(A) and 368(a)(2)(E) of
the Code. In addition, certain factual representations deemed necessary by
counsel to Victoria and by counsel to USF&G in order to confirm that the
requirements of Code Sections 368(a)(1)(A) and 368(a)(2)(E) are expected to be
satisfied have been obtained from the parties to the Merger (including certain
Victoria shareholders). However, none of the parties to the Merger intends to
obtain a ruling from the Internal Revenue Service as to the tax consequences of
the Merger.
Victoria and USF&G have, however, received opinions of Benesch,
Friedlander, Coplan & Aronoff and Willkie Farr & Gallagher, respectively,
substantially to the effect that the federal income tax consequences of the
Merger will be as follows:
(a) the Merger will qualify as a tax-free reorganization within the
meaning of Code Sections 368(a)(1)(A) and 368(a)(2)(E) and Victoria and
USF&G will each be a party to the reorganization;
(b) no gain or loss will be recognized by Victoria as a result of the
Merger;
(c) no gain or loss will be recognized by a shareholder of Victoria
upon the exchange of shares of Victoria Common Stock for USF&G Common Stock
(including the USF&G Rights), except that gain or loss will be recognized
by a shareholder of Victoria on the receipt of cash in lieu of fractional
shares;
(d) the adjusted tax basis of the USF&G Common Stock received by a
shareholder of Victoria pursuant to the Merger (including any fractional
share interests deemed received) will be the same as the adjusted tax basis
of the shares of Victoria Common Stock surrendered in exchange therefor;
(e) the holding period of the USF&G Common Stock received by a
shareholder of Victoria as a result of the Merger (including any fractional
share interests deemed received) will include the holding period of the
shares of Victoria Common Stock surrendered in exchange therefor, provided
that such Victoria Common Stock is held as a capital asset by the Victoria
shareholder at the consummation of the Merger; and
(f) any cash payment received by a holder of Victoria Common Stock in
lieu of a fractional share of USF&G Common Stock will be treated as if such
fractional share of USF&G Common Stock had been issued in the Merger and
then redeemed by USF&G.
The above tax opinions are based upon certain representations and
assumptions referred to in such tax opinions and assume that the Merger will be
completed in the manner described in this Proxy Statement/Prospectus and that
the representations made by the parties to the Merger are accurate and complete
and will continue to be accurate and complete as of the Effective Date.
The above tax opinions are based upon counsels' opinions that the
continuity of interest requirement of Treasury Regulations Section 1.368-1(b)
will be satisfied. The continuity of interest requirement will be satisfied if
Victoria's shareholders receive in the Merger and retain USF&G Common Stock
equal in value, as of the Effective Date, to at least 50% of the value of all of
the formerly outstanding shares of Victoria Common Stock as of that date. The
Internal Revenue Service (the "Service") established in Revenue Procedure 77-37,
as modified to the date hereof, ruling guidelines with respect to satisfying the
continuity of interest requirement. In order to satisfy those guidelines in
connection with a ruling request, a publicly traded company must represent to
the Service that there is no plan or intention by the company's shareholders who
own five percent or more of the company's stock, and to the best of the
knowledge of the management of the company, there is no plan or intention on the
part of the remaining shareholders of the company, to sell, exchange, or
otherwise dispose of a number of shares of the acquiring parent's stock received
in the transaction that would reduce the company's shareholders' ownership of
the acquiring parent's stock to a number of shares having a value, as of the
date of the transaction, of less than fifty percent of the value of all of the
formerly
37
<PAGE> 44
outstanding stock of the company as of the same date. The Service has adopted a
no-ruling policy with respect to transactions such as the Merger, stating that
it believes that the tax consequences of such transactions are adequately
addressed in the tax law, including but not limited to the Revenue Procedure.
Management of Victoria has represented to counsel, based upon inquiry of its
shareholders who own five percent or more of its stock and based upon Victoria's
absence of knowledge as to any plan or intention on the part of the remaining
shareholders, that there is no plan or intention by shareholders of Victoria who
own five percent or more of its stock and, to the best of management's
knowledge, there is no plan or intention on the part of the remaining Victoria
shareholders, to sell, exchange or otherwise dispose of such number of shares of
USF&G Common Stock received in the Merger that would result in failure to
satisfy the continuity of interest requirement as prescribed in the Treasury
Regulations and the Service ruling guidelines as set forth in Revenue Procedure
77-37, as modified to the date hereof. Counsels' opinions that the continuity of
interest requirement will be satisfied are based upon the representations of
Victoria's management to counsel, the ruling guidelines as set forth in Revenue
Procedure 77-37 and on the expressed reasoning of the Service for its adoption
of the no-ruling policy.
Any change in the facts, representations or assumptions could affect the
status of the Merger as a tax-free reorganization (within the meaning of
Sections 368 (a)(1)(A) and 368 (a)(2)(E) of the Code).
Finally, under Revenue Ruling 90-11, the USF&G Rights accompanying the
USF&G Common Stock to be received by holders of Victoria Common Stock in the
Merger will be considered part of the USF&G Common Stock prior to the occurrence
of a Triggering Event (as defined in the USF&G Rights Plan). The opinion with
respect to the receipt of the USF&G Rights in subparagraph (c) above is based
upon the current position of the Internal Revenue Service as set forth in
Revenue Ruling 90-11 and in several private letter rulings that the receipt of
such rights upon the exchange of shares in a merger that is a tax-free
reorganization does not give rise to the realization of gross income. No
assurance can be given that the Internal Revenue Service will not change its
position on the tax treatment of rights in a merger and assert that such receipt
of rights results in the realization of gross income, to the extent of the value
of such rights, if any, when received.
In connection with the foregoing, see generally "The Merger" and "The
Merger Agreement."
THE FOREGOING DISCUSSION OF THE ANTICIPATED MATERIAL FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER IS BASED ON THE LAW IN EFFECT AS OF THE DATE HEREOF,
INCLUDING THE CODE, THE TREASURY REGULATIONS PROMULGATED THEREUNDER, AND
ADMINISTRATIVE AND JUDICIAL INTERPRETATIONS THEREOF, ALL OF WHICH ARE SUBJECT TO
CHANGE (POSSIBLY ON A RETROACTIVE BASIS). THIS DISCUSSION DOES NOT ADDRESS ANY
ASPECT OF STATE, LOCAL OR FOREIGN TAXATION. IN ADDITION, THIS DISCUSSION DOES
NOT ATTEMPT TO ADDRESS ALL ISSUES THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF
VICTORIA COMMON STOCK IN LIGHT OF SUCH HOLDER'S PERSONAL CIRCUMSTANCES, AND DOES
NOT APPLY TO HOLDERS SUBJECT TO SPECIAL TREATMENT UNDER THE FEDERAL INCOME TAX
LAWS. FURTHER, THIS DISCUSSION MAY NOT APPLY TO A HOLDER OF VICTORIA COMMON
STOCK WHO ACQUIRED HIS OR HER STOCK PURSUANT TO THE EXERCISE OF AN EMPLOYEE
STOCK OPTION OR OTHERWISE AS COMPENSATION, AND DOES NOT APPLY TO A HOLDER OF
VICTORIA OPTIONS WHO RECEIVES SHARES OF USF&G COMMON STOCK IN EXCHANGE THEREFOR.
ACCORDINGLY, EACH HOLDER OF VICTORIA COMMON STOCK SHOULD CONSULT SUCH HOLDER'S
OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO SUCH HOLDER OF THE
MERGER, INCLUDING THE EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
REGULATORY APPROVALS
Under the HSR Act, and the rules promulgated thereunder by the Federal
Trade Commission (the "FTC"), the Merger may not be consummated until
notifications have been given and certain information has been furnished to the
FTC and the Antitrust Division of the Department of Justice (the "Antitrust
Division") and applicable waiting period requirements have been satisfied.
Victoria and USF&G filed notification and
38
<PAGE> 45
report forms under the HSR Act with the FTC and the Antitrust Division on
January 18, 1995. A request for early termination of the required waiting period
under the HSR Act was granted effective February 3, 1995. At any time before or
after the Effective Date of the Merger, notwithstanding that the waiting period
under the HSR Act has been terminated, the Antitrust Division, the FTC or any
state could take such action under the antitrust laws as it deems necessary or
desirable in the public interest. Such action could include seeking to enjoin
the consummation of the Merger or seeking divestiture of substantial assets or
businesses of Victoria or USF&G. Private parties may also seek to take legal
action under the antitrust laws under certain circumstances.
Under ORC Section 3901.321(F), a person entering into a merger agreement
with, or otherwise acquiring control of an insurance company domiciled in Ohio,
must obtain prior regulatory approval. In order to obtain such approval, the
parties must file with the Superintendent a statement containing certain
information about the acquiring party, the terms of the proposed transaction and
other related information. Victoria and USF&G filed the required statement on
January 18, 1995 and have filed all other required information with the Ohio
Insurance Department. Obtaining approval of the Superintendent is a condition to
the consummation of the Merger. It is the practice of the Ohio Insurance
Department not to grant such approval until after shareholder approval of the
transaction has been obtained. However, USF&G has been advised by the Ohio
Insurance Department that it currently expects to grant approval of the Merger
immediately after the holders of Victoria Common Stock approve the Merger
Agreement and the transactions contemplated thereby. The expiration or early
termination of the applicable waiting period under the HSR Act and receipt of
approval under the ORC are conditions to the obligations of USF&G and Victoria
to consummate the Merger. See "The Merger Agreement -- Conditions." Each party
has agreed to use all reasonable efforts to consummate and make effective the
transactions contemplated by the Merger Agreement and to lift any injunction or
other legal bar to the Merger.
RESALE OF USF&G STOCK; AFFILIATES
All shares of USF&G Common Stock received by holders of Victoria Common
Stock in the Merger will be freely transferable, except that USF&G Common Stock
received by persons who are deemed to be "affiliates" (as such term is defined
under the Securities Act) of USF&G or Victoria prior to the Merger may be resold
by them only in transactions permitted by the resale provisions of Rule 145
under the Securities Act with respect to affiliates of Victoria, or Rule 144
under the Securities Act with respect to persons who are or become affiliates of
USF&G or as otherwise permitted under the Securities Act. Persons who may be
deemed to be affiliates of USF&G or Victoria generally include individuals or
entities that control, are controlled by, or are under common control with
Victoria, and may include certain officers and directors of such party as well
as principal shareholders of such party.
Prior to the Effective Date, Victoria has agreed to deliver to USF&G a
letter identifying all persons who Victoria believes may be deemed "affiliates"
of Victoria as that term is used in paragraphs (c) and (d) of Rule 145 under the
Securities Act (the "Affiliates"). Victoria has agreed to use reasonable efforts
to obtain, and deliver to USF&G, agreements from all Affiliates that they will
not (i) offer to sell, sell or otherwise dispose of any of the USF&G Common
Stock issued to them pursuant to the Merger, except in compliance with Rule 145
or another exemption from the registration requirements of the Securities Act
and (ii) sell or in any way reduce such Affiliate's risk relative to any USF&G
Common Stock received in the Merger, until such time as financial results
covering at least 30 days of post-merger operations have been published, except
as permitted by Staff Accounting Bulletin No. 76 issued by the Commission. The
Merger Agreement provides that as soon as is reasonably practicable but in no
event later than 45 days after the end of the first fiscal quarter of USF&G
ending at least 30 days after the Effective Date, USF&G will publish results
including at least 30 days of combined operations of USF&G and Victoria as
referred to in the written agreements referred to in the previous sentence. See
"The Merger -- Anticipated Accounting Treatment."
Under the Merger Agreement, certificates representing shares of Victoria
Common Stock or option award agreements, as applicable, surrendered for exchange
by any Affiliate will not be exchanged for certificates representing shares of
USF&G Common Stock until USF&G has received the written agreements from such
persons as provided in the immediately preceding paragraph.
39
<PAGE> 46
NEW YORK STOCK EXCHANGE LISTING
USF&G has agreed to cause the USF&G Common Stock to be issued to Victoria
shareholders and holders of Victoria Options pursuant to the Merger Agreement to
be authorized for listing on the NYSE, upon official notice of issuance. Such
authorization for listing is a condition to the obligations of USF&G, Merger Sub
and Victoria to consummate the Merger.
NO APPRAISAL RIGHTS
UNDER THE DGCL, THE HOLDERS OF VICTORIA COMMON STOCK ARE NOT ENTITLED TO
ANY APPRAISAL RIGHTS WITH RESPECT TO THE MERGER. Under the DGCL, dissenters'
appraisal rights are not available for shares of any class of stock which, on
the applicable record date for the shareholder vote on a merger, are designated
as Nasdaq National Market System securities and which are to be converted into
shares of stock of any other corporation listed on the effective date of the
merger on a national securities exchange. On the record date, Victoria Common
Stock was designated as a Nasdaq National Market System security and it is a
condition to consummation of the Merger that the USF&G Common Stock to be issued
to Victoria shareholders in the Merger be listed on the NYSE, upon official
notice of issuance. Accordingly, holders of Victoria Common Stock are not
entitled to dissenters' appraisal rights in connection with the Merger.
40
<PAGE> 47
THE MERGER AGREEMENT
The following is a brief summary of certain provisions of the Merger
Agreement, a copy of which is attached as Annex I to this Proxy
Statement/Prospectus and incorporated herein by reference. Such summary is
qualified in its entirety by reference to the Merger Agreement. Shareholders of
Victoria are urged to read the Merger Agreement in its entirety for a more
complete description of the Merger.
THE MERGER
The Merger Agreement provides that, subject to the approval of the Merger
by the holders of Victoria Common Stock and the satisfaction or waiver (where
permissible) of the other conditions to the Merger, Merger Sub will be merged
with and into Victoria, and the separate existence of Merger Sub will cease and
Victoria will be the surviving corporation of the Merger and a wholly-owned
subsidiary of USF&G.
On the Effective Date, the conversion of Victoria Common Stock and Victoria
Options and the conversion of shares of the common stock of Merger Sub pursuant
to the Merger Agreement will be effected as described below in "-- Terms of the
Merger."
The Certificate of Incorporation of Merger Sub as in effect immediately
prior to the Effective Date and as amended in accordance with the provisions of
the Merger Agreement, will be the Certificate of Incorporation of Victoria
following the Merger. The By-laws of Merger Sub as in effect immediately prior
to the Effective Date will be the By-laws of Victoria following the Merger, and
thereafter both the Certificate of Incorporation and the By-laws may be amended
in accordance with their terms and as provided by law. The name of the surviving
corporation of the Merger will, by virtue of the Merger, remain "Victoria
Financial Corporation."
EFFECTIVE DATE
The Merger will be consummated and become effective after the requisite
approval of Victoria's shareholders has been obtained and all other conditions
to the Merger have been satisfied or waived (where permissible) and upon the
filing by Merger Sub and Victoria of a properly executed Certificate of Merger
with the Secretary of State of the State of Delaware or at such time thereafter
as is provided in the Certificate of Merger.
In the event that Victoria's shareholders do not approve the Merger
Proposal or if the Merger is not consummated for any other reason, Victoria
intends to continue as an independent company, operating on a basis consistent
with its historical operations. Victoria would continue to market and issue
nonstandard private passenger automobile insurance policies, and intends to
continue its selective geographic expansion, seeking to spread geographic risk
and to enhance its sales volume.
TERMS OF THE MERGER
General. Upon consummation of the Merger, each issued and outstanding
share of Victoria Common Stock (other than shares held by Victoria as treasury
shares and shares held by USF&G or by subsidiaries of Victoria or USF&G, all of
which will be cancelled) will be converted into the right to receive the number
of shares of USF&G Common Stock equal to the Exchange Rate (defined below).
Based upon the capitalization of USF&G and Victoria as of April 12, 1995 (and
assuming the issuance of 5,359,906 shares of USF&G Common Stock anticipated to
be issued prior to the Effective Date in connection with the acquisition by
USF&G of Discover Re Managers, Inc.), the latest practicable date prior to the
date hereof, assuming a Final Price of $13.994, (a) the shareholders of Victoria
will own approximately 3.6% of the outstanding shares of USF&G Common Stock, and
(b) the Victoria shareholders and holders of Victoria Options together will own
approximately 3.8% of the outstanding shares of USF&G Common Stock, in each case
immediately following consummation of the Merger. Each issued and outstanding
share of the common stock of Merger Sub shall be converted into and become one
fully paid and nonassessable share of common stock, par value $0.01 per share,
of Victoria.
41
<PAGE> 48
Exchange Rate. The "Exchange Rate" means:
(A) The quotient of (a) $13.959 divided by (b) the Final Price, if and
only if the Final Price is greater than $14.556; or
(B) .959, if and only if the Final Price is both (a) less than or
equal to $14.556 and (b) greater than $13.556; or
(C) The quotient of (a) $13 divided by (b) the Final Price, if and
only if the Final Price is both (x) less than or equal to $13.556 and (y)
greater than or equal to $11.90; or
(D) 1.092, if and only if the Final Price is less than $11.90.
In the event that the Final Price is less than $11.90, Victoria may, at any
time on or prior to the Effective Date, terminate the Merger Agreement without
any further action by Victoria shareholders.
The "Final Price" means the average closing price of USF&G Common Stock on
the NYSE - Composite Tape during the period comprising the twenty consecutive
trading days immediately preceding the third business day immediately preceding
the Effective Date.
By way of example (but in each instance subject to payment of cash in lieu
of fractional shares): if the Final Price of USF&G Common Stock is $13.00, the
Exchange Rate will be 1.000 and each share of Victoria Common Stock will entitle
the holder thereof to receive one share of USF&G Common Stock. If the Final
Price of USF&G Common Stock is $14.00, the Exchange Rate will be .959 and each
share of Victoria Common Stock will entitle the holder thereof to receive .959
shares of USF&G Common Stock. If the Final Price of USF&G Common Stock is
$15.00, the Exchange Rate will be .931 and each share of Victoria Common Stock
will entitle the holder thereof to receive .931 shares of USF&G Common Stock. If
the Final Price of USF&G Common Stock is $12.00, the Exchange Rate will be 1.083
and each share of Victoria Common Stock will entitle the holder thereof to
receive 1.083 shares of USF&G Common Stock. If the Final Price of USF&G Common
Stock is less than $11.90, the Exchange Rate will be 1.092 and each share of
Victoria Common Stock will entitle the holder thereof to receive 1.092 shares of
USF&G Common Stock.
THE CONSIDERATION TO BE RECEIVED BY VICTORIA SHAREHOLDERS IN THE MERGER
WILL BE BASED UPON A FORMULA AND CANNOT PRECISELY BE DETERMINED PRIOR TO THE
CLOSE OF BUSINESS ON THE FOURTH BUSINESS DAY IMMEDIATELY PRECEDING THE EFFECTIVE
DATE. The consideration will depend upon the Final Price, which establishes the
Exchange Rate. BECAUSE THE FINAL PRICE, THE EXCHANGE RATE AND THE MARKET PRICE
OF USF&G COMMON STOCK AS OF THE EFFECTIVE DATE ARE NOT DETERMINABLE AS OF THE
DATE OF THIS PROXY STATEMENT/PROSPECTUS AND AS OF THE DATE OF THE SPECIAL
MEETING, THE EXACT CONSIDERATION PER SHARE TO BE RECEIVED IN EXCHANGE FOR THE
OUTSTANDING VICTORIA COMMON STOCK IS NOT CURRENTLY DETERMINABLE. Victoria
shareholders will be entitled to receive not more than 1.092 shares nor less
than .959 shares of USF&G Common Stock for each share of Victoria Common Stock
(except if the Final Price exceeds $14.556, in which event Victoria shareholders
will be entitled to receive for each share of Victoria Common Stock that number
of shares of USF&G Common Stock with a value, based on the Final Price (but not
necessarily the market price as of the Effective Date), of $13.959). Had the
Merger been consummated on April 12, 1995, the Final Price would have been
$13.994, and each share of Victoria Common Stock outstanding would have been
converted into .959 shares of USF&G Common Stock (together with any related
USF&G Rights). The closing price of USF&G Common Stock on that date, as reported
on the NYSE - Composite Tape, was $14.50 per share. In fact, the Final Price may
be greater than or less than $13.994, and the price at which USF&G Common Stock
will be trading on the NYSE on and after the Effective Date may be greater than
or less than the Final Price.
Treatment of Victoria Options and Stock Appreciation Rights. Each of the
Victoria Options, whether vested or unvested, outstanding as of the Effective
Date will be converted without any action on the part of the holder thereof into
the right to receive, as of the Effective Date, USF&G Common Stock (or cash in
lieu of fractional shares as described below).
The number of shares of USF&G Common Stock that the holder of a Victoria
Option will be entitled to receive is a number determined by dividing (i) the
product of (x) the value of such Victoria Option as determined by the
Black-Scholes Model and (y) the Discount Factor (defined below) by (ii) the
Final Price.
42
<PAGE> 49
The Black-Scholes Model is an option valuation model which incorporates
such factors as volatility of the security's return, the price of the option,
the relationship of the underlying stock's price to the exercise price of the
option, and the time remaining until the option expires. The value of each
Victoria Option as determined by the Black-Scholes Model will be determined
using (a) a value per share of Victoria Common Stock equal to the product of (i)
the Final Price and (ii) the Exchange Rate, (b) a 52 week volatility for
Victoria Common Stock of 40% for Victoria Options expiring prior to three years
after the Effective Date and 35% for Victoria Options expiring three or more
years after the Effective Date, and (c) a risk free rate of 7.325%.
"Discount Factor" means (a) for a Victoria Option that is vested at the
Effective Date, one, and (b) for a Victoria Option that is not vested at the
Effective Date, (i) if the holder's employment by the Company has been
terminated, voluntarily or otherwise, on or before the Effective Date, zero and
(ii) if the holder's employment by the Company has not been terminated,
voluntarily or otherwise, on or before the Effective Date, one minus the product
of (x) 7/12% and (y) the number of months between the Effective Date and the
date such Victoria Options vest, rounded to the next largest number of months.
The following table sets forth the number of Victoria Options held by each
director and current executive officer of Victoria and the number of shares of
USF&G Common Stock into which such Victoria Options will be converted in the
Merger, based on the assumptions set forth below.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
USF&G COMMON STOCK
NAME OF DIRECTOR OR NUMBER OF VICTORIA ISSUABLE UPON CONVERSION OF
EXECUTIVE OFFICER OPTIONS VICTORIA OPTIONS(1)
-------------------------------- ------------------ ---------------------------
<S> <C> <C>
Jeffrey A. Cole................. 16,000 7,936
Kenneth R. Rosen................ 193,822 120,132
Alvin A. Siegal................. 6,000 2,976
Howard M. Zelikow............... 1,000 496
Milton Fromson.................. 6,000 2,976
Richard D. Margolis............. 6,000 2,976
Tab A. Keplinger................ 10,200 5,755
---------- ----------
Total.................... 239,022 143,247
================= =========================
</TABLE>
- ---------------
(1) A Final Price of $13.994 (which would have been the Final Price had the
Merger been consummated on April 12, 1995, the latest practicable date prior
to the printing of this Proxy Statement/Prospectus), and the resulting
Exchange Rate of .959, are assumed for purposes of determining the number of
shares of USF&G Common Stock to be received upon conversion of the Victoria
Options in the Merger. The actual Exchange Rate and Final Price may be
different from those assumed for these purposes and will be determined based
on the average closing price of USF&G Common Stock on the NYSE - Composite
Tape during the period comprising the twenty consecutive trading days
immediately preceding the third business day immediately preceding the
Effective Date.
At or prior to the Effective Date, Victoria and USF&G will take all action
necessary to cause the assumption by USF&G as of the Effective Date of the stock
appreciation rights outstanding under Victoria's Amended and Restated Key
Executive Stock Option and Stock Appreciation Rights Plan.
USF&G Rights. Each share of USF&G Common Stock issued pursuant to the
Merger, whether in respect of Victoria Common Stock or Victoria Options, will
include a USF&G Right. See "Description of USF&G Capital Stock -- USF&G Rights
Plan" and "Comparison of Rights of Holders of USF&G Capital Stock and Victoria
Capital Stock."
Fractional Shares. No fractional shares of USF&G Common Stock will be
issued in the Merger. In lieu of any such fractional shares, each holder of
Victoria Common Stock and each holder of Victoria Options who
43
<PAGE> 50
otherwise would be entitled to receive a fractional share of USF&G Common Stock
pursuant to the Merger will be paid an amount in cash equal to such fractional
interest multiplied by the Final Price.
SURRENDER AND PAYMENT
Promptly after the Effective Date, First Chicago Trust Company of New York,
or such other exchange agent as selected by USF&G (the "Exchange Agent"), will
mail a transmittal form and exchange instructions to each holder of record of
certificates which immediately prior to the Effective Date represented
outstanding shares of Victoria Common Stock (the "Certificates"), which form and
instructions are to be used in forwarding the Certificates for surrender and
exchange for (i) certificates representing that number of whole shares of USF&G
Common Stock that such holder has the right to receive pursuant to the Merger
and (ii) cash for any fractional shares of USF&G Common Stock to which such
holder otherwise would be entitled. VICTORIA SHAREHOLDERS ARE REQUESTED NOT TO
SURRENDER THEIR CERTIFICATES FOR EXCHANGE UNTIL SUCH TRANSMITTAL FORM AND
INSTRUCTIONS ARE RECEIVED.
At and after the Effective Date and until surrendered as provided above,
Certificates and, in the case of Victoria Options, option award agreements or
other evidence of the ownership thereof, will be deemed to represent the right
to receive certificates representing that number of whole shares of USF&G Common
Stock into which the shares of Victoria Common Stock or Victoria Options, as the
case may be, formerly represented by such Certificates or option award
agreements were converted in the Merger and a cash payment in lieu of any
fractional shares, and the holders of Certificates or option award agreements
will not be entitled to receive dividends or any other distributions from USF&G
or exercise any other rights of holders of USF&G Common Stock until such
Certificates or option award agreements are so surrendered. Upon surrender of a
Certificate, there shall be paid to the person in whose name such shares of
USF&G Common Stock are issued any dividends or other distributions which have a
record date after the Effective Date and which became payable prior to surrender
with respect to such shares of USF&G Common Stock. In no event shall the persons
entitled to receive such dividends or other distributions be entitled to receive
interest on such dividends or other distributions.
After the Effective Date, the Exchange Agent will mail a transmittal form
and exchange instructions to each holder of Victoria Options and each holder of
Victoria Options that are, as of the Effective Date, outstanding, whether vested
or unvested, will be entitled to receive the number of shares of USF&G Common
Stock and cash in lieu of fractional shares issuable to such holder of Victoria
Options in the Merger upon surrender of such holder's option award agreements
for cancellation or by providing other satisfactory evidence of the cancellation
of the Victoria Options in respect of which shares of USF&G are issuable in the
Merger, together with a duly executed letter of transmittal.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of the
parties, respectively, relating to, among other things: (a) due organization,
valid existence and good standing of each of Victoria and its subsidiaries,
USF&G and Merger Sub and the corporate powers to operate their respective
businesses; (b) the capital structure of each of Victoria, USF&G and Merger Sub;
(c) the authorization, execution, delivery and enforceability of the Merger
Agreement and the consummation of the transactions contemplated by the Merger
Agreement by Victoria, USF&G and Merger Sub and the execution and delivery of
the Merger Agreement and the consummation of the transactions contemplated
thereby not being in violation of their respective organizational documents,
material contracts and agreements, or law; (d) documents and financial
statements filed by each of Victoria and its subsidiaries and by USF&G with
applicable insurance regulatory authorities and the Commission and the accuracy
of information contained therein; (e) the absence of certain material adverse
changes or events; (f) litigation against or affecting Victoria or its
subsidiaries; (g) loss reserves and statutory capital and surplus of Victoria
and its subsidiaries; (h) reinsurance contracts applicable to Victoria and its
subsidiaries; (i) compliance by Victoria and its subsidiaries with applicable
laws; (j) undisclosed liabilities of Victoria and its subsidiaries; (k) policies
and contracts of insurance entered into or issued by Victoria or its
subsidiaries; (l) agents and fronting agreements of Victoria and its
subsidiaries; (m) taxes, tax returns and audits of Victoria and its
subsidiaries; (n) certain agreements, contracts and
44
<PAGE> 51
commitments of Victoria or its subsidiaries; (o) premium balances receivable of
Victoria and its subsidiaries; (p) the investment portfolio of Victoria and its
subsidiaries; (q) intellectual property of Victoria and its subsidiaries; (r)
licenses of Victoria and its subsidiaries; (s) intercompany agreements and
arrangements and affiliate transactions among Victoria and/or its subsidiaries
and affiliates; (t) employee benefit plans of Victoria and its subsidiaries and
compliance with the Employee Retirement Income Security Act of 1974, as amended;
(u) certain cash compensation paid by Victoria or its subsidiaries to officers,
directors and employees; (v) action by Victoria and USF&G respecting the Merger
and the inapplicability to the Merger of certain provisions of the DGCL; (w)
pending claims against Victoria and its subsidiaries; (x) insurance for the
benefit of Victoria and its subsidiaries; (y) title to assets of Victoria and
its subsidiaries and absence of liens thereon; (z) ability to conduct business
of Victoria and its subsidiaries; (aa) absence of unlawful payments by Victoria
or its subsidiaries; (bb) receipt of the McDonald & Company opinion; (cc)
financial advisors for Victoria, USF&G and Merger Sub; and (dd) the present
intention of USF&G to cause the principal office of the Surviving Corporation to
remain in Cleveland, Ohio.
CONDUCT OF BUSINESS BY VICTORIA PENDING THE MERGER
Pursuant to the Merger Agreement, Victoria has agreed that, during the
period from the date of the Merger Agreement through the Effective Date, except
as otherwise consented to in writing by USF&G or as contemplated or required by
the Merger Agreement or applicable law, Victoria will and will cause each of its
subsidiaries to: (a) carry on their respective businesses in the usual, regular
and ordinary course in substantially the same manner as previously conducted;
(b) use their reasonable efforts to preserve intact their present business
organizations; (c) maintain insurance coverages on its property and books,
accounts and records in the usual manner consistent with prior practices; (d)
comply with applicable laws; (e) maintain properties and equipment in good
repair, ordinary wear and tear excepted; and (f) perform obligations under
contracts and commitments.
Except as required by the Merger Agreement or as previously disclosed to
USF&G, Victoria has agreed that, during the period from the date of the Merger
Agreement through the Effective Date, it will not and it will not propose to:
(a) sell or pledge any of its capital stock of its subsidiaries; (b) amend its
Certificate of Incorporation or By-Laws or those of its subsidiaries; (c) split,
combine or reclassify its outstanding capital stock or issue or authorize any
other securities or declare, set aside or pay any dividend or other distribution
payable in cash, stock or property or extend any credit to any officer, director
or shareholder; or (d) directly or indirectly, redeem, purchase or otherwise
acquire any shares of Victoria Common Stock.
Except as required by the Merger Agreement or as previously disclosed to
USF&G, Victoria has agreed that, during the period from the date of the Merger
Agreement through the Effective Date, it will not, nor will it permit any of its
subsidiaries to: (a) issue, deliver or sell any additional shares of, or rights
of any kind to acquire any shares of, its capital stock of any class, any
indebtedness or any option, right or warrant to acquire, or securities
convertible into, shares of capital stock other than issuances of Victoria
Common Stock pursuant to the exercise of certain options outstanding on the date
of the Merger Agreement; (b) acquire, lease or dispose of any capital assets or
any other assets involving expenditures or proceeds in an amount, individually
or in the aggregate, greater than $100,000, other than the acquisition or lease
of certain telephone systems; (c) assume, incur or guarantee additional
indebtedness; (d) enter into any material contract or commitment of any kind
other than in the ordinary course of business and consistent with past practice,
or permit or suffer to be cancelled any material contract; (e) encumber or grant
a security interest in any material asset or enter into any other material
transaction; (f) acquire by merging or consolidating with, or by purchasing a
substantial equity interest in, or by any other manner, any business or any
corporation, partnership or other business organization or division thereof; (g)
decrease any case reserve or any bulk reserve other than in the ordinary course
of business; (h) make any change in the underwriting, reserves or claims
adjustment practices which would have a material adverse effect on Victoria and
its subsidiaries; or (i) enter into any contract, agreement, commitment or
arrangement with respect to any of the foregoing.
Except as previously disclosed to USF&G, Victoria has agreed that it will
not, nor will it permit any of its subsidiaries to, except as required by law
and except as provided in the Merger Agreement: (a) adopt, enter into, terminate
or amend any bonus, profit-sharing, compensation, severance, termination, stock
option,
45
<PAGE> 52
pension, retirement, deferred compensation, employment or other benefit plan,
agreement, trust, fund or other arrangement for the benefit or welfare of any
director, officer or current or former employee; (b) increase the compensation
or fringe benefit of any director, officer or employee except in the normal
course; (c) pay any benefit not provided under any existing plan or arrangement
disclosed to USF&G; (d) grant any awards under any bonus, incentive, performance
or other compensation plan or arrangement or other benefit plan except in the
normal course; (e) take any action to fund or secure the payment of compensation
or benefits under any employee plan, agreement, contract or arrangement or other
benefit plan other than in the ordinary course of business consistent with past
practice or as required thereunder; or (f) adopt, enter into, amend or terminate
any contract, agreement, commitment or arrangement to do any of the foregoing.
Victoria has agreed that it will not, nor will it permit any of its subsidiaries
to, take any action with respect to accounting policies or procedures other than
reasonable and usual actions in the ordinary course and consistent with past
practice.
CERTAIN COVENANTS
Under the Merger Agreement, USF&G and Victoria have each agreed to promptly
give written notice to the other upon becoming aware of the occurrence or, to
their knowledge, impending or threatened occurrence, of any event which could
cause or constitute a breach of any of its representations, warranties or
covenants contained or referenced in the Merger Agreement or which could cause a
material adverse effect on the business of such party, and each has agreed to
use its best efforts to prevent or promptly remedy the same.
NO SOLICITATION
The Merger Agreement provides that, subject to the Victoria Board's
fiduciary duties to shareholders (the "Victoria Board Fiduciary Duties"),
Victoria will not, nor will any of its subsidiaries, directly or indirectly,
take (or authorize or permit any of their respective officers, directors,
employees, representatives, investment bankers, attorneys, accountants or other
agents or affiliates to take) any action to (i) encourage, solicit or initiate
the submission of any Acquisition Proposal, (ii) enter into any agreement with
respect to any Acquisition Proposal or (iii) participate in any way in
discussions or negotiations with, or furnish any information to, any person in
connection with, or take any other action to facilitate any inquiries or the
making of any proposal that constitutes, or may reasonably be expected to lead
to, any Acquisition Proposal. "Acquisition Proposal" means any proposed (A)
merger, consolidation or similar transaction involving Victoria, (B) sale, lease
or other disposition directly or indirectly by merger, consolidation, share
exchange or otherwise of assets of Victoria or its subsidiaries representing 30%
or more of the consolidated assets of Victoria and its subsidiaries, (C) issue,
sale or other disposition of (including by way of merger, consolidation, share
exchange or similar transaction) securities (or options, rights or warrants to
purchase, or securities convertible into, such securities) representing 30% or
more of the voting power of Victoria or (D) transaction in which any person
shall acquire beneficial ownership (as such term is defined in Rule 13d-3 under
the Exchange Act), or the right to acquire beneficial ownership or any "group"
(as such term is defined under the Exchange Act) shall have been formed which
beneficially owns or has the right to acquire beneficial ownership of 30% or
more of the outstanding Victoria Common Stock.
Under the Merger Agreement, Victoria is required to promptly communicate to
USF&G the terms of any proposal or inquiry, including the identity of the person
and its affiliates making the same, that it may receive in respect of any such
transaction, or of any such information requested from it or of any such
negotiations or discussions being sought to be initiated with it.
INDEMNIFICATION
The Merger Agreement provides that, from and after the Effective Date,
USF&G will indemnify, defend and hold harmless the officers, directors and
employees of Victoria and its subsidiaries (the "Indemnified Parties") against
all losses, expenses, claims, damages or liabilities ("Claims") based in whole
or in part on the fact that such person is or was such officer, director or
employee of Victoria or its subsidiaries (including arising out of the
transactions contemplated by the Merger Agreement) to the fullest extent
permitted or required under applicable law. The Merger Agreement provides that
all rights to indemnification existing in favor of the directors, officers or
employees of Victoria as provided in Victoria's or the subsidiaries' respective
46
<PAGE> 53
Articles or Certificate of Incorporation or By-Laws or Code of Regulations, as
in effect on the date of the Merger Agreement, with respect to matters occurring
through the Effective Date, will survive the Merger and continue in full force
and effect for a period of not less than six years from the Effective Date.
USF&G has guaranteed unconditionally the satisfaction of all such rights to
indemnification (and has agreed to pay expenses in advance of the final
disposition of any such action or proceeding to each Indemnified Party to the
fullest extent permitted under Delaware law, upon receipt from the Indemnified
Party to whom expenses are advanced of the undertaking to repay such advances
contemplated by Section 145(e) of the DGCL).
The Merger Agreement provides that, in the event any Claim is brought
against any Indemnified Party (whether arising before or after the Effective
Date), after the Effective Date, (a) the Indemnified Parties may retain
Victoria's regularly engaged independent legal counsel or other independent
legal counsel satisfactory to them, provided that such other counsel shall be
reasonably acceptable to USF&G, (b) USF&G will pay all reasonable fees and
expenses of such counsel for the Indemnified Parties promptly as statements
therefor are received, and (c) USF&G will use its reasonable efforts to assist
in the defense of any such matter, provided that USF&G shall not be liable for
any settlement of any Claim effected without its written consent, which consent
shall not be unreasonably withheld. Any Indemnified Party wishing to claim
indemnification under the Merger Agreement upon learning of any such Claim, must
notify USF&G (although the failure so to notify USF&G shall not relieve USF&G
from any liability which USF&G may have under the Merger Agreement, except to
the extent such failure materially prejudices USF&G), and must deliver to USF&G
the undertaking contemplated by Section 145(e) of the DGCL. The Merger Agreement
provides that the Indemnified Parties as a group may retain no more than one law
firm (in addition to local counsel) to represent them with respect to each such
matter unless there is, under applicable standards of professional conduct (as
determined by counsel to the Indemnified Parties), a conflict on any significant
issue between the positions of any two or more Indemnified Parties, in which
event such additional counsel as may be required may be retained by the
Indemnified Parties and will be paid by USF&G.
Under the Merger Agreement, USF&G has agreed to maintain, or to cause
Victoria to maintain, in effect for not less than three years after the
Effective Date the current policies of directors' and officers' liability
insurance maintained by Victoria with respect to matters occurring prior to the
Effective Date; provided, however, that (a) Victoria may substitute therefor
policies of at least the same coverage (with carriers comparable to Victoria's
existing carrier) containing terms and conditions which are no less advantageous
to the Indemnified Parties and (b) Victoria shall not be required to pay an
annual premium for such insurance in excess of 200% of the last annual premium
paid prior to the date of the Merger Agreement, but in such case shall purchase
as much coverage as possible for such amount.
CONDITIONS
Conditions to Each Party's Obligation to Effect the Merger. The respective
obligations of Victoria and USF&G to effect the Merger are subject to certain
conditions, including: (a) the approval and adoption of Merger Proposal by
two-thirds of the outstanding shares of Victoria Common Stock; (b) the
authorization for listing on the NYSE, upon official notice of issuance, of the
USF&G Common Stock to be issued in the Merger; (c) the Registration Statement
becoming effective in accordance with the provisions of the Securities Act and
not being the subject of any stop order suspending effectiveness issued by the
Commission; (d) the waiting period applicable to the consummation of the Merger
under the HSR Act shall have expired or been terminated and all approvals
necessary for the consummation of the transactions contemplated by the Merger
Agreement including, without limitation, any approval required by the ORC, shall
have been obtained from the insurance commissioners, directors or
superintendents, as the case may be, of the applicable state insurance
departments, and any such approvals shall be in full force and effect; and (e)
the absence of any preliminary or permanent injunction or other order, decree or
ruling issued by a court of competent jurisdiction or by a governmental,
regulatory or administrative agency or commission nor any statute, rule,
regulation or executive order promulgated or enacted by any governmental entity
shall be in effect, which prevents the consummation of the Merger or makes such
consummation illegal.
47
<PAGE> 54
Conditions to Obligation of Victoria to Effect the Merger. The obligation
of Victoria to effect the Merger is subject to the following additional
conditions (unless waived by Victoria), including: (a) the performance in all
material respects by USF&G and Merger Sub of all obligations required to be
performed by them under the Merger Agreement; and (b) the accuracy of the
representations and warranties of USF&G and Merger Sub (except where the failure
to be true and correct, alone, or taken together with other failures to be true
and correct, would not have a material adverse effect on the business,
properties, assets, condition (financial or otherwise), liabilities or
operations of USF&G and its subsidiaries) as of the dates provided in the Merger
Agreement.
Conditions to Obligations of USF&G and Merger Sub to Effect the Merger.
The obligations of USF&G and Merger Sub to effect the Merger are subject to
the following additional conditions (unless waived by USF&G), including: (a) the
performance in all material respects by Victoria of all obligations required to
be performed by it under the Merger Agreement; (b) the accuracy of the
representations and warranties of Victoria (except where the failure to be true
and correct, alone or taken together with other failures to be true and correct,
would not have a material adverse effect on the business, properties, assets,
condition (financial or otherwise), liabilities or operations of Victoria and
its subsidiaries) as of the dates provided in the Merger Agreement; (c) in
connection with the receipt of the approvals described in clause (d) of
"Conditions to Each Party's Obligation to Effect the Merger" above, no approval
shall impose on USF&G or Merger Sub any conditions or other requirements that
would cause USF&G or Merger Sub any material additional costs, or interfere with
the continued operations of Victoria and its subsidiaries (taken as a whole) or
USF&G or any of its subsidiaries; (d) from the date of the Merger Agreement to
the Effective Date, there shall not have occurred any material adverse change
(other than one resulting from or relating to the Merger Agreement or the
transactions contemplated thereby) in the business, properties, assets,
condition (financial or otherwise), liabilities or operations of Victoria and
its subsidiaries, taken as a whole; (e) receipt by USF&G of a letter from KPMG
Peat Marwick LLP, Victoria's independent auditors, dated a date within two
business days before the date on which the Registration Statement shall become
effective and addressed to USF&G, and in form and substance reasonably
satisfactory to USF&G and customary in scope and substance for comfort letters
delivered by independent public accountants in connection with registration
statements similar to the Registration Statement; and (f) the Employment
Agreement between USF&G or a subsidiary thereof and Kenneth R. Rosen dated
December 18, 1994 is in full force and effect as of the Effective Date.
TERMINATION; FEES AND EXPENSES
Termination. The Merger Agreement may be terminated at any time prior to
the Effective Date:
(a) by mutual written consent of the USF&G Board and the Victoria
Board;
(b) by either USF&G or Victoria if the Merger has not been consummated
on or before July 31, 1995 (provided that the terminating party is not
otherwise in material breach of its representations, warranties or
obligations under the Merger Agreement or responsible for the failure of
the Merger to occur on or before such date);
(c) by Victoria if any of the conditions specified in (i) Section 8.1
of the Merger Agreement which are described above in "Conditions to Each
Party's Obligation to Effect the Merger" or (ii) Section 8.2 of the Merger
Agreement which are described above in "Conditions to Obligation of
Victoria to Effect the Merger" have not been met or waived by Victoria at
such time as such condition is no longer capable of satisfaction;
(d) by USF&G if any of the conditions specified in (i) Section 8.1 of
the Merger Agreement which are described above in "Conditions to Each
Party's Obligation to Effect the Merger" or (ii) Section 8.3 of the Merger
Agreement which are described above in "Conditions to Obligations of USF&G
and Merger Sub to Effect the Merger" have not been met or waived by USF&G
at such time as such condition is no longer capable of satisfaction;
48
<PAGE> 55
(e) by either USF&G or Victoria if the other party has breached the
Merger Agreement in any material respect and such breach either continues
for a period of ten days after the receipt of notice of the breach from the
non-breaching party or is not susceptible to cure; or
(f) by either Victoria or USF&G, if (i) the Victoria Board shall have
withdrawn or modified in a manner adverse to USF&G its approval or
recommendation to Victoria's shareholders of the Merger Agreement or the
Merger or has approved or recommended to Victoria's shareholders that they
accept the terms of any Acquisition Proposal or has resolved to take any of
the foregoing actions, provided, however, that reasonable delay required to
comply with the Victoria Board Fiduciary Duties will not be deemed to be a
withdrawal or a modification adverse to USF&G; or (ii) a Third Party
Acquisition (defined below) has occurred; provided that such termination
under this clause (f) will not relieve Victoria of its obligations to pay
fees and/or expenses to USF&G upon termination of the Merger Agreement.
"Third Party Acquisition" means the occurrence of any of the following
events: (w) the acquisition of Victoria by merger, tender offer or
otherwise by any person other than USF&G, Merger Sub or any affiliate
thereof (a "Third Party"); (x) the acquisition by a Third Party of 30% or
more of the total assets of Victoria and its subsidiaries, taken as a
whole; or (y) the acquisition by a Third Party of beneficial ownership, or
the right to acquire beneficial ownership, of 30% or more of the
outstanding Victoria Common Stock or other voting power of Victoria;
provided, however, that in the event USF&G terminates the Merger Agreement
pursuant to this clause (y), a fee shall be payable under the Merger
Agreement only so long as, and on or after the date when, Victoria (1) is
acquired (or enters into an agreement to be acquired) by merger, tender
offer or otherwise by such Third Party or (2) enters into an agreement with
a Third Party providing for the acquisition by said Third Party of 30% or
more of the total assets of Victoria or its subsidiaries, in each case,
within twelve months of the acquisition of, or right to acquire, such 30%
beneficial ownership. Notwithstanding anything to the contrary contained in
the Merger Agreement, "Third Party" does not include Victoria or any of its
subsidiaries (for purposes of this sentence, "subsidiary" includes all
subsidiaries of Victoria as of the date of the Merger Agreement and all
subsidiaries formed from and after the date of the Merger Agreement).
In addition, if the Final Price is less than $11.90, Victoria may, at any
time on or prior to the Effective Date, terminate the Merger Agreement without
any further obligations thereunder. See "The Merger Agreement -- Terms of the
Merger."
Fees and Expenses. The Merger Agreement provides that all costs and
expenses in connection with the Merger Agreement and the transactions
contemplated thereby will be paid by the party incurring such expenses, except
that Victoria and USF&G will each pay one-half of the printing expenses incurred
in connection with this Proxy Statement/Prospectus and the Registration
Statement. Notwithstanding the foregoing provisions of the Merger Agreement
relating to fees and expenses, USF&G has agreed to pay one-half of the fees and
expenses of D.F. King & Co., Inc., a proxy solicitation firm retained by
Victoria for assistance in connection with the Special Meeting.
Under certain circumstances set forth in the Merger Agreement, either
Victoria or USF&G may be required to reimburse the other party for its expenses
if the Merger Agreement is terminated. In addition to payment of expenses, the
Merger Agreement provides that Victoria pay USF&G an additional $2,500,000 upon
the occurrence of certain events which generally relate to: (i) an acquisition
of control of, or a significant equity interest in or significant assets of,
Victoria by a third party, or certain proposals or offers with respect thereto,
(ii) the withdrawal or material modification of the recommendation of the
Victoria Board with respect to the Merger, or (iii) the termination of the
Merger Agreement by USF&G as a result of Victoria's breach thereof and within
twelve months after termination Victoria is acquired by a party with whom it had
contact after the date of the Merger Agreement and prior to the date of
termination. None of such events has occurred as of the date of this Proxy
Statement/Prospectus. Certain aspects of this fee arrangement could have the
effect of discouraging a third party from pursuing an acquisition transaction
involving Victoria even if such third party was prepared to pay a higher price
per share of Victoria Common Stock than provided for in the Merger Agreement.
49
<PAGE> 56
AMENDMENT AND WAIVER
The Merger Agreement may be amended by the parties thereto, by or pursuant
to action taken by their respective Boards of Directors, at any time before or
after approval thereof by the shareholders of Victoria, but, after such
approval, no amendment may be made which changes the ratios at which Victoria
Common Stock is to be converted into USF&G Common Stock as provided in the
Merger Agreement or which in any way materially adversely affects the rights of
such shareholders, without the further approval of such shareholders. The Merger
Agreement may not be amended except by an instrument in writing signed on behalf
of each of the parties to the Merger Agreement.
At any time prior to the Effective Date, Victoria, USF&G and Merger Sub may
(i) extend the time for the performance of any of the obligations or other acts
of the other parties, (ii) waive any inaccuracies in the representations and
warranties contained in the Merger Agreement or in any documents delivered
pursuant thereto and (iii) waive compliance with any of the agreements or
conditions contained in the Merger Agreement; provided, however, that no such
waiver shall materially adversely affect the rights of Victoria's and USF&G's
shareholders. Any agreement by Victoria, USF&G or Merger Sub to any such
extension or waiver shall be valid only if set forth in an instrument in writing
signed on behalf of such party. Victoria does not intend to resolicit
shareholder approval in connection with any amendment or waiver of the terms of
the Merger Agreement except as would be required by the foregoing terms of the
Merger Agreement.
DESCRIPTION OF USF&G AND MERGER SUB
USF&G
General. USF&G is a holding company engaged primarily in the insurance
business. USF&G Company, its principal subsidiary, founded in 1896, is the
twenty-fourth largest property-casualty insurer in the United States, based on
net premiums written for the year ended December 31, 1993. USF&G Company markets
commercial and personal insurance products, concentrating on targeted market
segments, through a distribution network of approximately 3,800 independent
agents. USF&G's life insurance subsidiary, F&G Life, markets life insurance and
annuity products through a network of wholesalers, brokers and specialty
marketing organizations. USF&G's premiums earned totaled approximately $2.4
billion for the year ended December 31, 1994. USF&G is incorporated in Maryland,
its principal executive offices are located at 100 Light Street, Baltimore,
Maryland 21202 and its telephone number is (410) 547-3000.
Property-Casualty Insurance. USF&G Company, which accounted for $2.3
billion (or 94%) of USF&G's 1994 premiums earned, writes both commercial and
personal insurance, as well as certain specialty lines of insurance. Commercial
lines, which accounted for 52% of 1994 property-casualty premiums earned,
includes property, auto, inland marine, workers' compensation and general and
umbrella liability coverage for businesses. In commercial lines, USF&G Company
targets small and middle market businesses nationwide through its independent
agency network. USF&G Company provides services to its agents and customers
through 30 branch offices, each of which has service teams providing policy
administration from underwriting through claims processing. Personal lines,
which accounted for 25% of 1994 property-casualty premiums earned, includes
auto, homeowners, watercraft and umbrella insurance for individuals and
families. Personal auto insurance represented 71% of personal lines premiums
earned in 1994. USF&G Company also markets certain specialty insurance lines,
including fidelity-surety insurance and reinsurance products, which accounted
for 6% and 17% of 1994 property-casualty premiums earned, respectively.
50
<PAGE> 57
The table below shows premiums earned and the statutory loss ratio by lines
of property-casualty insurance.
<TABLE>
<CAPTION>
1994 1993 1992
-------------------------- -------------------------- --------------------------
STATUTORY STATUTORY STATUTORY
PREMIUMS LOSS PREMIUMS LOSS PREMIUMS LOSS
EARNED % RATIO EARNED % RATIO EARNED % RATIO
-------- --- --------- -------- --- --------- -------- --- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
COMMERCIAL LINES
Auto....................... $ 380 17% 58.8 $ 399 17% 54.8 $ 442 18% 64.5
General Liability.......... 357 16 89.4 351 15 80.5 388 15 99.2
Property................... 326 14 71.8 321 14 60.4 332 13 69.5
Workers' Compensation...... 126 5 121.0 152 7 210.8 318 13 121.0
-------- --- --------- -------- --- --------- -------- --- ---------
Total Commercial Lines... 1,189 52 78.1 1,223 53 83.0 1,480 59 86.9
-------- --- --------- -------- --- --------- -------- --- ---------
FIDELITY/SURETY
Fidelity................... 17 1 29.6 18 1 55.7 19 1 24.6
Surety..................... 107 5 37.8 100 4 49.2 92 3 33.5
-------- --- --------- -------- --- --------- -------- --- ---------
Total Fidelity/Surety.... 124 6 36.7 118 5 50.2 111 4 32.0
-------- --- --------- -------- --- --------- -------- --- ---------
PERSONAL LINES
Auto....................... 410 18 66.5 504 22 70.3 551 22 73.6
Homeowners................. 126 5 107.3 149 6 73.3 184 7 102.2
Property................... 39 2 49.1 28 1 65.6 50 2 67.9
-------- --- --------- -------- --- --------- -------- --- ---------
Total Personal Lines..... 575 25 74.2 681 29 70.7 785 31 80.0
-------- --- --------- -------- --- --------- -------- --- ---------
ASSUMED REINSURANCE
Finite Risk................ 172 7 71.9 169 7 70.1 74 3 78.9
Traditional Risk........... 223 10 64.8 136 6 62.1 83 3 72.8
-------- --- --------- -------- --- --------- -------- --- ---------
Total Assumed
Reinsurance............ 395 17 67.9 305 13 67.3 157 6 76.9
-------- --- --------- -------- --- --------- -------- --- ---------
Total...................... $2,283 100% 73.1 $2,327 100% 75.4 $2,533 100% 82.0
========== ==== ========= ========== ==== ========= ========== ==== =========
</TABLE>
Life Insurance. F&G Life offers a variety of annuity and life insurance
products, primarily to individuals nationwide. In 1994, F&G Life accounted for
15% of USF&G's total revenues (which includes investment income) and 33% of its
total assets. F&G Life's principal products include (i) structured settlements
of USF&G Company claims, (ii) single premium deferred annuities sold through
financial institutions, brokers and independent agents, (iii) tax sheltered
annuities marketed primarily to teachers through a national wholesale
distribution network, and (iv) universal and term life policies sold through
independent agents.
The following table shows life insurance and annuity sales by product type.
<TABLE>
<CAPTION>
1994 1993 1992
---------------- ---------------- ----------------
PREMIUMS PREMIUMS PREMIUMS
AND AND AND
DEPOSITS % DEPOSITS % DEPOSITS %
-------- --- -------- --- -------- ---
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
PRODUCT TYPE
Structured Settlement
annuities...................... $ 88 31% $ 66 32% $ 37 24%
Single-premium deferred
annuities...................... 82 29 44 22 33 21
Tax-sheltered annuities.......... 63 22 35 17 -- --
Other annuities.................. 41 14 54 26 74 48
Life insurance................... 12 4 6 3 11 7
-------- --- -------- --- -------- ---
Total.......................... $286 100% $205 100% $155 100%
========= === ========= === ========= ===
</TABLE>
51
<PAGE> 58
Recent History. During the late 1980's, USF&G embarked on a
diversification effort, investing substantial amounts of capital and management
attention in noninsurance related ventures. Many of these ventures proved
unsuccessful, diverting resources from USF&G's core insurance operations. During
the same period, a significant portion of USF&G's investment portfolio was
invested in relatively high risk assets (non-investment grade bonds, equity
securities and real estate).
Norman P. Blake, Jr. was appointed Chairman, President and Chief Executive
Officer in November 1990 and immediately began the task of rebuilding USF&G. He
instituted a restructuring strategy that involved the following critical
elements: (i) focusing on core insurance operations while divesting and
liquidating non-strategic businesses; (ii) strengthening the balance sheet
through a combination of improving the capital base, repositioning the
investment portfolio and improving overall reserve strength; (iii) withdrawing
from unattractive state markets and product lines in order to improve
underwriting results; (iv) installing a new management team focused on
repositioning insurance operations; (v) lowering operational and financial
leverage; and (vi) reducing costs and increasing productivity. As a result,
USF&G's financial condition and profitability have significantly improved over
the last four years. Net income totaled $232 million in 1994, compared with $165
million in 1993, $28 million in 1992 and losses of $176 million and $569 million
in 1991 and 1990, respectively.
Since the end of 1990, significant steps were taken to implement this
restructuring strategy. These steps included the following:
- A new senior management team was recruited, with many positions being
filled by executives with proven track records in the insurance industry.
- Substantially all of the noninsurance financial services ventures were
discontinued. In total, USF&G divested or liquidated 13 operating
businesses in an effort to concentrate management and capital resources
on core insurance operations and eliminate the earnings drag associated
with nonstrategic operations.
- The capital position was improved primarily through the sale of $320
million (liquidation value) of convertible preferred stock in mid-1991.
- The investment portfolio was repositioned through the reduction of
relatively high risk investments (non-investment grade bonds, equity
securities and real estate) from 29% of invested assets at December 31,
1990 to 16% at December 31, 1994. In addition, the Corporation
repositioned its assets to better match liabilities and reduce
volatility. At December 31, 1994, 83% of USF&G's investment portfolio was
invested in fixed income securities, 93% of which were investment grade.
- Emphasis was placed on core insurance operations in favorable regulatory
environments. Selected lines of business, predominantly personal
automobile and workers' compensation insurance, were discontinued in
states where the regulatory environment provided little or no opportunity
for adequate pricing, or where the involuntary residual market load
undermined the ability to realize an adequate level of profitability.
- The ratio of debt to total capital was reduced from 39% at December 31,
1990 to 31% at December 31, 1994 and the ratio of property-casualty net
premiums written to surplus was reduced from 2.4x in the year ended
December 31, 1990 to 1.4x in the year ended December 31, 1994. This was
largely the result of USF&G's capital raising efforts in 1991, its paring
of unprofitable property-casualty premiums and its return to
profitability.
- Operating expenses were reduced significantly, predominantly as a result
of a 50% reduction in staffing levels from 12,500 employees at December
31, 1990 to 6,300 employees at December 31, 1994. Reductions were made
possible by the discontinuation of substantially all noninsurance
operations and the implementation of programs to improve operating
efficiencies in core insurance operations, including a reduction in the
number of full-service branch offices from 54 to 30.
- In 1994, USF&G commenced a capital strategy to refinance over $500
million of outstanding debt. The first step in this strategy was the
issuance of $245 million aggregate principal amount at maturity
52
<PAGE> 59
of zero coupon convertible notes (providing net proceeds of $122 million
to the Corporation), the net proceeds of which were used to redeem
outstanding higher coupon debt. In June 1994, USF&G issued $150 million
8 3/8% Senior Notes, providing proceeds of $147 million which was used to
pay down short-term corporate debt. In addition, in advance of the
expiration in March 1995 of USF&G's short-term bank credit facility, a
new $400 million three-year facility was negotiated and replaced the
prior facility effective in September 1994.
- Beginning in the third quarter of 1994 and ending in the first quarter of
1995, USF&G called for redemption all of the 3.8 million outstanding
shares of its $5 Series C Cumulative Convertible Preferred Stock (the
"Series C Preferred Stock") which had been issued in mid-1991 to
strengthen USF&G's capital position at the outset of its financial and
operational restructuring. As a result of the calls, over 93 percent of
the Series C Preferred Stock converted into 14.7 million shares of USF&G
Common Stock in accordance with the terms of the Series C Preferred
Stock. Pursuant to arrangements USF&G had previously entered into with an
unaffiliated financial institution, USF&G sold 716,600 shares of USF&G
Common Stock to such institution to fund a portion of the cash
redemptions resulting from those calls.
- In December 1994, USF&G announced its proposal to acquire Victoria and in
January 1995 it announced its agreement to acquire Discover Re Managers,
Inc., a company providing insurance and related services to the
alternative risk transfer market, for approximately $78.5 million of
USF&G Common Stock and options. These transactions are part of USF&G's
strategy to enhance shareholder value by leveraging its specialized
expertise in related insurance businesses.
- In April 1995, USF&G announced a reorganization of certain of its
property-casualty operations to better focus on agent and customer needs.
The most significant change was to reorganize management to form a
separate group combining personal lines and small business commercial
lines. This group, which was named the Family and Business Insurance
Group, will include the operations of Victoria after the Merger.
MERGER SUB
Merger Sub is a Delaware corporation recently formed by USF&G for the sole
purpose of facilitating the Merger. Merger Sub is a wholly-owned subsidiary of
USF&G with no assets (other than those received in connection with its initial
capitalization) or liabilities (other than those incurred in connection with its
incorporation). The principal executive offices of Merger Sub are located at c/o
USF&G Corporation, 100 Light Street, Baltimore, Maryland 21202 and its telephone
number is (410) 547-3000.
DESCRIPTION OF VICTORIA
GENERAL
Victoria is an insurance holding company, which, through its subsidiaries,
primarily the Insurance Subsidiary (together with Victoria, the "Company"),
specializes in the marketing and issuance of nonstandard private passenger
automobile insurance policies. The Company operates in 11 states and has
acquired licenses to issue insurance policies in another 18 states and the
District of Columbia. Nonstandard private passenger automobile insurance
currently accounts for over 99% of the Company's direct written premiums. The
Insurance Subsidiary is rated "A-" (Excellent) by A.M. Best, a nationally
recognized insurance statistical and rating service. An A.M. Best rating is
intended to provide an independent opinion of an insurer's ability to meet its
obligations to its policyholders over a long period of time, and should not be
considered an investment recommendation.
On July 1, 1994, Victoria acquired IAS in exchange for 421,600 shares of
Victoria Common Stock. IAS is an insurance rating software specialist with
revenues in 1994 of $6.1 million.
53
<PAGE> 60
NONSTANDARD PRIVATE PASSENGER AUTOMOBILE INSURANCE INDUSTRY
The nonstandard private passenger automobile insurance industry is a
segment of the automobile insurance industry which, in turn, is part of the
property-casualty insurance industry. Nonstandard automobile insurance companies
specialize in providing automobile insurance to individuals who are unable to
obtain preferred or standard insurance coverage due to their inability to meet
certain standard underwriting criteria based on factors such as age, type of
automobile, residence location and driving record. Such drivers generally are
charged higher premiums than preferred or standard risk drivers due to their
risk profiles and generally purchase policies with lower limits and shorter
terms than preferred or standard risk drivers.
COMPETITION
The Company is subject to strong competition. Nonstandard automobile
insurers generally compete on the basis of price, service to agencies and
policyholders, claims handling and financial stability. The Company competes
against national and regional firms, some of which are substantially larger and
have significantly greater financial resources than the Company. These and other
competitors could reduce their rates from time to time, as some have done in the
past and others are doing currently, in an attempt to increase market share.
While maintaining competitive rates, the Company attempts to distinguish itself
from its competitors primarily on the basis of superior service to its agencies
and policyholders.
REINSURANCE
The Company maintains two reinsurance agreements as part of a comprehensive
program to reduce its economic exposure. While reinsurance ceded reduces the
Company's exposure on individual risks, it also decreases the written premiums
retained by the Company by the amount of premiums ceded to the reinsurer.
Although the ceding of insurance does not discharge the Company from its primary
liability to the policyholder, the insurance company that assumes the coverage
assumes the related liability.
Reinsurance relating to the Company's nonstandard automobile insurance
policies currently consists of an excess of liability loss treaty and an excess
catastrophe treaty. The excess of liability loss treaty allows the Company to
limit its risks with respect to certain liability losses by ceding to the
reinsurer liability losses in excess of $50,000 per risk (prior to July 1, 1993,
ceded losses were those in excess of $25,000 per risk). The excess catastrophe
treaty allows the Company to limit its risk with respect to certain physical
damage losses by ceding to several reinsurers 97.5% of losses in excess of
$250,000, up to a maximum of $750,000 per any one loss occurrence.
From July 1, 1992 through June 30, 1993, the Company was party to a quota
share treaty under which 10% of its written nonstandard automobile premium and
incurred losses were ceded to a reinsurer.
LOSS AND LAE RESERVES
Victoria's consolidated financial statements include the estimated
liability for unpaid losses and loss adjustment expenses ("LAE") of Victoria's
insurance subsidiaries. Reserves for unpaid losses covered by the insurance
policies consist of reported losses and incurred but not yet reported ("IBNR")
losses. These reserves are determined by individual claims adjuster estimates as
well as the use of actuarial and statistical procedures and they represent
undiscounted estimates of the ultimate cost of all unpaid losses and LAE
incurred through year end. Although management uses many resources to calculate
reserves, a degree of uncertainty is inherent in all actuarial estimates.
Therefore, no precise method for determining ultimate losses and LAE exists.
These estimates are subject to the effect of future claim settlement trends and
are continually reviewed and adjusted (if necessary) as experience develops and
new information becomes known. Any such adjustments to net reserves are
reflected in current operations.
The first table below provides a reconciliation of beginning and ending
loss and LAE reserves for 1992 through 1994. The second table below shows the
reserve development. During the years 1989 to 1991, Victoria experienced
deficiencies predominantly due to inadequacies in the reserves for LAE. The LAE
reserves are set as a percentage of loss reserves. The most significant
deficiencies emerged for 1990 and 1991. While the
54
<PAGE> 61
nonstandard automobile loss reserves (which comprise the majority of total
reserves) were within 1% of adequacy for these years, the reserves for LAE were
deficient by more than $800,000 in 1990 and $750,000 in 1991. In response to
this trend, in 1992 Victoria increased LAE reserves to 16.7% of outstanding loss
reserves (from 12.5% in 1990 and 14.8% in 1991). In addition, aggressive
measures were taken to prudently reduce LAE while maintaining a high level of
claims handling service. These measures included increasing the experience level
of the Company's claims department personnel, implementing the first phase of a
new claims system, establishing predetermined fee arrangements with defense
attorneys in Ohio and Tennessee, engaging national appraisal firms at negotiated
fees and increasing utilization of Company field appraisers.
During 1993 and 1994, these LAE reduction measures were developed further
as additional phases of the claims system were implemented, attorney and
independent appraiser agreements were continued, and more Company field
appraisers were hired. Furthermore, from the reserve-estimating perspective, LAE
development was reviewed by accident year. Victoria determined that the adverse
development in accident years 1989 through 1991 was likely to continue and that
those years, due to the extent to which they had already developed, would
experience limited benefit from the recently implemented LAE reduction measures
discussed above. These facts, coupled with the longer time period necessary to
fully develop LAE relative to losses, indicated that the older accident years
would require additional LAE reserve strengthening. Therefore, during 1993,
Victoria increased LAE reserves to 21.5% of loss reserves, and in 1994, further
strengthened the LAE reserve to 23.5% of loss reserves, based on accident year
development. Management believes this ratio will decline over time as more
development comes from recent years which are more heavily impacted by
Victoria's LAE reduction efforts and therefore require lower LAE reserves.
During 1994, the December 31, 1993 year end nonstandard automobile loss reserves
experienced a 3% or $657,000 redundancy. Due to the relatively short development
period on 1993 reserves and the imprecision in actuarial methods, a degree of
uncertainty remains on the estimate of ultimate loss costs. Based on the
foregoing, management determined not to realize the benefit of such redundancy
in current operations but rather to strengthen the loss reserves as of December
31, 1994 by an amount equal to the redundancy.
Within the constraints of the precision of actuarial methods, it is
Victoria's opinion that the reported loss and LAE reserves at December 31, 1994
are adequate to cover the ultimate cost of policy benefits and related expenses
incurred, and that the estimates shown for prior years approximate ultimate
claim costs.
The following table provides a reconciliation of beginning and ending loss
and LAE reserves for the periods indicated (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Net reserves at beginning of year............................. $21,572 $16,084 $ 9,377
Add: Provisions for estimated losses and LAE for claims
occurring during Current year............................ 36,100 34,353 26,074
Increase (decrease) in estimated losses and LAE for claims
occurring in prior years................................. (657) (160) 175
------- ------- -------
35,443 34,193 26,249
Less: Payments for losses and LAE for claims occurring during:
Current year................................................ 20,713 18,850 13,540
Prior years................................................. 12,390 9,675 6,002
------- ------- -------
33,103 28,525 19,542
------- ------- -------
Net reserves at end of year................................... $24,092 $21,752 $16,084
======= ======= =======
</TABLE>
55
<PAGE> 62
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSES DEVELOPMENT (IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986
------- ------- ------- ------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net reserves for unpaid losses
and LAE..................... $24,092 $21,752 $16,084 $ 9,377 $6,454 $5,742 $3,959 $2,742 $1,037
Cumulative amount of liability
paid through:
One year later............ 12,389 9,675 6,002 4,020 4,022 2,322 1,493 680
Two years later........... 13,417 8,742 5,952 5,301 3,211 2,112 867
Three years later......... 9,808 7,028 5,848 3,492 2,334 974
Four years later.......... 7,241 6,123 3,649 2,384 991
Five years later.......... 6,141 3,706 2,410 1,018
Six years later........... 3,701 2,421 1,036
Seven years later......... 2,420 1,035
Eight years later......... 1,035
The retroactively re-estimated
net liability for unpaid
claims/claim adjustment
expenses as of:
End of year............... 24,092 21,752 16,084 9,377 6,454 5,742 3,959 2,742 1,037
One year later............ 21,095 15,923 9,551 6,809 6,007 3,517 2,386 977
Two years later........... 15,862 10,334 7,189 6,082 3,668 2,348 1,001
Three years later......... 10,264 7,403 6,149 3,663 2,412 1,001
Four years later.......... 7,408 6,203 3,685 2,419 1,013
Five years later.......... 6,183 3,706 2,423 1,018
Six years later........... 3,701 2,421 1,036
Seven years later......... 2,420 1,035
Eight years later......... 1,035
------- ------- ------- ------- ------ ------ ------ ------ ------
Net cumulative (deficiency)
redundancy.................. $ -- $ 657 $ 222 $ (887) $ (954) $ (441) $ 258 $ 322 $ 2
======== ======== ======== ======== ====== ====== ====== ====== ======
Gross Liability --
End of Year................. $24,522 $22,431 $17,156
Reinsurance Recoverable....... 430 679 1,072
------- ------- -------
Net Liability -- End of
Year........................ $24,092 $21,752 $16,084
======== ======== ========
Gross re-estimated liability
--
Latest...................... $21,842 $17,351
Re-estimated recoverable --
Latest...................... 747 1,428
------- -------
Net re-estimated liability --
Latest...................... $21,095 $15,923
======== ========
Gross Cumulative redundancy
(deficiency)................ $ 589 $ (195)
</TABLE>
INVESTMENTS
Insurance company investments must comply with applicable laws and
regulations which prescribe the type, quality and concentration of investments.
In general, these laws and regulations permit investment, within specified
limits and subject to certain qualifications, in federal, state and municipal
obligations, corporate bonds, preferred and common equity securities, real
estate mortgages and real estate.
The Company's principal investment objective is the preservation of its
capital. The Company maintains an investment portfolio consisting predominantly
of high grade securities, as evidenced by the fact that as of December 31, 1994
approximately 99.0% of the Company's fixed income securities investment
portfolio had an investment rating of "A" or better from Standard & Poor's. An
"A" rating or better means that the security was issued by a company which, in
the opinion of Standard & Poor's, has an extremely strong, very strong or strong
capacity to pay interest and repay principal.
56
<PAGE> 63
GOVERNMENT REGULATION
The Insurance Subsidiary is subject to regulation by the insurance
regulatory authorities in Ohio, the state in which it is domiciled, and the
insurance regulatory bodies in the other jurisdictions in which it is licensed
to sell insurance. The primary purpose of such regulation is to provide
safeguards for policyholders rather than to protect the interests of
shareholders. The insurance laws of various jurisdictions establish regulatory
agencies with broad administrative powers relating to the licensing of insurers
and their agents, the regulation of trade practices, transactions with
affiliates, investments, deposits of securities, the form and content of
financial statements, accounting practices, reporting requirements, rates
charged by insurance companies, sales literature, insurance policy forms and the
maintenance of specified reserves and capital and surplus. Some states have
enacted laws or regulations which may restrict an insurer's underwriting
discretion, including the ability to reject insurance coverage applications.
Property-casualty insurance companies must maintain reasonable ratios
between net written premiums and statutory surplus in order to be consistent
with sound underwriting practices and requirements of insurance regulators and
rating agencies. Accordingly, a property-casualty insurance company's volume of
net written premiums is limited by the amount of its statutory surplus. As the
premium volume of the Insurance Subsidiary grows, its statutory surplus must
also increase so that the ratio of net written premiums to statutory surplus
does not become too high. The Company's objective is generally to maintain the
ratio of net written premiums to statutory surplus for the Insurance Subsidiary
within the maximum guideline of 3 to 1 set by the NAIC. As of December 31, 1994
such ratio for the Insurance Subsidiary was 2.1 to 1.
As part of its routine regulatory oversight process, the Ohio Department of
Insurance periodically conducts detailed examinations of the books, records and
accounts of insurance companies domiciled in Ohio. The Ohio Department of
Insurance is currently conducting its routine triennial examination of the
Company for the period ended December 31, 1993.
Most states have enacted legislation regulating insurance holding
companies. The insurance holding company laws and regulations vary by state, but
generally require an insurance holding company and its insurance company
subsidiary or subsidiaries licensed to do business in the state to register and
file certain reports with the regulatory authorities, including information
concerning capital structure, ownership, financial condition, certain
intercompany transactions and general business operations. State insurance laws
also require prior notice or regulatory agency approval of certain material
transactions between affiliates within the holding company structure.
As a holding company, Victoria's ability to meet debt service obligations
and pay operating expenses depends on the receipt of sufficient funds, primarily
through dividends and management fees, from the Insurance Subsidiary. Ohio
insurance laws limit the amount that can be paid as a dividend or other
distribution in any given year without prior regulatory approval. Under current
laws and regulations, the Insurance Subsidiary could pay aggregate dividends of
approximately $2.7 million without regulatory approval on the basis of its 1994
statutory financial statements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources." A change in the laws or regulations relating to the payment of
dividends could reduce the amount of dividends which may be paid by the
Insurance Subsidiary without prior regulatory approval.
The Ohio insurance holding company law also provides that no person may
acquire, directly or indirectly, control of an insurance company domiciled in
Ohio, or an insurance holding company whose insurance subsidiary is domiciled in
Ohio, without prior regulatory approval. A purchaser of 10% of the voting stock
of an insurance holding company is rebuttably presumed to have acquired control
of that company and is required to obtain the approval of the Ohio
Superintendent of Insurance before consummating such purchase.
The NAIC facilitates the regulation of multi-state companies through
uniform reporting requirements, standardized procedures for financial
examinations, and uniform regulatory procedures embodied in model acts and
regulations. The NAIC has been in the process of developing property-casualty
risk based capital (RBC) standards that relate an insurer's reported statutory
surplus to the risk inherent in its overall
57
<PAGE> 64
operations. The RBC formula uses the statutory annual statement to calculate the
minimum indicated capital level to support asset (investment and credit) risk
and underwriting (loss reserves, premiums written, and unearned premium) risk.
The model law calls for various levels of regulatory action based on the
magnitude of an indicated RBC capital deficiency, if any. The property-casualty
model was approved by the NAIC during 1994, effective for 1994 annual statement
filings. As supported by the fact that its RBC is approximately 3.9 times
greater than the NAIC authorized control level, the Insurance Subsidiary
currently believes that its capital levels are sufficient to support the level
of risk inherent in its operations.
EMPLOYEES
At December 31, 1994, the Company had 275 employees. The Company believes
that employee relations are satisfactory. The Company currently does not
contribute to any post-retirement benefit plans for its employees.
PROPERTIES
The Company conducts its insurance operations from corporate headquarters
located in Cleveland, Ohio and a claims office located in Cincinnati, Ohio under
operating leases which expire in 1999 and 1996, respectively. The lease for the
Cleveland corporate headquarters is for approximately 22,000 square feet and is
cancelable in 1995 and each year thereafter if the building cannot provide
satisfactory expansion areas. Victoria has options to rent additional space and
also has options to extend the term of the lease for three extension periods of
three years each. Victoria has a 19.9% limited partnership interest in the
office building which contains its corporate headquarters. Victoria intends to
enter into a three year extension of the lease prior to the Effective Date. See
"The Merger -- Interests of Certain Persons in the Merger." The lease for the
Cincinnati claims office is for approximately 2,100 square feet of standard
commercial office space. IAS conducts its operations from office space located
in Beachwood, Ohio under two leases which expire in 1998. The leases are for
approximately 27,000 square feet of standard commercial office space.
LEGAL PROCEEDINGS
There are no material legal proceedings pending, nor any material
proceedings known by the Company to be contemplated by governmental authorities
or other parties, to which the Company is or might become a party. The Company
continually engages in defending insurance claims, which is an ordinary part of
its business. Management does not believe that any of such claims will
materially impact the Company's liquidity or results of operations.
OWNERSHIP OF VICTORIA COMMON STOCK
The following table sets forth, as of April 12, 1995, certain information
regarding the beneficial ownership of shares of Victoria Common Stock by the
members of the Victoria Board, Victoria's Chief Executive Officer and the other
executive officers or former executive officers whose salary and bonus for 1994
exceeded
58
<PAGE> 65
$100,000, all directors and executive officers as a group, and beneficial owners
of more than 5% of the shares of Victoria Common Stock.
<TABLE>
<CAPTION>
NAME OF NUMBER OF SHARES PERCENT OF
BENEFICIAL OWNER BENEFICIALLY OWNED CLASS (1)
- ------------------------------------------------------------- ------------------ ----------
<S> <C> <C>
Jeffrey A. Cole (2).......................................... 217,544 5.4%
Kenneth R. Rosen (3)......................................... 212,722 5.1%
Alvin A. Siegal (4).......................................... 151,996 3.8%
Howard M. Zelikow............................................ 59,000 1.5%
Milton Fromson (5)........................................... 46,151 1.2%
Richard D. Margolis (6)...................................... 10,649 *
Dennis L. Abrahams (7)....................................... 16,278 *
Tab A. Keplinger (8)......................................... 8,147 *
Directors and executive officers as a group (8 persons)
(9)........................................................ 722,487 17.5%
Massachusetts Fiduciary Advisors, Inc. (10) (12)............. 308,000 7.7%
Century Capital Management, Inc. (11) (12)................... 200,000 5.0%
Rockefeller & Co., Inc. (13)................................. 258,400 6.5%
Bear, Stearns & Co., Inc. (14)............................... 200,180 5.0%
<FN>
- ---------------
* Less than 1%
</TABLE>
(1) Percent of class is calculated on the basis of applicable rules of the
Commission, which require for the purposes of calculating beneficial
ownership that, for each person for whom the calculation is made, presently
exercisable options to acquire shares of Common Stock held by that person
(which include options so held that become exercisable within 60 days) be
treated as outstanding shares.
(2) Includes (i) 8,000 shares held by the Joseph E. Cole II, 1986 Trust (the
"Trust") and (ii) 7,200 shares held by members of Mr. Cole's family. Mr.
Cole disclaims beneficial ownership of the shares held by the Trust and
members of his family.
(3) Includes (i) 840 shares held by Mr. Rosen's spouse, (ii) 440 shares held by
Mr. Rosen as trustee for his minor child, (iii) 478 shares held in the
Victoria Financial Corporation 401(k) Plan (the "401(k) Plan") for the
benefit of his spouse, (iv) 12,500 shares held by Mr. Rosen and his spouse
as trustees of the Sollie Rosen Memorial Foundation and (v) presently
exercisable options to purchase 109,575 shares. Mr. Rosen disclaims
beneficial ownership of the shares held by his spouse, held as trustee for
his minor child, held for the benefit of his spouse in the 401(k) Plan and
held in the Sollie Rosen Memorial Foundation.
(4) Includes (i) 3,556 shares held by The Leader Mortgage Company ("Leader"), of
which Mr. Siegal is Chairman of the Board and majority stockholder, but
excludes shares held by other employees of Leader, (ii) 18,800 shares held
by Mr. Siegal's spouse and (iii) 117,305 shares held by Mr. Siegal's spouse
as trustee of the Alvin A. Siegal Gift Trust. Mr. Siegal disclaims
beneficial ownership of shares held by Leader, employees of Leader, his
spouse, and his spouse as trustee of the aforementioned Gift Trust.
(5) Includes (i) 29,071 shares held by the Milton Fromson Shearson Individual
Retirement Account, (ii) 200 shares held by Mr. Fromson's spouse and (iii)
450 shares held by his spouse's Individual Retirement Account. Mr. Fromson
disclaims beneficial ownership of the shares held by the aforementioned
Individual Retirement Accounts and by his spouse.
(6) Includes 800 shares held by Mr. Margolis' spouse, as to which shares Mr.
Margolis disclaims beneficial ownership.
(7) Includes (i) presently exercisable options to purchase 13,999 shares and
(ii) 279 shares held in the 401(k) Plan. Mr. Abrahams was an executive
officer of Victoria until October 31, 1994, at which time he left the employ
of Victoria.
59
<PAGE> 66
(8) Includes (i) presently exercisable options to purchase 3,066 shares and (ii)
214 shares held in the 401(k) Plan.
(9) Includes presently exercisable options and indirect ownership interests as
described above, including those of Mr. Abrahams, who is no longer an
executive officer of Victoria.
(10) Massachusetts Fiduciary Advisors, Inc. ("MFA") is a registered investment
adviser. The business address of the beneficial owner is One Liberty
Square, Boston, Massachusetts 02019.
(11) Century Capital Management, Inc. ("CCM") is a registered investment
adviser. The business address of the beneficial owner is One Liberty
Square, Boston, Massachusetts 02019.
(12) MFA and CCM have informed Victoria that they constitute a group owning more
than 5% of the Common Stock.
(13) Consists of the shares held by three limited partnerships for which
Rockefeller & Co., Inc., a registered investment adviser, is the investment
manager. The business address of the beneficial owner is 30 Rockefeller
Plaza, New York, New York 10112. Each of the limited partnerships,
individually, owns less than 5% of the Common Stock.
(14) Bear, Stearns & Co., Inc. is a securities broker/dealer. The business
address of the beneficial owner is 245 Park Avenue, New York, New York
10167.
DIRECTORS AND EXECUTIVE OFFICERS
Directors. Set forth below is certain information regarding the members of
Victoria.
JEFFREY A. COLE, 54, has been a director of Victoria since 1976 and
Chairman of the Board since 1981. Mr. Cole is the Chairman, Chief Executive
Officer and a director of Cole National Corporation and has been
principally employed by Cole National Corporation and its affiliates since
1977. He is also a director of American Consumer Products, Inc., Hartmarx
Corporation and Dynair Electronics, Inc.
KENNETH R. ROSEN, 45, has been President, Chief Executive Officer and a
director of Victoria since 1984. Mr. Rosen is a member of the American
Academy of Actuaries and an associate in the Casualty Actuarial Society.
ALVIN A. SIEGAL, 71, has been a director of Victoria since 1976. Mr. Siegal
is Chairman of the Board of The Leader Mortgage Company and was its
President from 1963 through 1983. He is also a director of American
National Bank.
MILTON FROMSON, 71, has been a director of Victoria since 1976. Mr. Fromson
was President of Fromson Insurance Agency, Inc. from 1949 to 1991 and has
been the owner of M.G.F. Insurance, a sole proprietorship insurance agency,
since 1986.
RICHARD D. MARGOLIS, 56, has been Secretary and a director of Victoria
since 1983. Mr. Margolis has been a partner in the law firm of Benesch,
Friedlander, Coplan & Aronoff since 1968. He is also a director of Penril
DataComm Networks, Inc.
HOWARD M. ZELIKOW, 61, has been a director of Victoria since June 1991. Mr.
Zelikow has been a management and financial consultant doing business as
ZKA Associates since 1987. He is also a director of Capital Guaranty
Corporation.
Executive Officers. Set forth below is certain information regarding the
current executive officers of Victoria who are not directors. Executive officers
are elected annually by, and serve at the pleasure of, the Victoria Board.
TAB A. KEPLINGER, 34, joined Victoria as Assistant Vice President in June
1990 and was named Vice President -- Finance in February 1994 and Chief
Financial Officer in August 1993. Prior to June 1990, Mr. Keplinger was
employed by KPMG Peat Marwick as a senior audit manager after joining that
firm as an assistant accountant in June 1983.
60
<PAGE> 67
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth certain
information regarding the aggregate compensation paid by Victoria during the
three fiscal years ended December 31, 1994 to its Chief Executive Officer and
the other executive officers whose salary and bonus for 1994 exceeded $100,000.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------------------
AWARDS
ANNUAL COMPENSATION ----------------------- PAYOUTS
--------------------------------------- RESTRICTED -------
OTHER ANNUAL STOCK OPTIONS/ LTIP
NAME AND PRINCIPAL FISCAL COMPENSATION AWARD(S) SARS(1) PAYOUTS
POSITION YEAR SALARY($) BONUS($) ($) ($) (#) ($)
- ------------------------ ------ --------- -------- ------------ ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Kenneth R. Rosen........ 1994 $286,250 $275,000(2) (3) $ 0 40,000 $ 0
President and Chief 1993 250,982 140,000 (3) 0 0 0
Executive Officer 1992 204,250 150,379 (3) 0 47,155 0
Dennis L. Abrahams...... 1994 $148,000 $ 0 (3) $ 0 10,000 $ 0
Senior Vice President(5) 1993 140,397 80,000 (3) 0 0 0
1992 118,333 84,000 (3) 0 4,000 0
Tab A. Keplinger........ 1994 $103,116 $130,000(2) (3) $ 0 5,000 $ 0
Chief Financial Officer 1993 92,073 17,500 (3) 0 1,250 0
1992(6) N/A N/A N/A N/A N/A N/A
<CAPTION>
ALL OTHER
NAME AND PRINCIPAL COMPENSATION
POSITION ($)(4)
- ------------------------ ------------
<S> <C>
Kenneth R. Rosen........ $7,247
President and Chief 2,897
Executive Officer 5,045
Dennis L. Abrahams...... $2,480
Senior Vice President(5) 1,691
2,286
Tab A. Keplinger........ $1,628
Chief Financial Officer 1,309
N/A
</TABLE>
- ---------------
(1) No stock appreciation rights have been granted by Victoria during the three
fiscal years ended December 31, 1994.
(2) The Victoria Board awarded Mr. Rosen a regular bonus for 1994 of $150,000 in
connection with Victoria's performance in 1994 and the acquisition of IAS.
The Victoria Board also awarded Mr. Rosen a bonus of $125,000 in connection
with the execution of the Merger Agreement. Similarly, the Victoria Board
awarded Mr. Keplinger a regular bonus for 1994 of $105,000 relating to
Victoria's performance in 1994, the acquisition of IAS, and Mr. Keplinger's
assuming responsibilities of Victoria's former senior vice president. The
Victoria Board also approved a special bonus of $25,000 paid in 1995 to Mr.
Keplinger for his extraordinary commitment to Victoria, including his
efforts in connection with the merger negotiations.
(3) Victoria provided its executive officers with certain perquisites which in
no individual case had an aggregate incremental cost to Victoria which
exceeded the lesser of $50,000 or 10% of such executive officer's total
salary and bonus.
(4) Consists of premiums paid by Victoria for term life and disability insurance
policies.
(5) Mr. Abrahams was an executive officer of Victoria until October 31, 1994,
after which time he received severance payments. Amounts disclosed include
payments made through December 31, 1994. Under the terms of his severance
agreement he will receive his salary and benefits through July 31, 1995. The
aggregate amount of his salary for the severance period will be $112,500.
(6) Disclosure for Mr. Keplinger is limited to 1994 and 1993 because prior to
those years his salary and bonus did not exceed $100,000.
61
<PAGE> 68
<TABLE>
Stock Option Grants. The following table sets forth information concerning
Victoria Options granted in 1994 to Victoria's Chief Executive Officer and the
other executive officers whose salary and bonus for 1994 exceeded $100,000.
<CAPTION>
POTENTIAL
REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
- -------------------------------------------------------------------------- ANNUAL RATES OF
PERCENT OF STOCK PRICE
TOTAL OPTIONS APPRECIATION
GRANTED TO EXERCISE OR FOR OPTION TERM
NUMBER OF EMPLOYEES BASE PRICE ---------------------------------
NAME OPTIONS GRANTED IN FISCAL YEAR ($/SHARE) EXPIRATION DATE 5%($) 10%($)
- ---------------------- --------------- -------------- ------------ ------------------ ----------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth R. Rosen....... 40,000(1) 22.8% $ 9.00 February 8, 2001 $ 146,556 $ 341,528
Dennis L. Abrahams..... 10,000(2) 5.8% $ 8.75 February 22, 2001 $ 35,621 $ 83,011
Tab A. Keplinger....... 5,000(3) 2.9% $ 8.75 February 22, 2001 $ 17,811 $ 41,506
<FN>
- ---------------
(1) Consists of non-qualified stock options exercisable for shares of Victoria
Common Stock as follows: 13,333 shares after two years from the date of
grant; an aggregate of 26,666 shares after three years from the date of
grant; and all of the shares after five years from the date of grant.
(2) Consists of non-qualified stock options exercisable for shares of Victoria
Common Stock as follows: 3,333 shares after two years from the date of
grant; an aggregate of 6,666 shares after three years from the date of
grant; and all of the shares after five years from the date of grant. Mr.
Abrahams' unexercised options will not become exercisable because they will
not vest prior to the expiration of his severance period.
(3) Consists of non-qualified stock options exercisable for shares of Victoria
Common Stock as follows: 1,666 shares after two years from the date of
grant; 3,332 shares after three years from the date of grant; and all of the
shares after five years from the date of the grant.
</TABLE>
Stock Option Exercises and Fiscal Year End Option and Stock Appreciation
Right Values. The following table sets forth information on Victoria Options
exercised in 1994 by Victoria's Chief Executive Officer and the other executive
officers whose salary and bonus for 1994 exceeded $100,000 and the Victoria
Options and stock appreciation rights held by such persons at December 31, 1994.
No stock appreciation rights were exercised in 1994.
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
AT AT
YEAR-END(#) YEAR-END($)
------------- -------------
SHARES ACQUIRED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) VALUE REALIZED ($) UNEXERCISABLE UNEXERCISABLE
- ------------------------ ---------------- ------------------ ------------- -------------
<S> <C> <C> <C> <C>
Kenneth R. Rosen......... 0 N/A 127,575(1) $ 1,010,240
84,247(2) 204,600
Dennis L. Abrahams(3).... 0 N/A 13,999(2) $ 94,461
16,001(2) 62,739
Tab A. Keplinger......... 0 N/A 2,666(2) $ 19,995
7,534(2) 25,630
<FN>
- ---------------
(1) Consists of options to purchase 109,575 shares and 18,000 stock appreciation
rights exercisable at December 31, 1994.
(2) Consists of options.
(3) Mr. Abrahams' unexercisable options will not become exercisable because they
will not vest prior to the expiration of his severance period.
</TABLE>
Compensation of Directors. Victoria pays directors' fees as follows: (i)
$40,000 per year to the Chairman of the Board of Directors; (ii) $15,000 per
year to the Chairman of the Executive Committee; and
62
<PAGE> 69
(iii) $5,000 per year to the other directors except those directors who are
employees of Victoria or who receive other payments from Victoria. Directors'
fees are paid in quarterly installments.
In accordance with Victoria's director compensation policy, in 1994, Mr.
Cole, as Chairman of the Board, received $40,000, Mr. Siegal, as Chairman of the
Executive Committee, received $15,000 and Mr. Fromson received $5,000. The other
directors, Mr. Rosen (an employee), Mr. Margolis (whose law firm serves as
counsel to Victoria) and Mr. Zelikow (who serves as a management and financial
consultant to Victoria), did not receive directors' fees in 1994.
In February 1994, Mr. Cole was granted options to purchase 15,000 shares of
Victoria Common Stock at a price of $9.00 per share, which was the fair market
value of the Victoria Common Stock as of the date of the grant. In addition,
pursuant to the 1994 Non-Employee Directors' Stock Option Plan, the following
stock options were granted in February 1994 at a price of $9.00 per share, which
was the fair market value of the Victoria Common Stock as of the date of the
grant: Mr. Cole -- options to purchase 1,000 shares; Mr. Siegal -- options to
purchase 6,000 shares; Mr. Fromson -- options to purchase 6,000 shares; Mr.
Margolis -- options to purchase 6,000 shares; and Mr. Zelikow -- options to
purchase 1,000 shares.
In January 1995, again under the 1994 Non-Employee Directors' Stock Option
Plan, Messrs. Cole, Siegal, Fromson, Margolis and Zelikow each were granted
options to purchase 1,000 shares of Victoria Common Stock each at fair market
value. However, these options will be null and void and of no force and effect
upon consummation of the Merger.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information contained in this discussion should be read in conjunction
with, and is qualified in its entirety by reference to, the Consolidated
Financial Statements and Notes thereto of Victoria contained in this Proxy
Statement/Prospectus.
OVERVIEW
The Company entered the nonstandard private passenger automobile insurance
market in January 1986, when it began writing such insurance in Ohio.
Subsequently, the Company commenced operations in ten additional states and has
acquired licenses to issue insurance policies in another 18 states and the
District of Columbia. In the second quarter of 1994, the Company commenced
operations in the State of Mississippi. The Company limits geographic expansion
in any year to entrance into one or two new states. Initially, when the Company
enters a new state, higher loss ratios are expected due to greater uncertainty
in both pricing accuracy and the agency selection process. The higher loss
ratios are controlled by limiting sales volume until enough actuarial
information has been collected to better position the product. Once enough
actuarial information is gathered, the Company uses these new states to spread
geographic risk and sustain sales volume.
During the third quarter of 1993, to increase capital, Victoria completed a
public offering pursuant to which it issued 1,012,000 common shares at $12 per
share. Victoria received, net of the underwriting discount and related expenses,
$10.6 million for the common shares issued.
During the third quarter of 1992, the Insurance Subsidiary entered into a
quota share reinsurance agreement which required the ceding of 10% of its
unearned premium reserves in force as of July 1, 1992 and in general required it
to cede 10% of direct written premiums generated after July 1, 1992. Effective
July 1, 1993, the Insurance Subsidiary terminated the quota share reinsurance
agreement.
On July 1, 1994, Victoria acquired IAS of Beachwood, Ohio in exchange for
421,600 shares of common stock. IAS is an insurance rating software specialist,
with revenues in 1994 of $6.1 million.
On December 18, 1994, Victoria entered into the Merger Agreement with USF&G
and a wholly-owned subsidiary of USF&G (as amended February 9, 1995, making
technical changes) pursuant to which Victoria will become a wholly-owned
subsidiary of USF&G. In the Merger, all of Victoria's outstanding shares of
63
<PAGE> 70
common stock (other than shares held by Victoria and shares held by USF&G or
subsidiaries of USF&G, all of which will be canceled) will be converted into
shares of common stock of USF&G. The Merger is subject to approval by Victoria's
stockholders and certain regulatory authorities. Management anticipates that the
Merger will be consummated during the second quarter of 1995.
During the fourth quarter, Victoria incurred approximately $360,000 of
costs in connection with the Merger. At December 31, 1994, these costs have been
deferred and are included in other assets and will be expensed, along with any
additional transaction related expenses incurred during 1995, upon the
completion or termination of the Merger.
RESULTS OF OPERATIONS
Year ended December 31, 1994 versus year ended December 31, 1993.
Written Premiums. Direct written premiums decreased 7.6% to $50.7 million
for the year ended December 31, 1994 compared to $54.8 million for the year
ended December 31, 1993. Net written premiums for the same periods in 1994 and
1993 were $50.1 million and $53.3 million, respectively, representing a decrease
of 6.0%. The decrease in direct written premiums during 1994 resulted primarily
from pricing competition in certain of the Company's markets.
Revenues. Total revenues, excluding realized gains (losses) on security
sales, for the year ended December 31, 1994 and the year ended December 31, 1993
were $59.0 million and $52.5 million, respectively, representing an increase of
12.3%. The five components of the Company's revenues are net earned premiums,
net software systems and service revenue, net investment income, other revenues,
and net realized gains (losses) on security sales.
Net earned premiums for the year ended December 31, 1994 and the year ended
December 31, 1993 were $51.3 million and $48.8 million, respectively,
representing an increase of 5.1%. Because premiums are earned over the term of
the policies, changes in net earned premiums lag corresponding changes in direct
written premiums. The 5.1% increase in the Company's net earned premiums for
1994 is primarily attributable to a 22.8% increase in the Company's net written
premiums for the year ended December 31, 1993.
Net software systems and service revenues for 1994 were $3.0 million and
relate to the activities of IAS and are primarily comprised of sales of
insurance rating packages to insurance agencies and contracts with insurance
companies to develop specialized computer systems.
Net investment income, excluding gains on sales of securities, for the year
ended December 31, 1994 and the year ended December 31, 1993 was $2.5 million
and $1.9 million, respectively, representing an increase of 31.5%. The increase
is attributable to the proceeds from the 1993 public offering, completed in the
third quarter of 1993, being invested for an entire year during 1994, and due to
higher prevailing interest rates. In addition, the proceeds from the 1993 public
offering caused the average balance of the Company's investments to increase
from $42.7 million in 1993 to $50.7 in 1994. Because the Company's most
important investment objective is the preservation of capital, substantially all
of the Company's investments are in a portfolio of investment grade, short and
intermediate term fixed income securities.
Other revenues for the year ended December 31, 1994 and the year ended
December 31, 1993 were $2.1 million and $1.9 million, respectively, representing
an increase of 14.1%. Other revenues consist of fees assessed on the installment
payments of insurance policies. The total amount of revenues generated by these
fees is a function of premium volume, the payment plan chosen by the
policyholders and the amount of each fee. The increase in other revenues was a
result of an increase in net earned premiums, additional billing options made
available to the policyholders which increased the number of installment
payments upon which the fees were assessed, and selective fee increases.
Expenses. The loss and LAE ratios for the year ended December 31, 1994 and
the year ended December 31, 1993 were 69.1% and 70.2%, respectively,
representing a decrease of 1.6%. The improvement during 1994 was due to
aggressive LAE reduction measures, improved claims handling and disciplined
pricing and actuarial methods.
64
<PAGE> 71
Losses and LAE include claims paid, settlement costs and changes in loss
and LAE reserves. The changes in loss and LAE reserves include changes in
estimates used to determine such reserves. In connection with the determination
of the reserves, management uses historical data and current business conditions
to formulate estimates, including assumptions related to the ultimate cost to
settle claims. These estimates by their nature are subject to uncertainties.
During the years 1989 through 1991, the Company experienced some reserve
deficiencies, predominantly due to inadequate estimates of the LAE reserves
resulting from limited historical data relative to claims settlement. In
response to this, the Company strengthened the LAE reserves in subsequent
periods, including the year ended December 31, 1994. As a result, LAE reserves
as a percentage of outstanding loss reserves increased from 16.7% at December
31, 1992 to 23.5% at December 31, 1994. Management believes that the total loss
and LAE reserves as of December 31, 1994 are adequate to cover the ultimate cost
of policy benefits and related expenses incurred.
For the year ended December 31, 1994 and the year ended December 31, 1993,
policy acquisition costs as a percentage of net earned premiums were 26.4% and
23.8%, respectively. Policy acquisition costs, which relate to initiating
insurance policies, are deferred and charged ratably over a period that does not
exceed the policy term. The Company currently writes three, six and twelve month
policies and these deferred costs are expensed over a maximum of twelve months.
The increase in policy acquisition costs as a percentage of net earned premiums
is a result of a decrease in direct written premiums which has resulted in
excess capacity.
Other operating expenses consist of those expenses not directly associated
with the settlement of claims or the issuance of insurance policies. They are
generally administrative salaries, rental expenses, legal and accounting fees
and various other administrative expenses. Other operating expenses for the year
ended December 31, 1994 and the year ended December 31, 1993 were $4.6 million
and $4.1 million, respectively. As a percentage of revenues, these expenses were
8% during 1993 and 1994.
Earnings. Net operating income increased from $1.9 million for the year
ended December 31, 1993 to $2.0 million for the year ended December 31, 1994.
The ratio of net operating income to total revenues decreased from 3.6% in 1993
to 3.4% in 1994.
Net realized gains (losses) from the sales of securities, net of taxes,
were ($268,000) and $399,000 in the year ended December 31, 1994 and the year
ended December 31, 1993, respectively. The losses incurred were due to a
repositioning of a portion of the investment portfolio to defend against further
interest rate increases and a subsequent drop in market value of the Company's
overall portfolio. The majority of the realized losses resulted from sales of
low-coupon mortgage backed securities (GNMA pass-throughs) for purchases of U.S.
Treasury 10-year notes and 1-year bills. These trades effectively increased
quality, reduced yield, and reduced interest rate exposure. Quality and
liquidity were increased by purchasing U.S. Treasuries. Interest rate exposure
was lowered by reducing the duration of the instruments by 3.4 years, from 7.7
years to 4.3 years, and by adopting a strategy that benefits from short-term
interest rates rising faster than long-term interest rates. The ratio of net
income to total revenues decreased from 4.4% in 1993 to 2.9% in 1994.
Net income decreased from $2.3 million for the year ended December 31,
1993, to $1.7 million for the year ended December 31, 1994, representing a
decrease of 25.9%. The decrease in net income was primarily attributable to the
net realized losses of $332,000 in 1994 on the sale of securities compared to
the $529,000 net realized gains in 1993.
RESULTS OF OPERATIONS
Year ended December 31, 1993 versus year ended December 31, 1992.
Written Premiums. Direct written premiums increased 12% to $54.8 million
for the year ended December 31, 1993 compared to $49.1 million for the same
period in 1992. Net written premiums for the same periods in 1993 and 1992 were
$53.3 million and $43.4 million, respectively, representing an increase of 23%.
The growth in direct written premiums during 1993 resulted primarily from a
planned increase in the number of policies written in certain of the Company's
markets and, to a lesser extent, from selected rate increases. During 1993, the
Company expanded its business in Virginia, which it entered in late 1991, in
Florida, which it entered in mid-1992, and in Alabama, which it entered in late
1992.
65
<PAGE> 72
Revenues. Total revenues, excluding realized gains (losses) on security
sales, for the years ended December 31, 1993 and 1992 were $52.5 million and
$40.9 million, respectively, representing an increase of 28%. The four
components of the Company's revenues are net earned premiums, net investment
income, other revenues, and net realized gains (losses) on security sales.
Net earned premiums for the years ended December 31, 1993 and 1992 were
$48.8 million and $38.0 million, respectively, representing an increase of 28%.
Because premiums are earned over the term of the policies, changes in net earned
premiums lag corresponding changes in direct written premiums. The 28% increase
in the Company's net earned premiums for 1993 is primarily attributable to a 54%
increase in the Company's net written premiums for the year ended December 31,
1992.
Net investment income, excluding gains on sales of securities, for the
years ended December 31, 1993 and 1992 was $1.9 million and $1.7 million,
respectively, representing an increase of 16%. The Company experienced a decline
in pre-tax investment yield to 4.8% for 1993 from 5.8% for the same period in
1992 due to a lower prevailing interest rates and the repositioning of a
significant portion of its portfolio into tax-free investments in 1992. Because
the Company's most important investment objective is the preservation of
capital, substantially all of the Company's investments are in a portfolio of
investment grade, short and intermediate term fixed income securities. The
Company's policy is not to sacrifice investment quality for the purpose of
maximizing investment yields, and, therefore, investment yields may continue to
decline as the portfolio matures and is reinvested at prevailing market rates.
The decline in yield was more than offset by an increase in the average balance
of the Company's investments, which increased from $28.8 million in 1992 to
$42.7 million in 1993. The increase is attributable to the net proceeds from the
public offering of common stock, investment of cash flows generated by increased
written premiums, earnings, borrowings and realized net gains from the sale of
securities.
Other revenues for the years ended December 31, 1993 and 1992 were $1.9
million and $1.2 million, respectively, representing an increase of 49%. Other
revenues consist of fees assessed on the installment payments of insurance
policies. The total amount of revenues generated by these fees is a function of
premium volume, the payment plan chosen by the policyholders and the amount of
each fee. The increase in other revenues was a result of increased premium
volume, additional billing options made available to the policyholders which
increased the number of installment payments upon which fees were assessed, and
selective fee increases.
Expenses. The loss and LAE ratios for the years ended December 31, 1993
and 1992 were 70.2% and 69.1%, respectively, representing an increase of 2%.
Although the Company's loss experience during the first half of 1993 was
negatively affected by adverse weather conditions which resulted in an increase
in the frequency of accidents involving policyholders, the increase in the loss
and LAE ratio primarily resulted from a lower level of net earned premiums per
policy due to the Company's strategic decision to increase market share through
more aggressive pricing. This decision was made with an awareness that operating
efficiencies were positively impacting the Company's expense ratio. The higher
loss and LAE ratio combined with a lower expense ratio resulted in an improved
combined ratio of 98.7% for 1993 compared to 99.1% in 1992, reflecting improved
underwriting profit.
Losses and LAE include claims paid, settlement costs and changes in loss
and LAE reserves. The changes in loss and LAE reserves include changes in
estimates used to determine such reserves. In connection with the determination
of the reserves, management uses historical data and current business conditions
to formulate estimates, including assumptions related to the ultimate cost to
settle claims. These estimates by their nature are subject to uncertainties.
During the years 1989 through 1991, the Company experienced some reserve
deficiencies, predominately due to inadequate estimates of the LAE reserves
resulting from limited historical data relative to claims settlement. In
response to this, the Company strengthened the LAE reserves in subsequent
periods, including the year ended December 31, 1993. As a result, the LAE
reserves as a percentage of outstanding loss reserves increased from 16.7% at
December 31, 1992 to 21.5% at December 31, 1993. Management believes that the
total loss and LAE reserves as of December 31, 1993 are adequate to cover the
ultimate cost of policy benefits and related expenses incurred.
66
<PAGE> 73
For the years ended December 31, 1993 and 1992, policy acquisition costs as
a percentage of net earned premiums were 23.8% and 22.7%, respectively. Policy
acquisition costs, which relate to initiating insurance policies, are deferred
and charged ratably over the term of the policy. The Company currently writes
three, six and twelve month policies and these deferred costs are expensed over
a maximum of twelve months.
Other operating expenses consist of those expenses not directly associated
with the settlement of claims or the issuance of insurance policies. They are
generally administrative salaries, rental expenses, legal and accounting fees
and various other administrative expenses. Other operating expenses for the
years ended December 31, 1993 and 1992 were $4.1 million and $4.0 million,
respectively. As a percentage of revenues, these expenses decreased from 10%
during 1992 to 8% during 1993. The decrease in 1993 was principally due to
improved operating efficiencies and certain economies of scale associated with
the growth in net earned premiums.
Earnings. Net operating income increased from $1.0 million for the year
ended December 31, 1992 to a record $1.9 million for the year ended December 31,
1993, representing an increase of 91%. The ratio of net operating income to
total revenues improved from 2.4% in 1992 to 3.6% in 1993.
Net gains from the sales of securities, net of taxes, were $399,000 and
$328,000 in the years ended December 31, 1993 and 1992, respectively,
representing an increase of 22%.
Net income increased from $1.3 million for the year ended December 31,
1992, to a record $2.3 million for the year ended December 31, 1993,
representing an increase of 74%. The ratio of net income to total revenues
increased from 3.2% in December 31, 1992 to 4.4% in 1993.
LIQUIDITY AND CAPITAL RESOURCES
Operations. The Company receives substantial cash from premiums and, to a
lesser extent, investment income, other revenue and reinsurance recoverables.
The principal cash outflows are for the payment of claims, LAE, policy
acquisition costs, operating expenses, and income and other taxes. Substantially
all of the Company's revenue is received by, and expenses are incurred on behalf
of, the Insurance Subsidiary and IAS, its wholly-owned subsidiaries. Net cash
provided by operations was $4.6 million for the year ended December 31, 1994 and
$6.8 million for the year ended December 31, 1993. The decrease in net cash
provided by operations was due to an increase in the combined operating ratio in
1994 and lower profitability. The Company believes its cash resources are
adequate to meet its short-term operating requirements for the next year and its
long-term operating requirements.
Investing. Net funds used in investing activities of the Company were $9.1
million for the year ended December 31, 1994 and $14.7 million for the year
ended December 31, 1993. The amounts in 1993 include the investment of the
proceeds from the public stock offering.
The Company maintains a substantial level of cash and liquid short-term
investments, which are used to meet anticipated payment obligations. As of
December 31, 1994, the Company had cash and short-term investments of
approximately $16.0 million. The Company's remaining investment portfolio on
that date consisted of $46.7 million of long-term securities, which can provide
additional liquidity and cash for operations. Because the Company's most
important objective is the preservation of capital, substantially all of the
Company's investments are in a portfolio of investment grade, short and
intermediate term fixed income securities. The Company's policy is not to
sacrifice investment quality for the purpose of maximizing investment yields.
Financing. Net funds provided by financing activities of the Company were
$4.9 million for the year ended December 31, 1994 and $8.1 million for the year
ended December 31, 1993. The amounts in 1993 include the proceeds from the
public stock offering. Victoria has a bank credit agreement (the "Credit
Agreement") which was amended during the third quarter of 1993 to provide for a
$12.5 million revolving credit facility with interest payable on outstanding
balances at the lender's reference rate (the "Reference Rate"), which by the
terms of the Credit Agreement is the applicable interest rate, based on the
higher of the lender's base rate or a federal funds based rate. The Reference
Rate was 8.5% at December 31, 1994 and was
67
<PAGE> 74
9.0% at March 24, 1995. Prior to the amendment, the revolving credit agreement
provided for an $8.5 million facility. Although the Credit Agreement expires on
July 31, 1996, at any time on or before that date the entire amount outstanding
thereunder may be converted by Victoria into a four-year term loan. Over time,
Victoria has borrowed as much as $12.0 million under the Credit Agreement and
provided such funds to the Insurance Subsidiary, in order to augment the
Insurance Subsidiary's statutory surplus.
In order to reduce interest expense, it has been Victoria's practice to
borrow funds from the Insurance Subsidiary at the Reference Rate, for periods of
three months or less, to repay borrowings under the Credit Agreement. Although
the outstanding principal amounts under the Credit Agreement as of December 31,
1994 and December 31, 1993 were $12.0 million and $6.0 million, respectively, no
amounts were outstanding for most of 1994 and 1993. Victoria anticipates that it
will continue its practice of borrowing funds from the Insurance Subsidiary from
time to time. In the event that the Merger is consummated as anticipated,
Victoria may re-examine this practice. If Victoria determines to discontinue
such practice, or if Victoria is no longer permitted, whether by its lender or
by regulatory authorities, to continue such practice, Victoria anticipates that
it would, in accordance with the terms of the Credit Agreement, convert
borrowings under the Credit Agreement into a four-year term loan. Such
conversion would increase the Company's interest expense and, to a lesser
extent, the Company's interest income, which, in the aggregate, would decrease
net income by approximately $120,000 per year (assuming the Reference Rate
remains at 9.0%). The Company believes, therefore, that discontinuance by
Victoria of its practice of borrowing funds from the Insurance Subsidiary would
not have a material adverse effect on Victoria's liquidity, capital resources or
results of operations, or on the Insurance Subsidiary's statutory surplus.
The Credit Agreement currently requires the Company to maintain a minimum
net worth of approximately $21.8 million. This requirement will increase on
December 31 of each subsequent year, by 70% of the Company's consolidated net
income for each fiscal year. The Credit Agreement also contains certain other
financial and restrictive covenants. The Company was in compliance with all
covenants during 1994 and 1993.
State laws define certain minimum statutory surplus requirements which must
be met in order to retain an insurance license in that particular state. The
most restrictive requirement by any one state in which the Insurance Subsidiary
is licensed is $5.0 million of statutory surplus. As of December 31, 1994, the
Insurance Subsidiary had approximately $23.5 million of statutory surplus. The
Company strives to maintain a ratio of net written premiums to statutory surplus
for the Insurance Subsidiary within an industry maximum guideline of 3 to 1. As
of December 31, 1994, such ratio for the Insurance Subsidiary was 2.1 to 1.
Periodically, additional capital is required by the Insurance Subsidiary in
order to increase its volume of net written premiums.
As a holding company, Victoria is partially dependent on dividends from the
Insurance Subsidiary to meet its cash obligations. The Insurance Subsidiary is
subject to Ohio insurance regulatory restrictions that limit the payment of
dividends to Victoria without the approval of the Ohio Superintendent of
Insurance. The maximum dividends that may be paid under Ohio law during any
calendar year, without prior approval, are the greater of 10% of statutory
surplus as of the preceding calendar year or the statutory net income of the
same preceding year. Dividends which may be paid by the Insurance Subsidiary to
Victoria during 1995 are limited by these restrictions to approximately $2.7
million.
Management believes that the Company's operating cash flows, short-term
investments, the Credit Agreement and reinsurance agreements will provide
sufficient sources of liquidity and capital to meet the Company's anticipated
needs for the next several years.
Impact of Inflation. The Company's operations, like those of other
property-casualty insurers, are susceptible to the effect of inflation, as
premiums are established before the ultimate amounts of losses and LAE are
known. Management considers the potential effects of inflation when setting
premiums; nonetheless, such premiums may not fully compensate the Company for
the effects of inflation. However, as the majority of the Company's business
consists of lines which have short lead times between the occurrence of an
insured event, reporting of the claim to the Company and the final settlement of
the claim, the effects of inflation are minimized.
68
<PAGE> 75
In addition, inflation may affect the real rate of return on the Company's
investment portfolio, as well as its portfolio market value.
Recent Accounting Pronouncements. Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities ("SFAS No. 115"), was issued by the Financial Accounting Standards
Board ("FASB") in May 1993. SFAS No. 115 addresses the accounting and reporting
for investments in equity securities that have readily determinable fair market
values and for all investments in debt securities.
SFAS No. 115 is effective for fiscal years beginning after December 15,
1993; however, the Company implemented this statement as of December 31,1993,
the earliest permissible date. The statement requires companies to record (i)
fixed maturities intended to be held to maturity at amortized cost; (ii) fixed
maturities available for sale at market value with unrealized gains (losses)
recorded as a component of equity; and (iii) fixed maturities held for trading
purposes at market value with the unrealized gains (losses) reported in the
statement of operations.
SFAS No. 107, Disclosures about Fair Value of Financial Instruments, was
issued by the FASB in December 1991. SFAS No. 107 requires disclosure about the
fair value of financial instruments and is effective for financial statements
issued for fiscal years ending after December 15, 1995 for entities with less
than $150 million in total assets.
SFAS No. 119, Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments, was issued by the FASB in October 1994. SFAS No.
119 requires disclosure about derivative financial instruments and amends
existing requirements of SFAS Nos. 105 and 107. SFAS No. 119 is effective for
financial statements issued for fiscal years ending after December 15, 1995 for
entities with less than $150 million in total assets. The Company currently does
not invest in derivatives as defined by SFAS No. 119.
69
<PAGE> 76
DESCRIPTION OF USF&G CAPITAL STOCK
The following summary of the terms of USF&G's capital stock does not
purport to be complete and is qualified in its entirety by reference to the
applicable provisions of Maryland law and the USF&G Articles of Incorporation,
as amended (the "USF&G Charter").
GENERAL
The authorized capital stock of USF&G consists of 240,000,000 shares of
USF&G Common Stock and 12,000,000 shares of preferred stock, $50.00 par value
per share (the "USF&G Preferred Stock"), of which, as of April 12, 1995,
3,999,910 shares are classified as $4.10 Series A Convertible Exchangeable
Preferred Stock (the "Series A Preferred Stock"), 1,300,000 shares are
classified as $10.25 Series B Cumulative Convertible Preferred Stock (the
"Series B Preferred Stock") and 1,200,000 are classified as Junior Participating
Preferred Stock (the "Junior Preferred Stock"). As of April 12, 1995, there were
issued and outstanding 101,208,661 shares of USF&G Common Stock, 3,999,910
shares of Series A Preferred Stock and 1,300,000 shares of Series B Preferred
Stock. The shares of Junior Preferred Stock have been reserved for issuance in
connection with USF&G's shareholder rights plan and no shares of the Junior
Preferred Stock currently are outstanding.
The Series A Preferred Stock and Series B Preferred Stock rank on a parity
with each other and rank senior to the Junior Preferred Stock and the USF&G
Common Stock as to dividends and upon liquidation.
The Transfer Agent and Registrar for USF&G's Common Stock, Series A
Preferred Stock, Series B Preferred Stock and Junior Preferred Stock is First
Chicago Trust Company of New York ("First Chicago Trust").
COMMON STOCK
Each holder of USF&G Common Stock is entitled to one vote for each share of
USF&G Common Stock held. Cumulative voting for the election of directors is not
provided for in the USF&G Charter or the USF&G By-laws, as amended (the "USF&G
By-laws"). Subject to the prior rights of the Series A Preferred Stock, the
Series B Preferred Stock and the Junior Preferred Stock and any other preferred
stock which may be classified and issued, the holders of the USF&G Common Stock
are entitled to receive, pro-rata, such dividends as may be declared by the
USF&G Board out of funds legally available therefor, and are also entitled to
share, pro-rata, in any other distribution to shareholders. There are no
redemption or sinking fund provisions and no direct limitations in any indenture
or agreement on the payment of dividends. Payment of dividends by USF&G is not
subject to restrictions under the Maryland Insurance Code. However, payment of
dividends to USF&G by its insurance subsidiaries is subject to certain
restrictions under Maryland and other state insurance laws. Such restrictions as
well as other contractual restrictions may limit the amount of dividends that
may be paid by USF&G. All shares of USF&G Common Stock to be issued pursuant to
the Merger Agreement will be fully paid and non-assessable.
PREFERRED STOCK
General. Under the USF&G Charter, USF&G is authorized to issue 12,000,000
shares of USF&G Preferred Stock, in one or more series. The USF&G Board is
authorized to fix and determine the terms, limitations and relative rights and
preferences of any of the series of the USF&G Preferred Stock including, without
limitation, any voting rights thereof, to divide and issue any USF&G Preferred
Stock in series, and to fix and determine the variations among series to the
extent permitted by law. USF&G may amend from time to time the USF&G Charter to
increase the number of authorized shares of USF&G Preferred Stock. Any such
amendment would require the approval of the holders of a majority of the
outstanding shares of Common Stock, and the approval of the holders of a
majority of the outstanding shares of the Series A Preferred Stock and Series B
Preferred Stock (together with any other shares of USF&G Preferred Stock which
may be then outstanding and have similar rights) voting together as a single
class and the holders of two-thirds of the outstanding shares of the Series B
Preferred Stock voting separately as a class.
70
<PAGE> 77
OUTSTANDING PREFERRED STOCK
USF&G currently has outstanding three classes of Preferred Stock.
Series A Preferred Stock. Subject to the limitations discussed herein, the
holders of the Series A Preferred Stock are entitled to receive, when and as
declared by the USF&G Board out of funds legally available therefor, cumulative
dividends at the annual rate of $4.10 per share. Dividends are payable
quarterly, in arrears, on January 31, April 30, July 31 and October 31 in each
year. Unless full cumulative dividends on all outstanding Series A Preferred
Stock and any other class of preferred stock ranking on a parity with the Series
A Preferred Stock as to dividends and upon liquidation ("Parity Stock") have
been paid, USF&G will not declare or pay any dividend on, or set aside or apply
any amount to the redemption or purchase of, any shares of the USF&G Common
Stock or any other class of stock ranking junior to the Series A Preferred Stock
(except for dividends payable only in, or rights to subscribe for or purchase,
shares of junior stock).
Except as indicated below, or except as expressly required by applicable
law, the holders of shares of Series A Preferred Stock have no voting rights.
During any period in which dividends on the Series A Preferred Stock or any
outstanding Parity Stock are cumulatively in arrears in the amount of six or
more full quarterly dividends, the number of directors of USF&G will be
increased by two and the holders of shares of Series A Preferred Stock, voting
together as a class with the holders of any other class or series of Parity
Stock having a similar voting right, will have the right to elect two additional
directors to the USF&G Board to fill such newly created directorships until all
such dividends have been paid in full.
The approval of two-thirds of the outstanding shares of Series A Preferred
Stock and Parity Stock, voting together as a single class, shall be required in
order to amend the USF&G Charter to affect adversely the rights of the holders
of the Series A Preferred Stock or to authorize or create any class of stock
having rights senior with respect to dividends and upon liquidation to the
Series A Preferred Stock. In addition, the approval of a majority of the
outstanding shares of Series A Preferred Stock and Parity Stock, voting together
as a single class, shall be required in order to increase the number of shares
of preferred stock authorized in the USF&G Charter or to create any other class
of stock (but not any other series of preferred stock) ranking on a parity with
the Series A Preferred Stock as to dividends and upon liquidation.
At the option of the holders of the Series A Preferred Stock, such shares
may be converted into shares of USF&G Common Stock at the then applicable
conversion rate. The current conversion rate is 1.192 shares of USF&G Common
Stock for each share of Series A Preferred Stock (equivalent to a conversion
price of $41.93 per share). The conversion rate is subject to adjustment in
certain events, including stock dividends, subdivisions, splits and
combinations, and certain other distributions of rights or warrants to purchase
USF&G Common Stock at less than the then current market price (as defined), and
distributions to all holders of USF&G Common Stock of evidences of indebtedness
or assets of USF&G other than cash out of earned surplus. The conversion rate
has been adjusted under this provision as a result of dividend payments by USF&G
on its Common Stock notwithstanding the deficit in its earned surplus account.
The Series A Preferred Stock is exchangeable in whole but not in part at
the option of USF&G on any dividend payment date for USF&G's 8.20% Convertible
Subordinated Debentures due October 31, 2011 (the "Debentures") at a rate of
$50.00 principal amount of the Debentures plus cash in the amount of accrued but
unpaid dividends, if any, for each share of Series A Preferred Stock.
The Series A Preferred Stock is redeemable at the option of USF&G for cash,
as a whole or in part, at redemption prices declining to $50.00 per share on
October 31, 1996, plus accrued and unpaid dividends to the redemption date.
USF&G may not purchase or redeem less than all the Series A Preferred Stock and
any other series of Parity Stock if, as of such time, USF&G has failed to pay
all accrued and unpaid dividends thereon.
In case of the voluntary or involuntary liquidation, dissolution or
winding-up of USF&G, holders of any shares of Series A Preferred Stock are
entitled to receive $50.00 per share, plus an amount equal to any
71
<PAGE> 78
dividends accrued and unpaid to the payment date, before any distribution is
made to the holders of any junior stock.
Series B Preferred Stock. The 1,300,000 shares of the Series B Preferred
Stock were issued in three subseries: 650,000 shares of the Series B Cumulative
Convertible Preferred Stock 1995 (the "Series B Preferred Stock 1995"); 325,000
shares of the Series B Cumulative Convertible Preferred Stock 1996 (the "Series
B Preferred Stock 1996"); and 325,000 shares of the Series B Cumulative
Convertible Preferred Stock 1997 (the "Series B Preferred Stock 1997"). Subject
to the limitations discussed herein, the holders of the Series B Preferred Stock
are entitled to receive, when and as declared by the USF&G Board out of funds
legally available therefor, cumulative dividends at the annual rate of $10.25
per share. Dividends are payable quarterly, in arrears, on January 31, April 30,
July 31 and October 31 of each year. Unless full cumulative dividends on all
outstanding Series B Preferred Stock and any other Parity Stock have been paid,
USF&G will not declare or pay any dividend on, or set aside or apply any amount
to the redemption or purchase of, any shares of the USF&G Common Stock or any
other class of stock ranking junior to the Series B Preferred Stock.
Holders of Series B Preferred Stock have limited voting rights similar to
those of the Series A Preferred Stock except that under the terms of the Series
B Preferred Stock the right to elect two additional directors accrues when
dividends on the Series B Preferred Stock are cumulatively in arrears in the
amount of two or more full quarterly dividends. A special class vote of holders
of two-thirds of the outstanding Series B Preferred Stock is necessary in order
to (i) authorize the issuance of a new, or to increase the authorized number of
any existing, class of capital stock senior or superior to the Series B
Preferred Stock as to dividends and upon liquidation, (ii) increase the number
of shares of preferred stock or create any additional Parity Stock authorized in
the USF&G Charter, (iii) reissue any shares of Series B Preferred Stock that
have been redeemed or (iv) take any action to cause any amendment, alteration or
repeal of any of the provisions of the USF&G Charter that would materially
adversely affect the rights of holders of Series B Preferred Stock.
At the option of the holders of the Series B Preferred Stock, such shares
may be converted into shares of USF&G Common Stock at the then applicable
conversion rate. The current conversion rate for the Series B Preferred Stock is
8.316 shares of Common Stock per converted share of Series B Preferred Stock
(equivalent to a conversion price of $12.025 per share). The conversion rate is
subject to adjustment in certain events, including stock dividends,
subdivisions, splits and combinations, and certain distributions of rights or
warrants to purchase USF&G Common Stock at less than the then current market
price (as defined), and distributions to all holders of USF&G Common Stock of
evidences of indebtedness or assets of USF&G except out of earned surplus (other
than regular quarterly USF&G Common Stock dividends consistent with USF&G's
current dividend policy and future dividends payable out of consolidated earned
surplus or current earnings).
The Series B Preferred Stock is redeemable at the option of USF&G for cash,
as a whole or in part, at any time or from time to time, as follows: (i) the
Series B Preferred Stock 1995, at any time on or after June 1, 1994; (ii) the
Series B Preferred Stock 1996, at any time on or after June 1, 1995; and (iii)
the Series B Preferred Stock 1997, at any time on or after June 1, 1996; at a
per share redemption price equal to the liquidation value of $100.00 and accrued
and unpaid dividends plus, beginning after June 1, 1997, a premium which
declines to zero on June 1, 2001. Notwithstanding the foregoing, no redemption
may be effected prior to June 1, 1997, unless the closing price of the USF&G
Common Stock exceeds 150% of the then current Series B conversion price on the
date notice of redemption is given and for each of the twenty prior consecutive
trading days.
In the event that there shall occur a "change in control" (defined below)
of USF&G, then, at the election of each holder of Series B Preferred Stock,
USF&G will issue and sell additional nonredeemable equity securities and apply
the net proceeds thereof to redeem the Series B Preferred Stock at the
appropriate redemption price, plus accrued dividends, but only if and to the
extent any such proceeds are raised. The term "change in control" means any
acquisition by any person or group of 50% or more of the combined voting power
of the outstanding voting securities of USF&G, a sale of substantially all of
the assets of USF&G, or a merger of USF&G with or into another person which
results in the exchange, conversion, reclassification or cancellation of the
USF&G Common Stock.
72
<PAGE> 79
In case of the voluntary liquidation, dissolution or winding-up of USF&G,
holders of any shares of Series B Preferred Stock are entitled to receive
$100.00 per share, plus an amount equal to any dividends accrued and unpaid to
the payment date, before any distribution is made to the holders of any junior
stock.
USF&G RIGHTS PLAN
USF&G has a shareholder rights plan (the "Rights Plan") to deter coercive
or unfair takeover tactics and to prevent a potential purchaser from gaining
control of USF&G without offering a fair price to all of USF&G's shareholders.
Under the Rights Plan, each outstanding share of USF&G Common Stock has one
preferred share purchase right (a "USF&G Right") expiring in 1997. Each USF&G
Right entitles the registered holder to purchase 1/100 of a share of Junior
Preferred Stock for $140. The USF&G Rights cannot be exercised unless certain
events occur that might lead to a concentration in ownership of USF&G Common
Stock. Under certain conditions, the USF&G Rights may be exercised for (i) USF&G
Common Stock having a value of twice the exercise price, or (ii) shares of
common stock of a purchaser having a value of twice the exercise price. USF&G
will generally be entitled to redeem the USF&G Rights, at $.05 per USF&G Right,
any time before the tenth day after a 20% position in USF&G is acquired. See
"Incorporation of Certain Documents by Reference."
COMPARISON OF RIGHTS OF HOLDERS OF USF&G CAPITAL STOCK AND
VICTORIA CAPITAL STOCK
If the Merger is consummated, holders of Victoria Common Stock will become
holders of USF&G Common Stock and the rights of the former Victoria shareholders
will be governed by the laws of the State of Maryland and by the USF&G Charter,
the USF&G By-laws and the Rights Plan. The rights of USF&G shareholders differ
in certain respects from the rights of Victoria shareholders. Certain of the
differences are summarized below. This summary is qualified in its entirety by
reference to the full text of such documents. For information as to how such
documents may be obtained, see "Available Information."
BUSINESS COMBINATIONS
Generally, under the DGCL, the approval by the affirmative vote of the
holders of a majority of the outstanding stock (or, if the certificate of
incorporation provides for more or less than one vote per share, a majority of
the votes of the outstanding stock) of a corporation entitled to vote on the
matter is required for a merger or consolidation or sale, lease, or exchange of
all or substantially all the corporation's assets to be consummated.
The Victoria Certificate of Incorporation requires the affirmative vote of
the holders of at least two-thirds of the outstanding shares of capital stock
entitled to vote thereon to approve: (i) a merger or consolidation of Victoria
with or into any other corporation; (ii) any sale, lease, exchange or other
disposition by Victoria of all or substantially all of its assets taken as a
whole to or with any other corporation, person or other entity in a single
transaction or series of related transactions; or (iii) any dissolution of
Victoria or the revocation of a dissolution of Victoria. The Victoria
Certificate of Incorporation further provides that no amendment to the Victoria
Certificate of Incorporation shall amend, alter, change or repeal any of the
above super-majority voting provisions unless the amendment effecting such
amendment, alteration, change or repeal receives the affirmative vote of the
holders of at least two-thirds of the outstanding shares of capital stock
entitled to vote thereon. Victoria has no other super-majority, staggered board
or other anti-takeover provisions in either its Certificate of Incorporation or
its By-laws.
Under the General Corporation Law of the State of Maryland (the "MGCL"),
the vote of the holders of two-thirds of all outstanding shares of stock of a
Maryland corporation entitled to vote thereon is required to approve a merger,
consolidation, share exchange or transfer of all or substantially all of the
corporation's assets, subject to certain exceptions. The USF&G Charter does not
contain any specific provisions related to shareholder approval of business
combinations.
73
<PAGE> 80
APPRAISAL RIGHTS
Under the DGCL, except as otherwise provided by the DGCL, shareholders have
the right to demand and receive payment of the fair value of their stock in the
event of a merger or consolidation. However, except as otherwise provided by the
DGCL, shareholders do not have appraisal rights if, among other things, the
consideration they receive for their shares consists of (i) shares of stock of
the corporation surviving or resulting from such merger or consolidation, (ii)
shares of stock of any other corporation which at the effective date of the
merger or consolidation will be either listed on a national securities exchange
(which is true in the case of the USF&G Common Stock) or designated as a
national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc. or held of record by more than
2,000 shareholders, (iii) cash in lieu of fractional shares of the corporations
described in clause (i) or (ii) of this sentence, or (iv) any combination of
shares of stock and cash in lieu of fractional shares described in the foregoing
clauses (i), (ii) and (iii). See "The Merger -- No Appraisal Rights."
Shareholders of a Maryland corporation have the right to demand and receive
payment of the fair value of their stock in the event of certain mergers,
consolidations, share exchanges or transfers of assets or if the corporation
amends its charter in a way that substantially adversely affects the
shareholder's rights unless the right to do so is reserved in the corporation's
charter, subject to certain exceptions. However, except as otherwise provided by
the MGCL, shareholders do not have appraisal rights if, among other things, (i)
such shareholder's stock is listed on a national securities exchange or is
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc., or (ii) such
shareholder's stock is that of the surviving corporation in the merger unless
the merger alters the contract rights of the stock as expressly set forth in the
charter, and the charter does not reserve the right to do so, or the stock is to
be changed or converted in whole or in part in the merger into something other
than either stock in the successor or cash, scrip, or other rights or interests,
arising out of provisions for the treatment of fractional shares of stock in the
successor. The USF&G Charter reserves the right to alter the contract rights of
outstanding stock provided that not less than a majority of the aggregate number
of the votes entitled to be cast thereon so approve (two thirds with respect to
the currently outstanding USF&G Preferred Stock).
STATE TAKEOVER LEGISLATION
Delaware Business Combination Law. Section 203 of the DGCL (the "Delaware
Business Combination Law") generally prohibits any "business combination"
(defined to include a variety of transactions, including (i) mergers and
consolidations, (ii) sales or dispositions of assets having an aggregate market
value equal to 10% or more of the aggregate market value of the corporation
determined on a consolidated basis, (iii) issuances of stock (except for certain
pro rata and other issuances), (iv) disproportionate benefits from the
corporation (including loans and guarantees) and (v) any transaction which has
the effect of increasing the proportionate share of the stock of any class or
series of the corporation which is owned by the interested shareholder (except
as a result of immaterial changes)) between a Delaware corporation and any
"interested shareholder" (defined generally as any person who, directly or
indirectly, beneficially owns 15% or more of the outstanding voting stock of the
corporation) for a period of three years following the date that such
shareholder became an interested shareholder. The restrictions of the Delaware
Business Combination Law do not apply, however, (A) if, prior to such date, the
board of directors of the corporation approved either the business combination
or the transaction which resulted in such shareholder's becoming an interested
shareholder, (B) if, the interested shareholder owned at least 85% of the voting
stock of the corporation at the time the transaction resulting in such
shareholder becoming an interested shareholder was commenced (excluding, for the
purposes of determining the number of shares outstanding, shares owned by
persons who are directors and also officers and by certain employee plans of the
corporation), (C) if, on or subsequent to such date, the business combination is
approved by the board of directors and the holders of at least two-thirds of the
outstanding voting shares not owned by the interested shareholder or (D) under
certain other circumstances.
In addition, a Delaware corporation may adopt an amendment to its
certificate of incorporation or bylaws expressly electing not to be governed by
the Delaware Business Combination Law if, in addition to any other vote required
by law, such amendment is approved by the affirmative vote of a majority of the
shares entitled
74
<PAGE> 81
to vote. Such amendment will not, however, be effective until 12 months after
such shareholder vote and will not apply to any business combination with an
interested shareholder who was such on or prior to the effective date of such
amendment. Any such by-law amendment may not be further amended by the board of
directors. The Delaware Business Combination Law is inapplicable to the Merger.
Maryland Business Combination Law. The MGCL establishes special
requirements with respect to "business combinations" between Maryland
corporations and "interested shareholders" unless exemptions are applicable.
"Interested shareholders" are all persons owning beneficially, directly or
indirectly, 10% or more of the outstanding voting stock of a Maryland
corporation. "Business combinations" include any merger or similar transaction
subject to a statutory vote and additional transactions involving transfers of
assets or securities in specified amounts to interested shareholders or their
affiliates. Unless an exemption is available, a Maryland corporation may not
engage in certain business combinations with any interested shareholder (or its
affiliates) for a period of five years after the most recent date on which the
shareholder became an interested shareholder. After such five year period,
business combinations with interested shareholders must be recommended by the
board of directors and approved by (i) the affirmative vote of at least 80% of
the votes entitled to be cast by all holders of outstanding shares of voting
stock and (ii) at least two-thirds of the votes entitled to be cast by all
holders of outstanding shares of voting stock other than the interested
shareholder. A business combination with an interested shareholder which is
approved by the board of directors of a Maryland corporation at any time before
an interested shareholder first becomes an interested shareholder is not subject
to the special voting requirements. An amendment to a Maryland corporation's
charter electing not to be subject to the foregoing requirements must be
approved by the affirmative vote of at least 80% of the votes entitled to be
cast by all holders of outstanding shares of voting stock and at least
two-thirds of the votes entitled to be cast by holders of outstanding shares of
voting stock who are not interested shareholders. Any such amendment is not
effective until 18 months after the vote of shareholders and does not apply to
any business combination of a corporation with a shareholder who was an
interested shareholder on the date of the shareholder vote. The USF&G
shareholders have not adopted any such amendment to the USF&G Charter or By-laws
which have the effect of altering the default provisions of the MGCL with
respect to "control share acquisitions."
Maryland Control Share Acquisition Statute. Maryland law imposes
limitations on the voting rights of "control shares" acquired in a "control
share acquisition." The MGCL provides that "control shares" of a Maryland
corporation acquired in a "control share acquisition" have no voting rights
except to the extent approved by a vote of two-thirds of the votes entitled to
be cast on the matter, excluding shares of stock owned by the acquiror or by
officers or directors who are employees of the corporation. "Control shares" are
voting shares of stock which, if aggregated with all other shares of stock
previously acquired by such a person, would entitle the acquiror to exercise
voting power in electing directors within one of the following ranges of voting
power: (i) 20% or more but less than 33 1/3%; (ii) 33 1/3% or more but less than
a majority; or (iii) a majority of all voting power. Control shares do not
include shares the acquiring person is then entitled to vote as a result of
having previously obtained shareholder approval. A "control share acquisition"
means, subject to certain exceptions, the acquisition of, ownership of, or the
power to direct the exercise of voting power with respect to, control shares.
The statute also requires Maryland corporations to hold a special meeting at the
request of an actual or proposed control share acquiror generally within 50 days
after a request is made with the submission of an "acquiring person statement,"
of such special meeting (and, if requested by the board of directors, a bond to
secure such undertaking). In addition, unless the charter or by-laws provide
otherwise, the statute gives the Maryland corporation, subject to certain
conditions and limitations, various redemption rights if there is a shareholder
vote on the issue and the grant of voting rights is not approved, or if an
"acquiring person statement" is not delivered to the target within 10 days
following a control share acquisition. Moreover, unless the articles of
incorporation or by-laws provide otherwise, the statute provides that if, before
a control share acquisition occurs, voting rights are accorded to control shares
at a special meeting of shareholders which results in the acquiring person
having majority voting power, then minority shareholders have appraisal rights.
An acquisition of shares may be exempted from the control share statute provided
that an articles of incorporation or by-law provision is adopted for such
purpose prior to the control share acquisition. There are
75
<PAGE> 82
no provisions in the USF&G Charter or By-laws which have the effect of altering
the default provisions of the MGCL with respect to "control share acquisition."
Maryland Insurance Acquisitions Disclosure and Control Act. Under the
Maryland Insurance Code, unless certain filings are made with the Maryland
Insurance Commissioner, no person may acquire any voting security or security
convertible into a voting security of an insurance holding company, such as
USF&G, which controls one or more Maryland insurance companies if, as a result
of such acquisition, such person would "control" such insurance holding company.
The acquisition may not proceed unless it has been approved by the Maryland
Insurance Commissioner within 60 days after such filings have been submitted.
"Control" is presumed to exist if a person, directly or indirectly, owns or
controls 10% or more of the voting securities of another person. This
presumption may be rebutted by establishing by a preponderance of evidence that
control does not exist in fact.
Reference is made to the full text of the foregoing statutes for their
entire terms, and this partial summary is not intended to be complete.
USF&G RIGHTS PLAN
USF&G. USF&G has a shareholder rights plan to deter coercive or unfair
takeover tactics and to prevent a potential purchaser from gaining control of
USF&G without offering a fair price to all of USF&G's shareholders. See
"Description of USF&G Capital Stock -- USF&G Rights Plan."
Victoria. Victoria has not adopted a shareholder rights or similar plan.
AMENDMENTS TO CHARTERS
Under the DGCL, unless otherwise provided in the certificate of
incorporation, a proposed amendment to the certificate of incorporation requires
an affirmative vote of a majority of all votes entitled to be cast on the
matter. If any such amendment would adversely affect the rights of any holders
of shares of a class or series of stock, the vote of the holders of a majority
of all outstanding shares of the class or series, voting as a class, is also
necessary to authorize such amendment. The DGCL requires an affirmative vote of
a majority of the total number of shares outstanding and entitled to vote
thereon to amend the Victoria Certificate of Incorporation. However, the
Victoria Certificate of Incorporation provides that no amendment to the Victoria
Certificate of Incorporation shall amend, alter, change or repeal any of the
super-majority voting provisions relating to business combinations unless the
amendment effecting such amendment, alteration, change or repeal shall have
received the affirmative vote of the holders of at least two-thirds of the
outstanding shares of capital stock entitled to vote thereon.
Under the MGCL, a vote of two-thirds of all votes entitled to be cast on
the matter is required to approve any amendment to a Maryland charter. However,
the MGCL provides that the required vote may be increased or decreased (but not
to less than a majority) by a provision in a corporation's charter. Subject to
the voting rights of the holders of USF&G Preferred Stock, the USF&G Charter
provides that USF&G may from time to time make any amendments to the USF&G
Charter which may now or hereafter be authorized by law, including any
amendments changing the terms or contract rights, as expressly set forth in the
USF&G Charter, of any of its outstanding stock by classification,
reclassification or otherwise; but no such amendment which changes such terms or
contract rights of any of its outstanding stock shall be valid unless such
amendment shall have been authorized by not less than a majority of the
aggregate number of the votes entitled to be cast thereon at any meeting at
which a quorum is present.
AMENDMENTS TO BY-LAWS
Under the DGCL, the power to adopt, alter and repeal the by-laws is vested
in the shareholders, except to the extent that the certificate of incorporation
or by-laws vest it in the board of directors. The Victoria By-laws provide that
the Victoria By-laws, or any of them, may be supplemented, amended or repealed
by the Victoria Board, or by the vote of a majority in interest of the
shareholders represented and entitled to vote thereon at any meeting at which a
quorum is present.
76
<PAGE> 83
Under the MGCL, the power to adopt, alter and repeal the by-laws is vested
in the shareholders, except to the extent the charter or by-laws vest it in the
board of directors. The USF&G By-laws provide that any or all of the USF&G
By-laws may be altered, amended, repealed or added to by a majority vote of a
quorum at any regular or special meeting of the shareholders or of the USF&G
Board.
PREEMPTIVE RIGHTS
Under the DGCL, a shareholder does not have preemptive rights unless such
rights are specifically granted in the certificate of incorporation. The
Victoria Certificate of Incorporation does not provide for preemptive rights.
Under Maryland law, except with respect to certain specifically enumerated
circumstances, shareholders have preemptive rights unless such rights are
specifically denied in the charter. The USF&G Charter provides that no holder of
any stock of USF&G shall have any preemptive right to subscribe for stock of
USF&G other than such as the USF&G Board, in its sole discretion, may determine.
REDEMPTION OF CAPITAL STOCK
Under the DGCL, subject to certain limitations, a corporation's stock may
be made subject to redemption by the corporation at its option, at the option of
the holders of such stock or upon the happening of a specified event. The DGCL
prohibits the purchase or redemption of stock when the capital of a corporation
is or would become impaired; but shares entitled to dividend or liquidation
preference may be purchased or redeemed out of capital if such shares are
retired and capital is reduced in accordance with legal requirements. The
Victoria Certificate of Incorporation does not contain any provisions relating
to the right to redeem outstanding shares of capital stock.
Under the MGCL, a corporation may purchase or redeem its own shares, unless
(i) the corporation would not be able to pay its debts as they become due in the
usual course of business or (ii) the corporation's total assets would be less
than the sum of the corporation's total liabilities plus, unless the charter
provides otherwise, the amount that would be needed, if the corporation were to
be dissolved at the time of the purchase or redemption, to satisfy the
preferential rights upon dissolution of shareholders whose preferential rights
on dissolution are superior to those whose shares are purchased or redeemed.
Neither the USF&G Charter nor the USF&G By-laws contain any provision relating
to the redemption of USF&G capital stock other than the provisions relating to
the USF&G Preferred Stock described above. See "Description of USF&G Capital
Stock."
DIVIDEND SOURCES
Under the DGCL, a board of directors may authorize a corporation to make
distributions to its shareholders, subject to any restrictions in its
certificate of incorporation, either (i) out of surplus or (ii) if there is no
surplus, out of net profits for the fiscal year in which the dividend is
declared and/or the preceding fiscal year. Under the DGCL, no distribution out
of net profits is permitted, however, if the corporation's capital is less than
the amount of capital represented by the issued and outstanding stock of all
classes having a preference upon the distribution of assets, until such
deficiency has been repaired.
Under the MGCL, a board of directors may authorize a distribution unless,
after giving effect to such distribution, (i) the corporation would not be able
to pay its indebtedness as such indebtedness becomes due in the usual course of
business, or (ii) the corporation's total assets would be less than total
liabilities plus, unless the charter provides otherwise, the amount that would
be needed, if the corporation were to be dissolved at the time of the
distribution, to satisfy the preferential rights upon dissolution of
shareholders whose preferential rights on dissolution are superior to those
receiving the distribution.
Both USF&G and Victoria are primarily holding companies owning, directly or
indirectly, the capital stock of insurance company subsidiaries and other
subsidiaries. The laws of the domiciliary states of the insurance company
subsidiaries place legal limitations on the extent to which the insurance
company subsidiaries may pay dividends or lend or otherwise supply funds to
their parent companies. See "Certain
77
<PAGE> 84
Considerations -- Differences in Risks of Businesses Conducted by Victoria and
USF&G -- Holding Company Structure; Dividend Restrictions."
DURATION OF PROXIES
Under the DGCL, no proxy is valid more than three years after its date
unless otherwise provided in the proxy. A duly executed proxy is irrevocable if
it states that it is irrevocable and if, and only so long as, it is coupled with
an interest sufficient to support an irrevocable power.
Under the MGCL, no proxy is valid more than 11 months after its date unless
otherwise provided in the proxy. Irrevocable proxies may be created when: (i)
the proxy states that it is irrevocable; and (ii) the proxy is coupled with an
interest. A proxy may be made irrevocable for as long as it is coupled with an
interest and such interest exists.
SHAREHOLDER ACTION
Under the DGCL, unless otherwise provided in the certificate of
incorporation, any action required or permitted to be taken at a meeting of
shareholders may be taken without a meeting, without prior notice and without a
vote, if a written consent or consents setting forth the action taken is signed
by the holders of outstanding stock having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote upon such action were present and voted. The
Victoria By-laws permit shareholder action to be taken by written consent of the
holders of outstanding stock having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote upon such action were present and voted.
Under the MGCL, any action required or permitted to be taken at a meeting
of shareholders may be taken without a meeting only if a unanimous written
consent is signed by each shareholder entitled to vote on the matter and a
written waiver of any right to dissent is signed by each shareholder who would
have been entitled to notice of, but not to vote at such shareholder meeting.
SPECIAL SHAREHOLDER MEETINGS
The DGCL provides that a special meeting of shareholders may be called by
the board of directors or by such person or persons as may be authorized by the
certificate of incorporation or by the by-laws. The Victoria By-laws provide
that special meetings may be called by the Chairman of the Board or the
President, and shall be called by the President or the Secretary at the request
in writing of shareholders owning a majority in amount of the entire capital
stock of Victoria issued and outstanding and entitled to vote.
The MGCL provides that a special meeting of shareholders may be called by
the President, the board of directors, or any other person specified in the
charter or the by-laws. The MGCL further provides that the secretary of a
corporation shall call a special meeting of shareholders on the written request
of shareholders entitled to cast at least twenty-five percent of all the votes
entitled to be cast at the meeting. The USF&G By-laws provide that a special
meeting of shareholders may be called by the Chairman of the Board, the
President or by a majority of the USF&G Board.
CUMULATIVE VOTING
The DGCL permits cumulative voting, but neither the Victoria Certificate of
Incorporation nor the Victoria By-laws provide for cumulative voting for the
election of directors.
The MGCL permits cumulative voting, but cumulative voting is not provided
for in the USF&G Charter or By-laws. The USF&G By-laws provide that in all
elections for directors, each share of stock may be voted for as many
individuals as there are directors to be elected and for whose election the
share is entitled to be voted.
78
<PAGE> 85
NUMBER AND ELECTION OF DIRECTORS
The DGCL permits the certificate of incorporation or the by-laws of a
corporation to contain provisions governing the number and terms of directors.
However, if the certificate of incorporation contains provisions fixing the
number of directors, such number may not be changed without amending the
certificate of incorporation. The Victoria Certificate of Incorporation provides
that the number of directors shall be fixed by, or in the manner provided in,
the Victoria By-laws. The Victoria By-laws state that the number of directors
shall be determined from time to time by resolution of the Victoria Board, but
the number shall not be less than one, provided that the tenure of a director
shall not be affected by any decrease in the number of directors.
The DGCL permits the certificate of incorporation of a corporation or a
by-law to provide that directors be divided into one, two or three classes. The
term of office of one class of directors shall expire each year with the terms
of office of no two classes expiring the same year. Victoria does not have a
classified board of directors.
The MGCL provides that any corporation with outstanding stock and three or
more shareholders shall have at least three directors at all times. The USF&G
Charter provides that the number of directors of USF&G shall be three, which
number may be increased or decreased pursuant to the USF&G By-laws, but shall
never be less than the minimum number permitted by Maryland law. The USF&G
By-laws provide that USF&G shall have at least three directors at all times,
provided that (i) if there is no stock outstanding, the number of directors may
be less than three but not less than one and (ii) if there is stock outstanding
and so long as there are less than three shareholders, the number of directors
may be less than three but not less than the number of shareholders. The USF&G
By-laws further provide that a majority of the entire USF&G Board may alter the
number of directors set by the USF&G Charter to a number not exceeding
twenty-five nor less than the minimum number permitted in the USF&G By-laws, but
the action may not affect the tenure of office of any director.
The MGCL permits a corporation to have a classified board of directors. The
term of office of at least one class shall expire each year. USF&G does not have
a classified board of directors.
REMOVAL OF DIRECTORS
Under the DGCL, a director or directors of Victoria may be removed with or
without cause by the holders of a majority of the shares then entitled to vote
at an election of directors.
Under the MGCL and the USF&G By-laws, the shareholders of USF&G may remove
any director, with or without cause, by the affirmative vote of a majority of
all the votes entitled to be cast for the election of directors.
VACANCIES
Under the DGCL, unless otherwise provided in the certificate of
incorporation or the by-laws or unless the Board of Directors is classified,
vacancies on the board of directors and newly created directorships resulting
from an increase in the authorized number of directors may be filled by a
majority of the directors then in office, although less than a quorum, or by the
sole remaining director. In addition, if, at the time of the filling of any such
vacancy or newly created directorship, the directors in office constitute less
than a majority of the whole board (as constituted immediately prior to any such
increase), the Delaware Court of Chancery may, upon application of any
shareholder or shareholders holding at least 10% of the total number of
outstanding shares entitled to vote for such directors, summarily order an
election to fill any such vacancy or newly created directorship, or replace the
directors chosen by the directors then in office.
The Victoria By-laws provide that any vacancy or newly created directorship
resulting from any increase in the authorized number of directors may be filled
by vote of a majority of the directors then in office, though less than a
quorum, and any director so chosen shall hold office until the next annual
election of directors and until his successor is duly elected and qualified, or
until his earlier resignation or removal. If there are no directors in office,
any officer or shareholder may call a special meeting of shareholders in
accordance with the
79
<PAGE> 86
provisions of the Victoria Certificate of Incorporation and the Victoria
By-laws, at which meeting such vacancies shall be filled.
Under the MGCL, shareholders may elect a successor to fill a vacancy on the
board of directors which results from the removal of a director, provided that,
if the shareholders of any class or series are entitled separately to elect one
or more directors, the shareholders of that class or series may elect a
successor to fill a vacancy on the board of directors which results from the
removal of a director elected by that class or series. In addition, unless the
charter or the by-laws of the corporation provide otherwise, a majority of the
remaining directors, whether or not sufficient to constitute a quorum, may fill
a vacancy on the board of directors which results from any cause except an
increase in the number of directors, in which case, a majority of the entire
board of directors may fill a vacancy, provided that, if the shareholders of any
class or series are entitled separately to elect one or more directors, a
majority of the remaining directors elected by that class or series or the sole
remaining director elected by that class may fill any vacancy among the number
of directors elected by that class or series. A director elected by the board of
directors to fill a vacancy serves until the next annual meeting of shareholders
and until his successor is elected and qualifies. A director elected by the
shareholders to fill a vacancy which results from the removal of a director
serves for the balance of the term of the removed director.
The USF&G By-laws provide that shareholders may elect a successor to fill a
vacancy on the USF&G Board which results from the removal of a director. A
majority of the remaining directors, whether or not sufficient to constitute a
quorum, may fill a vacancy on the USF&G Board which results from any cause
except an increase in the number of directors and a majority of the entire USF&G
Board may fill a vacancy which results from an increase in the number of
directors. A director elected by the USF&G Board to fill a vacancy serves until
the next annual meeting of shareholders and until his successor is elected and
qualifies. A director elected by the shareholders to fill a vacancy which
results from the removal of a director serves for the balance of the term of the
removed director.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Indemnification under the DGCL and the Victoria Certificate of
Incorporation. Under the DGCL, a corporation may indemnify any director,
officer, employee or agent against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation to
procure a judgment in its favor -- a "derivative action") if such person acted
in good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal proceeding, had no reasonable cause to believe that his or her conduct
was unlawful. The Victoria Certificate of Incorporation contains provisions
which require Victoria to indemnify such persons to the full extent permitted by
the DGCL.
The DGCL also establishes several mandatory rules for indemnification. In
the case of a "derivative action" (e.g., a shareholder derivative suit), a
corporation may indemnify an officer, director, employee or agent if such person
acted in good faith and in a manner such person reasonably believed to be in or
not opposed to the best interests of the corporation; provided, however, that no
person adjudged to be liable to the corporation may be indemnified unless, and
only to the extent that, the Delaware Court of Chancery or the court in which
such action or suit was brought determines upon application that, despite the
adjudication of liability but in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses which
such court deems proper. A director, officer, employee or agent who is
successful, on the merits or otherwise, in defense of any proceeding subject to
the DGCL's indemnification provisions must be indemnified by the corporation for
reasonable expenses incurred therein, including attorneys' fees.
The DGCL states that a determination must be made that a director or
officer has met the required standard of conduct before the director or officer
may be indemnified. The determination may be made (i) by a majority vote of a
quorum of disinterested directors, (ii) if such a quorum is not obtainable, or
even if
80
<PAGE> 87
obtainable, a quorum of disinterested directors so directs, by independent legal
counsel (selected by the disinterested directors) or (iii) by the shareholders.
The DGCL and the Victoria Certificate of Incorporation require Victoria to
advance reasonable expenses to a director or officer upon receipt of an
undertaking by or on behalf of such person to repay the corporation if it
ultimately is determined that the required standard of conduct has not been met.
The Victoria Certificate of Incorporation also permits Victoria to advance
expenses to other employees and agents in a similar manner.
The indemnification and advancement of expenses described above under the
DGCL is not exclusive of any other rights to which those seeking indemnification
or advancement of expenses may be entitled under any by-law, agreement, vote of
shareholders or disinterested directors or otherwise.
Indemnification under the MGCL and the USF&G Charter. The MGCL permits a
corporation to indemnify its present and former directors and officers, among
others, against judgments, penalties, fines, settlements and reasonable expenses
actually incurred by them in connection with any proceeding to which they may be
a party by reason of their service in those or other capacities unless it is
established that (a) the act or omission of the director or officer was material
to the matter giving rise to the proceeding and was committed in bad faith or
was the result of active and deliberate dishonesty, or (b) the director or
officer actually received an improper personal benefit in money, property or
services or (c) in the case of any criminal proceeding, the director or officer
had reasonable cause to believe that the act or omission was unlawful. In
addition, the MGCL requires corporations, as a condition to advancing expenses,
to obtain (i) a written affirmation by the director or officer of his good faith
belief that he has met the standard of conduct necessary for indemnification by
the corporation as authorized by the MGCL, the corporation's charter and by-laws
and (ii) a written statement by or on his behalf to repay the amount paid or
reimbursed by the corporation if it shall ultimately be determined that the
standard of conduct was not met. The USF&G Charter requires USF&G to indemnify
its officers and directors and to pay or reimburse expenses in advance of the
final disposition of any proceeding to the full extent provided from time to
time by Maryland law.
Under the MGCL, USF&G is permitted to purchase and maintain, and USF&G has
purchased and maintains, insurance on behalf of its directors and officers
against any liability asserted against such directors and officers in their
capacities as such whether or not USF&G would have the power to indemnify such
persons under the provisions of Maryland law governing indemnification.
Indemnification for Liabilities arising under the Securities Act. Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling USF&G or Victoria
pursuant to the foregoing provisions, USF&G and Victoria have been informed that
in the opinion of the Commission such indemnification is against public policy
as expressed in the Securities Act and is therefore unenforceable.
LIMITATION OF PERSONAL LIABILITY OF DIRECTORS
The DGCL provides that a corporation's certificate of incorporation may
include a provision limiting the personal liability of a director to the
corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director. However, no such provision can eliminate or limit the
liability of a director for (i) any breach of the director's duty of loyalty to
the corporation or its shareholders, (ii) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of the law, (iii)
violation of certain provisions of the DGCL, (iv) any transaction from which the
director derived an improper personal benefit or (v) any act or omission prior
to the adoption of such a provision in the certificate of incorporation. The
Victoria Certificate of Incorporation contains a provision eliminating the
personal liability for monetary damages of its directors to the fullest extent
permitted under Delaware law.
Under the MGCL, a corporation's charter may, with certain exceptions,
include any provision expanding or limiting the liability of its directors and
officers to the corporation or its shareholders for money damages, but may not
include any provision that restricts or limits the liability of its directors or
officers to the corporation or its shareholders to the extent that (i) it is
proved that the person actually received an improper benefit or profit in money,
property, or services for the amount of the benefit or profit in money,
property, or
81
<PAGE> 88
services actually received; or (ii) a judgment or other final adjudication
adverse to the person is entered in a proceeding based on a finding in the
proceeding that the person's action, or failure to act, was the result of active
and deliberate dishonesty and was material to the cause of action adjudicated in
the proceeding. The USF&G Charter contains a provision limiting the personal
liability of officers and directors to USF&G and its shareholders to the fullest
extent permitted under Maryland law.
LEGAL MATTERS
The validity of the shares of USF&G Common Stock to be issued in connection
with the Merger will be passed upon for USF&G by John A. MacColl, Senior Vice
President and General Counsel of USF&G. Mr. MacColl owns shares of USF&G Common
Stock and holds options to purchase additional shares aggregating less than 0.1%
of USF&G Common Stock.
Certain of the tax consequences of the Merger to Victoria shareholders will
be passed upon at the Effective Date, by Benesch, Friedlander, Coplan & Aronoff,
Cleveland, Ohio on behalf of Victoria and by Willkie Farr & Gallagher, New York,
New York on behalf of USF&G. See "The Merger -- Certain Federal Income Tax
Consequences." Richard D. Margolis, who is a partner in the firm of Benesch,
Friedlander, Coplan & Aronoff, participated in the representation of Victoria in
connection with the Merger, and is a director of Victoria, beneficially owned,
10,649 shares of Victoria Common Stock and held 6,000 Victoria Options, as of
April 12, 1995.
INDEPENDENT AUDITORS
The consolidated financial statements and schedules of Victoria and its
subsidiaries as of December 31, 1994 and 1993, and for each of the years in the
three-year period ended December 31, 1994, have been included herein in reliance
upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
The consolidated financial statements and schedules of USF&G and its
subsidiaries incorporated herein by reference in USF&G's Annual Report on Form
10-K for the year ended December 31, 1994, have been audited by Ernst & Young
LLP, independent auditors, as set forth in their reports thereon included
therein and incorporated herein by reference. Such consolidated financial
statements are incorporated herein by reference in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
It is expected that representatives of KPMG Peat Marwick LLP will attend
the Special Meeting to respond to appropriate questions of shareholders and to
make a statement if they so desire.
SHAREHOLDER PROPOSALS
Any proposals of shareholders intended to be presented at the 1996 Annual
Meeting of Shareholders of Victoria (if such meeting is required), must be
received by Victoria for inclusion in Victoria's proxy statement no later than
January 3, 1996.
82
<PAGE> 89
INDEX TO VICTORIA'S CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
INDEX PAGE NO.
- ----------------------------------------------------------------------------------- --------
<S> <C>
Report of Independent Certified Public Accountants................................. F-2
Consolidated Balance Sheets at December 31, 1994 and 1993.......................... F-3
Consolidated Statements of Income for the Three Years Ended
December 31, 1994, 1993 and 1992................................................. F-4
Consolidated Statements of Stockholders' Equity for the Three Years
Ended December 31, 1994, 1993 and 1992........................................... F-5
Consolidated Statements of Cash Flows for the Three Years Ended
December 31, 1994, 1993 and 1992................................................. F-6
Notes to Consolidated Financial Statements......................................... F-8
Schedule I -- Summary of Investments Other Than Investments in Related Parties..... F-19
Schedule III -- Condensed Financial Information of Registrant...................... F-20
Schedule V -- Supplementary Insurance Information.................................. F-23
Schedule VI -- Reinsurance......................................................... F-24
</TABLE>
F-1
<PAGE> 90
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Stockholders and Board of Directors
Victoria Financial Corporation:
We have audited the consolidated financial statements of Victoria Financial
Corporation and subsidiaries as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we also have audited
the financial statement schedules as listed in the accompanying index. These
consolidated financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Victoria Financial
Corporation and subsidiaries as of December 31, 1994 and 1993, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1994, in conformity with generally accepted accounting
principles. Also, in our opinion, the financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
KPMG PEAT MARWICK LLP
Columbus, Ohio
February 10, 1995
F-2
<PAGE> 91
VICTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ASSETS 1994 1993
------- -------
<S> <C> <C>
Investments (notes 1f and 2):
Fixed maturities held-to-maturity at amortized cost........................ $ 9,116 10,541
Fixed maturities available-for-sale at market.............................. 35,603 38,026
------- -------
Total fixed maturities................................................ 44,719 48,567
Equity securities, at market............................................... 1,973 529
Short-term investments, at cost which approximates market.................. 15,350 8,295
------- -------
Total investments..................................................... 62,042 57,391
Cash......................................................................... 667 307
Premium balances receivable, net of allowance for doubtful accounts of $115
in 1994 and $213 in 1993................................................... 15,336 15,801
Deferred policy acquisition costs (note 1d).................................. 6,272 6,618
Trade accounts receivable, net of allowance for doubtful accounts of $186 in
1994....................................................................... 1,050 --
Reinsurance recoverable (note 9)............................................. 430 679
Accrued investment income.................................................... 857 734
Furniture and equipment, at cost, net of accumulated depreciation of $1,206
in 1994 and $1,473 in 1993................................................. 2,734 1,619
Goodwill, net of accumulated amortization of $78 in 1994..................... 3,073 --
Capitalized software development costs, net of accumulated amortization of
$83 in 1994 (note 1h)...................................................... 1,087 --
Deferred federal income taxes (note 8)....................................... 55 29
Other assets................................................................. 1,252 818
------- -------
Total assets.......................................................... $94,855 83,996
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Losses and loss adjustment expenses payable (notes 7 and 9)................ $24,522 22,431
Unearned premiums.......................................................... 22,202 23,427
Commissions payable........................................................ 3,250 3,233
Deferred revenue........................................................... 978 --
Other liabilities.......................................................... 4,555 3,490
Notes payable (note 4)..................................................... 12,009 6,000
Current federal income taxes payable....................................... 125 316
------- -------
Total liabilities..................................................... 67,641 58,897
Stockholders' equity (notes 3 and 6):
Preferred shares, $.01 par value; authorized 1,000,000 shares; none
issued................................................................... -- --
Common shares, $.01 par value; authorized 10,000,000 shares; issued
4,000,164 shares in 1994 and 3,578,564 shares in 1993.................... 40 36
Additional paid-in capital................................................. 22,650 20,499
Net unrealized holding gains (losses), net of taxes........................ (1,396) 358
Retained earnings.......................................................... 5,920 4,206
------- -------
Stockholders' equity.................................................. 27,214 25,099
------- -------
Commitments (note 10)
Total liabilities and stockholders' equity............................ $94,855 83,996
======== ========
</TABLE>
See accompanying notes to Consolidated Financial Statements
F-3
<PAGE> 92
VICTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
REVENUES:
Net earned premiums (note 9).................................. $51,313 48,753 38,003
Net software systems and service revenue...................... 3,017 -- --
Net investment income (note 2)................................ 2,545 1,936 1,673
Net realized gains (losses) on security sales................. (332) 529 427
Other......................................................... 2,109 1,849 1,240
------- ------- -------
Total revenues...................................... 58,652 53,067 41,343
------- ------- -------
EXPENSES:
Losses and loss adjustment expenses........................... 35,443 34,193 26,249
Policy acquisition costs (note 1d)............................ 13,571 11,627 8,631
Other operating expenses...................................... 4,567 4,122 4,035
Software systems and service expense.......................... 2,854 -- --
Interest...................................................... 97 65 691
------- ------- -------
Total expenses...................................... 56,532 50,007 39,606
------- ------- -------
Net income before federal income taxes.............. 2,120 3,060 1,737
Federal income tax expense (note 8)........................... 406 746 406
------- ------- -------
Net income.......................................... $ 1,714 2,314 1,331
======= ======= =======
NET INCOME PER COMMON SHARE:
PRIMARY:................................................. $ .44 .78 .96
======= ======= =======
FULLY DILUTED:........................................... $ .44 .78 .66
======= ======= =======
</TABLE>
See accompanying notes to Consolidated Financial Statements
F-4
<PAGE> 93
VICTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NET
UNREALIZED
ADDITIONAL HOLDING NET
COMMON PAID-IN GAINS RETAINED TREASURY STOCKHOLDERS'
SHARES CAPITAL (LOSSES) EARNINGS SHARES EQUITY
------ ---------- ---------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1992............ $ 13 3,879 (12) 561 (5) 4,436
Net income............................ -- -- -- 1,331 -- 1,331
Net unrealized holding gains.......... -- -- 18 -- -- 18
Purchase of 47,156 common shares for
treasury............................ -- -- -- -- (464) (464)
Retirement of 47,156 treasury
shares.............................. (1) (463) -- -- 464 --
Issuance of 1,600 common shares from
treasury............................ -- -- -- -- 5 5
Issuance of 1,234,800 common shares
upon conversion of convertible debt
(note 4)............................ 12 5,975 -- -- -- 5,987
Issuance of 99,600 common shares under
stock option plan (note 6a)......... 2 315 -- -- -- 317
Tax benefit from exercise of 80,000
nonqualified stock options (note
1k)................................. -- 193 -- -- -- 193
------ ---------- ---------- -------- -------- ------------
Balance at December 31, 1992.......... 26 9,899 6 1,892 0 11,823
Net income............................ -- -- -- 2,314 -- 2,314
Net unrealized holding gains.......... -- -- 25 -- -- 25
Cumulative effect of change in
accounting for investments (note
1f)................................. -- -- 327 -- -- 327
Issuance of 1,012,000 common shares
from public offering (note 6b)...... 10 10,600 -- -- -- 10,610
------ ---------- ---------- -------- -------- ------------
Balance at December 31, 1993.......... 36 20,499 358 4,206 0 25,099
Net income............................ -- -- -- 1,714 -- 1,714
Net unrealized holding (losses)....... -- -- (1,754) -- -- (1,754)
Issuance of 421,600 common shares from
purchase of Insurance Automation
Systems, Inc. (note 5).............. 4 2,151 -- -- -- 2,155
------ ---------- ---------- -------- -------- ------------
Balance at December 31, 1994.......... $ 40 22,650 (1,396) 5,920 0 27,214
====== ======= ======== ====== ====== =========
</TABLE>
See accompanying notes to Consolidated Financial Statements
F-5
<PAGE> 94
VICTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES, NET OF EFFECTS OF THE
PURCHASE OF INSURANCE AUTOMATION SYSTEMS, INC.:
Net income............................................. $ 1,714 2,314 1,331
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization..................... 1,079 309 238
Realized (gain) on sale of equity securities...... -- (12) --
Realized (gain) loss on sale of fixed
maturities...................................... 332 (517) (427)
Changes in assets and liabilities:
(Increase) decrease in premium balances
receivable................................. 465 (2,197) (5,819)
(Increase) decrease in deferred policy
acquisition costs.......................... 346 (1,481) (1,034)
(Increase) in trade accounts receivable...... (551) -- --
(Increase) decrease in reinsurance
recoverable................................ 249 393 (78)
(Increase) decrease in reinsurance
receivable................................. -- 3,986 (4,912)
(Increase) in accrued investment income...... (123) (298) (31)
(Increase) decrease in deferred federal
income taxes............................... 292 77 (274)
(Increase) decrease in other assets.......... (361) (125) 233
Increase in losses and loss adjustment
expenses payable........................... 2,091 5,275 7,376
Increase (decrease) in unearned premiums..... (1,225) 2,506 7,529
Increase in deferred revenue................. 221 -- --
Increase (decrease) in funds held under
reinsurance treaties....................... -- (4,151) 3,912
Increase in commissions payable.............. 17 352 1,222
Increase in other liabilities................ 325 137 1,345
Increase (decrease) in current federal income
taxes payable.............................. (314) 193 17
Decrease in deferred federal income taxes
payable.................................... -- -- (111)
--------- --------- --------
Net cash provided by operating activities.... 4,557 6,761 10,517
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to furniture and equipment................... (1,170) (947) (433)
Additions to capitalized software...................... (371) -- --
Purchase of investments -- short-term.................. (196,116) (130,293) (29,810)
Purchase of investments -- equity securities........... (1,394) (465) (573)
Purchase of investments -- fixed maturities............ (19,631) (34,637) (29,605)
Purchase of Insurance Automation Systems, Inc. net of
cash acquired........................................ (142) -- --
Proceeds from maturity of short-term investments....... 189,060 132,522 26,407
Proceeds from sale of equity securities available for
sale................................................. -- 606 --
Proceeds from sale of fixed maturities available for
sale................................................. 18,946 17,630 15,403
Proceeds from maturity of fixed maturities............. 1,710 929 4,405
--------- --------- --------
Net cash used in investing activities........ $ (9,108) (14,655) (14,206)
--------- --------- --------
</TABLE>
F-6
<PAGE> 95
VICTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and long-term debt......... $ 38,000 29,000 28,000
Principal payments on notes payable and long-term
debt................................................. (33,089) (31,500) (24,687)
Proceeds from exercise of stock options................ -- -- 510
Purchase of treasury shares............................ -- -- (464)
Issuance of treasury shares............................ -- -- 5
Proceeds from issuance of common stock................. -- 10,610 --
--------- --------- --------
Net cash provided by financing activities.... 4,911 8,110 3,364
--------- --------- --------
Net increase (decrease) in cash............................. 360 216 (325)
Cash at beginning of year................................... 307 91 416
--------- --------- --------
Cash at end of year......................................... $ 667 307 91
========= ========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest................. $ 97 219 844
========= ========= ========
Cash paid during the year for income taxes............. $ 370 475 576
========= ========= ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING:
The Company purchased all of the capital stock of Insurance
Automation Systems, Inc. in exchange for 421,600 shares of
common stock and cash of $142. The fair value of the net
assets acquired on the date of the transaction was $2,324.
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
All holders of the Company's 10% Convertible Subordinated
Notes of $6,174 exercised their conversion rights into
1,234,800 shares of common stock, $.01 par value in 1992.
</TABLE>
See accompanying notes to Consolidated Financial Statements
F-7
<PAGE> 96
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) -- SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Victoria Financial Corporation ("Victoria Financial" and, together with its
subsidiaries, the "Company"), Victoria Fire & Casualty Company ("Victoria Fire"
and, together with its subsidiaries, "VF&C"), Victoria Insurance Agency, Inc.
("VIAI") and Insurance Automation Systems, Inc. ("IAS"). Victoria Select
Insurance Company ("VSIC") and Victoria Automobile Insurance Company ("VAIC")
are wholly owned subsidiaries of VF&C. All intercompany transactions have been
eliminated upon consolidation.
The accounting practices of insurance companies are prescribed or permitted
by regulatory authorities (statutory accounting practices). To the extent that
certain of these practices differ from generally accepted accounting principles
(GAAP), the accounts have been adjusted for inclusion in the accompanying
consolidated financial statements. The major difference includes the deferral of
policy acquisition costs of $6,272 and $6,618 at December 31, 1994 and 1993,
respectively.
(B) BUSINESS
VF&C, Victoria Financial's principal subsidiary, provides nonstandard
automobile property-casualty insurance coverage to individuals. The subsidiary
is subject to competition from other property-casualty insurance companies and
to the regulations of certain state insurance departments and undergoes periodic
examinations by regulatory authorities. In preparing the financial statements,
management is required to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheets
and revenues and expenses for the periods reported.
Material estimates that are particularly susceptible to significant change
in the near term relate to the determination of loss and loss adjustment
expenses payable and the recoverability of deferred policy acquisition costs. In
connection with the determination of these items, management uses historical
data and current business conditions to formulate estimates including
assumptions related to the ultimate cost to settle claims. These estimates by
their nature are subject to uncertainties for various reasons. The Company's
results of operations and financial condition could be adversely affected should
the ultimate payments required to settle claims be materially in excess of the
reserves currently provided.
Management believes that the reserves for loss and loss adjustment expenses
are adequate and that deferred policy acquisition costs are recoverable. While
management uses available information to estimate these items, future changes to
the estimates may be necessary based on experience and changing economic
conditions. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the Company's reserves.
The Company faces several business risk factors associated with
property-casualty insurance carriers. The following is a general description of
those risks and how management addresses each one.
A regulatory risk exists in that changes in the regulatory environment in
which the Company operates could create additional losses or expenses not
anticipated in pricing its product. That is, regulatory initiatives which reduce
the Company's profits or new legal theories may create costs for the Company
beyond those recorded in the financial statements. The Company attempts to
mitigate this risk through geographic diversification.
A credit risk exists in that issuers of securities owned by the Company
could default, or other parties, including reinsurers, that owe the Company
money could not pay. Management attempts to minimize this risk by adherence to a
conservative investment strategy, maintenance of sound reinsurance and credit
and collection policies, and provision for any amounts deemed to be
uncollectible.
F-8
<PAGE> 97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The risk also exists that interest rates could change and, as a result,
cause a decrease in the value of the Company's investments. Management attempts
to mitigate this risk by evaluating anticipated cash flow needs, including
expected amounts due from policyholders, net of the payment of liabilities. To
the extent that liabilities could become due prior to the maturity of
investments, the Company would be required to sell assets prior to maturity and
recognize a gain or loss.
VSIC and VAIC did not underwrite any insurance policies during the year
ended December 31, 1994.
IAS provides comparative rating services to insurance agencies and develops
insurance company underwriting systems used to underwrite insurance policies.
The subsidiary is subject to competition from various other rating service and
computer consulting companies.
(C) PREMIUM REVENUES
Premiums on property-casualty policies are recognized as earned primarily
on a daily pro rata basis over the contract period.
(D) DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs, consisting of commissions to agents, premium
taxes and selling and underwriting expenses related to the production of
property-casualty business, are deferred and charged ratably against the income
over the policy term. The method followed in computing deferred policy
acquisition costs limits the amounts of such deferred costs to their estimated
realizable value. In determining estimated realizable value, the computation
gives effect to the premiums and investment income to be earned, losses and loss
adjustment expenses and certain other costs expected to be incurred as the
premiums are earned. Deferred policy acquisition costs are summarized as
follows:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------ -----
<S> <C> <C> <C>
Balance, beginning of year..................... $ 6,618 5,137 4,103
Additions...................................... 13,225 13,108 9,665
Period Charge.................................. 13,571 11,627 8,631
------- ------ -----
Balance, end of year........................... $ 6,272 6,618 5,137
======= ====== =====
</TABLE>
(E) UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES ("LAE") PAYABLE
Unpaid losses and LAE are based on case-basis estimates for reported claims
and on experience-based estimates for unreported claims and loss adjustment
expenses. The liability for unpaid losses and loss adjustment expenses, net of
estimated salvage and subrogation recoverable, has been established to cover the
estimated ultimate net cost of insured losses. The amounts are necessarily based
on estimates of future rates of inflation and other factors, and accordingly,
there can be no assurance that the ultimate liability will not vary from such
estimates.
(F) INVESTMENTS
Effective December 31, 1993 the Company has adopted Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities, (Statement 115) and has reported the cumulative effect of
this change in method of accounting in the 1993 consolidated statements of
stockholders' equity. Statement 115 requires, at acquisition, the Company to
classify debt and equity securities into one of three categories:
held-to-maturity, available-for-sale, or trading.
F-9
<PAGE> 98
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Investments in equity securities consist of common stocks, preferred stocks
and a limited partnership holding. Equity securities are reported at fair value.
Net unrealized holding gains (losses) of equity securities, less applicable
federal income taxes, are shown as a separate component of stockholders' equity
and are not included in the determination of net income. All equity securities
are classified as available-for-sale.
Fixed maturities which management has the intent and the Company has the
ability at the time of purchase to hold until maturity are classified as
investments held-to-maturity and as such are carried at amortized historical
costs. Fixed maturities not classified as trading or as held-to-maturity are
classified as available-for-sale and carried at fair value. Net unrealized gains
(losses) of investments available-for-sale, if any, less applicable federal
income taxes are shown as a separate component of stockholders' equity and are
not included in the determination of net income. Prior to adoption of Statement
115, fixed maturities held as available-for-sale were carried at the lower of
amortized cost or market value (in the aggregate). An identified certificate
basis is used to determine the cost of investments sold.
(G) NET SOFTWARE SYSTEMS AND SERVICE REVENUE
The Company has received payments during 1994 relating to competitive
rating services for the first quarter of 1995 which are recorded as deferred
revenue at the time of billing. As the services are provided to subscribers, the
proportionate share of the service fee is recognized as income. The Company also
enters into contracts to design company underwriting systems and recognizes this
revenue under the percentage of completion contract method.
(H) SOFTWARE DEVELOPMENT COSTS
The Company has capitalized costs related to the development of certain
software products. In accordance with Statement of Financial Accounting
Standards No. 86, Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed, capitalization of costs begins when technological
feasibility has been established and ends when the product is available for
general release to customers. Amortization is computed on an individual product
basis and has been recognized for each product available for market based on the
product's estimated economic life.
(I) CASH
For purposes of the Consolidated Statements of Cash Flows, the Company
considers only cash on hand and in banks as cash.
(J) NET INCOME PER SHARE
Primary net income per common share amounts are based upon the weighted
average number of common shares outstanding during the period plus, when
dilutive, the net equivalent common shares to be issued upon the assumed
exercise of stock options and warrants. Fully diluted net income per common
share is computed as above and assumes conversion of the 10% Convertible
Subordinated Notes Due 2001, which took place in 1992. The weighted average
common shares outstanding for the purposes of calculating primary net income per
share at December 31, 1994, 1993 and 1992 were 3,856,711, 2,963,435 and
1,382,711, respectively. The weighted average common shares outstanding for the
purposes of calculating fully diluted net income per share at December 31, 1994,
1993 and 1992 were 3,881,826, 2,963,435 and 2,633,696, respectively.
(K) STOCKHOLDERS' EQUITY
For shares issued as part of the 1987 Restricted Stock Bonus Plan, the
market price of the shares (less their par value which must be paid by the
employee) is added to additional paid-in capital and an equal
F-10
<PAGE> 99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
amount is deducted from stockholders' equity (unearned portion of restricted
stock) on the date of the grant. The unearned amount is amortized as
compensation expense over the period the restrictions lapse.
Upon exercising nonqualified stock options, the Company included the tax
benefit as an addition to additional paid-in capital.
(L) SEGMENT INFORMATION
Since the Company operates over 90% of its business in the nonstandard
private passenger automobile segment, additional segment information is not
disclosed. The nonstandard automobile segment consists of underwriting
automobile insurance for nonstandard risks through the issuance of automobile
insurance policies and financial responsibility bonds.
(M) INCOME TAXES
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes, (Statement 109) was issued by the Financial Accounting Standards Board in
February 1992. Statement 109 requires a change from the deferred method under
APB Opinion 11 to the asset and liability method of accounting for income taxes.
Under the asset and liability method of Statement 109, deferred income taxes are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
Effective January 1, 1992, the Company adopted Statement 109 which had no
material impact upon the 1992 consolidated statement of income.
(N) RECLASSIFICATIONS
Certain reclassifications have been made in the 1993 and 1992 Consolidated
Financial Statements to conform to the 1994 presentation.
(2) -- INVESTMENTS AND INVESTMENT INCOME
At December 31, 1994, the Company held equity securities with a cost of
$1,892 and a market value of $1,973. At December 31, 1993, the Company held
equity securities with a cost of $498 and a market value of $529. Gross
unrealized gains on equity securities amounted to $81 and $31 at December 31,
1994 and 1993, respectively.
F-11
<PAGE> 100
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following tables contain amortized cost and market value information on
fixed maturity securities by investment categories at December 31, 1994 and
1993:
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-----------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
HELD-TO-MATURITY:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies................. $ 274 4 -- 278
Obligations of states and political subdivisions....... 8,642 23 (84) 8,581
Corporate securities................................... 200 3 -- 203
--------- --- ---------- ------
TOTAL HELD-TO-MATURITY................................. $ 9,116 30 (84) 9,062
======= ======== ======== ======
AVAILABLE-FOR-SALE:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies................. $ 5,134 -- (287) 4,847
Obligations of states and political subdivisions....... 19,681 5 (499) 19,187
Corporate securities................................... 8,100 13 (499) 7,614
Mortgage-backed securities............................. 4,289 -- (356) 3,933
Debt securities issued by foreign governments.......... 25 -- (3) 22
--------- --- ---------- ------
TOTAL AVAILABLE-FOR-SALE............................... $37,229 18 (1,644) 35,603
======= ======== ======== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1993
-----------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
HELD-TO-MATURITY:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies................. $ 474 36 -- 510
Obligations of states and political subdivisions....... 9,263 425 (2) 9,686
Corporate securities................................... 804 24 -- 828
--------- --- ---------- ------
TOTAL HELD-TO-MATURITY................................. $10,541 485 (2) 11,024
======= ======== ======== ======
AVAILABLE-FOR-SALE:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies................. $ 3,288 6 (37) 3,257
Obligations of states and political subdivisions....... 17,107 589 -- 17,696
Corporate securities................................... 6,949 37 (115) 6,871
Mortgage-backed securities............................. 10,162 58 (41) 10,179
Debt securities issued by foreign governments.......... 25 -- (2) 23
--------- --- ---------- ------
TOTAL AVAILABLE-FOR-SALE............................... $37,531 690 (195) 38,026
======= ======== ======== ======
</TABLE>
F-12
<PAGE> 101
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The amortized cost and market value of fixed maturity securities at
December 31, 1994, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED MARKET
COST VALUE
--------- ------
<S> <C> <C>
HELD-TO-MATURITY:
Due in one year or less................................... $ 200 203
Due after one year through five years..................... 3,313 3,288
Due after five years through ten years.................... 5,603 5,571
Due after ten years....................................... -- --
--------- ------
TOTAL HELD-TO-MATURITY.................................... $ 9,116 9,062
======= ======
AVAILABLE-FOR-SALE:
Due in one year or less................................... $ 502 500
Due after one year through five years..................... 13,654 13,325
Due after five years through ten years.................... 12,890 12,142
Due after ten years....................................... 5,894 5,703
--------- ------
Subtotal.................................................. 32,940 31,670
Mortgage-backed securities................................ 4,289 3,933
--------- ------
TOTAL AVAILABLE-FOR-SALE.................................. $37,229 35,603
======= ======
</TABLE>
Fixed maturity securities with a carrying value of $5,419 and $2,881 at
December 31, 1994 and 1993, respectively, were on deposit with regulatory
authorities.
Proceeds from the sales of fixed maturities available for sale were
$18,946, $17,630 and $15,403 in 1994, 1993 and 1992, respectively. Gross gains
of $143, $541 and $464 and gross losses of $475, $23 and $37 were realized on
sales of fixed maturities available for sale during 1994, 1993 and 1992,
respectively, and gross gains of $11 were realized on sales of equity securities
available for sale in 1993.
Net investment income is summarized below:
<TABLE>
<CAPTION>
1994 1993 1992
------ ----- -----
<S> <C> <C> <C>
Fixed maturities...................................... $2,537 2,035 1,764
Equity securities..................................... 56 24 7
Short-term investments and invested cash.............. 161 95 78
------ ----- -----
2,754 2,154 1,849
Investment expenses................................... (209) (218) (176)
------ ----- -----
Net investment income................................. $2,545 1,936 1,673
====== ===== =====
</TABLE>
(3) -- STATUTORY NET INCOME AND STOCKHOLDERS' EQUITY AND DIVIDEND RESTRICTIONS
VF&C is subject to insurance regulatory restrictions that limit the payment
of cash dividends to Victoria Financial without the prior approval of the Ohio
Superintendent of Insurance. Notice must be provided to state regulators within
five days of the declaration of the dividend and payment of the dividend cannot
be made until ten days after notice has been provided to state regulators. The
maximum dividend that may be paid under Ohio law by VF&C to Victoria Financial
during a calendar year without prior approval is the greater of 10% of statutory
surplus as of the preceding December 31, or the statutory net income of the
F-13
<PAGE> 102
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
preceding calendar year. Dividends from VF&C to Victoria Financial in 1995,
without prior regulatory approval, are limited by these restrictions to $2,678.
VF&C's statutory surplus as of December 31, 1994 and 1993 was $23,455 and
$20,618, respectively. Statutory net income for the year ended December 31,
1994, 1993 and 1992 was $2,678, $2,970, and $892, respectively.
Victoria Financial has a bank credit agreement (the "Credit Agreement")
which provides for a $12,500 revolving credit facility. Over time, Victoria
Financial has borrowed as much as $12,000 under the Credit Agreement and
provided such funds to Victoria Fire in order to augment Victoria Fire's
statutory surplus. This practice has been permitted by the Ohio Department of
Insurance, and disallowance by the Department of Insurance would have no impact
on Victoria Fire's statutory surplus since Victoria Financial, at any time, may
convert the borrowings under the Credit Agreement into a four-year term loan.
(4) -- NOTES PAYABLE
Notes payable at December 31, consisted of:
<TABLE>
<CAPTION>
1994 1993
------- ------
<S> <C> <C>
Revolving credit facility................................ $12,000 6,000
Other.................................................... 9 --
------- ------
$12,009 6,000
======= ======
</TABLE>
During the third quarter of 1993, Victoria Financial amended its Credit
Agreement to provide for a $12,500 revolving credit facility with interest
payable on outstanding balances at the lender's reference rate (the "Reference
Rate") which is currently 9.0%. Prior to the amendment, the revolving Credit
Agreement provided for an $8,500 facility. Although the Credit Agreement expires
on July 31, 1996, at any time on or
before that date the entire amount outstanding thereunder may be converted by
Victoria Financial into a four-year term loan. A commitment fee is payable on
any unused credit availability at rate ranging from one fourth of one percent
(0.25%) to one percent (1.0%) per annum.
During the third quarter of 1991, Victoria Financial completed a registered
public offering pursuant to which it issued, at par, an aggregate of $6,174
principal amount of 10% Convertible Subordinated Notes Due 2001 (the "Notes").
The offering consisted of a rights offering to stockholders of Victoria
Financial and a related exchange offer to holders of $4,250 principal amount of
privately placed debt securities issued on September 30, 1990. Consideration for
the Notes issued consisted of $1,722 cash, the exchange of $203 principal amount
of 13% Subordinated Debentures and the exchange of $4,250 principal amount of
privately placed Convertible Subordinate Notes. In 1992, all of the holders
converted the Notes into 1,234,800 shares of common stock, par value $.01, of
Victoria Financial. Unamortized debt issue costs of $188 were netted against the
additional paid-in capital upon conversion of the Notes.
(5) -- BUSINESS COMBINATION
On July 1, 1994, IAS was acquired by the Company and 421,600 shares of the
Company's common stock and $142 in cash were exchanged for all of the
outstanding common stock of IAS. The transaction was accounted for as a purchase
and, accordingly, the operating results of IAS have been included in the
consolidated operating results since the date of the acquisition. The goodwill
created in connection with this transaction is being amortized over a 20 year
period. Pro forma results of this business combination, assuming it had been
made at the beginning of each year presented, would not be materially different
from the results reported.
F-14
<PAGE> 103
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(6) -- STOCKHOLDERS' EQUITY
(A) STOCK OPTION AND STOCK APPRECIATION RIGHTS PLAN
Under various plans Victoria Financial can issue stock options to key
employees and non-employee directors. All options are granted at no less than
the fair market value of common stock at the time of the grant. Options issued
under the plans generally become exercisable as to the shares covered by the
options in equal increments commencing within three years from the date of the
grant. Options generally expire seven years from such date unless specifically
extended by the Stock Option Committee.
At December 31, 1994, 1,003,600 shares remained reserved for issuance under
these plans and for other stock options that were awarded. At that date, options
to purchase 404,382 shares were outstanding at prices ranging from $3.438 to
$12.813 per share; options to purchase 132,530 shares were exercisable.
No options were exercised during 1994 or 1993. During 1992, options to
purchase 99,600 shares at prices ranging from $2.344 to $4.375 were exercised.
One of the plans also contains a provision for the awarding to key
executives stock appreciation rights, of which an award of 18,000 rights was
made in January 1988 at a base price of $4.531. These rights, when exercised,
entitle the executive to be paid an amount equal to the increase in the price of
one share of Victoria Financial's common stock at the date of exercise over such
price at the date the rights are granted (base price) times the number of rights
granted. Each award is for a term not to exceed ten years. No additional stock
appreciation rights remain available for future awards.
(B) STOCK OFFERING
During the third quarter of 1993, Victoria Financial completed a public
offering pursuant to which it issued 1,012,000 common shares at $12 per share.
Victoria Financial received, net of the underwriting discount and related
expenses, $10,610 for the common shares issued.
(7) -- LIABILITY FOR UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES
Activity in the liability for unpaid loss and loss adjustment expenses is
summarized as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Balance beginning of year..................................... $22,431 17,156 9,680
Less reinsurance recoverables............................ 679 1,072 303
------- ------- -------
Net balance at beginning of year.............................. 21,752 16,084 9,377
Incurred related to:
Current year............................................. 36,100 34,353 26,074
Prior years.............................................. (657) (160) 175
------- ------- -------
Total incurred................................................ 35,443 34,193 26,249
Paid related to:
Current year............................................. 20,713 18,850 13,540
Prior years.............................................. 12,390 9,675 6,002
------- ------- -------
Total paid.................................................... 33,103 28,525 19,542
Net balance at end of year.................................... 24,092 21,752 16,084
Plus reinsurance recoverables............................ 430 679 1,072
------- ------- -------
Balance at end of year........................................ $24,522 22,431 17,156
======= ======= =======
</TABLE>
F-15
<PAGE> 104
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
As a result of changes in estimates of insured events in prior years, the
provision for loss and loss adjustment expenses (net of reinsurance recoveries
of $357 and $1,086 in 1994 and 1993, respectively) decreased by $657 in 1994 and
decreased by $160 in 1993.
(8) -- INCOME TAXES
Federal income tax expense (benefit) consists of the following components:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- -----
<S> <C> <C> <C>
Current.................................................... $302 670 593
Deferred................................................... 104 76 (381)
Amount credited to additional paid-in capital.............. -- -- 194
---- ---- -----
Total...................................................... $406 746 406
==== ==== =====
</TABLE>
A reconciliation between the actual income tax expense and income taxes
computed by applying the statutory federal income tax rate is as follows:
<TABLE>
<CAPTION>
1994 1993 1992
----- ------ -----
<S> <C> <C> <C>
Computed income taxes at 34%............................ $ 721 1,040 591
Tax exempt interest..................................... (387) (335) (198)
Accrual adjustment...................................... 74 29 2
Other, net.............................................. (2) 12 11
----- ------ -----
Total................................................... $ 406 746 406
===== ====== =====
</TABLE>
The tax effects of the temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax (liabilities) at December
31, 1994 and 1993 are presented below:
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Deferred tax assets:
Unearned premiums......................................... $ 1,510 1,582
Loss reserves............................................. 979 916
Net unrealized holding loss............................... 525 --
Other..................................................... 56 215
------- -------
Total gross deferred tax assets...................... 3,070 2,713
Less Valuation allowance.................................. (324) --
------- -------
Total net deferred tax assets........................ 2,746 2,713
Deferred tax liabilities:
Deferred policy acquisition costs......................... (2,133) (2,250)
Net unrealized holding gain............................... -- (168)
Capitalized software...................................... (268) (126)
Investment in limited partnership......................... (165) (140)
Other..................................................... (125) --
------- -------
Total gross deferred tax liabilities................. (2,691) (2,684)
------- -------
Net deferred tax asset............................... $ 55 29
======= =======
</TABLE>
The Company established a valuation allowance based on its analysis of
future deductible amounts. The valuation allowance at December 31, 1994 relates
entirely to the net unrealized holding loss at December 31, 1994 and accordingly
has been recorded directly to stockholders' equity. The Company believes the
remaining
F-16
<PAGE> 105
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
deferred tax assets are fully realizable since all future deductible amounts can
be offset by future taxable amounts or recovery of federal income taxes paid
within the statutory carryback period.
(9) -- REINSURANCE
VF&C cedes insurance to nonaffiliated reinsurers under contracts that cover
individual risks or entire classes of business. During 1994, reinsurance was
ceded on an excess-of-loss basis and during 1993 and 1992, reinsurance was ceded
on a quota-share and excess-of-loss basis. These reinsurance arrangements
provide greater diversification of business and minimize VF&C's losses arising
from large risks. Although the ceding of insurance does not discharge the
original insurer from primary liability to its policyholder, the insurance
company that assumes the coverage assumes the related liability.
There were no ceded unearned premiums at December 31, 1994 or 1993. Ceded
unearned premiums amounted to approximately $2,090 at December 31, 1992.
Earned premiums ceded to reinsurers amounted to approximately $563, $3,550
and $3,537 for the years ended December 31, 1994, 1993 and 1992, respectively.
Ceded losses to reinsurers amounted to approximately $108, $1,977 and
$1,814 for the years ended December 31, 1994, 1993 and 1992, respectively.
During the period from July 1, 1992 through June 30, 1993, VF&C entered
into a quota share reinsurance agreement with a reinsurer rated A++ by A.M. Best
Co. The contract called for VF&C to cede 10% of the net liabilities under
nonstandard automobile insurance policies in force on July 1, 1992 and those
written during the term of the agreement.
Statement of Financial Accounting Standards No. 113, Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration Contracts,
(Statement 113) was issued by the Financial Accounting Standards Board in
December 1992. Statement 113 requires, among other things, that ceded
reinsurance amounts previously deducted from losses and loss expenses payable
and unearned premiums (ceded reserves) be reported as assets. Effective January
1, 1992, the Company adopted Statement 113 which did not have a material impact
upon the 1992 consolidated statement of earnings. All reinsurance contracts
provide indemnification against loss or liability relating to insurance risk and
have been accounted for as reinsurance.
(10) -- COMMITMENTS
The Company conducts its insurance operations from corporate office
facilities located in Cleveland, Ohio and a claims office located in Cincinnati,
Ohio under operating leases which expire in 1999 and 1996, respectively. IAS
conducts its operations from office space located in Beachwood, Ohio under two
leases which expire in 1998. The Company also leases equipment under operating
leases expiring at various dates through 1997. Future minimum rental commitments
under these leases follow:
<TABLE>
<S> <C>
1995............................................................. $ 993
1996............................................................. 947
1997............................................................. 942
1998............................................................. 784
1995............................................................. 605
------
$4,271
======
</TABLE>
The lease for the corporate headquarters in Cleveland is cancelable in 1995
and each year thereafter if the building cannot provide satisfactory expansion
area for the Company. Commencing in 1991, the lease provided for payment by the
Company of its proportionate share of increases in the operating costs of
maintaining the
F-17
<PAGE> 106
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
property over the costs incurred during 1990. The Company owns a 19.9% equity
interest in a limited partnership, valued at $87, that owns the home office
facility. A limited partner of the limited partnership is also a stockholder,
director, and officer of the Company.
Total rent expense charged to operations for the years 1994, 1993 and 1992
was $785, $659 and $581, respectively.
(11) -- QUARTERLY OPERATING RESULTS (UNAUDITED)
Quarterly operating results for 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
1994
-------------------------------------------
1st 2nd 3rd 4th
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total revenues..................................... $14,006 13,915 15,498 15,233
Earnings before income taxes....................... (463) 617 1,128 838
Net earnings....................................... (347) 459 840 762
Net earnings per common and common equivalent
share............................................ $ (0.10) 0.13 0.21 0.20
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
1993
-------------------------------------------
1st 2nd 3rd 4th
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total revenues..................................... $11,241 12,427 14,412 14,987
Earnings before income taxes....................... 695 680 800 885
Net earnings....................................... 521 521 600 672
Net earnings per common and common equivalent
share............................................ $ 0.20 0.20 0.21 0.17
======= ======= ======= =======
</TABLE>
(12) -- PENDING MERGER
On December 18, 1994, Victoria Financial entered into an Agreement and Plan
of Merger with USF&G Corporation ("USF&G") and a wholly-owned subsidiary of
USF&G pursuant to which Victoria Financial will become a wholly-owned subsidiary
of USF&G (the "Merger"). On February 9, 1995, the parties executed an Amended
and Restated Agreement and Plan of Merger making certain technical changes. In
the Merger, all of Victoria Financial's outstanding shares of common stock
(other than shares held by the Company and shares held by USF&G or subsidiaries
of USF&G, all of which will be canceled) will be converted into shares of common
stock of USF&G worth approximately $55.3 million. The Merger is subject to
approval by Victoria Financial's stockholders and certain regulatory
authorities. The purchase price represents approximately $13 per share of
Victoria Financial's stock. Management anticipates that the Merger will be
consummated during the second quarter of 1995.
During the fourth quarter the Company incurred approximately $360 of costs,
in connection with the proposed merger. At December 31, 1994 these costs have
been deferred and are included in other assets and will be expensed along with
any additional transaction related expenses incurred during 1995 upon the
completion or termination of the Merger.
F-18
<PAGE> 107
VICTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
SCHEDULE I
SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1994
(in thousands)
<TABLE>
<CAPTION>
COLUMN D
AMOUNT
COLUMN A COLUMN B COLUMN C SHOWN IN
TYPE OF SECURITY COST MARKET VALUE BALANCE SHEET
- ---------------------------------------------------- --------- ------------ -------------
<S> <C> <C> <C>
Fixed maturities:
Held to maturity:
U.S. treasury securities and obligations of
U.S. government................................... $ 274 278 274
Obligations of state and political subdivisions..... 8,642 8,581 8,642
Corporate Securities................................ 200 203 200
--------- ------------ -------------
Total held to maturity......................... 9,116 9,062 9,116
--------- ------------ -------------
Available for sale:
U.S. treasury securities and obligations of
U.S. government................................... 5,134 4,847 4,847
Obligations of state and political subdivisions..... 19,681 19,187 19,187
Corporate securities................................ 8,100 7,614 7,614
Mortgage-backed securities.......................... 4,289 3,933 3,933
Debt securities issued by foreign governments....... 25 22 22
--------- ------------ -------------
Total available for sale....................... 37,229 35,603 35,603
--------- ------------ -------------
Total fixed maturities......................... 46,345 44,665 44,719
--------- ------------ -------------
Equity securities:
Common Stocks....................................... 1,805 1,886 1,886
Limited Partnership................................. 87 87 87
--------- ------------ -------------
Total equity securities........................ 1,892 1,973 1,973
Short-term investments.............................. 15,350 15,350 15,350
--------- ------------ -------------
Total investments.............................. $63,587 61,988 62,042
========== ========== ==========
</TABLE>
See accompanying report of Independent Certified Public Accountants.
F-19
<PAGE> 108
VICTORIA FINANCIAL CORPORATION
SCHEDULE III
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS -- DECEMBER 31, 1994 AND 1993
(in thousands)
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
ASSETS:
Cash................................................................... $ 422 $ 31
Investments in (at equity) and advances to
consolidated subsidiaries............................................ 37,200 30,438
Furniture and equipment, at cost, net of accumulated depreciation of
$331 in 1994 and $530 in 1993........................................ 1,331 818
Other assets........................................................... 990 564
------- -------
TOTAL ASSETS.................................................... $39,943 $31,851
======= =======
LIABILITIES:
Notes payable.......................................................... 12,000 6,000
Other liabilities...................................................... 711 752
Deferred taxes payable................................................. 18 --
------- -------
TOTAL LIABILITIES............................................... 12,729 6,752
------- -------
STOCKHOLDERS' EQUITY:
Preferred stock -- $0.01 par value; authorized -- 1,000,000 shares;
none issued.......................................................... -- --
Common stock -- $0.01 par value; authorized -- 10,000,000 shares;
issued 4,000,164 shares in 1994 and 3,578,564 shares in 1993......... 40 36
Additional paid-in capital............................................. 22,650 20,499
Net unrealized holding gain or (loss).................................. (1,396) 358
Retained earnings...................................................... 5,920 4,206
------- -------
TOTAL STOCKHOLDERS' EQUITY............................................. 27,214 25,099
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................. $39,943 $31,851
======= =======
</TABLE>
See accompanying report of Independent Certified Public Accountants.
F-20
<PAGE> 109
VICTORIA FINANCIAL CORPORATION
SCHEDULE III
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
FOR THE THREE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
(in thousands)
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- ------
<S> <C> <C> <C>
REVENUES:
Net investment income...................................... $ 96 96 96
Management fee billed to subsidiaries...................... 8,367 6,707 7,629
------- ------- ------
Total Revenues........................................ $ 8,463 6,803 7,725
------- ------- ------
COSTS AND EXPENSES:
Salaries, wages and related expenses....................... 6,655 5,811 5,240
Other operating expenses................................... 2,970 3,098 2,434
Interest expense........................................... 87 65 691
------- ------- ------
Total Costs and Expenses.............................. 9,712 8,974 8,365
------- ------- ------
Net loss before equity in subsidiaries' earnings............. (1,249) (2,171) (640)
Equity in subsidiaries' earnings............................. 2,963 4,485 1,971
------- ------- ------
NET INCOME............................................ $ 1,714 $ 2,314 $1,331
======= ======= ======
Cash dividends received from subsidiaries.................... $ -- $ -- $ 923
======= ======= ======
</TABLE>
See accompanying report of Independent Certified Public Accountants
F-21
<PAGE> 110
VICTORIA FINANCIAL CORPORATION
SCHEDULE III
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
(in thousands)
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- ------
<S> <C> <C> <C>
Net Cash (used in) provided by operating activities.......... $(1,708) (2,670) 389
Cash flows from investing activities:
Additions to furniture and equipment....................... (513) (479) (96)
Investment and advances to consolidated subsidiaries....... (3,397) (4,702) (3,665)
------- ------- ------
Net cash used in investing activities................. (3,910) (5,181) (3,761)
------- ------- ------
Cash flows from financing activities:
Net increase (decrease) in notes payable................... 6,009 (2,500) (2,674)
Proceeds from restricted stock grant and exercise of stock
options................................................. -- -- 510
Repurchase of common stock................................. -- -- (459)
Proceeds from conversion of long-term borrowings........... -- -- 5,987
Proceeds from issuance of common stock..................... -- 10,610 --
------- ------- ------
Net cash provided by financing activities............. 6,009 8,110 3,364
Net increase (decrease) in cash.............................. 391 259 (8)
Cash at beginning of year.................................... 31 (228) (220)
------- ------- ------
Cash at the end of year...................................... 422 31 (228)
======= ======= ======
Supplemental disclosures of cash flow information:
Cash paid during the year for interest..................... $ 97 219 844
======= ======= ======
Cash paid during the year for income taxes................. $ 370 475 576
======= ======= ======
</TABLE>
See accompanying report of Independent Certified Public Accountants
F-22
<PAGE> 111
VICTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
SCHEDULE V
SUPPLEMENTARY INSURANCE INFORMATION
(in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the year ended December 31, 1994
December 31, 1994 Column H
Column C -------- Column I
Column B ------------- BENEFITS, ------------
----------- FUTURE POLICY Column G CLAIMS, AMORTIZATION Column J Column K
DEFERRED BENEFITS Column D Column F -------- LOSSES OF DEFERRED -------- --------
Column A POLICY LOSSES, -------- -------- NET AND POLICY OTHER NET
- ------------ ACQUISITION CLAIMS AND UNEARNED PREMIUM INVESTMENT SETTLEMENT ACQUISITION OPERATING PREMIUMS
SEGMENT COSTS LOSS EXPENSES PREMIUMS REVENUES INCOME EXPENSES COSTS EXPENSES WRITTEN
- ------------ ----------- ------------- -------- -------- -------- -------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Nonstandard $ 6,272 24,522 22,202 51,313 2,213 35,443 13,571 7,421 50,089
========== ============ ========== ========= ========== ========== ============ ========= =========
auto
- ------------------------------------------------------------------------------------------------------------------------
December 31, 1993 For the Year Ended December 31, 1993
Nonstandard $ 6,618 22,431 23,427 48,753 2,465 34,193 11,627 4,122 53,347
========== ============ ========== ========= ========== ========== ============ ========= =========
auto
- ------------------------------------------------------------------------------------------------------------------------
December 31, 1992 For the Year Ended December 31, 1992
Nonstandard $ 5,137 17,156 20,921 38,003 2,100 26,249 8,631 4,035 43,443
========== ============ ========== ========= ========== ========== ============ ========= =========
auto
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying report of Independent Certified Public Accountants
F-23
<PAGE> 112
VICTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
SCHEDULE VI
REINSURANCE
FOR THE THREE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
(in thousands)
<TABLE>
<CAPTION>
Column F
--------
Column D PERCENTAGE
Column C -------- OF
Column B -------- ASSUMED Column E AMOUNT
Column A -------- CEDED TO FROM -------- ASSUMED
- ------------------------------------ GROSS OTHER OTHER NET TO
1994 AMOUNT COMPANIES COMPANIES AMOUNT NET
- ------------------------------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Premiums Earned
Accident & health insurance....... $ 322 4 -- 318 --%
Property & liability insurance.... 51,554 559 -- 50,995 --%
-------- -------- --- -------- ---
Total Premiums Earned........ $51,876 563 -- 51,313 --%
========= ========= ========= ========= =========
1993
Premiums Earned
Accident & health insurance....... $ 355 -- -- 355 --%
Property & liability insurance.... 51,948 3,550 -- 48,398 --%
-------- -------- --- -------- ---
Total Premiums Earned........ $52,303 3,550 -- 48,753 --%
========= ========= ========= ========= =========
1992
Premiums Earned
Accident & health insurance....... $ 408 -- -- 408 --%
Property & liability insurance.... 41,132 3,537 -- 37,595 --%
-------- -------- --- -------- ---
Total Premiums Earned........ $41,540 3,537 -- 38,003 --%
========= ========= ========= ========= =========
</TABLE>
See accompanying report of Independent Certified Public Accountants
F-24
<PAGE> 113
ANNEX I
AMENDED AND RESTATED
AGREEMENT AND PLAN
OF MERGER
DATED AS OF
DECEMBER 18, 1994
AND AMENDED AS OF
FEBRUARY 9, 1995
AMONG
USF&G CORPORATION,
QUEENSLAND, INC.
AND
VICTORIA FINANCIAL CORPORATION
<PAGE> 114
<TABLE>
TABLE OF CONTENTS
<S> <C> <C> <C>
ARTICLE I THE MERGER................................................................ 1
Section 1.1 The Merger................................................. 1
Section 1.2 Effective Date of the Merger............................... 1
Section 1.3 Tax-Free Reorganization.................................... 1
ARTICLE II THE SURVIVING CORPORATION................................................. 1
Section 2.1 Certificate of Incorporation............................... 1
Section 2.2 By-laws.................................................... 2
Section 2.3 Board of Directors; Officers............................... 2
Section 2.4 Effects of the Merger...................................... 2
ARTICLE III CONVERSION OF SHARES...................................................... 2
Section 3.1 Exchange Rate.............................................. 2
Section 3.2 Payment for Shares in the Merger........................... 3
Section 3.3 Dividends; Transfer Taxes.................................. 3
Section 3.4 No Fractional Shares....................................... 4
Section 3.5 Stock Options.............................................. 4
Section 3.6 Stockholder Approval....................................... 5
Section 3.7 Closing of the Company's Transfer Books.................... 5
Section 3.8 Assistance in Consummation of the Merger................... 5
Section 3.9 Closing.................................................... 5
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT
AND MERGER SUB............................................................ 5
Section 4.1 Organization and Qualification............................. 5
Section 4.2 Capitalization............................................. 6
Section 4.3 Authority Relative to this Merger Agreement................ 6
Section 4.4 Reports and Financial Statements........................... 7
Section 4.5 Absence of Certain Changes or Events....................... 8
Section 4.6 Financial Advisor.......................................... 8
Section 4.7 Parent Action.............................................. 8
Section 4.8 Principal Office........................................... 8
ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE COMPANY............................. 8
Section 5.1 Organization and Qualification............................. 8
Section 5.2 Capitalization............................................. 9
Section 5.3 Subsidiaries............................................... 9
Section 5.4 Authority Relative to this Merger Agreement................ 9
Section 5.5 Reports and Financial Statements........................... 10
Section 5.6 Absence of Certain Changes or Events....................... 11
Section 5.7 Litigation................................................. 11
Section 5.8 Loss Reserves; Statutory Capital........................... 11
Section 5.9 Reinsurance................................................ 12
Section 5.10 Compliance with Applicable Laws............................ 12
Section 5.11 Liabilities................................................ 12
Section 5.12 Written Insurance Policies; Regulatory Filings............. 12
Section 5.13 Agents; Fronting........................................... 13
Section 5.14 Taxes...................................................... 13
Section 5.15 Certain Agreements......................................... 14
Section 5.16 Premium Balances Receivable................................ 14
Section 5.17 Investment Portfolio and Other Assets...................... 14
Section 5.18 Intellectual Property...................................... 14
Section 5.19 Licenses................................................... 15
Section 5.20 Intercompany and Affiliate Transactions; Insider
Interests.................................................. 15
</TABLE>
i
<PAGE> 115
<TABLE>
<S> <C> <C> <C>
Section 5.21 Employee Benefit Plans..................................... 15
Section 5.22 ERISA...................................................... 16
Section 5.23 Officers, Directors and Employees.......................... 16
Section 5.24 Company Action; Takeover Provisions Inapplicable........... 16
Section 5.25 Pending Claims............................................. 16
Section 5.26 Insurance for the Benefit of the Company and the
Subsidiaries............................................... 16
Section 5.27 Title to Assets; Liens..................................... 16
Section 5.28 Ability to Conduct Business................................ 17
Section 5.29 Financial Advisor.......................................... 17
Section 5.30 Questionable Payments...................................... 17
Section 5.31 Fairness Opinion........................................... 17
Section 5.32 Disclosure................................................. 17
ARTICLE VI CONDUCT OF BUSINESS PENDING THE MERGER.................................... 17
Section 6.1 Conduct of Business by the Company Pending the Merger...... 17
Section 6.2 No Solicitation............................................ 18
Section 6.3 Notice of Breach........................................... 19
ARTICLE VII ADDITIONAL AGREEMENTS..................................................... 19
Section 7.1 Access and Information..................................... 19
Section 7.2 Registration Statement/Proxy Statement..................... 20
Section 7.3 Compliance with the Securities Act......................... 20
Section 7.4 Stock Exchange Listing..................................... 20
Section 7.5 Consents, Approvals and Filings............................ 20
Section 7.6 HSR Act.................................................... 21
Section 7.7 Additional Agreements...................................... 21
Section 7.8 Takeover Provisions Inapplicable........................... 21
Section 7.9 Information in Disclosure Documents, Registration
Statements, Etc............................................ 21
Section 7.10 Indemnification............................................ 21
Section 7.11 Employee Benefits.......................................... 22
Section 7.12 Employment Arrangements.................................... 23
Section 7.13 Lease Extension............................................ 23
ARTICLE VIII CONDITIONS PRECEDENT...................................................... 23
Section 8.1 Conditions to Each Party's Obligation to Effect the
Merger..................................................... 23
Section 8.2 Conditions to Obligation of the Company to Effect the
Merger..................................................... 23
Section 8.3 Conditions to Obligations of Parent and Merger Sub to
Effect the Merger........................................ 24
ARTICLE IX TERMINATION, AMENDMENT AND WAIVER......................................... 25
Section 9.1 Termination................................................ 25
Section 9.2 Effect of Termination...................................... 25
Section 9.3 Amendment.................................................. 25
Section 9.4 Waiver..................................................... 26
ARTICLE X GENERAL PROVISIONS........................................................ 26
Section 10.1 Non-Survival of Representations, Warranties and
Agreements................................................. 26
Section 10.2 Notices.................................................... 26
Section 10.3 Fees and Expenses.......................................... 27
Section 10.4 Publicity.................................................. 27
Section 10.5 Specific Performance....................................... 28
Section 10.6 Interpretation............................................. 28
Section 10.7 Miscellaneous.............................................. 28
</TABLE>
ii
<PAGE> 116
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER, dated as of
December 18, 1994 and amended as of February 9, 1995 (the "Merger Agreement"),
by and among USF&G CORPORATION, a Maryland corporation ("Parent"), QUEENSLAND,
INC., a Delaware corporation and a wholly owned subsidiary of Parent ("Merger
Sub"), and VICTORIA FINANCIAL CORPORATION, a Delaware corporation (the
"Company"):
WITNESSETH:
WHEREAS, the Boards of Directors of Parent, Merger Sub and the Company have
approved the merger of Merger Sub into the Company upon the terms and subject to
the conditions set forth herein (the "Merger");
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, for accounting purposes, it is intended that the Merger shall be
accounted for as a "pooling of interests."
NOW, THEREFORE, in consideration of the foregoing premises and the
representations, warranties and agreements contained herein, the parties hereto
agree as follows.
ARTICLE I
THE MERGER
Section 1.1 The Merger. Upon the terms and subject to the conditions
hereof, on the Effective Date (as defined in Section 1.2), Merger Sub shall be
merged with and into the Company and the separate existence of Merger Sub shall
thereupon cease, and the name of the Company, as the surviving corporation in
the Merger (the "Surviving Corporation"), shall by virtue of the Merger remain
"Victoria Financial Corporation."
Section 1.2 Effective Date of the Merger. The Merger shall become
effective when a properly executed Certificate of Merger is duly filed with the
Secretary of State of the State of Delaware, which filing shall be made
concurrently with the closing of the transactions contemplated by this Merger
Agreement in accordance with Section 3.9. When used in this Merger Agreement,
the term the "Effective Date" shall mean the date and time at which such
Certificate of Merger is so filed or at such time thereafter as is provided in
such Certificate of Merger.
Section 1.3 Tax-Free Reorganization. The parties intend to adopt this
Merger Agreement as a tax-free plan of reorganization and to consummate the
Merger in accordance with the provisions of Sections 368(a)(1)(A) and
368(a)(2)(E) of the Code. In this regard, Parent represents that it presently
intends, and that at the Effective Date it will intend, to continue the
Company's historic business or use a significant portion of the Company's
business assets in a business.
ARTICLE II
THE SURVIVING CORPORATION
Section 2.1 Certificate of Incorporation. The Certificate of Incorporation
of Merger Sub as in effect immediately prior to the Effective Date shall be the
Certificate of Incorporation of the Surviving Corporation until duly amended,
except that the Certificate of Incorporation of the Surviving Corporation shall
be amended, in accordance with the terms thereof and of the Delaware General
Corporation Law (the "DGCL"), to provide that the name of the Surviving
Corporation shall be "Victoria Financial Corporation."
<PAGE> 117
Section 2.2 By-laws. The By-laws of Merger Sub as in effect immediately
prior to the Effective Date shall be the By-laws of the Surviving Corporation,
and thereafter may be amended in accordance with its terms and as provided by
law.
Section 2.3 Board of Directors; Officers. The directors of Merger Sub
immediately prior to the Effective Date shall be the directors of the Surviving
Corporation and the officers of the Company immediately prior to the Effective
Date shall be the officers of the Surviving Corporation, in each case until
their respective successors are duly elected and qualified.
Section 2.4 Effects of the Merger. The Merger shall have the effects set
forth in Section 259 of the DGCL.
ARTICLE III
CONVERSION OF SHARES
Section 3.1 Exchange Rate.
(a) As of the Effective Date, by virtue of the Merger and without any
action on the part of any holder of any shares of the Company's Common
Stock, $0.01 par value ("Company Common Stock"):
(i) All shares of Company Common Stock which are held by the
Company or any subsidiary of the Company, and any shares of Company
Common Stock owned by Parent, Merger Sub or any other subsidiary of
Parent, other than shares under the Victoria Financial Corporation
401(K) Plan and the Amended and Restated Employee and Agency Stock
Purchase Plan, which shares are held by the Company as trustee, shall be
cancelled.
(ii) Subject to Section 3.4, each remaining outstanding share of
Company Common Stock shall be converted into the number of fully paid
and nonassessable shares of the Common Stock, $2.50 par value, of Parent
("Parent Common Stock") equal to the Exchange Rate (as defined below).
Each share of Parent Common Stock issued pursuant to Sections 3.1(a)(ii)
or 3.5(a) shall include a Preferred Share Purchase Right issued pursuant
to the Rights Agreement dated as of September 18, 1987, between Parent
and First Chicago Trust Company of New York (successor to Morgan
Shareholder's Service Trust Company) or any other purchase right issued
in substitution thereof (the "Parent Rights").
(iii) In the event of any stock dividend, stock split,
reclassification, recapitalization, combination or exchange of shares
with respect to, or rights issued in respect of, Parent Common Stock or
Parent Rights after the date hereof and prior to or as of the Effective
Date, the Exchange Rate shall be adjusted accordingly.
(iv) Each issued and outstanding share of Common Stock, $0.01 par
value, of Merger Sub ("Merger Sub Common Stock") shall be converted into
and become one fully paid and nonassessable share of Common Stock, $0.01
par value, of the Surviving Corporation.
(b) (i) The "Exchange Rate" shall mean:
(A) The quotient of (a) $13.959 divided by (b) the Final Price
(as defined below), if and only if the Final Price is greater than
$14.556; or
(B) .959, if and only if the Final Price is both (x) less than
or equal to $14.556 and (y) greater than $13.556; or
(C) The quotient of (a) $13.00 divided by (b)the Final Price, if
and only if the Final Price is both (x) less than or equal to $13.556
and (y) greater than or equal to $11.90; or
(D) 1.092, if and only if the Final Price is less than $11.90;
provided, however, that in the event that the Final Price is less
than $11.90, then in that event the Company may, in its sole
2
<PAGE> 118
discretion, at any time on or prior to the Effective Date, terminate
this Merger Agreement, in which case none of the parties hereto shall
have any further obligations hereunder.
(ii) The "Final Price" shall mean the average closing price of
Parent Common Stock on the New York Stock Exchange -- Composite Tape
during the period comprising the twenty consecutive trading days
immediately preceding the third business day immediately preceding the
Effective Date, as such closing prices are reported in The Wall Street
Journal, or if not so published in such newspaper, in any other
newspaper of general circulation selected by the Company.
Section 3.2 Payment for Shares in the Merger. The manner of making payment
for Company Common Stock in the Merger shall be as follows:
(a) On the Effective Date, Parent shall make available to First
Chicago Trust Company of New York or such other exchange agent as selected
by Parent and reasonably acceptable to the Company (the "Exchange Agent"),
for the benefit of each holder of Company Common Stock and each holder of
Company Options (as defined in Section 3.5(a)), a sufficient number of
certificates representing Parent Common Stock required to effect the
delivery of Parent Common Stock required to be issued pursuant to Sections
3.1 and 3.5. The Exchange Agent shall, pursuant to irrevocable
instructions, deliver the Parent Common Stock contemplated to be issued
pursuant to Sections 3.1 and 3.5.
(b) Promptly after the Effective Date, the Exchange Agent shall mail
to each holder of record (as shown on the books of the Company's transfer
agent as of the Effective Date) of a certificate or certificates which
immediately prior to the Effective Date represented outstanding shares of
Company Common Stock (individually, a "Certificate" and collectively, the
"Certificates") (i) a form of letter of transmittal (which shall specify
that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon proper delivery of the Certificates to
the Exchange Agent) and (ii) instructions for use in effecting the
surrender of the Certificates for payment therefor. Upon surrender of
Certificates for cancellation to the Exchange Agent, together with such
letter of transmittal duly executed and any other required documents, the
holder of such Certificates shall be entitled to receive for each of the
shares of Company Common Stock represented by such Certificates the number
of shares of Parent Common Stock into which such shares of Company Common
Stock are converted in the Merger and the Certificates so surrendered shall
forthwith be cancelled. Until so surrendered, Certificates shall represent
solely the right to receive the number of shares of Parent Common Stock
into which such shares of Company Common Stock are converted in the Merger
and any cash in lieu of fractional shares of Parent Common Stock as
contemplated by Section 3.4 with respect to each of the shares of Company
Common Stock represented thereby. The Exchange Agent shall not be entitled
to vote or exercise any rights of ownership with respect to the Parent
Common Stock held by it from time to time hereunder, except that it shall
receive and hold all dividends or other distributions paid or distributed
with respect to such Parent Common Stock for the account of the persons
entitled thereto.
(c) Certificates or option award agreements, as applicable,
surrendered for exchange by any Affiliate (as defined in Section 7.3(a))
shall not be exchanged for certificates representing shares of Parent
Common Stock until Parent has received the written agreements from such
person as provided in Section 7.3(b).
Section 3.3 Dividends; Transfer Taxes. No dividends or other distributions
that are declared or made on Parent Common Stock will be paid to persons
entitled to receive certificates representing Parent Common Stock pursuant to
this Merger Agreement until such persons (i) surrender their Certificates
representing Company Common Stock or (ii) surrender their option award
agreements or provide other satisfactory evidence of the cancellation of Company
Options, as applicable. Upon such surrender, there shall be paid to the person
in whose name the certificates representing such Parent Common Stock shall be
issued any dividends or other distributions which shall have become payable with
respect to such Parent Common Stock in respect of a record date after the
Effective Date. In no event shall the person entitled to receive such dividends
be entitled to receive interest on such dividends. If any cash in lieu of
fractional shares or any certificate representing Parent Common Stock is to be
paid to or issued in a name other than that in which the Certificate surrendered
in exchange therefor is registered, it shall be a condition of such exchange
that the
3
<PAGE> 119
Certificate so surrendered shall be properly endorsed and otherwise in proper
form for transfer and that the person requesting such exchange shall pay to the
Exchange Agent any transfer or other taxes required by reason of the issuance of
certificates for such Parent Common Stock in a name other than that of the
registered holder of the Certificate surrendered, or shall establish to the
satisfaction of the Exchange Agent that such tax has been paid or is not
applicable. Notwithstanding the foregoing, neither the Exchange Agent nor any
party hereto shall be liable to a holder of Company Options or shares of Company
Common Stock for any shares of Parent Common Stock or dividends thereon
delivered to a public official pursuant to any applicable escheat laws.
Section 3.4 No Fractional Shares. No certificates or scrip representing
less than one share of Parent Common Stock shall be issued upon the surrender
for exchange of (i) Certificates representing Company Common Stock pursuant to
Section 3.1(b) or (ii) option award agreements or other evidence of cancellation
of Company Options pursuant to Section 3.5(a). In lieu of any such fractional
share, each holder of Company Common Stock or Company Options who would
otherwise have been entitled to a fraction of a share of Parent Common Stock
upon surrender of (i) Certificates for exchange pursuant to Section 3.1(b) or
(ii) option award agreements or other evidence of cancellation of Company
Options pursuant to Section 3.5(b) shall be paid upon such surrender cash
(without interest) in an amount equal to such fractional interest multiplied by
the Final Price. As soon as practicable after the determination of the amount of
cash to be paid to former stockholders or option holders of the Company in lieu
of any fractional interests, Parent shall make available to the Exchange Agent,
which shall in turn make available in accordance with this Merger Agreement,
such amounts to such former stockholders and option holders.
Section 3.5 Stock Options.
(a) Each of the options to purchase Company Common Stock, whether
vested or unvested, issued under the Company's (i) Amended and Restated
1986 Non-Qualified and Incentive Stock Option Plan (the "1986 Plan"), (ii)
1994 Non-Employee Directors' Stock Option Plan (the "Non-Employee Plan"),
(iii) 1994 Long-Term Incentive Plan (the "1994 Plan" and, collectively with
the 1986 Plan and the Non-Employee Plan, the "Stock Option Plans"), and
(iv) individual options not issued under a Plan ("Other Options") and which
are (A) listed on Section 3.5 of the Company Disclosure Schedule (as
defined in Section 5.1) and (B) outstanding as of the Effective Date
(individually, a "Company Option" and collectively, the "Company Options")
shall be converted without any action on the part of the holder thereof
into the right to receive, as of the Effective Date, shares of Parent
Common Stock (or cash in lieu of fractional shares as provided in Section
3.4). The number of shares of Parent Common Stock that the holder of a
Company Option shall be entitled to receive shall be a number determined by
dividing (i) the product of (x) the value of such Company Option as
determined by the Black-Scholes model and (y)the Discount Factor (as
defined below) by (ii) the Final Price. The value of each such Company
Option as determined by the Black-Scholes model shall be determined using
(i) a value per share of Company Common Stock equal to the product of (x)
the Final Price and (y) the Exchange Rate, (ii) a 52 week volatility for
Company Common Stock of 40% for Company Options expiring prior to three
years after the Effective Date and 35% for Company Options expiring three
or more years after the Effective Date, and (iii) a risk free rate of
7.325%. The "Discount Factor" shall mean (A) for a Company Option that is
vested at the Effective Date, one and (B) for a Company Option that is not
vested at the Effective Date, (i) if the holder's employment by the Company
has been terminated, voluntarily or otherwise, on or before the Effective
Date, zero and (ii) if the holder's employment by the Company has not been
terminated, voluntarily or otherwise, on or before the Effective Date, one
minus the product of (x) 7/12% and (y) the number of months between the
Effective Date and the date such Company Option vests, rounded to the next
largest number of months. Promptly after the Effective Date, the Exchange
Agent shall mail to each holder of Company Options (as listed on Section
3.5 of the Company Disclosure Schedule) (i) a form of letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and
title to the Company Options shall pass, only upon proper delivery of the
option award agreements or other satisfactory evidence of cancellation of
Company Options to the Exchange Agent) and (ii) instructions for use in
effecting the surrender of the option award agreements or other
satisfactory evidence of cancellation of Company Options for payment.
Holders of Company Options
4
<PAGE> 120
outstanding on the Effective Date shall surrender to the Exchange Agent
their option award agreements for cancellation or provide other
satisfactory evidence of the cancellation of the Company Options, together
with a duly executed letter of transmittal, and thereupon shall receive the
requisite shares of Parent Common Stock or cash in lieu of fractional
shares, subject to applicable withholding taxes. Until so surrendered,
option award agreements or other evidence of ownership of Company Options
shall represent solely the right to receive the number of shares of Parent
Common Stock into which such Company Options are converted in the Merger
and any cash in lieu of fractional shares of Parent Common Stock as
contemplated by Section 3.4.
(b) At or prior to the Effective Date, the Company and Parent shall
take all action necessary to cause the assumption by Parent as of the
Effective Date of the rights available under the Amended and Restated Key
Executive Stock Option and Stock Appreciation Rights Plan (the "SAR Plan").
Section 3.6 Stockholder Approval. The Company shall take all action
necessary, in accordance with applicable law and its Certificate of
Incorporation and By-laws, to convene a special meeting of the holders of
Company Common Stock (the "Company Meeting") as promptly as practicable for the
purpose of considering and taking action upon this Merger Agreement. Subject to
Section 6.2, the Board of Directors of the Company will recommend that holders
of Company Common Stock vote in favor of the approval of the Merger and the
adoption of this Merger Agreement at the Company Meeting. At the Company
Meeting, all of the shares of Company Common Stock then owned by Parent, Merger
Sub, or any other subsidiary of Parent, or with respect to which Parent, Merger
Sub, or any other subsidiary of Parent holds the power to direct the voting,
will be voted in favor of approval of the Merger and adoption of this Merger
Agreement.
Section 3.7 Closing of the Company's Transfer Books. At the Effective
Date, the stock transfer books of the Company shall be closed and no transfer of
shares of Company Common Stock shall be made thereafter. In the event that,
after the Effective Date, Certificates are presented to the Surviving
Corporation, they shall be cancelled and exchanged for Parent Common Stock
and/or cash as provided in Sections 3.1(a), 3.2, 3.3 and 3.4.
Section 3.8 Assistance in Consummation of the Merger. Each of Parent,
Merger Sub and the Company shall provide all reasonable assistance to, and shall
cooperate with, each other to bring about the consummation of the Merger as soon
as practicable in accordance with the terms and conditions of this Merger
Agreement. Parent shall cause Merger Sub to perform all of its obligations in
connection with this Merger Agreement.
Section 3.9 Closing. The closing of the transactions contemplated by this
Merger Agreement shall take place (i) at the offices of Benesch, Friedlander,
Coplan & Aronoff, 2300 BP America Building, 200 Public Square, Cleveland, Ohio
44114, at 10:00 A.M. local time on the day which is three business days after
the day on which the last of the conditions set forth in Article VIII (other
than those requiring an exchange of certificate, opinion or other document, or
the taking of other action, at the Closing) is fulfilled or waived or (ii) at
such other time and place as Parent and the Company shall agree in writing.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT
AND MERGER SUB
Parent and Merger Sub jointly and severally represent and warrant to, and
agree with, the Company as follows:
Section 4.1 Organization and Qualification. Parent is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Maryland, Merger Sub is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware, and each has the
corporate power to carry on its business as it is now being conducted or
currently proposed to be conducted. Parent is duly qualified as a foreign
corporation to do business, and is in good standing, in each jurisdiction where
the character of its properties owned or held under lease or the nature of its
activities make such qualification
5
<PAGE> 121
necessary, except where the failure to be so qualified would not, individually
or in the aggregate, have a material adverse effect on the business, properties,
assets, condition (financial or otherwise), liabilities or operations of Parent
and its subsidiaries taken as a whole (a "Parent Material Adverse Effect").
Merger Sub has not engaged in any business (other than certain organizational
matters and matters relating to this Merger Agreement) since the date of its
incorporation. Complete and correct copies as of the date hereof of the Articles
of Incorporation and By-laws of Parent have been provided to the Company.
Section 4.2 Capitalization.
(a) As of the date hereof, the authorized capital stock of Parent
consists of 240,000,000 shares of Parent Common Stock and 12,000,000 shares
of Preferred Stock, $50.00 par value. As of December 15, 1994, there were
(i) 95,473,145 shares of Parent Common Stock (and corresponding Parent
Rights) validly issued and outstanding (all of which are fully paid and
nonassessable), (ii) 3,999,910 shares of Parent Series A Preferred Stock
validly issued and outstanding (all of which are fully paid and
nonassessable), (iii) 1,300,000 shares of Parent Series B Preferred Stock
validly issued and outstanding (all of which are fully paid and
nonassessable), and (iv) 1,359,066 shares of Parent Series C Preferred
Stock validly issued and outstanding (all of which are fully paid and
nonassessable). As of the date hereof, except for (i) 3,999,910 shares of
Parent Series A Preferred Stock, (ii) 1,300,000 shares of Parent Series B
Preferred Stock, (iii) 1,359,066 shares of Parent Series C Preferred Stock,
(iv) options to purchase or other obligations to issue 5,987,916 shares of
Parent Common Stock, (v) $247,000,000 principal amount of Zero Coupon
Convertible Subordinated Notes due March 3, 2009 issued by Parent, and (vi)
the Parent Rights, there are no options, warrants, calls or other rights,
agreements or commitments presently outstanding obligating Parent to issue,
deliver or sell shares of its capital stock, or obligating Parent to grant,
extend or enter into any such option, warrant, call or other such right,
agreement or commitment. All of the shares of Parent Common Stock issuable
in accordance with this Merger Agreement in exchange for Company Common
Stock or Company Options at the Effective Date will be, when so issued,
duly authorized, validly issued, fully paid and nonassessable. Parent has
not issued any securities in violation of any preemptive or similar rights.
Except as set forth in this Section 4.2(a), and as of the date hereof,
there are no options, warrants, calls, rights or other securities,
agreements or commitments of any character obligating Parent to grant,
extend or enter into any such option, warrant, call or other such right,
agreement or commitment.
(b) The authorized capital stock of Merger Sub consists of 1,000
shares of Merger Sub Common Stock, 1,000 shares of which are validly issued
and outstanding, fully paid and nonassessable. Merger Sub has not issued
any securities in violation of any preemptive or similar rights, and there
are no options, warrants, calls, rights or other securities, agreements or
commitments of any character obligating Merger Sub to grant, extend or
enter into any such option, warrant, call or other such right, agreement or
commitment.
Section 4.3 Authority Relative to this Merger Agreement. Each of Parent and
Merger Sub has the corporate power to enter into this Merger Agreement and the
agreements contemplated hereby and to carry out its obligations hereunder and
thereunder. The execution and delivery of this Merger Agreement and the
agreements contemplated hereby and the consummation of the transactions
contemplated hereby have been duly authorized by the Boards of Directors of
Parent and Merger Sub and by Parent as the sole stockholder of Merger Sub. This
Merger Agreement constitutes a valid and binding obligation of Parent and Merger
Sub and is enforceable against them in accordance with its terms except as
enforcement may be limited by bankruptcy, insolvency or other similar laws
affecting the enforcement of creditors' rights generally and except that the
availability of equitable remedies, including specific performance, is subject
to the discretion of the court before which any proceeding therefor may be
brought. No other corporate proceedings on the part of Parent or Merger Sub are
necessary to authorize this Merger Agreement and the transactions contemplated
hereby. The execution, delivery and performance of this Merger Agreement by
Parent and Merger Sub and the consummation by Parent and Merger Sub of the
transactions contemplated hereby do not and will not (i) conflict with or
violate the Articles or Certificate of Incorporation or By-laws of Parent or
Merger Sub, (ii) violate or conflict with any permit, order, license, decree,
judgment, statute, law, ordinance, rule or regulation applicable to Parent or
Merger Sub or by which any of their properties are bound or affected, or (iii)
result in
6
<PAGE> 122
any breach or violation of, or constitute a default (with or without notice or
lapse of time or both) under, or give to others any rights of termination,
cancellation or acceleration of, or result in the creation of any lien or
encumbrance on any of the properties or assets of Parent or Merger Sub pursuant
to, any note, bond, mortgage, indenture or other loan document, contract,
agreement, lease, instrument or franchise to which Parent or Merger Sub or any
of their properties are bound or affected other than, (A) in the case of clause
(iii) only, any breaches, violations, defaults, terminations, cancellations,
accelerations, liens or encumbrances which would not, individually or in the
aggregate, have a Parent Material Adverse Effect or prevent the consummation of
the transactions contemplated hereby and (B) the laws and regulations referred
to in the next sentence. Except as referred to herein or, in connection, or in
compliance, with the provisions of the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR Act"), the Securities Act of 1933, as amended
(the "Securities Act"), the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), the corporation, securities or Blue Sky laws or regulations of
the various states, and Applicable Insurance Laws (as defined in Section 5.8)
including, without limitation, Ohio Revised Code ("ORC ") sec. 3901.321(F),
Requirements and Procedure for Approval of Mergers or Acquisitions of Domestic
Insurance Companies, and other similar requirements in states in which any
Subsidiary is licensed as an insurance company or agency, no filing or
registration with, or authorization, consent or approval of, any public body or
authority is necessary for the consummation by Parent or Merger Sub of the
Merger or the other transactions contemplated by this Merger Agreement, other
than filings, registrations, authorizations, consents or approvals which if not
obtained or made would not, individually or in the aggregate, have a Parent
Material Adverse Effect or prevent the consummation of the transactions
contemplated hereby.
Section 4.4 Reports and Financial Statements.
(a) Parent has made, and will prior to the Effective Date make,
available to the Company true, complete and correct copies of the
consolidated Annual Statements and Quarterly Statements of United States
Fidelity and Guaranty Company ("USFGC ") and its subsidiaries as filed with
the Maryland Insurance Administration for the three years ended December
31, 1991, December 31, 1992 and December 31, 1993 and for the quarterly
periods ended March 31, 1994, June 30, 1994 and September 30, 1994. The
consolidated balance sheets of USFGC and its subsidiaries included therein
as of December 31, 1993, and the related summaries of operations and
statement of cash flows for the year then ended, included in the Annual
Statements of USFGC and its subsidiaries for the year then ended, were
prepared in all material respects in conformity with statutory accounting
practices prescribed or permitted by the applicable insurance regulatory
authorities ("Statutory Accounting Principles") consistently applied for
the period covered thereby, were prepared in accordance with the books and
records of USFGC and its subsidiaries and present fairly the consolidated
statutory financial position of USFGC and its subsidiaries as at the date
thereof and the consolidated statutory results of operations of USFGC and
its subsidiaries and other data contained therein for the period then
ended. The consolidated balance sheets of USFGC and its subsidiaries
included therein in respect of any period ending after December 31, 1993,
and the related summaries of operations and statements of cash flows for
the periods then ended included in the Quarterly Statements, were prepared
in conformity with Statutory Accounting Principles applicable to interim
financial statements consistently applied during the periods involved,
subject to normal year-end adjustments, and fairly present the consolidated
statutory financial position of USFGC and its subsidiaries at the
respective dates and the consolidated results of operations of USFGC and
its subsidiaries for the periods then ended.
(b) Parent has furnished the Company with true and complete copies of
its (i) Annual Reports on Form 10-K for the three fiscal years ended
December 31, 1991, December 31, 1992 and December 31, 1993, as filed with
the Securities and Exchange Commission (the "Commission"), (ii) Quarterly
Reports on Form 10-Q for the quarters ended March 31, 1994, June 30, 1994
and September 30, 1994, as filed with the Commission, (iii) proxy
statements related to all meetings of its stockholders (whether annual or
special) since December 31, 1991, and (iv) all other reports or
registration statements filed by Parent with the Commission since December
31, 1993, except registration statements on Form S-8 or reports on Form
11-K, in each case relating to employee benefit plans (the documents
described in clauses (i) through (iv) being referred to herein collectively
as the "Parent SEC Reports"). As of their
7
<PAGE> 123
respective filing dates, the Parent SEC Reports complied in all material
respects with the requirements of the Securities Act or the Exchange Act,
as the case may be, and the rules and regulations of the Commission
thereunder applicable to such Parent SEC Reports. As of their respective
filing dates, the Parent SEC Reports did not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The audited
consolidated financial statements and unaudited interim financial
statements of Parent included in the Parent SEC Reports comply as to form
in all material respects with applicable accounting requirements and with
the published rules and regulations of the Commission with respect thereto,
and the financial statements included in the Parent SEC Reports have been
prepared in accordance with generally accepted accounting principles
applied on a consistent basis (except as may be indicated therein or in the
notes thereto) and fairly present the financial position of Parent as at
the dates thereof and the results of its operations and changes in
financial position for the periods then ended subject, in the case of the
unaudited interim financial statements, to normal year-end audit
adjustments and any other adjustments described therein.
Section 4.5 Absence of Certain Changes or Events. Except as disclosed in
the Parent SEC Reports, since September 30, 1994, there has not been (i) any
transaction, commitment, dispute or other event or condition (financial or
otherwise) of any character (whether or not in the ordinary course of business)
which would, individually or in the aggregate, have a Parent Material Adverse
Effect (other than as a result of changes in laws or regulations of general
applicability or changes in general economic or market conditions); (ii) any
damage, destruction or loss, whether or not covered by insurance, which, insofar
as reasonably can be foreseen, in the future would, individually or in the
aggregate, have a Parent Material Adverse Effect; or (iii) any declaration,
setting aside or payment of any dividend or other distribution (whether in cash,
stock or property) with respect to the capital stock of Parent other than
regular quarterly dividends.
Section 4.6 Financial Advisor. Except for Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ"), no broker, finder or investment banker is
entitled to any brokerage, finder's or other fee or commission in connection
with the Merger or the transactions contemplated by this Merger Agreement based
upon arrangements made by or on behalf of Parent or Merger Sub, and the fees and
commissions payable to DLJ as contemplated by this Section will be payable by
Parent. To the extent any claim for broker, finder or investment banking fees is
alleged or asserted by Kidder, Peabody & Co., or any person previously
associated with Kidder, Peabody & Co., Parent will pay such fee or, at its
discretion, fully indemnify the Company against any and all costs, expenses,
claims, losses or liabilities (including reasonable attorneys fees and expenses)
incurred by the Company in connection with any such claim.
Section 4.7 Parent Action. The Board of Directors of Parent (at a meeting
duly called and held) has by the requisite vote of all directors present taken
all necessary steps, if any, to render the Parent Rights inapplicable to the
Merger and the transactions contemplated by this Merger Agreement.
Section 4.8 Principal Office. Parent intends to cause the principal office
of the Surviving Corporation to remain in Cleveland, Ohio.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to, and agrees with, Parent and Merger
Sub as follows:
Section 5.1 Organization and Qualification. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has the corporate power to carry on its business as it is
now being conducted or currently proposed to be conducted. The Company is duly
qualified as a foreign corporation to do business, and is in good standing, in
each jurisdiction where the character of its properties owned or held under
lease or the nature of such activities make such qualification necessary except
where the failure to so qualify would not, individually or in the aggregate,
have a material adverse effect on the business, properties, assets, condition
(financial or otherwise), liabilities or operations of the Company and the
Subsidiaries (as defined in Section 5.3) taken as a whole (a "Company Material
Adverse Effect"). All such
8
<PAGE> 124
jurisdictions are listed in Section 5.1 of the disclosure schedule delivered
herewith by the Company (the "Company Disclosure Schedule"). Complete and
correct copies as of the date hereof of the Certificate of Incorporation and
By-laws of the Company and each Subsidiary have been provided to Parent.
Section 5.2 Capitalization. The authorized capital stock of the Company
consists of 10,000,000 shares of Company Common Stock and 1,000,000 shares of
Preferred Stock, $0.01 par value ("Company Preferred Stock"). There are (i)
4,000,404 shares of Company Common Stock validly issued and outstanding (all of
which are fully paid and nonassessable), (ii) no shares of Company Preferred
Stock issued and outstanding, (iii) 230,160 shares of Company Common Stock
reserved for issuance under the 1986 Plan, (iv) 100,000 shares of Company Common
Stock reserved for issuance under the Non-Employee Plan, (v) 40,000 shares of
Company Common Stock reserved for issuance under the SAR Plan, (vi) 500,000
shares of Company Common Stock reserved for issuance under the 1994 Plan, (vii)
50,000 shares of Company Common Stock reserved for issuance under the Amended
and Restated Agent and Employee Stock Purchase Plan, (viii) 50,000 shares of
Company Common Stock reserved for issuance under the Victoria Financial
Corporation Employee Stock Bonus Plan and (ix) 133,200 shares of Company Common
Stock reserved for issuance under the Other Options. Except as set forth on
Section 3.5 of the Company Disclosure Schedule, there are no options, warrants,
calls or other rights, agreements or commitments presently outstanding
obligating the Company to issue, deliver or sell shares of its capital stock, or
obligating the Company to grant, extend or enter into any such option, warrant,
call or other such right, agreement or commitment. There are no bonds,
debentures, notes or other indebtedness having the right to vote on any matters
on which the Company's stockholders may vote that are issued or outstanding. The
Company has not issued any securities in violation of any preemptive or similar
rights and, except for the Company Options, there are no options, warrants,
calls, rights or other securities, agreements or commitments of any character
obligating or committing the Company to issue, deliver or sell shares of its
capital stock or debt securities, or obligating the Company to grant, extend or
enter into any such option, warrant, call or other such right, agreement or
commitment.
Section 5.3 Subsidiaries. Section 5.3 of the Company Disclosure Schedule
sets forth a true and complete list of all subsidiaries of the Company (each, a
"Subsidiary" and collectively, the "Subsidiaries"). Each of the Subsidiaries is
a corporation duly organized, validly existing and in good standing under the
laws of its jurisdiction of incorporation and has the corporate power to carry
on its business as it is now being conducted or currently proposed to be
conducted. Each of the Subsidiaries is duly qualified as a foreign corporation
to do business, and is in good standing, in each jurisdiction where the
character of its properties owned or held under lease or the nature of such
activities make such qualification necessary except where the failure to so
qualify would not, individually or in the aggregate, have a Company Material
Adverse Effect. All such jurisdictions are listed in Section 5.3 of the Company
Disclosure Schedule. All the outstanding shares of capital stock of each
Subsidiary are duly authorized, validly issued, fully paid and nonassessable and
owned by the Company free and clear of any liens, claims or encumbrances. None
of the Subsidiaries has issued any securities in violation of any preemptive or
similar rights and there are no options, warrants, calls, rights or other
securities, agreements or commitments of any character obligating or committing
any Subsidiary or the Company to issue, deliver or sell shares of such
Subsidiary's capital stock or debt securities, or obligating any of the
Subsidiaries or the Company to grant, extend or enter into any such option,
warrant, call or other such right, agreement or commitment. Except as set forth
in Section 5.3 of the Company Disclosure Schedule, the Company does not directly
or indirectly own any interest in any corporation, partnership, joint venture or
other business association or entity other than the Subsidiaries.
Section 5.4 Authority Relative to this Merger Agreement. The Company has
the corporate power to enter into this Merger Agreement and, subject to the
requisite approval of this Merger Agreement by the holders of Company Common
Stock, to carry out its obligations hereunder. The execution and delivery of
this Merger Agreement and the consummation of the transactions contemplated
hereby have been duly authorized by the Company's Board of Directors. This
Merger Agreement constitutes a valid and binding obligation of the Company
enforceable against it in accordance with its terms except as enforcement may be
limited by bankruptcy, insolvency or other similar laws affecting the
enforcement of creditors' rights generally and except that the availability of
equitable remedies, including specific performance, is subject to the discretion
of the court before which any proceeding therefor may be brought. Except for the
requisite approval of the holders of
9
<PAGE> 125
Company Common Stock, no other corporate proceedings on the part of the Company
are necessary to authorize this Merger Agreement and the transactions
contemplated hereby. The execution, delivery and performance of this Merger
Agreement by the Company and the consummation by the Company of the transactions
contemplated hereby do not and will not (i) conflict with or violate the
Articles or Certificate of Incorporation or By-laws or Code of Regulations of
the Company or the Subsidiaries, (ii) violate or conflict with any permit,
order, license, decree, judgment, statute, law, ordinance, rule or regulation
applicable to the Company or the Subsidiaries or by which any of their
properties are bound or affected, or (iii) except as set forth in Section 5.4 of
the Company Disclosure Schedule, result in any breach or violation of, or
constitute a default (with or without notice or lapse of time or both) under, or
give to others any rights of termination, cancellation or acceleration of, or
result in the creation of any lien or encumbrance on any of the properties or
assets of the Company or any of the Subsidiaries pursuant to, any note, bond,
mortgage, indenture or other loan document, contract, agreement, lease,
instrument or franchise to which the Company or any of the Subsidiaries or its
or any of their properties is bound or affected other than, (A) in the case of
clause (iii) only, any breaches, violations, defaults, terminations,
cancellations, accelerations, liens or encumbrances which would not,
individually or in the aggregate, have a Company Material Adverse Effect or
prevent the consummation of the transactions contemplated hereby and (B) the
laws and regulations referred to in the next sentence. Except as referred to
herein or, in connection, or in compliance, with the provisions of the HSR Act,
the Securities Act, the Exchange Act, the corporation, securities or Blue Sky
laws or regulations of the various states, and Applicable Insurance Laws
including, without limitation, ORC sec. 3901.321(F), and other similar
requirements in states in which any Subsidiary is licensed as an insurance
company or agency, no filing or registration with, or authorization, consent or
approval of, any public body or authority is necessary for the consummation by
the Company of the Merger or the other transactions contemplated hereby, other
than filings, registrations, authorizations, consents or approvals which if not
obtained or made would not, individually or in the aggregate, have a Company
Material Adverse Effect or prevent the consummation of the transactions
contemplated hereby and thereby.
Section 5.5 Reports and Financial Statements.
(a) The Company has heretofore delivered or made available to Parent
true, complete and correct copies of the Annual Statements and Quarterly
Statements of the Company and each of the Subsidiaries as filed with the
insurance regulatory authorities in Ohio and any other state in which such
statements are required to be filed for the three years ended December 31,
1991, December 31, 1992 and December 31, 1993 and for the quarterly periods
ended March 31, 1994, June 30, 1994 and September 30, 1994. The respective
balance sheets of the Company and each of the Subsidiaries as of December
31, 1993, and the related summaries of operations and statement of cash
flows for the year then ended, included in the Annual Statements of the
Company and each of the Subsidiaries for the year then ended, were prepared
in all material respects in conformity with Statutory Accounting Principles
consistently applied for the period covered thereby, were prepared in
accordance with the books and records of the Company or the applicable
Subsidiary, as the case may be, and present fairly the statutory financial
position of the Company or the applicable Subsidiary, as the case may be,
as at the date thereof and the statutory results of operations of the
Company or the applicable Subsidiary, as the case may be, and other data
contained therein for the period then ended. The balance sheets of the
Company and each of the Subsidiaries in respect of any period ending after
December 31, 1993, and the related summaries of operations and statements
of cash flows for the periods then ended included in the Quarterly
Statements, were prepared in conformity with Statutory Accounting
Principles applicable to interim financial statements consistently applied
during the periods involved, subject to normal year-end adjustments, and
fairly present their respective statutory financial positions at the
respective dates and the results of the Company's and the Subsidiaries'
respective operations for the periods then ended.
(b) The Company has previously furnished Parent with true and complete
copies of its (i) Annual Reports on Form 10-K for the three fiscal years
ended December 31, 1991, December 31, 1992 and December 31, 1993, as filed
with the Commission, (ii) Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1994, June 30, 1994 and September 30, 1994, as filed with
the Commission, (iii) proxy statements related to all meetings of its
stockholders (whether annual or special) since December 31,
10
<PAGE> 126
1991 and (iv) all other reports or registration statements filed by the
Company with the Commission since December 31, 1991, which are all the
documents (other than preliminary material) that the Company was required
to file with the Commission since that date (the documents described in
clauses (i) through (iv) being referred to herein collectively as the
"Company SEC Reports"). As of their respective dates, the Company SEC
Reports complied in all material respects with the requirements of the
Securities Act or the Exchange Act, as the case may be, and the rules and
regulations of the Commission thereunder applicable to such Company SEC
Reports. As of their respective dates, the Company SEC Reports did not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The audited consolidated financial statements and unaudited
interim financial statements of the Company included in the Company SEC
Reports comply as to form with applicable accounting requirements and with
the published rules and regulations of the Commission with respect thereto,
and the financial statements included in the Company SEC Reports, have been
prepared in accordance with generally accepted accounting principles
applied on a consistent basis (except as may be indicated therein or in the
notes thereto) and fairly present the financial position of the Company and
its subsidiaries as at the dates thereof and the results of their
operations and changes in financial position for the periods then ended
subject, in the case of the unaudited interim financial statements, to
normal year-end audit adjustments and any other adjustments described
therein.
Section 5.6 Absence of Certain Changes or Events. Except as disclosed in
the Company SEC Reports or as disclosed in Section 5.6 of the Company Disclosure
Schedule or as contemplated by this Merger Agreement, since September 30, 1994,
(a) there has not been (i) any transaction, commitment, dispute or other event
or condition (financial or otherwise) of any character (whether or not in the
ordinary course of business) individually or in the aggregate having, or likely
to have, or which, with or without notice or lapse of time or both, would have,
a Company Material Adverse Effect (other than as a result of changes in laws or
regulations of general applicability or changes in general economic or market
conditions); (ii) any damage, destruction or loss, whether or not covered by
insurance, which, insofar as reasonably can be foreseen, in the future would
have a Company Material Adverse Effect; (iii) any entry into any commitment or
transaction material to the Company and the Subsidiaries taken as a whole
(including, without limitation, any borrowing or sale of assets) except in the
ordinary course of business consistent with past practice; or (iv) any
declaration, setting aside or payment of any dividend or other distribution
(whether in cash, stock or property) with respect to the capital stock of the
Company. Since September 30, 1994, neither the Company nor any of the
Subsidiaries has made any change in its underwriting, reserves, or claims
adjustment practices which, individually or in the aggregate, would have a
Company Material Adverse Effect. The Company is not aware of any fact or facts
which, with or without notice or lapse of time or both, would, individually or
in the aggregate, result in a Company Material Adverse Effect.
Section 5.7 Litigation. Except as otherwise described in Section 5.7 of
the Company Disclosure Schedule, there are no claims, suits, actions or
proceedings pending or, to the knowledge of the Company, threatened, against or
affecting the Company or the Subsidiaries, outside the ordinary course of
business, which, individually or in the aggregate, if adversely determined,
would have a Company Material Adverse Effect.
Section 5.8 Loss Reserves; Statutory Capital. The reserves of the Company
and each of the Subsidiaries including, but not limited to, the reserves for
incurred losses, incurred loss adjustment expenses, incurred but not reported
losses and loss adjustment expenses for incurred but not reported losses (the
"Loss Reserves") as set forth in the audited consolidated financial statements
and unaudited interim financial statements of the Company included in the
Company SEC Reports were determined in good faith by the Company in accordance
with generally accepted accounting principles and were believed by the Company
to be reasonable when made. The Loss Reserves attributable to the Company's and
the Subsidiaries' insurance business, including without limitation reserve and
other liability amounts in respect of insurance policies, whether direct or
assumed by reinsurance, established or reflected in the respective statutory
annual statements for the three years ended December 31, 1993, of the Company
and each of the Subsidiaries, were
11
<PAGE> 127
determined in accordance with generally accepted actuarial standards
consistently applied and are in compliance, in all material respects, with the
requirements of the insurance laws, rules and regulations of Ohio as well as
those of any other applicable jurisdictions (collectively, "Applicable Insurance
Laws"). To the Company's knowledge, the Loss Reserves were adequate to cover the
total amount of all matured and unmatured liabilities and obligations of the
Company and each of the Subsidiaries under all their respective outstanding
insurance policies, funding agreements and annuity, guaranteed interest,
reinsurance, coinsurance and other similar contracts at September 30, 1994.
Subject to the description set forth in Section 5.8 of the Company Disclosure
Schedule, the Company and each of the Subsidiaries own assets that qualify as
admitted assets under Applicable Insurance Laws in an amount at least equal to
the sum of all such reserves and liability amounts and its minimum statutory
capital and surplus as required by the insurance laws, rules and regulations of
Ohio or, to the extent material to the Company and the Subsidiaries taken as a
whole, any other jurisdiction.
Section 5.9 Reinsurance. Section 5.9 of the Company Disclosure Schedule
sets forth a true and complete list of all reinsurance treaties and contracts
applicable to the Company or the Subsidiaries (individually, a "Reinsurance
Agreement" and collectively, the "Reinsurance Agreements"). None of the
Reinsurance Agreements will terminate because of a change in control of the
Company or any of the Subsidiaries. No other party to any Reinsurance Agreement
has given notice to the Company or any of the Subsidiaries that it intends to
terminate or cancel any such Reinsurance Agreement as a result of the Merger or
the contemplated operations of the Company and the Subsidiaries after the Merger
is consummated, which termination or change would have a Company Material
Adverse Effect.
Section 5.10 Compliance with Applicable Laws. Except as otherwise
described in Section 5.10 of the Company Disclosure Schedule, the businesses of
the Company and the Subsidiaries are not being conducted in violation of any
law, ordinance or regulation of any legislative, executive, judicial, federal,
state or local governmental or regulatory agency or authority in the United
States or any other jurisdiction ("Governmental Entities"), except where such
violation would not have a Company Material Adverse Effect. Except as set forth
in Section 5.10 of the Company Disclosure Schedule, no investigation or review
by any Governmental Entity with respect to the Company or the Subsidiaries is
pending, or, to the knowledge of the Company, threatened, nor has any
Governmental Entity indicated to the Company an intention to conduct the same.
Section 5.11 Liabilities. Neither the Company nor any of the Subsidiaries
has any material indebtedness or liability, absolute, accrued, contingent or
otherwise, whether due or to become due (and there is no basis for any such
liability), which is not shown or provided for in the audited financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1993 (the "1993 Financial Statements") other than liabilities
incurred or accrued in the ordinary course of business and consistent with past
practice since December 31, 1993.
Section 5.12 Written Insurance Policies; Regulatory Filings.
(a) To the Company's knowledge, all policies and contracts of
insurance and reinsurance entered into or issued, as the case may be, by
the Company or the Subsidiaries or which are being entered into or issued
by the Company or the Subsidiaries as of the date hereof, are in
compliance, and at the respective dates of issuance were in compliance,
with all applicable laws and, to the extent required under applicable law,
are on forms approved by the appropriate Governmental Entities in the
jurisdictions where issued or have been filed with and not objected to by
such Governmental Entity within the period provided for objection. Any
premium rates with respect to insurance or reinsurance policies or
contracts currently issued by the Company or the Subsidiaries which are
required to be filed with or approved by any Governmental Entity have been
so filed or approved in accordance with applicable law, and the premiums
charged thereon conform thereto. The Company shall not be deemed to have
breached all or any portion of this Section 5.12 unless such breach or
breaches would result in a Company Material Adverse Effect.
(b) Neither the Company nor any of the Subsidiaries is a party to any
underwriting management agreement.
12
<PAGE> 128
(c) Each Reinsurance Agreement to which the Company or any of the
Subsidiaries is a party is valid and binding on the Company or the
Subsidiary and in full force and effect in accordance with its terms,
except as enforceability may be limited by bankruptcy, insolvency or other
similar laws affecting the enforcement of creditors rights generally and
except that the availability of equitable remedies, including specific
performance, is subject to the discretion of the court before which the
enforcement of any proceeding therefor may be brought. Neither the Company
nor any of the Subsidiaries is in default in any material respect with
respect to any such Reinsurance Agreement, and no such Reinsurance
Agreement contains any provision providing that the other party thereto may
terminate the same by reason of the transactions contemplated by this
Merger Agreement, or contains any other provision which would be altered or
otherwise become applicable by reason of such transactions.
Section 5.13 Agents; Fronting.
(a) As of the date hereof, the Company is unaware of any Agent which
is not duly licensed (to the extent that such licenses are required) in the
jurisdictions in which the Agent places or sells insurance and each Agent
is duly authorized and appointed by the Company or the applicable
Subsidiary pursuant to Applicable Insurance Laws. All written contracts or
agreements between any Agent, on one hand, and the Company or any
Subsidiary, on the other hand, are in compliance with Applicable Insurance
Laws. To the best knowledge of the Company, no Agent is the subject of, or
party to, any disciplinary action or proceeding under Applicable Insurance
Laws. The Company shall not be deemed to have breached all or any portion
of this Section 5.13(a) unless such breach or breaches, individually or in
the aggregate, would result in a Company Material Adverse Effect.
(b) No Agent represented more than five percent of the gross premiums
written by the Company and the Subsidiaries, taken as a whole.
(c) As of the date hereof, the Company is unaware of any Agent that
intends to terminate or materially change its relationship with the Company
or the Subsidiaries as a result of the Merger or the contemplated
operations of the Company and the Subsidiaries after the Merger is
consummated, which termination or change would have a Company Material
Adverse Effect.
(d) Except as set forth in Section 5.13 of the Company Disclosure
Schedule, neither the Company nor any of the Subsidiaries is a party to any
fronting agreement or places or sells reinsurance whether for its own
account or for any reinsurance company.
Section 5.14 Taxes.
(a) The Company and the Subsidiaries have filed all tax returns
required to be filed by any of them and have paid, or have set up an
adequate reserve for the payment of, all taxes required to be paid in
respect of the periods covered by such returns, other than nonpayments
which would not have a Company Material Adverse Effect. No deficiencies for
any taxes have been proposed, asserted or assessed against the Company or
the Subsidiaries that have not been finally settled or paid in full. For
the purposes of this Merger Agreement, the term "tax" shall include all
federal and state income or franchise taxes and all state and local sales
and use taxes together with all interest, penalties and additions imposed
with respect to such amounts.
(b) Section 5.14 of the Company Disclosure Schedule sets forth a list
of the states in which the Company and the Subsidiaries currently file tax
returns. There are no waivers or extensions of any applicable statute of
limitations for the assessment or collection of such taxes with respect to
the Company's and the Subsidiaries' returns, which waivers or extensions
are currently in effect. Except as set forth in Section 5.14 of the Company
Disclosure Schedule, neither the Company nor any of the Subsidiaries has
received notice of any actions, suits, proceedings, investigations, audits,
claims or assessments in connection with any taxes that are presently
pending and, to the Company's knowledge, there are no suits, actions or
audits proposed with regard to any taxes that relate to the Company or any
of the Subsidiaries for which any of them would be liable.
13
<PAGE> 129
(c) Except as set forth in Section 5.14 of the Company Disclosure
Schedule, neither the Company nor any of the Subsidiaries has received a
Tax Ruling or entered into a Tax Closing Agreement with any taxing
authority that would have a continuing material effect after the Effective
Date. For purposes of the preceding sentence, the term "Tax Ruling" shall
mean a written ruling of a taxing authority relating to taxes, and the term
"Tax Closing Agreement" shall mean a written agreement with a taxing
authority relating to taxes.
(d) Neither the Company nor any of the Subsidiaries is required to
make any adjustment pursuant to Section 481 of the Code by reason of a
change in accounting method or otherwise.
(e) To the Company's knowledge, there are no liens, pledges, security
interests or mortgages for taxes (other than for taxes not yet due and
payable) upon the assets of either the Company or the Subsidiaries.
Section 5.15 Certain Agreements. Except as set forth in Section 5.15 of
the Company Disclosure Schedule, neither the Company nor any of the Subsidiaries
is a party to any material oral or written (i) agreement, contract, indenture or
other instrument relating to indebtedness, or (ii) agreement which, after giving
effect to the transactions contemplated by this Merger Agreement, purports to
restrict or bind Parent or any of its subsidiaries, other than the Surviving
Corporation and its subsidiaries, in any respect. Neither the Company nor any of
the Subsidiaries is in default (or would be in default with notice or lapse of
time, or both) under any indenture, note, credit agreement, loan document,
lease, license or other agreement including, but not limited to, any Company
Benefit Plan (as defined in Section 5.21), whether or not such default has been
waived, which default has or would have, if not waived, a Company Material
Adverse Effect.
Section 5.16 Premium Balances Receivable. The premium balances receivable
of the Company and the Subsidiaries as reflected in the September Financial
Statements, to the extent uncollected on the date hereof, and the premium
balances receivable reflected on the books of the Company and the Subsidiaries
as of the date hereof, are valid and existing and represent monies due, and the
Company has made reserves reasonably considered adequate for receivables not
collectible in the ordinary course of business, and (subject to the aforesaid
reserves) are subject to no refunds or other adjustments and to no defenses,
rights of setoff, assignments, restrictions, encumbrances or conditions
enforceable by third parties on or affecting any material amount thereof.
Section 5.17 Investment Portfolio and Other Assets. The Company,
including, for purposes of this Section 5.17, the Subsidiaries, owns an
investment portfolio acquired in the ordinary course of business, and a true and
complete list of the securities and other investments in such investment
portfolio, as of November 30, 1994, with information included thereon as to the
cost of each such investment and the market value thereof as of such date, is
listed in Section 5.17 of the Company Disclosure Schedule. As of November 30,
1994, to the Company's knowledge, (i) none of the investments included in such
investment portfolio is in default in the payment of principal or interest or
dividends or impaired to any extent and (ii) all investments included in such
investment portfolio comply (x) with all insurance laws and regulations of each
of the states to which the Company and the Subsidiaries is subject relating
thereto and (y) with all federal and state securities laws.
Section 5.18 Intellectual Property. Section 5.18 of the Company Disclosure
Schedule sets forth a complete and correct listing of the Intellectual Property
(as defined in this Section 5.18). All Intellectual Property listed therein is
owned by the Company or the Subsidiaries free and clear of all liens, claims,
licenses or other encumbrances and is not known by the Company or the
Subsidiaries to be the subject of any challenge. There are no unresolved claims
made and there has not been communicated to the Company or the Subsidiaries the
threat of any claim that the holder of such Intellectual Property is in
violation or infringement of any trademark, service mark, patent, trade name,
copyright, trade secret or copyright registration of any other Person. The
Company and each of the Subsidiaries is the owner of the patents, patent
licenses, trade names, trademarks, service marks, trade secrets, pending
trademark applications, pending copyright applications, copyrights, know-how and
other proprietary rights necessary for the conduct of their respective
businesses as now conducted, and without any known conflict with the rights of
others, and neither the Company nor any of the Subsidiaries has forfeited or
otherwise relinquished any such patent, patent license, trade name, trademark,
service mark, trade secret, pending trademark application, pending copyright
14
<PAGE> 130
application, copyright, know-how or other proprietary right necessary for the
conduct of their respective businesses as conducted on the date hereof. For
purposes of this Merger Agreement, "Intellectual Property" shall mean all
letters patent, patent applications, trademarks, service marks, trade names,
copyrights, pending trademark applications, pending copyright applications and
licenses and rights with respect to the foregoing that the Company or any of the
Subsidiaries owns or possesses.
Section 5.19 Licenses. Except as set forth in Section 5.19 of the Company
Disclosure Schedule, the Company and the Subsidiaries have obtained all
licenses, certificates of authority, permits, authorizations, orders and
approvals of, and have made all registrations or filings with, all Governmental
Entities as required in connection with the conduct of the businesses of the
Company and the Subsidiaries, other than licenses, certificates, permits,
authorizations, orders, approvals, registrations or filings which if not
obtained or made would not have a Company Material Adverse Effect (collectively,
the "Licenses"). Section 5.19 of the Company Disclosure Schedule sets forth a
true and complete list of the Company's and each Subsidiary's Licenses
(including the jurisdictions in which the Company and the Subsidiaries possess
Licenses or other approvals to conduct their insurance businesses) together with
a description of the nature thereof. Except as set forth in Section 5.19 of the
Company Disclosure Schedule, the Company has heretofore made available to Parent
true and complete copies of all of such Licenses as are currently in effect.
Except as set forth in Section 5.19 of the Company Disclosure Schedule, neither
the Company nor any of the Subsidiaries is improperly transacting any insurance
business in any jurisdiction in which it is not authorized or permitted to
transact such business. All Licenses are valid and in full force and effect. No
such License is the subject of a proceeding for suspension or revocation or
similar proceedings. No jurisdiction has demanded or requested that the Company
or any of the Subsidiaries qualify or become licensed as a foreign corporation,
except with respect to their respective insurance or reinsurance business.
Section 5.20 Intercompany and Affiliate Transactions; Insider Interests.
(a) Except as otherwise disclosed in the Company SEC Reports, Section
5.20 of the Company Disclosure Schedule lists all intercompany agreements
or arrangements of any kind between or among the Company and/or the
Subsidiaries, on the one hand, and the Company's officers, directors or
stockholders owning more than 5% of Company Common Stock, on the other
hand.
(b) Except as set forth in Section 5.20 of the Company Disclosure
Schedule and except as otherwise disclosed in the Company SEC Reports, none
of the Company's officers or directors has any direct or indirect interest,
either by way of stock ownership or otherwise, in any firm, corporation,
association or business enterprise, which competes with the Company or the
Subsidiaries, is a supplier, client, customer, agent or broker of the
Company or the Subsidiaries, or is otherwise engaged in the business
engaged in by the Company and the Subsidiaries. Ownership of capital stock
listed on a national securities exchange or traded in the over-the-counter
market of any corporation shall not be deemed a violation of this Section,
provided the owner thereof and his affiliates do not own more than an
aggregate of five percent of the capital stock of such corporation.
Section 5.21 Employee Benefit Plans. Section 5.21 of the Company
Disclosure Schedule lists all employee benefit or compensation plans, agreements
or arrangements, of any kind whatsoever, including "employee benefit plans," as
defined in Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended, ("ERISA"), and including, but not limited to, plans, agreements or
arrangements relating to former employees, maintained, contributed to, or
sponsored by the Company or the Subsidiaries, and any collective bargaining
agreements to which the Company or the Subsidiaries is a party or under which
the Company or any of the Subsidiaries has any obligation (together, the
"Company Benefit Plans"). Except to the extent that a breach of the following
representations would not, in the aggregate, have a Company Material Adverse
Effect: (a) the consummation of the Merger does not trigger any payment
obligations (contingent or otherwise) by, or increase any liabilities of, the
Company or the Subsidiaries under any Company Benefit Plan; (b) no default
exists with respect to the obligations of the Company or the Subsidiaries under
any Company Benefit Plan; (c) there have been no disputes or grievances subject
to any grievance procedure, unfair labor practice proceedings, arbitration or
litigation under any Company Benefit Plan, which have not been finally resolved,
settled or otherwise disposed of, nor is there any default, or any
15
<PAGE> 131
condition which, with notice or lapse of time or both, would constitute such a
default, under any Company Benefit Plan, by the Company or the Subsidiaries, or
any other party thereto; (d) there have been no strikes, lockouts or work
stoppages, slowdowns, jurisdictional disputes or organizing activity occurring
or threatened with respect to the business or operations of the Company or the
Subsidiaries. All Company Benefit Plans have been administered in accordance,
and are in compliance, with all applicable provisions of ERISA, the Code and
other applicable law.
Section 5.22 ERISA. Each of the Company Benefit Plans which is intended to
meet the requirements of Section 401(a) of the Code has been determined by the
Internal Revenue Service to be "qualified," within the meaning of such section
of the Code, and the Company knows of no fact which would have an adverse effect
on the qualified status of such plans. There are not now, nor have there been,
any non-exempt "prohibited transactions," as such term is defined in Section
4975 of the Code or Section 406 of ERISA, involving the Company Benefit Plans
which could subject the Company, the Subsidiaries, Parent or the Surviving
Corporation to any liability under Title I of ERISA or to any penalty or tax
imposed under Section 502(i) of ERISA or Section 4975 of the Code. No Company
Benefit Plan is subject to Title IV of ERISA. None of the Company, the
Subsidiaries, nor any trade or business, whether or not incorporated, which has
ever been treated as a single employer together with the Company under Section
414(b) or 414(c) of the Code (a "Related Entity"), has ever maintained,
sponsored, or contributed to any plan subject to Title IV of ERISA, and none of
the Company, the Subsidiaries nor any Related Entity has otherwise incurred any
liability under Title IV of ERISA.
Section 5.23 Officers, Directors and Employees. Except as otherwise
disclosed in the Company SEC Reports, Section 5.23 of the Company Disclosure
Schedule sets forth the names of and total cash compensation paid by the Company
or the Subsidiaries to (a) the Company's officers and directors and (b) each
other employee whose salary for the fiscal year ended December 31, 1993, equaled
or exceeded $50,000 or who received or has accrued in respect of such period a
cash bonus equal to or in excess of $10,000 or who will receive a salary for the
fiscal year ending December 31, 1994 equal to or in excess of $50,000.
Section 5.24 Company Action; Takeover Provisions Inapplicable. The Board
of Directors of the Company (at a meeting duly called and held) has by the
requisite vote of all directors present (i) determined that the Merger is
advisable and fair and in the best interests of the Company and its
stockholders, (ii) approved the Merger in accordance with the provisions of
Section 251 of the DGCL, (iii) recommended the approval of this Merger Agreement
and the Merger by the stockholders of the Company and directed that the Merger
be submitted for consideration by its stockholders, (iv) taken all necessary
steps to render Section 203 of the DGCL inapplicable to the Merger and the
transactions contemplated by this Merger Agreement and (v) adopted a resolution
having the effect of causing the Company not to be subject, to the extent
permitted by applicable law, to any state takeover law that may purport to be
applicable to the Merger and the transactions contemplated by this Merger
Agreement.
Section 5.25 Pending Claims. Section 5.25 of the Company Disclosure
Schedule lists all pending claims arising from insurance or reinsurance policies
issued by the Company and the Subsidiaries for which, as of the date hereof,
amounts reserved by the Company and the Subsidiaries exceed $50,000.
Section 5.26 Insurance for the Benefit of the Company and the
Subsidiaries. The Company and the Subsidiaries have, and will make provision
through the Effective Date for, usual insurance coverage on their property and
assets customary for businesses similar to the Company and consistent with past
practice.
Section 5.27 Title to Assets; Liens. The Company and the Subsidiaries have
good and marketable title to all of their respective premium balances
receivable, property, equipment and other assets, and such assets are free and
clear of any mortgages, liens, charges, encumbrances or title defects of any
nature whatsoever, except for such mortgages, liens, charges, encumbrances or
title defects which would not, individually or in the aggregate, materially and
adversely affect the value of such property as carried on the financial
statements which are included in the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1994. The Company and the Subsidiaries have
valid and enforceable leases for the premises and the equipment, furniture and
fixtures purported to be leased by them.
16
<PAGE> 132
Section 5.28 Ability to Conduct Business. The Company is unaware of any
fact, other than circumstances, matters or events attributable, directly or
indirectly, to Parent which, with or without the passage of time, would prevent
Parent from conducting the business of the Company and the Subsidiaries
substantially as it is currently being conducted, except as otherwise
contemplated hereby and except with respect to regulatory notices, filings and
applications that Parent is required to make in connection with the consummation
of the transactions contemplated hereby and with such other exceptions as would
not, individually or in the aggregate, have a Company Material Adverse Effect.
Section 5.29 Financial Advisor. Except as set forth in Section 6.1 of the
Company Disclosure Schedule and except for McDonald & Company Securities, Inc.
("McDonald"), no broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with the Merger or
the transactions contemplated by this Merger Agreement based upon arrangements
made by or on behalf of the Company, and the fees and commissions payable to
McDonald as contemplated by this Section will be payable by the Company.
Section 5.30 Questionable Payments. To the best knowledge of the Company,
neither the Company nor any Subsidiary nor any director, officer, agent,
employee or other person associated with or acting on behalf of the Company or
any Subsidiary has used any corporate funds for unlawful contributions, gifts,
entertainment or other unlawful expenses relating to political activity, or made
any direct or indirect unlawful payments to government officials or employees or
Agents from corporate funds, or established or maintained any unlawful or
unrecorded funds.
Section 5.31 Fairness Opinion. The Company has received the opinion of
McDonald, financial advisor to the Company, dated the date hereof, to the effect
that the Exchange Rate is fair to the holders of Company Common Stock from a
financial point of view. The Company will deliver a copy of the written opinion
of McDonald to Parent promptly after receipt thereof.
Section 5.32 Disclosure. The representations and warranties of the Company
in this Merger Agreement, modified by the Company Disclosure Schedule, to the
Company's knowledge, do not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements contained herein
not misleading.
ARTICLE VI
CONDUCT OF BUSINESS PENDING THE MERGER
Section 6.1 Conduct of Business by the Company Pending the Merger. Prior
to the Effective Date, unless Parent shall otherwise agree in writing:
(i) the Company shall, and shall cause the Subsidiaries to, carry on
their respective businesses in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted, and shall, and shall
cause the Subsidiaries to, use their reasonable efforts to preserve intact
their present business organizations, keep available the services of their
present officers and employees and preserve their relationships with
customers, suppliers and others having business dealings with them. The
Company shall, and shall cause the Subsidiaries to (A) maintain insurance
coverages on their own property and assets and their books, accounts and
records in the usual manner consistent with prior practices; (B) comply in
all material respects with all laws, ordinances and regulations of
Governmental Entities applicable to the Company and the Subsidiaries; (C)
maintain and keep their properties and equipment in good repair, working
order and condition, ordinary wear and tear excepted; and (D) perform in
all material respects their obligations under all contracts and commitments
to which any of them is a party or by which any of them is bound;
(ii) except as required by this Merger Agreement or otherwise
disclosed in Section 6.1 of the Company Disclosure Schedule, the Company
shall not and shall not propose to (A) sell or pledge or agree to sell or
pledge any capital stock of the Subsidiaries; (B) amend its Certificate of
Incorporation or By-laws or those of the Subsidiaries; (C) split, combine
or reclassify its outstanding capital stock or issue
17
<PAGE> 133
or authorize or propose the issuance of any other securities in respect of,
in lieu of or in substitution for shares of capital stock of the Company,
or declare, set aside or pay any dividend or other distribution payable in
cash, stock or property or extend any credit to any officer, director or
stockholder; or (D) directly or indirectly redeem, purchase or otherwise
acquire or agree to redeem, purchase or otherwise acquire any shares of
Company Common Stock;
(iii) except as required by this Merger Agreement or otherwise
disclosed in Section 6.1 of the Company Disclosure Schedule, the Company
shall not, nor shall it permit the Subsidiaries to (A) issue, deliver or
sell or agree to issue, deliver or sell any additional shares of, or rights
of any kind to acquire any shares of, its capital stock of any class, any
indebtedness or any option, rights or warrants to acquire, or securities
convertible into, shares of capital stock other than issuances of Company
Common Stock pursuant to the exercise of Company Options outstanding on the
date hereof; (B) acquire, lease or dispose or agree to acquire, lease or
dispose of any capital assets or any other assets involving expenditures or
proceeds in an amount, individually or in the aggregate, greater than
$100,000, other than the acquisition or lease of telephone systems for the
Company or the Subsidiaries, the cost of which will not exceed $400,000;
(C) assume, incur or guarantee additional indebtedness; (D) enter into any
contract or commitment of any kind material, individually or in the
aggregate, to the Company or the Subsidiaries other than in the ordinary
course of business and consistent with past practice, or permit or suffer
to be cancelled any contract material, individually or in the aggregate, to
the Company or the Subsidiaries; (E) encumber or grant a security interest
in any material asset or enter into any other material transaction; (F)
acquire or agree to acquire by merging or consolidating with, or by
purchasing a substantial equity interest in, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof; (G) decrease any case reserve or any bulk
reserve other than in the ordinary course of business; (H) make any change
in the underwriting, reserves or claims adjustment practices which would
have a Company Material Adverse Effect; or (I) enter into any contract,
agreement, commitment or arrangement with respect to any of the foregoing;
and
(iv) except as otherwise disclosed in Section 6.1 of the Company
Disclosure Schedule, the Company shall not, nor shall it permit the
Subsidiaries to, except as required to comply with applicable law and
except as provided in Section 3.5 hereof or elsewhere in this Merger
Agreement (A) adopt, enter into, terminate or amend any bonus, profit
sharing, compensation, severance, termination, stock option, pension,
retirement, deferred compensation, employment or other Company Benefit
Plan, agreement, trust, fund or other arrangement for the benefit or
welfare of any director, officer or current or former employee; (B)
increase in any manner the compensation or fringe benefit of any director,
officer or employee; (C) pay any benefit not provided under any existing
plan or arrangement heretofore disclosed to Parent; (D) grant any awards
under any bonus, incentive, performance or other compensation plan or
arrangement or Company Benefit Plan (including, without limitation, the
grant of stock options, stock appreciation rights, stock based or stock
related awards, performance units or restricted stock, or the removal of
existing restrictions in any benefit plans or agreements or awards made
thereunder); (E) take any action to fund or in any other way secure the
payment of compensation or benefits under any employee plan, agreement,
contract or arrangement or Company Benefit Plan other than in the ordinary
course of business consistent with past practice or as required thereunder;
or (F) adopt, enter into, amend or terminate any contract, agreement,
commitment or arrangement to do any of the foregoing; and
(v) the Company shall not, nor shall it permit the Subsidiaries to,
take any action with respect to accounting policies or procedures other
than reasonable and usual actions in the ordinary course and consistent
with past practice.
Section 6.2 No Solicitation. Neither the Company nor any of the
Subsidiaries shall, directly or indirectly, take (nor shall the Company
authorize or permit its Subsidiaries, officers, directors, employees,
representatives, investment bankers, attorneys, accountants or other agents or
affiliates to take) any action to (i) encourage, solicit or initiate the
submission of any Acquisition Proposal (as defined in this Section 6.2), (ii)
enter into any agreement with respect to any Acquisition Proposal or (iii)
participate in any way in discussions or negotiations with, or furnish any
information to, any person in connection with, or take any other action to
facilitate any inquiries or the making of any proposal that constitutes, or may
reasonably be expected
18
<PAGE> 134
to lead to, any Acquisition Proposal. The Company will promptly communicate to
Parent the terms of any proposal or inquiry, including the identity of the
person and its affiliates making the same, that it may receive in respect of any
such transaction, or of any such information requested from it or of any such
negotiations or discussions being sought to be initiated with it.
Notwithstanding the foregoing, neither the provisions contained in this Section
6.2 or elsewhere in this Merger Agreement shall prohibit the Board of Directors
of the Company from (i) furnishing information to or entering into discussions
or negotiations with, any person or entity that makes an unsolicited bona fide
written proposal to acquire the Company pursuant to a merger, consolidation,
share exchange, purchase of a substantial portion of the assets, business
combination or other similar transaction, if the Board of Directors of the
Company determines in good faith, based as to legal matters on the advice of
counsel, that such action is required for the Board of Directors to comply with
its fiduciary duties to stockholders imposed by law (the "Company Board
Fiduciary Duties") and (ii) complying with Rule 14e-2 of the Exchange Act with
regard to any Acquisition Proposal, if applicable. "Acquisition Proposal" shall
mean any proposed (A) merger, consolidation or similar transaction involving the
Company, (B) sale, lease or other disposition directly or indirectly by merger,
consolidation, share exchange or otherwise of assets of the Company or the
Subsidiaries representing 30% or more of the consolidated assets of the Company
and the Subsidiaries, (C) issue, sale, or other disposition of (including by way
of merger, consolidation, share exchange or any similar transaction) securities
(or options, rights or warrants to purchase, or securities convertible into,
such securities) representing 30% or more of the voting power of the Company or
(D) transaction in which any person shall acquire beneficial ownership (as such
term is defined in Rule 13d-3 under the Exchange Act), or the right to acquire
beneficial ownership, or any "group" (as such term is defined under the Exchange
Act) shall have been formed which beneficially owns or has the right to acquire
beneficial ownership, of 30% or more of the outstanding Company Common Stock.
The exercise of the Company Board Fiduciary Duties, notwithstanding any other
provision of this Merger Agreement, shall not constitute a breach or violation
of any provision of this Merger Agreement; provided, that the parties
acknowledge that nothing contained in this Section 6.2 shall either expand or
narrow the obligations of the Company under Section 10.3.
Section 6.3 Notice of Breach. Each party shall promptly give written
notice to the other parties upon becoming aware of the occurrence or, to its
knowledge, impending or threatened occurrence, of any event which could cause or
constitute a breach of any of its representations, warranties or covenants
contained or referenced in this Merger Agreement or which could cause a Company
Material Adverse Effect or a Parent Material Adverse Effect, and will use its
best efforts to prevent or promptly remedy the same. Any such notification shall
not be deemed an amendment of the Company Disclosure Schedule. No disclosure to,
or investigation made by or on behalf of, any party hereto on or before the
Effective Date shall affect or limit the representations, warranties and
covenants of any party under this Merger Agreement.
ARTICLE VII
ADDITIONAL AGREEMENTS
Section 7.1 Access and Information. The Company and the Subsidiaries shall
afford to Parent and to Parent's accountants, counsel and other representatives,
full access during normal business hours (and at such other times as the parties
may mutually agree) throughout the period prior to the Effective Date to all of
their properties, books, contracts, commitments, records and personnel and,
during such period, the Company shall furnish promptly to Parent all information
concerning its business (including any applications or notifications made to or
by any Governmental Entity), properties and personnel as Parent may reasonably
request. In addition, the Company shall promptly deliver to Parent all
regulatory reports that are filed with respect to the Company or any Subsidiary,
and any correspondence between the Company or any Subsidiary on the one hand and
any state insurance regulatory agency on the other hand. Upon gaining access
pursuant to this Section 7.1, Parent shall conduct itself in such a manner so as
not to be disruptive of the ordinary business activities of the Company or the
Subsidiaries. Parent shall hold, and shall cause its respective employees and
agents to hold, in confidence all such information in accordance with the terms
of the Confidentiality Agreement dated November 14, 1994 between Parent and the
Company. Parent shall afford to the Company and to its accountants, counsel and
other representatives the same access it would grant to a significant
19
<PAGE> 135
institutional investor provided Parent were acting reasonably. The Company shall
hold, and shall cause its respective employees and agents to hold, in confidence
all such information in accordance with the terms of the Confidentiality
Agreement dated December 12, 1994 between Parent and the Company.
Section 7.2 Registration Statement/Proxy Statement.
(a) As promptly as practicable after the execution of this Merger
Agreement, the Company and Parent shall prepare and file with the
Commission preliminary proxy materials which shall constitute the
preliminary Proxy Statement (as defined in Section 7.9) and a preliminary
prospectus with respect to the Parent Common Stock to be issued in
connection with the Merger. As promptly as practicable after comments are
received from the Commission with respect to the preliminary proxy
materials and after the furnishing by the Company and Parent of all
information required to be contained therein, the Company shall file with
the Commission the definitive Proxy Statement and Parent shall file with
the Commission the Registration Statement (as defined in Section 7.9) and
Parent and the Company shall use all reasonable efforts to cause the
Registration Statement to become effective as soon thereafter as
practicable.
(b) Parent and the Company shall make all necessary filings with
respect to the Merger under the Securities Act and the Exchange Act and the
rules and regulations thereunder, under applicable Blue Sky or similar
securities laws, and shall use all reasonable efforts to obtain required
approvals and clearances with respect thereto.
Section 7.3 Compliance with the Securities Act.
(a) Prior to the Effective Date, the Company shall deliver to Parent a
letter setting forth a true and complete list of persons whom the Company
believes may be deemed to be "affiliates" of the Company as that term is
used in paragraphs (c) and (d) of Rule 145 under the Securities Act (the
"Affiliates").
(b) The Company shall use its reasonable efforts to obtain as promptly
as practicable a written agreement from each person who is identified as an
Affiliate in the letter referred to in clause (a) above, in the form
previously approved by the parties, that he or she will not offer to sell,
sell or otherwise dispose of any of the Parent Common Stock issued to him
or her pursuant to the Merger, except in compliance with Rule 145 or
another exemption from the registration requirements of the Securities Act.
The Company shall deliver all such written agreements obtained by it to
Parent on or prior to the Effective Date. The Company shall use its
reasonable efforts to cause each person who is identified as an Affiliate
in such letter to deliver to Parent, on or prior to the earlier of (i) the
mailing of the Proxy Statement or (ii) the thirtieth day prior to the
Effective Date, a written agreement, in the form to be approved by the
parties hereto, that such Affiliate will not thereafter sell or in any
other way reduce such Affiliate's risk relative to any Parent Common Stock
received in the Merger (within the meaning of the Commission's Financial
Reporting Release No. 1, "Codification of Financing Reporting Policies,"
sec. 201.01 (47 F.R. 21030) (April 15, 1982)), until such time as financial
results (including combined sales and net income) covering at least 30 days
of post-merger operations have been published, except as permitted by Staff
Accounting Bulletin No. 76 issued by the Commission. As soon as is
reasonably practicable but in no event later than 45 days after the end of
the first fiscal quarter of Parent ending at least 30 days after the
Effective Date, Parent will publish results including at least 30 days of
combined operations of Parent and the Company as referred to in the written
agreements provided for by this Section 7.3(b).
Section 7.4 Stock Exchange Listing. Parent shall list on the New York
Stock Exchange ("NYSE"), upon official notice of issuance, the Parent Common
Stock to be issued pursuant to the Merger.
Section 7.5 Consents, Approvals and Filings. Parent and the Company shall
make, and cause their subsidiaries and affiliates to make, all necessary filings
with respect to the Merger and the other transactions contemplated hereby
including, without limitation, those required under the HSR Act, the Securities
Act and the Exchange Act and the rules and regulations thereunder, under
applicable Blue Sky or similar securities laws and under Applicable Insurance
Laws, including, without limitation, ORC Section 3901.321(F), and shall use all
reasonable efforts to obtain required approvals and clearances with respect
thereto to (i) comply as promptly as practicable with all governmental
requirements applicable to the Merger and the other
20
<PAGE> 136
transactions contemplated hereby and (ii) obtain promptly all necessary permits,
orders and other consents of Governmental Entities and consents of third parties
necessary for the consummation of the Merger and the other transactions
contemplated hereby.
Section 7.6 HSR Act. The Company and Parent shall use, and shall cause
their "ultimate parent entities" (if applicable) to use, their best efforts to
file by January 15, 1995 notifications under the HSR Act in connection with the
Merger and the transactions contemplated hereby and to respond as promptly as
practicable to any inquiries received from the Federal Trade Commission and the
Antitrust Division of the Department of Justice for additional information or
documentation and to respond as promptly as practicable to all inquiries and
requests received from any state attorney general or other Governmental Entity
in connection with antitrust matters.
Section 7.7 Additional Agreements.
(a) Subject to the terms and conditions herein provided, each of the
parties hereto agrees to use all reasonable efforts to take, or cause to be
taken, all actions and to do, or cause to be done, all things necessary,
proper or advisable under applicable laws and regulations to consummate and
make effective the transactions contemplated by this Merger Agreement,
including using all reasonable efforts to obtain all necessary waivers,
consents and approvals, to effect all necessary registrations and filings
(including, but not limited to, filings under the HSR Act and with all
applicable Governmental Entities) and to lift any injunction or other legal
bar to the Merger (and, in such case, to proceed with the Merger as
expeditiously as possible), subject, however, to the appropriate vote of
stockholders of the Company.
(b) In case at any time after the Effective Date any further action is
necessary or desirable to carry out the purposes of this Merger Agreement,
the proper officers and/or directors of Parent, the Company and the
Surviving Corporation shall take all such necessary action.
(c) Following the Effective Date, Parent shall conduct its business,
and shall cause the Surviving Corporation to conduct its business, in a
manner which would not jeopardize the characterization of the Merger as a
reorganization within the meaning of Section 368(a)(1)(A) and 368(a)(2)(E)
of the Code. Parent and Merger Sub will provide the Company with certain
factual representations of Parent and Merger Sub reasonably requested by
the Company as necessary to confirm that Parent and Merger Sub will not
take any action on or after the Effective Date that would jeopardize the
tax free nature of the transaction.
Section 7.8 Takeover Provisions Inapplicable. The Company shall take all
actions necessary to ensure that the consummation of the Merger and the other
transactions contemplated hereby shall not render Section 203 of the DGCL
applicable to such transactions.
Section 7.9 Information in Disclosure Documents, Registration Statements,
Etc. Each of Parent, Merger Sub and the Company agree that none of the
information supplied by it for inclusion in (i) the Registration Statement to be
filed with the Commission by Parent on Form S-4 under the Securities Act for the
purpose of registering the shares of Parent Common Stock to be issued in the
Merger (the "Registration Statement") and (ii) the prospectus/proxy statement of
the Company and Parent (the "Proxy Statement") required to be mailed to the
stockholders of the Company in connection with the Merger will, in the case of
the Proxy Statement or any amendments or supplements thereto, at the time of the
mailing of the Proxy Statement and any amendments or supplements thereto, and at
the time of the Company Meeting to be held in connection with the Merger, or, in
the case of the Registration Statement, at the time it becomes effective and at
the Effective Date, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading. Parent and Merger Sub agree that the Registration
Statement will comply as to form in all material respects with the provisions of
the Securities Act and the rules and regulations promulgated thereunder. The
Company agrees that the Proxy Statement will comply as to form in all material
respects with the provisions of the Exchange Act and the rules and regulations
thereunder.
Section 7.10 Indemnification. From and after the Effective Date, Parent
shall indemnify, defend and hold harmless the officers, directors and employees
of the Company and the Subsidiaries (individually, an
21
<PAGE> 137
"Indemnified Party" and collectively, the "Indemnified Parties") against all
losses, expenses, claims, damages or liabilities ("Claims") based in whole or in
part on the fact that such person is or was such officer, director or employee
of the Company or the Subsidiaries (including arising out of the transactions
contemplated by this Merger Agreement) to the fullest extent permitted or
required under applicable law. Parent agrees that all rights to indemnification
existing in favor of the directors, officers or employees of the Company as
provided in the Company's or the Subsidiaries' respective Articles or
Certificate of Incorporation or By-Laws or Code of Regulations, as in effect as
of the date hereof, with respect to matters occurring through the Effective
Date, shall survive the Merger and shall continue in full force and effect for a
period of not less than six years from the Effective Date and Parent hereby
guaranties unconditionally the satisfaction of all such rights to
indemnification (and shall pay expenses in advance of the final disposition of
any such action or proceeding to each Indemnified Party to the fullest extent
permitted under Delaware law, upon receipt from the Indemnified Party to whom
expenses are advanced of the undertaking to repay such advances contemplated by
Section 145(e) of the DGCL). Without limiting the foregoing, in the event any
Claim is brought against any Indemnified Party (whether arising before or after
the Effective Date) after the Effective Date (i) the Indemnified Parties may
retain the Company's regularly engaged independent legal counsel or other
independent legal counsel satisfactory to them, provided that such other counsel
shall be reasonably acceptable to Parent, (ii) Parent shall pay all reasonable
fees and expenses of such counsel for the Indemnified Parties promptly as
statements therefor are received and (iii) Parent shall use its reasonable
efforts to assist in the defense of any such matter, provided that Parent shall
not be liable for any settlement of any Claim effected without its written
consent, which consent shall not be unreasonably withheld. Any Indemnified Party
wishing to claim indemnification under this Section 7.10, upon learning of any
such Claim shall notify Parent (although the failure to so notify Parent shall
not relieve Parent from any liability which Parent may have under this Section
7.10, except to the extent such failure materially prejudices Parent) and shall
deliver to Parent the undertaking contemplated by Section 145(e) of the DGCL.
The Indemnified Parties as a group may retain no more than one law firm (in
addition to local counsel) to represent them with respect to each such matter
unless there is, under applicable standards of professional conduct (as
determined by counsel to the Indemnified Parties), a conflict on any significant
issue between the positions of any two or more Indemnified Parties, in which
event such additional counsel as may be required may be retained by the
Indemnified Parties and will be paid by Parent. Parent agrees to maintain, or to
cause the Surviving Corporation to maintain, in effect for not less than three
years after the Effective Date, the current policies of directors' and officers'
liability insurance maintained by the Company with respect to matters occurring
prior to the Effective Date; provided, however, that (i) the Surviving
Corporation may substitute therefor policies of at least the same coverage (with
carriers comparable to the Company's existing carriers) containing terms and
conditions which are no less advantageous to the Indemnified Parties and (ii)
the Surviving Corporation shall not be required to pay an annual premium for
such insurance in excess of 200% of the last annual premium paid prior to the
date hereof, but in such case shall purchase as much coverage as possible for
such amount.
Section 7.11 Employee Benefits. With respect to benefit plans available to
employees of the Company or the Subsidiaries generally, for at least one year
from and after the Effective Date, Parent shall cause the Surviving Corporation
to either (i) maintain all employee benefits of the Company or the Subsidiary,
as the case may be, including, without limitation, benefits under employee
benefit plans, policies and arrangements, existing on the Effective Date or (ii)
provide benefits to employees and former employees, as applicable, of the
Surviving Corporation that are, taken as a whole, substantially equivalent to or
better than the benefits offered to such persons by the Company or applicable
Subsidiary, as the case may be, immediately prior to the Effective Date;
provided, however, that neither Parent nor the Surviving Corporation shall be
required to adopt or maintain any plan or arrangement providing for the sale of
the Parent Common Stock or Company Common Stock other than the Victoria
Financial Corporation 401(k) Plan. In no event, however, shall the provisions of
this Section 7.11 prohibit the consolidation of the Company's and the
Subsidiaries' benefit plans, as long as after such consolidation, the benefits
provided to employees and former employees, as applicable, of the Company and
the Subsidiaries are, taken as a whole, substantially equivalent to or better
than the benefits offered to such persons by the Company or applicable
Subsidiary, as the case may be, immediately prior to such consolidation.
22
<PAGE> 138
Section 7.12 Employment Arrangements. On or prior to the Effective Date,
Parent shall use all reasonable efforts to enter into, or cause the Surviving
Corporation to enter into, agreements with the individuals specified in Section
7.12 of the Company Disclosure Schedule providing, in the event of termination
for any reason other than for cause prior to the first anniversary of the
Effective Date, for salary equivalent severance payments for a period equal to
the greater of six months or two weeks per year of service to the Company and
the Surviving Corporation, taken together, provided that, in accordance with the
current practice of the Parent, the Surviving Corporation may require a release
of all claims relating to employment matters from such individuals as
consideration for such payments and such payments shall be in lieu of any other
severance benefits payable under the Company's current plans, policies or
arrangements.
Section 7.13 Lease Extension. Notwithstanding any other provision
contained in this Merger Agreement, Parent acknowledges that the Company may
enter into a lease extension respecting its principal office location at 5915
Landerbrook Place, Cleveland, Ohio 44124 for a period of three years at a rental
equal to the rental amount for the extension as contained in the existing lease.
ARTICLE VIII
CONDITIONS PRECEDENT
Section 8.1 Conditions to Each Party's Obligation to Effect the
Merger. The respective obligations of each party to effect the Merger shall be
subject to the fulfillment at or prior to the Effective Date of the following
conditions:
(a) This Merger Agreement and the transactions contemplated hereby
shall have been approved and adopted by the requisite vote of the holders
of the Company Common Stock;
(b) The Parent Common Stock issuable in the Merger shall have been
authorized for listing on the NYSE upon official notice of issuance;
(c) The Registration Statement shall have become effective in
accordance with the provisions of the Securities Act. No stop order
suspending the effectiveness of the Registration Statement shall have been
issued by the Commission and remain in effect;
(d) The waiting period applicable to the consummation of the Merger
under the HSR Act shall have expired or been terminated and all approvals
necessary for the consummation of the transactions contemplated by this
Merger Agreement including, without limitation, any approval required by
the ORC, shall have been obtained from the insurance commissioners,
directors or superintendents, as the case may be, of the applicable state
insurance departments, and any such approvals shall be in full force and
effect;
(e) No preliminary or permanent injunction or other order, decree or
ruling issued by a court of competent jurisdiction or by a governmental,
regulatory or administrative agency or commission nor any statute, rule,
regulation or executive order promulgated or enacted by any Governmental
Entity shall be in effect, which prevents the consummation of the Merger or
makes such consummation illegal.
Section 8.2 Conditions to Obligation of the Company to Effect the
Merger. The obligation of the Company to effect the Merger shall be subject to
the fulfillment at or prior to the Effective Date of the following additional
conditions, unless waived by the Company:
(a) Parent and Merger Sub shall have performed in all material
respects their agreements contained in this Merger Agreement required to be
performed on or prior to the Effective Date, and except as contemplated or
permitted by this Merger Agreement, the representations and warranties of
Parent and Merger Sub contained in this Merger Agreement that are subject
to a Parent Material Adverse Effect qualifier shall be true and correct
when made and on and as of the Effective Date as if made on and as of such
date, and the representations and warranties of Parent and Merger Sub
contained in this Merger Agreement that are not subject to such a qualifier
shall be true and correct (except where the failure to be true and correct,
alone or taken together with other failures to be true and correct, would
not have a
23
<PAGE> 139
Parent Material Adverse Effect) when made and on and as of the Effective
Date as if made on and as of such date, except for the representations and
warranties set forth in Sections 4.2(a) (second, third and final sentences
only) and 4.4 which were or will be true in all material respects at such
time or times as stated therein and the representations and warranties set
forth in Section 4.5 which were true in all material respects as of the
date hereof; and
(b) The Company shall have received a certificate, dated the Effective
Date, signed by the President or Chief Executive Officer or a Vice
President of Parent and Merger Sub, certifying that the conditions
specified in Section 8.2(a) have been fulfilled.
Section 8.3 Conditions to Obligations of Parent and Merger Sub to Effect
the Merger. The obligations of Parent and Merger Sub to effect the Merger shall
be subject to the fulfillment at or prior to the Effective Date of the following
additional conditions, unless waived by Parent:
(a) The Company shall have performed in all material respects its
agreements contained in this Merger Agreement required to be performed on
or prior to the Effective Date, and except as contemplated or permitted by
this Merger Agreement, the representations and warranties of the Company
contained in this Merger Agreement that are subject to a Company Material
Adverse Effect qualifier shall be true and correct when made and on and as
of the Effective Date as if made on and as of such date, and the
representations and warranties of the Company contained in this Merger
Agreement that are not subject to such a qualifier shall be true and
correct (except where the failure to be true and correct, alone or taken
together with other failures to be true and correct, would not have a
Company Material Adverse Effect) when made and on and as of the Effective
Date as if made on and as of such date, except (i) in the case of Section
5.2, for any failure to be true and correct resulting from the exercise of
Company Options, (ii) in the case of Section 5.20(a), for any failure to be
true and correct resulting from a change following the date hereof in the
persons owning more than 5% of Company Common Stock and (iii) for the
representations and warranties set forth in 5.5, 5.13(a) and (c), 5.17 and
5.25 which were true in all material respects at such time as stated
therein;
(b) Parent and Merger Sub shall have received a certificate, dated the
Effective Date, signed by the President or Chief Executive Officer or a
Vice President of the Company, certifying that the conditions specified in
Section 8.3(a) have been fulfilled;
(c) In connection with the receipt of the approvals referred to in
Section 8.1(d), no approval shall impose on Parent or Merger Sub any
conditions or other requirements that would (i) cause Parent or Merger Sub
any material additional costs, or (ii) interfere with the continued
operations of the Company and the Subsidiaries, taken as a whole, or Parent
or its subsidiaries;
(d) From the date hereof to the Effective Date, there shall not have
occurred any material adverse change (other than one resulting from or
relating to this Merger Agreement or the transactions contemplated hereby)
in the business, properties, assets, condition (financial or otherwise),
liabilities or operations of the Company and the Subsidiaries taken as a
whole;
(e) Parent shall have received a letter from KPMG Peat Marwick, the
Company's independent auditors, dated a date within two business days
before the date on which the Registration Statement shall become effective
and addressed to Parent, in form and substance reasonably satisfactory to
Parent and customary in scope and substance for letters delivered by
independent public accountants in connection with registration statements
similar to the Registration Statement; and
(f) The Employment Agreement between Parent or a subsidiary thereof
and Kenneth R. Rosen dated December 18, 1994 is in full force and effect as
of the Effective Date.
24
<PAGE> 140
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
Section 9.1 Termination. This Merger Agreement may be terminated at any
time prior to the Effective Date:
(a) by mutual consent of the Board of Directors of Parent and the
Board of Directors of the Company;
(b) by either Parent or the Company if the Merger shall not have been
consummated on or before July 31, 1995 (provided the terminating party is
not otherwise in material breach of its representations, warranties or
obligations under this Merger Agreement or responsible for the failure of
the Merger to occur on or before such date);
(c) by the Company if any of the conditions specified in Sections 8.1
and 8.2 have not been met or waived by the Company at such time as such
condition is no longer capable of satisfaction;
(d) by Parent if any of the conditions specified in Sections 8.1 and
8.3 have not been met or waived by Parent at such time as such condition is
no longer capable of satisfaction;
(e) by either Parent or the Company if the other party shall have
breached this Merger Agreement in any material respect and such breach
either continues for a period of ten days after the receipt of notice of
the breach from the non-breaching party or is not susceptible to cure;
(f) by either the Company or Parent, if (i) the Board of Directors of
the Company shall have withdrawn or modified in a manner adverse to Parent
its approval or recommendation to the Company's stockholders of this Merger
Agreement or the Merger or shall have approved or recommended to the
Company's stockholders that they accept the terms of any Acquisition
Proposal or shall have resolved to take any of the foregoing actions;
provided, however, that reasonable delay required to comply with the
Company Board Fiduciary Duties shall not be deemed to be a withdrawal or a
modification adverse to Parent; or (ii) a Third Party Acquisition shall
have occurred; provided, however, that such termination under this clause
(f) shall not relieve the Company of its fee obligations under Section 10.3
hereof. "Third Party Acquisition" means the occurrence of any of the
following events: (w) the acquisition of the Company by merger, tender
offer or otherwise by any person other than Parent, Merger Sub or any
affiliate thereof (a "Third Party"); (x) the acquisition by a Third Party
of 30% or more of the total assets of the Company and the Subsidiaries,
taken as a whole; or (y) the acquisition by a Third Party of beneficial
ownership, or the right to acquire beneficial ownership, of 30% or more of
the outstanding Company Common Stock or other voting power of the Company;
provided, however, that in the event Parent terminates this Merger
Agreement pursuant to this clause (y), a fee shall be payable under Section
10.3 only so long as, and on or after the date when, the Company (1) is
acquired (or enters into an agreement to be acquired) by merger, tender
offer or otherwise by such Third Party or (2) enters into an agreement with
a Third Party providing for the acquisition by said Third Party of 30% or
more of the total assets of the Company or the Subsidiaries, in each case,
within twelve months of the acquisition of, or right to acquire, such 30%
beneficial ownership. Notwithstanding anything to the contrary contained
herein, "Third Party" shall not include the Company or any Subsidiary (for
purposes of this sentence, "Subsidiary" shall include all subsidiaries of
the Company as of the date hereof and all subsidiaries formed from and
after the date hereof).
Section 9.2 Effect of Termination. In the event of termination of this
Merger Agreement by either Parent or the Company, as provided above, this Merger
Agreement shall forthwith become void and (except for the willful breach of this
Merger Agreement by any party hereto) there shall be no liability on the part of
the Company, Parent or Merger Sub or their respective officers or directors;
provided that Section 4.6, Section 5.29, the antepenultimate and last sentences
of Section 7.1 and Section 10.3 shall survive the termination of this Merger
Agreement.
Section 9.3 Amendment. This Merger Agreement may be amended by the parties
hereto, by or pursuant to action taken by their respective Boards of Directors,
at any time before or after approval hereof by
25
<PAGE> 141
the stockholders of the Company, but, after such approval, no amendment shall be
made which changes the ratios at which Company Common Stock is to be converted
into Parent Common Stock as provided in Section 3.1 or which in any way
materially adversely affects the rights of such stockholders, without the
further approval of such stockholders. This Merger Agreement may not be amended
except by an instrument in writing signed on behalf of each of the parties
hereto.
Section 9.4 Waiver. At any time prior to the Effective Date, the parties
hereto may (i) extend the time for the performance of any of the obligations or
other acts of the other parties hereto, (ii) waive any inaccuracies in the
representations and warranties contained herein or in any documents delivered
pursuant hereto and (iii) waive compliance with any of the agreements or
conditions contained herein provided, however, that no such waiver shall
materially adversely affect the rights of the Company's and Parent's
stockholders. Any agreement on the part of a party hereto to any such extension
or waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party.
ARTICLE X
GENERAL PROVISIONS
Section 10.1 Non-Survival of Representations, Warranties and
Agreements. No representations, warranties or agreements in this Merger
Agreement shall survive the Merger, except for the agreements contained in
Sections 3.1, 3.2, 3.3, 3.4, 3.5, 3.7, 7.3(b) (the last sentence only), 7.7,
10.1, 10.3 and 10.7, and except for the agreements referred to in Sections
7.3(b), 7.10 and 7.11 (for the periods provided therein).
Section 10.2 Notices. All notices or other communications under this
Merger Agreement shall be in writing and shall be deemed to have been duly given
or made as of the date delivered or mailed if delivered personally or mailed by
registered or certified mail (postage prepaid, return receipt requested), or
upon transmission thereof if by facsimile, addressed as follows:
If to the Company:
Victoria Financial Corporation
5915 Landerbrook Drive
Cleveland, Ohio 44124-1058
Attention: Chief Financial Officer
Facsimile No.: (216) 461-0958
With a copy to:
Benesch, Friedlander, Coplan & Aronoff
2300 BP America Building
200 Public Square
Cleveland, Ohio 44114
Attention: Richard D. Margolis
Facsimile No.: (216) 363-4588
If to Parent or Merger Sub:
USF&G Corporation
100 Light Street
Baltimore, Maryland 21202
Attention: Corporate Secretary
Facsimile No.: (410) 234-2056
26
<PAGE> 142
With a copy to:
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, New York 10022
Attention: Michael G. Marks
Facsimile No.: (212) 821-8111
or to such other address as any party may have furnished to the other parties in
writing in accordance with this Section 10.2.
Section 10.3 Fees and Expenses.
(a) Except as provided below in this Section 10.3, all costs and
expenses incurred in connection with this Merger Agreement and the
transactions contemplated hereby shall be paid by the party incurring such
expenses except that the Company and Parent each agree to pay 50% of all
printing expenses incurred by either party in connection with the
Registration Statement and the Proxy Statement. Notwithstanding the
provisions of the preceding sentence, in any action, suit or other
proceeding under or to enforce any provision of this Merger Agreement, the
prevailing party shall be entitled to recover its reasonable attorneys'
fees and other out-of-pocket expenses from the losing party.
(b) (i) If this Merger Agreement is terminated by Parent pursuant
to (A) Section 9.1(d) or (e) hereof as a result of any willful breach by
the Company of any of the representations, warranties, covenants or
agreements of the Company contained in this Merger Agreement, or (B)
Section 9.1(f) hereof, the Company shall pay, or cause to be paid, in
same day funds to Parent upon demand, all actual out-of-pocket costs,
expenses and fees (including, without limitation, fees payable to all
investment banking firms and other institutions, and their respective
agents, and including attorneys fees and expenses and other professional
or service fees and expenses) incurred or to be incurred by Parent or
Merger Sub in connection with this Merger Agreement and the transactions
contemplated hereby.
(ii) If this Merger Agreement is terminated by the Company pursuant
to Section 9.1(c) or (e) hereof as a result of any willful breach by
Parent or Merger Sub of any of the representations, warranties,
covenants or agreements of Parent or Merger Sub contained in this Merger
Agreement, Parent shall pay, or cause to be paid, in same day funds to
the Company upon demand, all actual out-of-pocket costs, expenses and
fees (including, without limitation, fees payable to all investment
banking firms and other institutions, and their respective agents, and
including attorneys fees and expenses and other professional or service
fees and expenses) incurred or to be incurred by the Company in
connection with this Merger Agreement and the transactions contemplated
hereby.
(c) In addition to any amounts payable under clause (b) of this
Section 10.3, the Company shall pay, or cause to be paid, in same day funds
to Parent upon demand a fee of $2,500,000 if:
(i) this Merger Agreement is terminated by Parent pursuant to
Section 9.1(f), giving effect to the proviso contained in the definition
of Third Party Acquisition; or
(ii) this Merger Agreement is terminated by Parent pursuant to
Section 9.1(e) and within 12 months thereafter, the Company enters into
an agreement with respect to a Third Party Acquisition, or a Third Party
Acquisition occurs, involving a Third Party (x) with whom the Company
(or its agents) had any discussions with respect to a Third Party
Acquisition, (y) to whom the Company (or its agents) furnished
information with respect to or with a view to a Third Party Acquisition
or (z) who had submitted an Acquisition Proposal or expressed any
interest publicly or to the Company in a Third Party Acquisition, in the
case of each of clauses (x), (y) and (z), at any time from and after the
date hereof to the date of such termination.
Section 10.4 Publicity. So long as this Merger Agreement is in effect,
Parent, Merger Sub and the Company agree to consult with each other in issuing
any press release or otherwise making any public
27
<PAGE> 143
statement with respect to the transactions contemplated by this Merger
Agreement, and none of them shall issue any such press release or make any such
public statement prior to such consultation, except as may be required by law or
by obligations pursuant to any listing agreement with any national securities
exchange. The commencement of litigation relating to this Merger Agreement or
the transactions contemplated hereby or any proceedings in connection therewith
shall not be deemed a violation of this Section 10.4.
Section 10.5 Specific Performance. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Merger Agreement were not performed in accordance with their specific terms or
were otherwise breached. It is accordingly agreed that the parties shall be
entitled to an injunction or injunctions to prevent breaches of this Merger
Agreement and to enforce specifically the terms and provisions hereof in any
court of the United States or any state having jurisdiction, this being in
addition to any other remedy to which they are entitled at law or in equity.
Section 10.6 Interpretation. The headings contained in this Merger
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Merger Agreement. Although this Merger
Agreement was amended and restated on February 9, 1995, references in this
Merger Agreement to "the date hereof" shall refer to December 18, 1994.
Section 10.7 Miscellaneous. This Merger Agreement (including the documents
and instruments referred to herein) (a) constitutes the entire agreement and
supersedes all other prior agreements and understandings, both written and oral,
among the parties, or any of them, with respect to the subject matter hereof
(other than as provided in the Confidentiality Agreements between the Company
and Parent dated November 14, 1994 and December 12, 1994, as the same may be
amended); (b) except as provided in Section 7.10, is not intended to confer upon
any other person any rights or remedies hereunder; (c) shall not be assigned by
operation of law or otherwise, except that Merger Sub shall have the right to
assign to Parent or any direct wholly owned subsidiary of Parent any and all
rights and obligations of Merger Sub under this Merger Agreement; and (d) shall
be governed in all respects, including validity, interpretation and effect, by
the laws of the State of Ohio (without giving effect to the provisions thereof
relating to conflicts of law). This Merger Agreement may be executed in two or
more counterparts which together shall constitute a single agreement.
IN WITNESS WHEREOF, Parent, Merger Sub and the Company have caused this
Merger Agreement to be signed by their respective officers thereunder duly
authorized all as of the date first written above.
USF&G CORPORATION
By:/s/ J. Kendall Huber
------------------------------
Title: Vice President and
Deputy General Counsel
QUEENSLAND, INC.
By:/s/ J. Kendall Huber
------------------------------
Title: Vice President
VICTORIA FINANCIAL CORPORATION
By:/s/ Tab A. Keplinger
------------------------------
Title: Vice President
28
<PAGE> 144
ANNEX II
MCDONALD & COMPANY
SECURITIES, INC.
MEMBER NEW YORK STOCK EXCHANGE
SUITE 2100
800 SUPERIOR AVENUE
CLEVELAND, OHIO 44114-2603
216-443-2300
April 13, 1995
Board of Directors
Victoria Financial Corporation
5915 Landerbrook Drive
Cleveland, OH 44124-1058
Gentlemen:
You have requested our opinion with respect to the fairness, from a
financial point of view, as of the date hereof, to the holders of common stock,
par value $0.01 per share ("Victoria Common"), of Victoria Financial Corporation
("Victoria") of the exchange rate as set forth in Section 3.1(b) of the
Agreement and Plan of Merger, dated December 18, 1994 (the "Merger Agreement"),
by and among USF&G Corporation ("USF&G"), Queensland, Inc., a wholly owned
subsidiary of USF&G (the "Merger Sub") and Victoria.
The Merger Agreement provides for the merger (the "Merger") of the Merger
Sub with and into Victoria, pursuant to which, among other things, at the
Effective Date (as defined in the Merger Agreement), outstanding shares of
Victoria Common will be exchanged for a specified number of shares of common
stock, par value $2.50 per share ("USF&G Common") of USF&G as set forth in
Section 3.1(b) of the Merger Agreement (the "Exchange Rate"). Under the terms of
the Merger Agreement, the Exchange Rate will be determined by reference to the
average closing price of USF&G Common as reported on the New York Stock Exchange
Composite Tape during the twenty trading days immediately preceding the third
business day prior to the Effective Date. For purposes of this opinion, we have
assumed that the average closing price of USF&G Common as determined in
accordance with applicable provisions of the Merger Agreement will not be less
than $11.90 per share. The terms and conditions of the Merger are more fully set
forth in the Merger Agreement.
McDonald & Company Securities, Inc., as part of its investment banking
business, is customarily engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes.
We have acted as Victoria's financial advisor in connection with the
execution of the Merger Agreement for the sole purpose of rendering this
opinion. In connection with rendering our opinion set forth herein, we have
among other things:
(i) Reviewed Victoria's Annual Reports to Shareholders and Annual
Reports on Form 10-K for each of the three years ended December 31, 1994,
December 31, 1993 and December 31, 1992, including the audited financial
statements contained therein;
(ii) Reviewed USF&G's Annual Reports to Shareholders and Annual
Reports on Form 10-K for each of the three years ended December 31, 1994,
December 31, 1993 and December 31, 1992, including the audited financial
statements contained therein;
(iii) Reviewed certain other public and non-public information,
primarily financial in nature, relating to the respective businesses,
earnings, assets and prospects of Victoria and USF&G provided to us or
publicly available;
(iv) Participated in meetings with members of senior management of
Victoria and meetings with members of senior management of USF&G concerning
the financial condition, business, assets, financial
<PAGE> 145
forecasts and prospects of the respective companies, as well as other
matters we believe relevant to our inquiry;
(v) Reviewed certain stock market information for Victoria Common and
USF&G Common, and compared it with similar information for certain
companies, the securities of which are publicly traded;
(vi) Compared the results of operations and financial condition of
Victoria with that of certain companies which we deemed to be relevant for
purposes of this opinion;
(vii) Reviewed the financial terms, to the extent publicly available,
of certain acquisition transactions which we deemed to be relevant for
purposes of this opinion;
(viii) Reviewed the Merger Agreement and its schedules and exhibits
and certain related documents; and
(ix) Performed such other analyses as we have deemed appropriate.
In our review and analysis and in arriving at our opinion, we have assumed
and relied upon the accuracy and completeness of all of the financial and other
information reviewed by us and have relied upon the accuracy and completeness of
the representations and warranties of Victoria and USF&G contained in the Merger
Agreement, without undertaking any responsibility for independent investigation
or verification of such matters. We have not conducted a physical inspection of
any of the assets, properties or facilities of either Victoria or USF&G, nor
have we made or obtained or been furnished with any independent evaluation or
appraisal of any of such assets, properties or facilities or any of the
liabilities of either Victoria or USF&G. With respect to financial forecasts
used in our analysis, we have assumed that such forecasts have been reasonably
prepared on a basis reflecting the best currently available estimates and
judgments of the management of Victoria as to the future performance of
Victoria. McDonald & Company also received consensus security analysts earnings
estimates for USF&G, and discussed those estimates with management of USF&G. We
express no view as to such financial forecasts or earnings estimates or the
assumptions on which they are based. We have also assumed that all of the
conditions to the consummation of the Merger, as set forth in the Merger
Agreement, including the tax-free treatment of the Merger to the holders of
Victoria Common, would be satisfied and that the Merger would be consummated on
a timely basis in the manner contemplated by the Merger Agreement.
We will receive a fee for our services in connection with rendering this
opinion.
In the ordinary course of business, we may actively trade securities of
Victoria and USF&G for our own account and for the accounts of customers and,
accordingly, we may at any time hold for a long or short position in such
securities.
This opinion is based on economic and market conditions and other
circumstances existing on, and information made available as of, the date
hereof. In addition, our opinion is, in any event, limited to the fairness to
Victoria's stockholders, as of the date hereof, from a financial point of view,
of the Exchange Rate, and does not address Victoria's underlying business
decision to effect the Merger or any other terms of the Merger and does not
constitute a recommendation to any Victoria shareholder as to how such
shareholder should vote with respect to the Merger. This opinion does not
represent our opinion as to what the value of Victoria Common or USF&G's Common
may be at the effective date of the Merger or as to the prospects of USF&G's
business, nor are we making any recommendation to Victoria's shareholders with
respect to the advisability of disposing or retaining USF&G Common received
pursuant to the Merger.
This opinion has been prepared solely for the confidential use of the Board
of Directors and senior management of Victoria and will not be reproduced,
summarized, described or referred to or given to any other person without our
prior written consent. Notwithstanding the foregoing, this opinion may be
included in a proxy statement to be mailed to the holders of Victoria Common in
connection with the Merger, provided that this opinion will be reproduced in
such proxy statement in full, and any description of or reference to us or our
actions, or any summary of the opinion in such proxy statement will be in a form
acceptable to us and our counsel.
2
<PAGE> 146
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Exchange Rate, pursuant to the Merger Agreement, is fair to the
holders of Victoria Common from a financial point of view.
Very truly yours,
McDONALD & COMPANY SECURITIES, INC.
3
<PAGE> 147
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The MGCL permits a corporation to indemnify its present and former
directors and officers, among others, against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection with
any proceeding to which they may be a party by reason of their service in those
or other capacities unless it is established that (a) the act or omission of the
director or officer was material to the matter giving rise to the proceeding and
was committed in bad faith or was the result of active and deliberate
dishonesty, or (b) the director or officer actually received an improper
personal benefit in money, property or services or (c) in the case of any
criminal proceeding, the director or officer had reasonable cause to believe
that the act or omission was unlawful. In addition, the MGCL requires
corporations, as a condition to advancing expenses, to obtain (i) a written
affirmation by the director or officer of his good faith belief that he has met
the standard of conduct necessary for indemnification by the corporation as
authorized by the MGCL, the corporation's charter and by-laws and (ii) a written
statement by or on his behalf to repay the amount paid or reimbursed by the
corporation if it shall ultimately be determined that the standard of conduct
was not met. The USF&G Charter requires USF&G to indemnify its officers and
directors and to pay or reimburse expenses in advance of the final disposition
of any proceeding to the full extent provided from time to time by Maryland law.
Under the MGCL, USF&G is permitted to purchase and maintain, and USF&G has
purchased and maintains, insurance on behalf of its directors and officers
against any liability asserted against such directors and officers in their
capacities as such whether or not USF&G would have the power to indemnify such
persons under the provisions of Maryland law governing indemnification.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
A. Exhibits.
<CAPTION>
EXHIBIT
NUMBER
- ------
<S> <C>
2.1 -- Amended and Restated Agreement and Plan of Merger, dated as of December 18, 1994
and amended as of February 9, 1995, among USF&G Corporation, Queensland, Inc. and
Victoria Financial Corporation (included as Annex I to the Proxy
Statement/Prospectus). The Registrant agrees to furnish supplementally a copy of
any omitted schedule to the Commission upon request.
4.1 -- Rights Agreement dated as of September 18, 1987, between USF&G Corporation and
First Chicago Trust Company of New York (successor to Morgan Shareholder's Service
Trust Company) including Form of Rights Certificate. (Incorporated by reference
to Exhibits 1 and 2 to the Registrant's Form 8-A filed September 21, 1987, File
No. 1-8233.)
4.2 -- Bond issuance and payment agreement dated November 16, 1987, for Swiss Franc
Public Issue of 5 1/2% Bonds 1988-1996 of Swiss Francs 120,000,000. (Incorporated by
reference to Exhibit 4M to the Registrant's Form 10-K for the year ended December
31, 1987, File No. 1-8233.)
4.3 -- Indenture dated January 28, 1994 between USF&G Corporation and Chemical Bank.
(Incorporated by reference to Exhibit 4E to the Registrant's Form 10-K for the year
ended December 31, 1993, File No. 1-8233.)
4.4 -- Indenture dated January 28, 1994 between USF&G Corporation and Signet Bank.
(Incorporated by reference to Exhibit 4D to the Registrant's Form 10-K for the year
ended December 31, 1994, File No. 1-8233.)
</TABLE>
II-1
<PAGE> 148
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ------
<S> <C>
4.5 -- Form of Note dated March 3, 1994, for Zero Coupon Convertible Subordinated Notes
due 2009. (Incorporated by reference to Exhibit 4 to the Registrant's Form 8-K dated
March 3, 1994, File No. 1-8233.)
4.6 -- Form of Note dated June 30, 1994, for 8 3/8% Senior Notes due 2001. (Incorporated
by reference to Exhibit 4 to the Registrant's Form 8-K dated June 30, 1994, File No.
1-8233.)
4.7 -- Credit Agreement dated as of September 30, 1994 among USF&G Corporation and
Morgan Guaranty Trust Company of New York as agent. (Incorporated by reference to
Exhibit 10 to the Registrant's Form 10-Q for the quarter ended September 30,
1994, File No. 1-8233.)
4.8 -- Credit Agreement dated as of December 1, 1994, among USF&G Corporation and
Deutsche Bank AG, as agent. (Incorporated by reference to Exhibit 4H to the
Registrant's Form 10-K for the year ended December 31, 1994, File No. 1-8233.)
4.9 -- Letter of Credit Agreement dated as of October 25, 1994, among USF&G Corporation
and the Bank of New York, as agent. (Incorporated by reference to Exhibit 4I to the
Registrant's Form 10-K for the year ended December 31, 1994, File No. 1-8233.)
5.1 -- Opinion of John A. MacColl, Senior Vice President and General Counsel of the
Registrant, as to the legality of the securities being registered.
8.1 -- Opinion of Benesch, Friedlander, Coplan & Aronoff as to certain federal income
tax consequences.
8.2 -- Opinion of Willkie Farr & Gallagher as to certain federal income tax
consequences.
23.1 -- Consent of McDonald & Company Securities, Inc.
23.2 -- Consent of KPMG Peat Marwick LLP.
23.3 -- Consent of Ernst & Young LLP.
23.4 -- Consent of John A. MacColl (included in Exhibit 5.1).
23.5 -- Consent of Benesch, Friedlander, Coplan & Aronoff (included in Exhibit 8.1).
23.6 -- Consent of Willkie Farr & Gallagher (included in Exhibit 8.2).
24.1 -- Power of Attorney.
28.1 -- Information from reports furnished to state insurance regulatory authorities.
(Incorporated by reference to Exhibit 28 to the Registrant's Form 10-K for the year
ended December 31, 1994, File No. 1-8233.)
99.1 -- Form of proxy for special meeting to be mailed to Victoria shareholders.
99.2 -- Employment Agreement, dated as of December 18, 1994, between USF&G Corporation
and Kenneth R. Rosen.
</TABLE>
B. Financial Statement Schedules.
No financial statement schedules are required to be filed herewith pursuant
to Item 21(b) of Form S-4.
C. Reports, Opinions and Appraisals.
Reference is made to Annex II included as part of the Proxy
Statement/Prospectus.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
II-2
<PAGE> 149
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the Registrant's annual report pursuant to section
13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report pursuant to
section 15(d) of the Securities Exchange Act of 1934) that is incorporated by
reference in the Registration Statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(5) That prior to any public offering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the Registrant undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items of
the applicable form.
(6) That every prospectus (i) that is filed pursuant to paragraph (5)
immediately preceding, or (ii) that purports to meet the requirements of section
10(a)(3) of the Securities Act of 1933 and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(7) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means. This
includes information contained in documents filed subsequent to the effective
date of the Registration Statement through the date of responding to the
request.
(8) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-3
<PAGE> 150
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF BALTIMORE, STATE OF
MARYLAND, ON APRIL 13, 1995.
USF&G CORPORATION
By: /s/ NORMAN P. BLAKE, JR.
--------------------------------
Norman P. Blake, Jr.
Chairman of the Board
President and Chief
Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATES INDICATED.
April 13, 1995 /s/ NORMAN P. BLAKE, JR.
---------------------------------
Norman P. Blake, Jr.
Chairman of the Board,
President and
Chief Executive Officer
(Principal Executive Officer)
April 13, 1995 /s/ DAN L. HALE
---------------------------------
Dan L. Hale
Executive Vice President,
Chief Financial
Officer (Principal Financial
Officer and
Principal Accounting Officer)
Board of Directors:
H. Furlong Baldwin, Michael J. Birck, George L. Bunting, Jr., Robert E.
Davis, Dale F. Frey, Robert E. Gregory, Jr., Robert J. Hurst, Wilbur G.
Lewellen, Henry A. Rosenberg, Jr., Larry P. Scriggins and Anne Marie Whittemore.
April 13, 1995 /s/ NORMAN P. BLAKE, JR.
---------------------------------
Norman P. Blake, Jr.
(for himself and as
attorney-in-fact)
II-4
<PAGE> 151
<TABLE>
EXHIBIT INDEX
<CAPTION>
EXHIBIT
NUMBER PAGE
- ------- ----
<S> <C> <C>
2.1 -- Amended and Restated Agreement and Plan of Merger, dated as of December
18, 1994 and amended as of February 9, 1995, among USF&G Corporation,
Queensland, Inc. and Victoria Financial Corporation (included as Annex I to
the Proxy Statement/Prospectus). The Registrant agrees to furnish
supplementally a copy of any omitted schedule to the Commission upon
request.
4.1 -- Rights Agreement dated as of September 18, 1987, between USF&G
Corporation and First Chicago Trust Company of New York (successor to
Morgan Shareholder's Service Trust Company) including Form of Rights
Certificate. (Incorporated by reference to Exhibits 1 and 2 to the
Registrant's Form 8-A filed September 21, 1987, File No. 1-8233.)
4.2 -- Bond issuance and payment agreement dated November 16, 1987, for Swiss
Franc Public Issue of 5 1/2% Bonds 1988-1996 of Swiss Francs 120,000,000.
(Incorporated by reference to Exhibit 4M to the Registrant's Form 10-K for
the year ended December 31, 1987, File No. 1-8233.)
4.3 -- Indenture dated January 28, 1994 between USF&G Corporation and Chemical
Bank. (Incorporated by reference to Exhibit 4E to the Registrant's Form
10-K for the year ended December 31, 1993, File No. 1-8233.)
4.4 -- Indenture dated January 28, 1994 between USF&G Corporation and Signet
Bank. (Incorporated by reference to Exhibit 4D to the Registrant's Form
10-K for the year ended December 31, 1994, File No. 1-8233.)
4.5 -- Form of Note dated March 3, 1994, for Zero Coupon Convertible
Subordinated Notes due 2009. (Incorporated by reference to Exhibit 4 to the
Registrant's Form 8-K dated March 3, 1994, File No. 1-8233.)
4.6 -- Form of Note dated June 30, 1994, for 8 3/8% Senior Notes due 2001.
(Incorporated by reference to Exhibit 4 to the Registrant's Form 8-K dated
June 30, 1994, File No. 1-8233.)
4.7 -- Credit Agreement dated as of September 30, 1994 among USF&G Corporation
and Morgan Guaranty Trust Company of New York as agent. (Incorporated by
reference to Exhibit 10 to the Registrant's Form 10-Q for the quarter ended
September 30, 1994, File No. 1-8233.)
4.8 -- Credit Agreement dated as of December 1, 1994, among USF&G Corporation
and Deutsche Bank AG, as agent. (Incorporated by reference to Exhibit 4H to
the Registrant's Form 10-K for the year ended December 31, 1994, File No.
1-8233.)
4.9 -- Letter of Credit Agreement dated as of October 25, 1994, among USF&G
Corporation and the Bank of New York, as agent. (Incorporated by reference
to Exhibit 4I to the Registrant's Form 10-K for the year ended December 31,
1994, File No. 1-8233.)
5.1 -- Opinion of John A. MacColl, Senior Vice President and General Counsel of
the Registrant, as to the legality of the securities being registered.
8.1 -- Opinion of Benesch, Friedlander, Coplan & Aronoff as to certain federal
income tax consequences.
8.2 -- Opinion of Willkie Farr & Gallagher as to certain federal income tax
consequences.
23.1 -- Consent of McDonald & Company Securities, Inc.
23.2 -- Consent of KPMG Peat Marwick LLP.
23.3 -- Consent of Ernst & Young LLP.
23.4 -- Consent of John A. MacColl (included in Exhibit 5.1).
</TABLE>
II-5
<PAGE> 152
<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGE
- ------- ----
<S> <C> <C>
23.5 -- Consent of Benesch, Friedlander, Coplan & Aronoff (included in Exhibit
8.1).
23.6 -- Consent of Willkie Farr & Gallagher (included in Exhibit 8.2).
24.1 -- Power of Attorney.
28.1 -- Information from reports furnished to state insurance regulatory
authorities. (Incorporated by reference to Exhibit 28 to the Registrant's
Form 10-K for the year ended December 31, 1994, File No. 1-8233.)
99.1 -- Form of proxy for special meeting to be mailed to Victoria shareholders.
99.2 -- Employment Agreement, dated as of December 18, 1994, between USF&G
Corporation and Kenneth R. Rosen.
</TABLE>
II-6
<PAGE> 1
EXHIBIT 5.1
April 13, 1995
USF&G Corporation
100 Light Street
Baltimore, Maryland 21201
Dear Sirs:
I am the duly elected and acting Senior Vice President-General Counsel
of USF&G Corporation (the "Corporation") and I have acted as counsel to the
Corporation in connection with the Registration Statement on Form S-4 covering
the registration of 4,620,000 shares of the Corporation's Common Stock, $2.50
par value (the "Shares"), to be issued to holders of Common Stock and options
to purchase Common Stock, in each case, of Victoria Financial Corporation, a
Delaware corporation ("Victoria"), in accordance with and pursuant to the
Amended and Restated Agreement and Plan of Merger dated as of February 9, 1995
(the "Merger Agreement") among the Corporation, Queensland, Inc. and Victoria.
In this capacity, I have reviewed the Corporation's charter, by-laws, and such
other documents, matters of law and records of corporate proceedings as I have
deemed necessary in the rendering of the opinion set forth herein.
Based upon the foregoing, I am of the opinion that upon issuance of the
Shares in accordance with and pursuant to the Merger Agreement, such Shares
will be validly issued, fully paid and nonassessable.
I consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to me under the caption "Legal
Matters" in the Prospectus constituting a part thereof.
Very truly yours,
John A. MacColl
JAM/sfd
<PAGE> 1
EXHIBIT 8.1
BENESCH
FRIEDLANDER 2300 BP America Building
COPLAN 200 Public Square
& ARONOFF Cleveland, Ohio 44114-2378
ATTORNEYS AT LAW (216) 363-4500
Fax (216) 363-4588
April 13, 1995
Victoria Financial Corporation
5915 Landerbrook Drive
Cleveland, Ohio 44124-4058
Ladies and Gentlemen:
This letter is in response to your request for our opinion with respect to
certain federal income tax consequences of the proposed merger of Queensland,
Inc. ("Queensland"), a wholly owned subsidiary of USF&G Corporation ("USF&G"),
with and into Victoria Financial Corporation ("Victoria") pursuant to the
Amended and Restated Agreement and Plan of Merger dated as of December 18, 1994
and amended as of February 9, 1995, by and among USF&G, Queensland and Victoria
(the "Merger Agreement"). Unless otherwise specified, the terms used herein
are defined in the Proxy Statement/Prospectus of Victoria.
In connection with the proposed Merger, we understand the following:
(a) Pursuant to the laws of Delaware, Queensland will merge with and
into Victoria, which will be the surviving corporation;
(b) At the Effective Date, each outstanding share of Victoria Common
Stock will be converted into a right to receive the number of
shares of USF&G Common Stock equal to the Exchange Rate;
(c) At the Effective Date, each holder of Victoria Common Stock who
otherwise would have been entitled to a fractional share of USF&G
Common Stock will receive cash in lieu thereof;
(d) As soon as practicable on or after the Effective Date, the
Exchange Agent will distribute USF&G Common Stock and cash in
lieu of fractional shares to holders of Victoria Common Stock; and
(e) USF&G will cause Victoria to continue to conduct the historic
business of
Cleveland Columbus Cincinnati
<PAGE> 2
BENESCH, FRIEDLANDER, COPLAN & ARONOFF
Victoria Financial Corporation
Page 2
Victoria or use a significant portion of Victoria's historic
business assets in a business within the meaning of Treasury
Regulation Section 1.368-1(d).
In connection herewith, we have examined the Merger Agreement, the Registration
Statement on Form S-4 filed by USF&G with the Securities and Exchange
Commission (which contains a Proxy Statement/Prospectus of Victoria) and such
other information as we have deemed relevant. As to questions of fact material
to the opinions herein, we have relied upon representations of Victoria and
USF&G set forth in certificates executed by their respective officers, as well
as USF&G's covenant in the Merger Agreement that it will not take any action,
nor will it cause Victoria to take any action, following the Effective Date of
the Merger, that would jeopardize the characterization of the Merger as a
reorganization within the meaning of Sections 368(a)(1)(A) and 368(a)(2)(E) of
the Code. Moreover, we have assumed that the Merger will be completed in the
manner set forth in the Proxy Statement/Prospectus, and that the
representations and covenants made by the parties to the Merger are accurate
and complete and that such representations and covenants will continue to be
accurate and complete as of the Effective Date of the Merger. On the basis of
the foregoing and subject to the conditions, qualifications and limitations set
forth herein, we are of the opinion that for federal income tax purposes:
(a) The Merger will qualify as a tax-free reorganization
within the meaning of Sections 368(a)(1)(A) and
368(a)(2)(E) of of the Internal Revenue Code 1986, as
amended (the "Code"), and Victoria and USF&G will each
be a party to the reorganization;
(b) No gain or loss will be recognized by Victoria as a result
of the Merger;
(c) No gain or loss will be recognized by a shareholder of
Victoria upon the exchange of shares of Victoria Common
Stock for USF&G Common Stock (including the USF&G
Rights), except that gain or loss will be recognized by
a shareholder of Victoria on the receipt of cash in lieu
of a fractional share interest in USF&G Common Stock;
(d) The adjusted tax basis of the USF&G Common Stock received
by a shareholder of Victoria pursuant to the Merger
(including fractional share interests deemed received)
will be the same as the adjusted tax basis of the shares
of Victoria Common Stock surrendered in exchange therefor;
(e) The holding period of the Victoria Common Stock received
by a shareholder of Victoria as a result of the Merger
(including fractional share interests deemed received)
will include the holding period of the shares of Victoria
Common Stock surrendered in exchange therefor, provided
that such Victoria Common Stock is held as a capital
asset by the Victoria shareholder at the consummation of
the Merger; and
<PAGE> 3
BENESCH, FRIEDLANDER, COPLAN & ARONOFF
Victoria Financial Corporation
Page 3
(f) Any cash payment received by a holder of Victoria Common
Stock in lieu of a fractional share of USF&G Common Stock
will be treated as if such fractional share of USF&G Common
Stock had been issued in the Merger and then redeemed by USF&G.
The opinions expressed above are based upon our opinion that the continuity of
interest requirement of Treasury Regulations Section 1.368-1(b) will be
satisfied. The continuity of interest requirement will be satisfied if
Victoria's shareholders receive in the Merger and retain USF&G Common Stock
equal in value, as of the Effective Date, to at least 50% of the value of all
of the formerly outstanding shares of Victoria Common Stock as of that date.
The Internal Revenue Service (the "Service") established in Revenue Procedure
77-37, as modified to the date hereof, ruling guidelines with respect to
satisfying the continuity of interest requirement. In order to satisfy those
guidelines in connection with a ruling request, a publicly traded company must
represent to the Service that there is no plan or intention by the company's
shareholders who own 5 percent or more of the company's stock, and to the best
of the knowledge of the management of the company, there is no plan or
intention on the part of the remaining shareholders of the company, to sell,
exchange, or otherwise dispose of a number of shares of the acquiring parent's
stock received in the transaction that would reduce the company's shareholders'
ownership of the acquiring parent's stock to a number of shares having a value,
as of the date of the transaction, of less than fifty percent of the value of
all of the formerly outstanding stock of the company as of the same date. The
Service has adopted a no-ruling policy with respect to transactions such as the
Merger, stating that it believes that the tax consequences of such transactions
are adequately addressed in the tax law, including but not limited to the
Revenue Procedure. Management of Victoria has represented to us, based upon
inquiry of its shareholders who own 5 percent or more of its stock and based
upon Victoria's absence of knowledge as to any plan or intention on the part of
the remaining shareholders, that there is no plan or intention by shareholders
of Victoria who own 5 percent or more of its stock and, to the best of
management's knowledge, there is no plan or intention on the part of the
remaining Victoria shareholders, to sell, exchange or otherwise dispose of such
number of shares of USF&G Common Stock received in the Merger that would result
in failure to satisfy the continuity of interest requirement as prescribed in
the Treasury Regulations and the Service ruling guidelines as set forth in
Revenue Procedure 77-37, as modified to the date hereof. Our opinion that the
continuity of interest requirement will be satisfied is based upon management's
representation to us, the ruling guidelines as set forth in Revenue Procedure
77-37 and on the expressed reasoning of the Service for its adoption of the
no-ruling policy.
The opinion with respect to the receipt of the USF&G Rights in subparagraph (c)
above is based upon the Service's current position set forth in Revenue Ruling
90-11 regarding the tax consequences of the distribution of such rights upon
their creation and several private letter rulings in which the Service has held
that the receipt of rights upon the exchange of shares in a merger which is a
tax-free reorganization does not give rise to the realization of gross income.
No assurance can be given that the Service will not change its current position
and assert that the receipt of rights in a tax-free merger results in the
realization of gross income, to the extent of the value of such rights, if any,
when received.
<PAGE> 4
BENESCH, FRIEDLANDER, COPLAN & ARONOFF
Victoria Financial Corporation
Page 4
This opinion does not relate to or purport to cover any matters other than the
ones expressly stated herein. The opinion expressed herein is limited to the
consequences of the Merger under current federal income tax law (including the
Code, the Treasury Regulations promulgated thereunder, and administrative and
judicial interpretations thereof) as of the date of this opinion letter. No
opinion is expressed with respect to state, local, foreign or other tax laws.
Moreover, this opinion does not apply to (i) holders of Victoria Common Stock
subject to special tax treatment under the federal income tax laws or (ii)
holders of Victoria Common Stock who acquired their stock pursuant to the
exercise of an employee stock option or otherwise as compensation or in
exchange for Victoria options. We assume no obligation to revise or supplement
this opinion should the present federal income tax laws be changed by any
legislation, judicial decisions, or otherwise.
This opinion is based upon existing law, regulations, administrative rulings
and judicial opinions. No assurance can be given that changes in law or
regulation or forthcoming opinions or decisions may not modify the conclusions
expressed in this opinion. Further, no assurance can be given that the Service
will not apply stricter standards than set forth in its advance ruling
guidelines or that it will not challenge the conclusions stated in this
opinion.
We hereby consent to the reference to us under "Certain Federal Income Tax
Consequences" in the Proxy Statement/Prospectus forming a part of the
Registration Statement and to the filing of a copy of this opinion as an
exhibit to the Registration Statement.
Very truly yours,
BENESCH, FRIEDLANDER,
COPLAN & ARONOFF
<PAGE> 1
EXHIBIT 8.2
WILLKIE FARR & GALLAGHER
New York
Washington, DC
London
Paris
April 13, 1995
USF&G Corporation
100 Light Street
Baltimore, Maryland 21202
Ladies and Gentlemen:
This letter is in response to your request for our opinion with respect to
certain federal income tax consequences of the proposed merger of Queensland,
Inc. ("Queensland"), a wholly owned subsidiary of USF&G Corporation ("USF&G"),
with and into Victoria Financial Corporation ("Victoria") pursuant to the
Amended and Restated Agreement and Plan of Merger dated as of December 18, 1994
and amended as of February 9, 1995, by and among USF&G, Queensland and Victoria
(the "Merger Agreement"). Unless otherwise specified, the terms used herein
are defined in the Proxy Statement/Prospectus of Victoria.
In connection with the proposed Merger, we understand the following:
(a) Pursuant to the laws of Delaware, Queensland will merge with and
into Victoria, which will be the surviving corporation;
(b) At the Effective Date, each outstanding share of Victoria Common
Stock will be converted into a right to receive the number of
shares of USF&G Common Stock equal to the Exchange Rate;
(c) At the Effective Date, each holder of Victoria Common Stock who
otherwise would have been entitled to a fractional share of USF&G
Common Stock will receive cash in lieu thereof;
(d) As soon as practicable on or after the Effective Date, the
Exchange Agent will distribute USF&G Common Stock and cash in lieu
of fractional shares to holders of Victoria Common Stock; and
(e) USF&G will cause Victoria to continue to conduct the historic
business of Victoria or use a significant portion of Victoria's
historic business assets in a business within the meaning of
Treasury Regulation Section 1.368-1(d).
One Citicorp Center 212 821 8000
153 East 53rd Street Fax: 212 821 8111
New York, NY 10022-4677
<PAGE> 2
USF&G Corporation
April 13, 1995
Page 2
In connection herewith, we have examined the Merger Agreement, the Registration
Statement on Form S-4 filed by USF&G with the Securities and Exchange
Commission (which contains a Proxy Statement/Prospectus of Victoria) and
such other information as we have deemed relevant. As to questions of fact
material to the opinions herein, we have relied upon representations of
Victoria and USF&G set forth in certificates executed by their respective
officers, as well as USF&G's covenant in the Merger Agreement that it will not
take any action, nor will it cause Victoria to take any action, following the
Effective Date of the Merger, that would jeopardize the characterization of the
Merger as a reorganization within the meaning of Sections 368(a)(1)(A) and
368(a)(2)(E) of the Code. Moreover, we have assumed that the Merger will
be completed in the manner set forth in the Proxy Statement/Prospectus, and
that the representations and covenants made by the parties to the Merger are
accurate and complete as of the Effective Date of the Merger. On the basis of
the foregoing and subject to the conditions, qualifications and limitations set
forth herein, we are of the opinion that for federal income tax purposes:
(a) The Merger will qualify as a tax-free reorganization within the
meaning of Section 368(a)(1)(A) and 368(a)(2)(E) of the
Internal Revenue Code of 1986, as amended (the "Code"), and
Victoria and USF&G will each be a party to the reorganization;
(b) No gain or loss will be recognized by Victoria as a result of the
Merger;
(c) No gain or loss will be recognized by a shareholder of Victoria
upon the exchange of shares of Victoria Common Stock for USF&G
Common Stock (including the USF&G Rights), except that gain or
loss will be recognized by a shareholder of Victoria on the
receipt of cash in lieu of a fractional share interest in USF&G
Common Stock;
(d) The adjusted tax basis of the USF&G Common Stock received by a
shareholder of Victoria pursuant to the Merger (including
fractional share interests deemed received) will be the same as
the adjusted tax basis of the shares of Victoria Common Stock
surrendered in exchange therefor;
(e) The holding period of the Victoria Common Stock received by a
shareholder of Victoria as a result of the Merger (including
fractional share interests deemed received) will include the
holding period of the shares of Victoria Common Stock surrendered
in exchange therefor, provided that such Victoria Comon Stock is
held as a capital asset by the Victoria shareholder at the
consummation of the Merger; and
<PAGE> 3
USF&G Corporation
April 13, 1995
Page 3
(f) Any cash payment received by a holder of Victoria Common Stock in
lieu of a fractional share of USF&G Common Stock will be treated
as if such fractional share of USF&G Common Stock had been
issued in the Merger and then redeemed by USF&G.
The opinions expressed above are based upon our opinion that the continuity of
interest requirement of Treasury Regulations Section 1.368-1(b) will be
satisfied. The continuity of interest requirement will be satisfied if
Victoria's shareholders receive in the Merger and retain USF&G Common Stock
equal in value, as of the Effective Date, to at least 50% of the value of all
of the formerly outstanding shares of Victoria Common Stock as of that date.
The Internal Revenue Service (the "Service") established in Revenue Procedure
77-37, as modified to the date hereof, ruling guidelines with respect to
satisfying the continuity of interest requirement. In order to satisfy those
guidelines in connection with a ruling request, a publicly traded company must
represent to the Service that there is no plan or intention by the company's
shareholders who own 5 percent or more of the company's stock, and to the best
of the knowledge of the management of the company, there is no plan or
intention on the part of the remaining shareholders of the company, to sell,
exchange, or otherwise dispose of a number of shares of the acquiring parent's
stock received in the transaction that would reduce the company's shareholders'
ownership of the acquiring parent's stock to a number of shares having a value,
as of the date of the transaction, of less than fifty percent of the value of
all of the formerly outstanding stock of the company as of the same date. The
Service has adopted a no-ruling policy with respect to transactions such as the
Merger, stating that it believes that the tax consequences of such transactions
are adequately addressed in the tax law, including but not limited to the
Revenue Procedure. Management of Victoria has represented to us, based upon
inquiry of its shareholders who own 5 percent or more of its stock and based
upon Victoria's absence of knowledge as to any plan or intention on the part of
the remaining shareholders, that there is no plan or intention by shareholders
of Victoria who own 5 percent or more of its stock and, to the best of
management's knowledge, there is no plan or intention on the part of the
remaining Victoria shareholders, to sell, exchange or otherwise dispose of such
number of shares of USF&G Common Stock received in the Merger that would result
in failure to satisfy the continuity of interest requirement as prescribed in
the Treasury Regulations and the Service ruling guidelines as set forth in
Revenue Procedure 77-37, as modified to the date hereof. Our opinion that the
continuity of interest requirement will be satisfied is based upon management's
representation to us, the ruling guidelines as set forth in Revenue Procedure
77-37 and on the expressed reasoning of the Service for its adoption of the
no-ruling policy.
<PAGE> 4
USF&G Corporation
April 13, 1995
Page 4
This opinion does not relate to or purport to cover any matters other than the
ones expressly stated herein. The opinion expressed herein is limited to the
consequences of the Merger under current federal income tax law (including the
Code, the Treasury regulations promulgated thereunder, and administrative and
judicial interpretations thereof) as of the date of this opinion letter. No
opinion is expressed with respect to state, local, foreign or other tax laws.
Moreover, this opinion does not apply to (i) holders of Victoria Common Stock
subject to special tax treatment under the federal income tax laws or (ii)
holders of Victoria Common Stock who acquired their stock pursuant to the
exercise of an employee stock option or otherwise as compensation or in
exchange for Victoria options. We assume no obligation to revise or supplement
this opinion should the present federal income tax laws be changed by any
legislation, judicial decision, or otherwise.
This opinion is based upon existing law, regulations, administrative rulings and
judicial opinions. No assurance can be given that changes in law or regulation
or forthcoming opinions or decisions may not modify the conclusions expressed
in this opinion. Further, no assurance can be given that the Service will not
apply stricter standards than set forth in its advance ruling guidelines or
that it will not challenge the conclusions stated in this opinion.
We hereby consent to the reference to us under "Certain Federal Income Tax
Consequences" in the Proxy Statement/Prospectus forming a part of the
Registration Statement and to the filing of a copy of this opinion as an
exhibit to the Registration Statement.
Very truly yours,
WILLKIE FARR & GALLAGHER
<PAGE> 1
EX. 23.1
CONSENT OF MCDONALD & COMPANY SECURITIES, INC.
We consent to the inclusion in this Registration Statement on Form S-4
of USF&G Corporation of our April 13, 1995 opinion, set forth as Annex II to
the proxy Statement/Prospectus, which is part of this Registration Statement,
and to the disclosure in the Proxy Statement/Prospectus under the caption
"Opinion of Financial Advisor to the Victoria Board."
MCDONALD & COMPANY SECURITIES, INC.
Cleveland, Ohio
April 13, 1995
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Stockholders
Victoria Financial Corporation:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Selected Historical Consolidated Financial Information"
and "Independent Auditors" in the Proxy Statement/Prospectus.
KPMG Peat Marwick LLP
Columbus, Ohio
April 13, 1995
<PAGE> 1
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the reference to our firm under the captions "Selected Historical
Consolidated Financial Information" and "Independent Auditors" in the
Registration Statement (Form S-4) of USF&G Corporation for the registration of
4,620,000 shares of its common stock in connection with the proposed
acquisition of Victoria Financial Corporation pursuant to the Amended and
Restated Agreement and Plan of Merger dated February 9, 1995, and to the
incorporation by reference therein of our report dated as of February 24, 1995,
with respect to the consolidated financial statements and schedules of USF&G
Corporation included or incorporated by reference in its Annual Report (Form
10-K) for the year ended December 31, 1994, filed with the Securities and
Exchange Commission.
Ernst & Young LLP
Baltimore, Maryland
April 13, 1995
<PAGE> 1
EXHIBIT 24.1
USF&G CORPORATION
100 Light Street
Baltimore, Maryland 21202
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS that the undersigned Officers and
Directors of USF&G Corporation, a Maryland corporation, hereby constitute and
appoint Norman P. Blake, Jr., Dan L. Hale and John A. MacColl, of Baltimore
City, Maryland, and each of them, the true and lawful agents and attorneys-in-
fact of the undersigned with full power and authority in said agents and
attorneys-in-fact, and in any one or more of them, to sign for the undersigned
and in their respective names as Officers and as Directors of the Corporation
a Registration Statement on Form S-4 of the Corporation to be filed with the
Securities and Exchange Commission, Washington, D.C., under the Securities Act
of 1933, as amended, and any amendment or amendments to such Registration
Statement, relating to the proposed issuances of shares of Common Stock of the
Corporation in connection with the proposed acquisition of Victoria Financial
Corporation, a Delaware corporation; hereby ratifying and confirming all acts
taken by such agents and attorneys-in-fact, or any one or more of them, as
herein authorized.
Dated: January 18, 1995
Name Title
- ---- -----
/s/ H. Furlong Baldwin
- -------------------------- Director
H. Furlong Baldwin
/s/ Michael J. Birck
- -------------------------- Director
Michael J. Birck
/s/ Norman P. Blake, Jr.
- -------------------------- Director, Chairman of the Board,
Norman P. Blake, Jr. President and Chief Executive
Officer
/s/ George L. Bunting, Jr.
- -------------------------- Director
George L. Bunting, Jr.
/s/ Robert E. Davis
- -------------------------- Director
Robert E. Davis
/s/ Dale F. Frey
- -------------------------- Director
Dale F. Frey
/s/ Robert E. Gregory, Jr.
- -------------------------- Director
Robert E. Gregory, Jr.
<PAGE> 2
/s/ Dan L. Hale
- ----------------------- Executive Vice President, Chief
Dan L. Hale Financial Officer and Principal
Accounting Officer
/s/ Robert J. Hurst
- ---------------------- Director
Robert J. Hurst
/s/ Wilbur G. Lewellen
- ---------------------- Director
Wilbur G. Lewellen
/s/ Henry A. Rosenberg, Jr.
- --------------------------- Director
Henry A. Rosenberg, Jr.
/s/ Larry P. Scriggins
- ---------------------- Director
Larry P. Scriggins
/s/ Anne Marie Whittemore
- ------------------------- Director
Anne Marie Whittemore
<PAGE> 1
Exhibit 99.1
VICTORIA FINANCIAL CORPORATION
SPECIAL MEETING OF SHAREHOLDERS, MAY 22, 1995
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Jeffrey A. Cole, Kenneth R. Rosen or Tab A.
Keplinger as proxy, each with full power to appoint his substitute, and hereby
authorizes each of them to vote as directed below all the shares of common stock
of Victoria Financial Corporation ("Victoria") which the undersigned would be
entitled to vote, if personally present, at the Special Meeting of Shareholders
of Victoria to be held at the offices of Victoria, 5915 Landerbrook Drive,
Cleveland, Ohio on Monday, May 22, 1995 at 10:00 A.M., or any postponement or
adjournment thereof.
PROPOSAL TO APPROVE AND ADOPT THE AMENDED AND RESTATED AGREEMENT AND PLAN OF
MERGER, dated as of February 9, 1995 (the "Merger Agreement"), among Victoria,
USF&G Corporation ("USF&G") and Queensland, Inc. ("Merger Sub"), a wholly-owned
subsidiary of USF&G, and THE MERGER of Merger Sub with and into Victoria upon
the terms and subject to the conditions thereof, pursuant to which shares of
Victoria Common Stock will be converted into shares of common stock of USF&G.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE MERGER AGREEMENT AND THE
MERGER.
/ / FOR / / AGAINST / / ABSTAIN
IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER BUSINESS
AS MAY PROPERLY COME BEFORE THE SPECIAL MEETING, EXCEPT THAT THEY MAY NOT VOTE
SHARES IN FAVOR OF ADJOURNING THE SPECIAL MEETING TO A LATER DATE FOR
SHAREHOLDERS WHO HAVE DIRECTED A VOTE AGAINST THE MERGER AGREEMENT AND THE
MERGER.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
ABOVE. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE MERGER
AGREEMENT AND THE MERGER.
(Continued on other side.)
(Continued from other side.)
The undersigned acknowledges receipt from Victoria prior to the execution of
this proxy of the Proxy Statement/Prospectus dated April 13, 1995.
PLEASE SIGN EXACTLY AS NAME APPEARS BELOW.
Date:_________________, 1995
Signature____________________
When shares are held by joint
tenants, either may sign.
When signing as attorney,
executor, administrator,
trustee or guardian, please
give full title as such. If a
corporation, please sign in
full corporate name by the
President or other authorized
officer. If a partnership,
please sign in partnership
name by an authorized person.
/ / If you plan to attend the
Special Meeting, please
check this box.
PLEASE SIGN, DATE AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED ENVELOPE.
<PAGE> 1
EXHIBIT 99.2
[U S F + G LOGO]
Executive
December 18, 1994
Mr. Kenneth R. Rosen
30 Church Street
Chagrin Falls, Ohio 44022
Dear Ken:
It provides me with great pleasure to invite you to join the management
team of United States Fidelity and Guaranty Company ("USF&G") as Chairman and
Senior Executive Officer of Victoria Financial Corporation, the successor
company in the proposed merger between Victoria Financial Corporation and
Queensland, Inc. (such successor company is hereinafter referred to as the
"Company"). The business you have helped build and the leadership you have
demonstrated will play critical roles in fulfilling USF&G's strategies moving
forward. The title of Chairman and the position of Senior Executive Officer
will become effective upon the effective date (the "Effective Date") of the
proposed merger between Victoria Financial Corporation and Queensland, Inc.
(the "Merger"), subject to the successful completion of the Merger.
TERM AND DUTIES
This agreement will extend for a period of four years from the
Effective Date. During the first one and one-half years of this agreement
after the Effective Date (the "Employment Period"), you will serve as Senior
Executive Officer of the Company. As part of your duties, you will be
expected, among other things, to play a critical role in the Company's
transition into the USF&G insurance group, develop business strategies for the
Company, identify potential synergies between USF&G and the Company, assist in
the distribution of the Company's products through USF&G's agents, and provide
tactical advice relating to new market entry opportunities for the Company and
USF&G. In performing these functions, you will report directly to Jim Lewis,
Senior Vice President of Personal Lines for USF&G. In addition, you will be
expected to support USF&G's business development efforts as directed by Andy
Stern, Senior Vice President of Strategic Planning, Corporate Marketing and
Corporate Communications. In this capacity you will explore and investigate
new business ventures and projects on behalf of
United States Fidelity and Guaranty Company
100 Light Street
Baltimore, MD 21202
Tel 410.547.3000
US Mail
PO Box 1138
Baltimore, MD 21203-1138
<PAGE> 2
Mr. Kenneth R. Rosen
December 18, 1994
Page 2
USF&G. Any business ventures or opportunities which you identify as
appropriate for USF&G will be presented to USF&G with a view toward and with a
right by USF&G (but with no obligation whatsoever) to make investments. It is
expected that in the first portion of the Employment Period most of your duties
will be focused on assisting in the transition of the Company; as that
transition progresses successfully, your attention increasingly will be devoted
to the business development aspects of your role. During the Employment Period,
you may not accept employment from any other person or entity, although you may
engage in other business ventures (including ventures declined by USF&G) which
do not unreasonably interfere with your duties as Senior Executive Officer and
which are not in violation of our agreement regarding non-competition.
During the last two and one-half years of this agreement (the
"Consulting Period"), you will serve as a consultant to the Company, providing
such services as the Company may reasonably request, and as to which you may
reasonably agree, related to the non-standard automobile insurance business and
other business opportunities; provided that you will not be required to provide
services that would unreasonably interfere with your regular employment or
other ventures and you will not be required to provide services for more than
two days in any week and no more than three weeks in any calendar quarter. In
this capacity, you will be expected to play an advisory role in the general
business areas described above and in such other areas related to non-standard
automobile insurance as USF&G or the Company may reasonably request. During
this period, you will not be precluded from accepting employment with another
person or entity, provided such employment is not in violation of our agreement
regarding non-competition.
During the term of this agreement, you will remain as Chairman of the
Board of the Company at the discretion of USF&G. However, your removal from
that title will not reduce your responsibilities under this agreement and will
not affect your compensation.
COMPENSATION AND BENEFITS
During the first twelve months of the Employment Period, you will be
paid $850,000, payable in bi-weekly installments. During the last six months of
the Employment Period, you will be paid $450,000, payable in bi-weekly
installments.
During the first eighteen months of the Consulting Period, you will be
paid $525,000, payable in bi-weekly installments. During the last twelve months
of the Consulting Period, you will be paid $275,000, payable in bi-weekly
installments.
<PAGE> 3
Mr. Kenneth R. Rosen
December 18, 1994
Page 3
You will be provided with the following benefits during the Employment
Period:
(1) You will participate in the Company's pension and welfare benefit
plans on the same basis as other employees;
(2) You will be entitled to a total of nine weeks of paid vacation;
(3) You will be provided with the same fringe benefits currently
provided to you by Victoria Financial Corporation, including, without
limitation, those listed on Schedule I hereto, as well as any benefits
provided to employees of Victoria Financial Corporation generally;
(4) You will be provided with an office suitable to your position as
Senior Executive Officer and other support, including secretarial, as is
required or appropriate for you to fulfill your responsibilities hereunder; and
(5) You will be reimbursed for reasonable business-related expenses
in accordance with and subject to Company policy.
In addition, upon termination of the Employment Period:
(1) You will be entitled to assume the Company's lease on your
Company car;
(2) You will have the right to purchase at cash surrender value (or
assume the rights and premium obligations under) the Company's Key Man
insurance policy and any additional life or disability insurance policies held
for you, subject to the terms of such policies; and
(3) The Company will cover the reasonable expenses of moving your
computers, office furniture, art work and antiques from your current office and
the area immediately outside your current office to your home or other
designated location within the Cleveland area.
TERMINATION
In the event that the Company terminates your employment or consulting
relationship without Cause, or if you terminate your employment or consulting
relationship for Good Reason, you will be paid immediately upon such
termination the full balance of your compensation remaining under this
agreement, in a single-lump sum, without a present value discount. For
purposes of this Agreement:
<PAGE> 4
Mr. Kenneth R. Rosen
December 18, 1994
Page 4
(1) "Cause" means (i) your conviction of a felony involving moral
turpitude, or (ii) your deliberate and continued gross misconduct (continuing
after notice thereof by the Company) resulting in material damage to the
business of the Company or USF&G. For purposes of this definition, an act, or
failure to act, will be considered "deliberate" only if done by you in bad
faith and without a reasonable belief that your conduct was in the best
interests of the Company and USF&G;
(2) "Good Reason" means (i) during the Employment Period, actions by
USF&G or the Company which, without your consent, unreasonably increase the
amount of work or travel time required of you above what your current position
requires, or require you to relocate your principal place of business to a
place more than 25 miles from Mayfield Heights, Ohio, and (ii) during the
Consulting Period, actions by USF&G or the Company requiring you to perform
services which unreasonably interfere with your conduct of other business
activities permitted hereunder; provided, in each case, that you have first
given written notice to USF&G or the Company specifying such actions in
reasonable detail, and such actions are not cured promptly. "Good Reason" will
not include any exercise by USF&G of its right to determine the composition of
the Company's Board of Directors.
In the event that the Company terminates your employment or consulting
relationship for Cause, or you terminate your employment or consulting
relationship without Good Reason, you will not be entitled to any compensation
after the date of such termination.
In the event that you die during the Employment Period or the Consulting
Period, your estate or other designated beneficiary will receive as a death
benefit the remaining payments due to you under this agreement. If these
benefits are funded through an insurance policy, the premiums for which are
taxable to you, you will be grossed-up for the tax on such premiums.
NON-COMPETITION
(1) For a period of three years after the Effective Date (the
"Non-Competition Period"), you will not, directly or indirectly, whether as an
employee, consultant, independent contractor, partner, joint venturer or
otherwise, (i) engage in the business of underwriting non-standard automobile
insurance; (ii) solicit or induce, or in any manner attempt to solicit or
induce, any person employed by, or as agent of, the Company to terminate such
person's employment or agency, as the case may be, with the Company; or (iii)
divert, or attempt to divert, any person, concern, or entity from doing
business with the Company (except that this clause (iii) will not be construed
to prohibit you from
<PAGE> 5
Mr. Kenneth R. Rosen
December 18, 1994
Page 5
appointing or doing business with, other than non-standard automobile
insurance business, agents who are also doing business with the Company). This
covenant will not preclude you from (i) being associated in any way with a
company which underwrites non-standard automobile insurance but not as its
primary business, so long as you have no involvement in the underwriting of
non-standard automobile insurance of such company, or (ii) owning solely as a
passive investor not more than a five percent equity interest in any company,
or owning any interest in a Company for which non-standard insurance is an
incidental or insignificant part of its total business.
(2) You will at all times during and after this agreement keep in
confidence all confidential or proprietary information of the Company (or its
predecessor) or USF&G which you have acquired while an employee or consultant
of the Company (or its predecessor) or USF&G.
(3) You acknowledge that a remedy at law for any breach or threatened
breach by you of the provisions of the preceding two paragraphs would be
inadequate. You therefore agree that USF&G and the Company will be entitled to
injunctive relief in addition to any other available rights and remedies in
case of any such breach or threatened breach; provided, however, that nothing
contained herein shall be construed as prohibiting USF&G or the Company from
pursuing any other remedies available for any such breach or threatened breach.
OTHER MATTERS
Effective as of the Merger, this agreement will replace in all respects
your existing employment agreement with Victoria Financial Corporation. You
will not be entitled to any further compensation, benefits or other amounts
under that agreement.
USF&G will cause the Company to assign to you on the Effective Date its
rights to the Insurance Guild trademark. You and the Company will share any
research developed on the Insurance Guild as of the Effective Date.
For purposes of this agreement, references to the Company include its
subsidiaries.
I trust you find these terms acceptable and would ask you to
acknowledge your agreement by signing this letter in the space below.
We have major challenges and opportunities ahead of us at the Company
and USF&G. The acquisition of Victoria Financial Corporation represents a
great step
<PAGE> 6
Mr. Kenneth R. Rosen
December 18, 1994
Page 6
forward towards our vision for the future. I look forward to working with
you and your colleagues as we build a truly great company.
Regards,
United States Fidelity and Guaranty Company
/s/ Andrew A. Stern
By:----------------------------------------
Andrew A. Stern
Name:--------------------------------------
Sr. Vice President
Title:-------------------------------------
ACCEPTED:
/s/ Kenneth R. Rosen
- -----------------------------
Kenneth R. Rosen
<PAGE> 7
SCHEDULE I
----------
Payment of car expenses and related tax gross-up for Lexus LS400 or similar
model
Excess health plan payments - (deductible and co-payment)
Insurance premiums for $500,000 term life insurance, key man and disability
policies
Reasonable car phone expenses
Reasonable estate and financial planning expenses
December 18, 1994 - 11:59am - JCD
CLE2 - 137266.2B - 04735\1
