<PAGE>
FILED PURSUANT TO RULE 424(b)(2)
REGISTRATION NO. 33-65471
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED FEBRUARY 21, 1996)
[LOGO]
$100,000,000
USF&G CAPITAL II
8.47% CAPITAL SECURITIES, SERIES B
(LIQUIDATION AMOUNT $1,000 PER CAPITAL SECURITY)
FULLY AND UNCONDITIONALLY GUARANTEED, TO THE EXTENT DESCRIBED HEREIN, BY
USF&G CORPORATION
--------------------------
The 8.47% Capital Securities, Series B (the "Series B Capital Securities"),
offered hereby represent undivided beneficial interests in the assets of USF&G
Capital II, a statutory business trust created under the laws of the State of
Delaware (the "Series B Issuer"). USF&G Corporation, a Maryland corporation
("USF&G"), will be the owner of all the beneficial interests represented by
common securities of the Series B Issuer (the "Common Securities"). The Bank of
New York is the Property Trustee of the Series B Issuer. The Series B Issuer
exists for the sole purpose of issuing its trust interests and investing the
proceeds thereof in 8.47% Deferrable Interest Junior Subordinated Debentures,
Series B, Due 2027 (the "Series B Debentures") to be issued by USF&G. The
preferred interests represented by the Series B Capital Securities will have a
preference under certain circumstances with respect to cash distributions and
amounts payable on liquidation,
(CONTINUED ON NEXT PAGE)
--------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 5 OF THE ACCOMPANYING PROSPECTUS FOR
CERTAIN INFORMATION RELEVANT TO AN INVESTMENT IN THE SERIES B CAPITAL
SECURITIES, INCLUDING THE PERIOD AND CIRCUMSTANCES DURING WHICH PAYMENT OF
DISTRIBUTIONS ON THE SERIES B CAPITAL SECURITIES AND SERIES B DEBENTURES MAY BE
DEFERRED AND THE RELATED FEDERAL INCOME TAX CONSEQUENCES.
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
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT
RELATES. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PROCEEDS TO THE
PRICE TO UNDERWRITING SERIES B
PUBLIC COMMISSION(1) ISSUER(3)
<S> <C> <C> <C>
Per Series B Capital Security.................................. $1,000.00 (2) $1,000.00
Total.......................................................... $ 100,000,000 (2) $ 100,000,000
</TABLE>
(1) The Series B Issuer and USF&G have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting."
(2) In view of the fact that the proceeds of the sale of the Series B Capital
Securities will be used to purchase the Series B Debentures, the
Underwriting Agreement provides that USF&G will pay to the Underwriters, as
compensation ("Underwriters' Compensation") for their arranging the
investment therein of such proceeds, $10.00 per Series B Capital Security
(or $1,000,000 in the aggregate). See "Underwriting."
(3) Expenses of the offering, which are payable by USF&G, are estimated to be
$275,000.
------------------------
The Series B Capital Securities offered hereby are offered severally by the
Underwriters, as specified herein and subject to receipt and acceptance by them
and subject to their right to reject any order in whole or in part. It is
expected that delivery of the Series B Capital Securities will be made only in
book-entry form through the facilities of The Depository Trust Company ("DTC")
on or about January 10, 1997.
--------------------------
MERRILL LYNCH & CO. GOLDMAN, SACHS & CO.
BEAR, STEARNS & CO. INC.
LEHMAN BROTHERS
SMITH BARNEY INC.
--------------------------
The date of this Prospectus Supplement is January 7, 1997.
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
redemption or otherwise over the trust interests represented by the Common
Securities of the Series B Issuer. See "Description of the Preferred
Securities--Subordination of Common Securities" in the accompanying Prospectus.
Capitalized terms not otherwise defined in this Prospectus Supplement are
defined in the accompanying Prospectus. The Series B Capital Securities are a
"Preferred Security" as defined and described in the accompanying Prospectus.
Holders of the Series B Capital Securities will be entitled to receive
cumulative cash Distributions accruing from the date of original issuance and
payable semi-annually in arrears on January 10 and July 10 of each year,
commencing July 10, 1997, at the rate of 8.47% per annum, payable from amounts
received by the Series B Issuer as interest on the Series B Debentures. So long
as no Event of Default under the Indenture has occurred and is continuing, USF&G
has the right to defer payments of interest on the Series B Debentures by
extending the interest payment period thereon at any time for up to 10
consecutive semi-annual periods (each an "Extension Period"). Such Extension
Periods may not, however, extend beyond the maturity date or redemption date of
the Series B Debentures. If and for so long as interest payments are so
deferred, Distributions on the Series B Capital Securities will also be
deferred. During an Extension Period, Distributions will continue to accrue, and
holders of Series B Capital Securities will be required to accrue interest
income for United States federal income tax purposes. See "Certain Terms of the
Series B Debentures--Option to Extend Interest Payment Period" and "Certain
Federal Income Tax Consequences--Interest Income and Original Issue Discount."
The payment of Distributions and payments on liquidation of the Series B
Issuer or the redemption of the Series B Capital Securities, as set forth below,
in each case out of funds held by the Series B Issuer, are guaranteed by USF&G
under a Guarantee Agreement (the "Series B Guarantee") to the extent described
herein. If USF&G fails to make interest payments on the Series B Debentures held
by the Series B Issuer, the Series B Issuer will have insufficient funds to pay
Distributions on the Series B Capital Securities. The Series B Guarantee does
not cover payment of Distributions when the Series B Issuer does not have
sufficient funds on hand available to pay such Distributions. In such event, the
remedy of a holder of Series B Capital Securities is through enforcement of the
rights of the Series B Issuer under the Series B Debentures held by the Series B
Issuer. The obligations of USF&G under the Series B Guarantee are subordinate
and junior in right of payment to all liabilities of USF&G except those made
PARI PASSU or subordinate to the Series B Guarantee expressly by their terms.
The Series B Capital Securities are subject to mandatory redemption upon
repayment of the Series B Debentures at maturity or their earlier redemption.
USF&G will have the option at any time on or after January 10, 2007 to redeem,
in whole or in part, the Series B Debentures. USF&G also will have the right at
any time, upon occurrence of a Special Event, to redeem, in whole but not in
part, the Series B Debentures. See "Certain Terms of the Series B
Debentures--Redemption". USF&G will have the right, upon the occurrence of
certain events, to shorten the maturity of the Series B Capital Securities to a
date not less than 19 1/2 years from the date of original issuance. See "Certain
Terms of the Series B Capital Securities--Right to Shorten Maturity." USF&G will
also have the right, subject to certain conditions, at any time to distribute
the Series B Debentures to the holders of the Series B Capital Securities upon
liquidation of the Series B Issuer. See "Certain Terms of the Series B Capital
Securities--Liquidation Distribution Upon Termination."
The Series B Debentures are subordinate and junior in right of payment to
all Senior Indebtedness of USF&G. As of September 30, 1996, USF&G had
outstanding approximately $749 million principal amount of Senior Indebtedness
(including $219 million of Intercompany Indebtedness). The terms of the Series B
Debentures do not limit USF&G's ability to incur additional Senior Indebtedness.
See "Description of the Debentures--Subordination" in the accompanying
Prospectus.
In the event of a liquidation upon termination of the Series B Issuer, after
satisfaction of liabilities to creditors of the Series B Issuer as provided by
applicable law, the holders of the Series B Capital Securities will be entitled
to receive a stated liquidation preference of $1,000 per Series B Capital
Security plus accrued and unpaid Distributions thereon to the date of payment,
unless, in connection with such liquidation, Series B Debentures are distributed
to the holders of the Series B Capital Securities, subject to certain
limitations. See "Description of the Preferred Securities--Liquidation
Distribution Upon Termination" in the accompanying Prospectus.
The Series B Capital Securities will be represented by global certificates
registered in the name of DTC or its nominee. Beneficial interests in the Series
B Capital Securities will be shown on, and transfers thereof will be effected
only through, records maintained by participants in DTC. Except as described in
the accompanying Prospectus, Series B Capital Securities in certificated form
will not be issued in exchange for the global certificates. See "Description of
the Preferred Securities--Book-Entry-Only Issuance--The Depository Trust
Company" in the accompanying Prospectus.
S-2
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SERIES B
CAPITAL SECURITIES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
FOR NORTH CAROLINA RESIDENTS: THE COMMISSIONER OF INSURANCE OF THE STATE OF
NORTH CAROLINA HAS NOT APPROVED OR DISAPPROVED THIS OFFERING NOR HAS THE
COMMISSIONER PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT
OR THE PROSPECTUS.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
In addition to those documents identified in the accompanying Prospectus,
USF&G's Annual Report on Form 10-K for the year ended December 31, 1995 and
Quarterly Reports on Form 10-Q for the quarters ended March 31, June 30 and
September 30, 1996, and Current Reports on Form 8-K dated July 24, November 20
and December 3, 1996 are incorporated herein by reference.
NOTICE TO INVESTORS
Because the assets of the Series B Issuer may be deemed to be "plan assets"
of an employee benefit plan or other plan subject to Title 1 of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") or Section 4975 of
the Internal Revenue Code (a "Plan") investing in the Series B Issuer, the
Series B Capital Securities may not be purchased or held by any Plan or any
entity whose underlying assets include "plan assets" by reason of any Plan's
investment in the entity (a "Plan Asset Entity") or any person investing "plan
assets" of any Plan, unless such purchaser or holder is eligible for the
exemptive relief available under PTCE 96-23, 95-60, 91-38, 90-1 or 84-14, or
another applicable exemption. Any purchaser or holder of the Series B Capital
Securities or any interest therein will be deemed to have represented by its
purchase and holding thereof that it either (a) is not a Plan or a Plan Asset
Entity and is not purchasing such securities on behalf of or with "plan assets"
of any Plan or (b) is eligible for the exemptive relief available under PTCE
96-23, 95-60, 91-38, 90-1 or 84-14 or another applicable exemption with respect
to such purchase or holding. See "Certain ERISA Considerations".
S-3
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY INFORMATION IS QUALIFIED IN ITS ENTIRETY BY THE MORE
DETAILED INFORMATION APPEARING ELSEWHERE IN THE PROSPECTUS, THIS PROSPECTUS
SUPPLEMENT AND THE CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES
THERETO, INCORPORATED HEREIN BY REFERENCE. UNLESS INDICATED OTHERWISE, ALL
FINANCIAL DATA HAVE BEEN PREPARED USING GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES, AND HAVE BEEN RESTATED TO REFLECT THE ACQUISITION DURING 1995 OF
DISCOVER RE MANAGERS, INC. AND VICTORIA FINANCIAL CORPORATION USING THE
POOLING-OF-INTERESTS METHOD OF ACCOUNTING.
THE OFFERING
<TABLE>
<S> <C>
Securities Offered............ 100,000 Shares of 8.47% Capital Securities, Series B
(liquidation preference $1,000 per Capital Security).
Distribution Payment Dates.... January 10 and July 10, commencing July 10, 1997, subject to
deferral as described herein.
Redemption.................... As set forth on the cover of this Prospectus Supplement.
Use of Proceeds............... To purchase the Series B Debentures. After paying the
expenses of the offering made hereby, USF&G intends to use
the net proceeds from the sale of the Series B Debentures to
fund the redemption of $100 million of USF&G's $4.10 Series
A Convertible Exchangeable Preferred Stock. See "Use of
Proceeds."
</TABLE>
THE COMPANY
<TABLE>
<S> <C>
Principal Business............ USF&G is a holding company whose principal subsidiaries are
engaged primarily in the business of insurance, with
property/casualty insurance as its primary business.
</TABLE>
S-4
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth selected financial data for the five years
ended December 31, 1995 which are derived from the consolidated financial
statements of USF&G which have been audited by Ernst & Young, LLP, independent
auditors. The selected financial data for the nine month period ended September
30, 1996 are derived from unaudited financial statements. The table should be
read in conjunction with the consolidated financial statements, related notes
and other financial information incorporated herein by reference.
<TABLE>
<CAPTION>
9 MONTHS YEAR ENDED DECEMBER 31
ENDED -----------------------------------------------------
SEPTEMBER 30, 1996 1995 1994 1993 1992 1991
------------------ --------- --------- --------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS:
Premiums Earned............................. $ 2,028 $ 2,666 $ 2,508 $ 2,521 $ 2,683 $ 3,213
Net Investment Income....................... 537 733 749 753 820 880
Other....................................... 15 53 48 43 61 71
------- --------- --------- --------- --------- ---------
Revenues Before Realized Gains............ 2,580 3,452 3,305 3,317 3,564 4,164
Net Realized Gains on Investments........... 16 7 5 6 148 38
------- --------- --------- --------- --------- ---------
Total Revenues............................ 2,596 3,459 3,310 3,323 3,712 4,202
------- --------- --------- --------- --------- ---------
Losses, Loss Expenses, and Policy
Benefits.................................. 1,640 2,178 2,132 2,200 2,497 2,999
Underwriting, Acquisition, and Operating
Expenses.................................. 781 1,048 1,001 979 1,087 1,237
Interest Expense............................ 30 44 37 41 41 47
Restructuring Charges....................... -- -- -- -- 51 60
Facilities Exit Cost/(Sublease Income)...... (14) (6) 183 -- -- --
------- --------- --------- --------- --------- ---------
Total Expenses............................ 2,437 3,264 3,353 3,220 3,676 4,343
------- --------- --------- --------- --------- ---------
Income (Loss) From Continuing Operations
Before Income Taxes and Cumulative Effect
of Adopting New Accounting Standard....... 159 195 (43) 103 36 (141)
Provision for Income Taxes (Benefit)........ -- (14) (280) (27) -- 4
------- --------- --------- --------- --------- ---------
Income (Loss) From Continuing Operations
Before Cumulative Effect of Adopting New
Accounting Standards...................... 159 209 237 130 36 (145)
Loss From Discontinued Operations........... -- -- -- -- (7) (32)
Income (Loss) From Cumulative Effect of
Adopting New Accounting Standards......... -- -- -- 38 -- --
------- --------- --------- --------- --------- ---------
Net Income (Loss)........................... 159 209 237 168 29 (177)
Preferred Stock Dividends................... 14 28 46 48 48 37
------- --------- --------- --------- --------- ---------
Net Income (Loss) Available to Common
Shareholders.............................. $ 145 $ 181 $ 191 $ 120 ($ 19) ($ 214)
------- --------- --------- --------- --------- ---------
------- --------- --------- --------- --------- ---------
</TABLE>
S-5
<PAGE>
<TABLE>
<CAPTION>
9 MONTHS YEAR ENDED DECEMBER 31
ENDED -----------------------------------------------------
SEPTEMBER 30, 1996 1995 1994 1993 1992 1991
------------------ --------- --------- --------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA:
Income (Loss) from Continuing Operations
Before Cumulative Effect of Adopting New
Accounting Standards...................... $ 1.21 $ 1.63 $ 2.00 $ 0.90 ($ 0.14) ($ 2.06)
Loss from Discontinued Operations........... -- -- -- -- (0.08) (0.36)
Income (Loss) from Cumulative Effect of
Adopting New Accounting Standards......... -- -- 0.42 -- --
Net Income (Loss)........................... 1.21 1.63 2.00 1.32 (0.22) (2.42)
Dividends Declared.......................... $ 0.15 $ 0.20 $ 0.20 $ 0.20 $ 0.20 $ 0.02
RATIO OF EARNINGS TO FIXED CHARGES.......... 4.8 4.0 0.8(1) 2.5 1.4 (2)
RATIO OF CONSOLIDATED EARNINGS TO COMBINED
FIXED CHARGES AND PREFERRED STOCK
DIVIDENDS................................. 3.6 2.8 0.6(1) 1.5 0.8 (2)
CONSOLIDATED STATEMENT OF FINANCIAL
POSITION:
Total Investments........................... $ 9,857 $ 11,107 $ 10,561 $ 11,474 $ 11,417 $ 12,216
Total Assets................................ 14,527 14,651 13,980 14,481 13,242 14,555
Unpaid Losses, Loss Expenses and Policy
Benefits.................................. 9,648 9,816 9,962 10,343 9,460 9,488
Unearned Premiums........................... 1,189 1,055 968 950 797 996
Corporate Debt.............................. 530 591 586 574 574 617
Real Estate and Other Debt.................. 16 16 42 53 54 73
Total Liabilities........................... 12,761 12,667 12,539 12,925 11,942 13,209
Shareholders' Equity........................ 1,766 1,984 1,441 1,556 1,300 1,346
Statutory Surplus (USF&G Company)........... 1,310 1,341 1,621 1,577 1,498 1,432
</TABLE>
- ------------------------
(1) USF&G's earnings were inadequate to cover fixed charges and combined fixed
charges and preferred stock dividends by $43 million and $89 million,
respectively, for the year ended December 31, 1994. In 1994, USF&G recorded
facilities exit costs of $183 million relating to its plan to consolidate
its Baltimore headquarters facilities by relocating all USF&G personnel
currently located at its office building in downtown Baltimore to other
facilities owned by USF&G. The ratio of consolidated earnings before
facilities exit costs to fixed charges was 3.1 in 1994, and the ratio of
consolidated earnings before facilities exit costs to combined fixed charges
and preferred stock dividends was 1.8 in 1994.
(2) USF&G had a net loss for the year ended December 31, 1991 and earnings were
inadequate to cover fixed charges and combined fixed charges and preferred
stock dividends by $150 million and $187 million, respectively, for the year
ended December 31, 1991.
S-6
<PAGE>
THE FOLLOWING INFORMATION SUPPLEMENTS AND SHOULD BE READ IN CONJUNCTION WITH
THE INFORMATION CONTAINED IN THE ACCOMPANYING PROSPECTUS. EACH OF THE
CAPITALIZED TERMS USED IN THIS PROSPECTUS SUPPLEMENT HAS THE MEANING SET FORTH
IN THIS PROSPECTUS SUPPLEMENT OR IN THE ACCOMPANYING PROSPECTUS. THE SERIES B
CAPITAL SECURITIES ARE A "PREFERRED SECURITY" AS DEFINED AND DESCRIBED IN THE
ACCOMPANYING PROSPECTUS.
USF&G CORPORATION
GENERAL
USF&G is a holding corporation organized in 1981 as a Maryland corporation.
United States Fidelity and Guaranty Company ("USF&G Company"), organized in 1896
under Maryland law and a subsidiary of USF&G, is the predecessor of USF&G.
USF&G, through its subsidiaries, is engaged primarily in the business of
insurance, with property/ casualty insurance as its primary business. USF&G
Company, USF&G's largest subsidiary, is the 24th largest property/casualty
insurer among over 2,400 insurers in the United States based on 1995 statutory
net premiums written. Life insurance and annuity products are sold by Fidelity
and Guaranty Life Insurance Company ("F&G Life").
PROPERTY & CASUALTY
USF&G Company currently underwrites most forms of property/casualty
insurance. USF&G Company's property/casualty business is grouped into three
business categories: (1) the Commercial Insurance Group ("CIG"); (2) the Family
and Business Group ("FBIG"); and (3) specialty insurance businesses. For the
year ended December 31, 1995, the property/casualty segment accounted for 85
percent of USF&G's total revenues and 68 percent of its total assets.
Coverages offered by CIG provide protection related to property loss,
liability claims and workers' compensation benefits to businesses and
governmental entities and fidelity bonds for financial institutions. Property
loss and liability claims insurance protects against loss from damage to the
insured's covered properties and protects against legal liability for injuries
to other persons or damage to their property arising from the insured's business
operations. Workers' compensation provides benefits to employees, as mandated by
state laws, for employment-related accidents, injuries or illnesses. Fidelity
bonds indemnify employers against the dishonesty or default of persons in their
employ. For the year ended December 31, 1995, coverages provided by CIG
accounted for 35 percent of USF&G Company's total premiums written.
FBIG provides personal automobile and homeowner insurance, as well as
small-size account commercial insurance business. Automobile policies cover
liability to third-parties for bodily injury and property damage, and cover
physical damage to the insured's own vehicle resulting from collision and
various other perils. Nonstandard personal automobile coverage is provided
through Victoria Fire & Casualty Company, which was acquired by USF&G Company in
1995. Homeowners policies protect against loss of dwellings and contents arising
from a variety of perils, as well as liability arising from ownership or
occupancy. Small-size account commercial business includes property loss,
liability, claims and workers' compensation, as well as automobile and other
coverages. For the year ended December 31, 1995, coverages provided by FBIG
accounted for 39 percent of USF&G Company's total premiums written.
USF&G's specialty insurance businesses consist primarily of assumed
reinsurance, surety and alternative risk transfer. USF&G Company operates a
separate reinsurance division which underwrites treaty reinsurance and is
composed of various wholly-owned subsidiaries. The lead company in this group,
F&G Re, Inc., acts as the reinsurance underwriting manager and solicits and
services assumed reinsurance for USF&G Company. F&G Re, Inc. markets reinsurance
in North America and in specific foreign countries (mainly in Western Europe and
Japan). F&G Re, Inc. recently established a branch in Hong Kong. Reinsurance
prices and conditions are not normally subject to the same state regulation
applicable to the primary insurance market because reinsurers contract solely
with other insurance companies. For the year
S-7
<PAGE>
ended December 31, 1995, reinsurance accounted for 20 percent of USF&G Company's
total premiums written.
Surety bonds guarantee the performance of a principal who undertakes
contractual or statutory obligations, and indemnify third-party obligees for
damages caused by the principal's failure to perform. For the year ended
December 31, 1995, surety bonds accounted for 5 percent of USF&G Company's total
premiums written.
USF&G Company participates in the alternative risk transfer ("ART") market
through Discover Re, Inc., which it acquired in 1995. Discover Re, Inc. provides
insurance, reinsurance and related services to the ART market, primarily in the
municipalities, transportation, education and retail sections. Through
alternative risk transfer, a company self-insures the predictable frequency
portion of its own losses and purchases insurance for the less predictable,
high-severity losses that could have a major financial impact on the company.
For the year ended December 31, 1995, alternative risk transfer accounted for 1
percent of USF&G Company's total premiums written.
USF&G Company's products have been sold exclusively by independent agents
since its founding in 1896. Independent agents generally represent multiple
insurance companies. USF&G Company's products are sold through approximately
3,700 independent agencies in the United States on a commission basis.
As of December 31, 1995, USF&G Company maintained 15 regional offices and 30
branch offices to service its independent agents and policyholders. These
offices are located throughout the United States and support the administration
of underwriting standards, the delivery of policies, and the supervision of the
company's claim offices. In 1996, USF&G Company opened three regional "Centers
for Agency Service" dedicated to underwriting and policy processing for FBIG.
The regional and branch offices are being consolidated but will continue to
serve the Commercial Insurance Group. USF&G Company also opened a centralized
claims reception center in Tampa, Florida, which will provide 24-hour claim
reporting services to customers and agents throughout the United States.
LIFE INSURANCE
F&G Life sells many forms of annuity and life insurance products, including
single premium deferred annuities ("SPDAs"), structured settlement annuities,
tax sheltered annuities, single premium immediate annuities and universal life
and term life insurance. For the year ended December 31, 1995, the F&G Life
segment accounted for 14 percent of USF&G's total revenues and 31 percent of its
total assets.
SPDAs are sold primarily through independent agents and insurance brokers.
Structured settlements annuities are sold predominantly to USF&G Company in
settlement of insurance claims. Tax-sheltered annuities are sold through a
national wholesale distribution network primarily to teachers.
In August 1996, F&G Life entered into a coinsurance contract with an
unaffiliated life insurance company to cede all of the remaining block of SPDAs
that were originally sold through securities brokerage firms prior to 1992. The
block had a current account value of approximately $950 million. The transaction
did not have a material effect on USF&G's earnings.
RECENT DEVELOPMENTS
On December 17, 1996, USF&G Company completed its acquisition of Afianzadora
Insurgentes Serfin, S.A. de C.V. ("Afianzadora") for $65 million. Afianzadora is
the largest surety bond company in Mexico, writing approximately 27 percent of
the Mexican surety market. USF&G also announced on December 20, 1996 its
acquisition of Ashley Palmer Limited, a United Kingdom corporation which was
formerly a member of the Ashley Palmer Group. The Ashley Palmer Group managed
specialty Lloyd's of London syndicates, including a syndicate which USF&G
established in 1995 as sole corporate member. The transaction will allow USF&G
to manage in 1997 approximately $300 million in Lloyd's syndicate capacity.
S-8
<PAGE>
USF&G, from time to time, considers other possible acquisitions,
restructurings and divestitures, some of which could be material Currently,
USF&G has made no final determination with respect to any such material
transactions.
On December 24, 1996, USF&G Capital I, a subsidiary trust of USF&G, issued
100,000 shares of 8 1/2% Capital Securities, Series A. The $100 million of
proceeds from the sale of the 8 1/2% Capital Securities, Series A were used to
purchase 8 1/2% Deferrable Interest Junior Subordinated Debentures, Series A of
USF&G.
USF&G CAPITAL II
The Series B Issuer is a statutory business trust created under Delaware
law. The Series B Issuer's business and affairs are conducted by two Issuer
Trustees and three administrators: The Bank of New York, as Property Trustee and
The Bank of New York (Delaware), an affiliate of the Property Trustee, as
Delaware Trustee, and three individual administrators who are employees or
officers of or affiliated with USF&G (the "Administrators"). The exclusive
business of the Series B Issuer is issuing the Series B Capital Securities and
the Common Securities representing undivided beneficial interests in the assets
of the Series B Issuer, using the proceeds of the sale of the Series B Capital
Securities and the Common Securities to acquire the Series B Debentures,
maintaining the status of the Series B Issuer as a grantor trust for United
States federal income tax purposes and engaging in only those other activities
that are necessary or incidental thereto. All of the Common Securities of the
Series B Issuer will be owned directly or indirectly by USF&G. The Common
Securities of the Series B Issuer will rank PARI PASSU, and payments will be
made thereon PRO RATA, with the Series B Capital Securities, except that upon
the occurrence and continuance of a Debenture Event of Default under the Series
B Trust Agreement, the rights of USF&G, as holder of the Common Securities of
the Series B Issuer, to payment in respect of Distributions and payments upon
liquidation or redemption will be subordinated to the rights of the holders of
the Series B Capital Securities. See "Description of Preferred
Securities--Subordination of Common Securities" in the accompanying Prospectus.
The principal place of business of the Series B Issuer is c/o USF&G Corporation,
100 Light Street, Baltimore, Maryland 21202 and its telephone number is (410)
547-3000.
S-9
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated short-term debt and
capitalization of USF&G as of September 30, 1996 and as adjusted to give effect
to the issuance and sale of the Series B Capital Securities offered hereby and
the application of the estimated net proceeds therefrom to redeem $100 million
of USF&G's $4.10 Series A Convertible Exchangeable Preferred Stock and the
issuance of and application of the net proceeds from the sale of the 8 1/2%
Capital Securities, Series A of USF&G Capital I issued on December 24, 1996 (the
"Series A Capital Securities"). See "Use of Proceeds."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------
<S> <C> <C>
ACTUAL AS ADJUSTED
--------- -----------
<CAPTION>
(IN MILLIONS)
<S> <C> <C>
Short-Term Debt:
Corporate................................................................................ $ 55 $ --
--------- -----------
Total short-term debt.................................................................. 55 --
--------- -----------
Long-Term Debt
Corporate:
7% Senior Notes due 1998............................................................... 145 145
8 3/8% Senior Notes due 2001........................................................... 149 149
7 1/8% Senior Notes due 2005........................................................... 80 80
Zero Coupon Convertible Subordinated Notes due 2009.................................... 101 101
--------- -----------
Subtotal............................................................................. 475 475
--------- -----------
Real estate and other....................................................................
9.96% Secured note due 1999............................................................ 11 11
Other.................................................................................. 5 5
Subtotal............................................................................. 16 16
--------- -----------
Total long-term debt..................................................................... 491 491
--------- -----------
Total debt............................................................................... 546 491
--------- -----------
USF&G-obligated mandatorily redeemable preferred securities of subsidiary trusts holding
solely USF&G Debentures(1)............................................................... -- 200
Shareholders' equity
Capital Stock
Preferred Stock, par value $50.00; 12,000,000 shares authorized $4.10 Series A
Convertible Exchangeable Preferred Stock; 3,999,910 shares outstanding............... 200 100
$10.25 Series B Cumulative Convertible Preferred Stock; 277,550 shares outstanding..... 13 13
Common Stock, par value $2.50; 240,000,000 shares authorized; 116,008,813
outstanding.......................................................................... 290 290
Paid-in capital............................................................................ 1,136 1,136
Net unrealized gain on investments......................................................... (12) (12)
Minimum pension liability.................................................................. (100) (100)
Retained earnings........................................................................ 239 239
--------- -----------
Total shareholders' equity............................................................... 1,766 1,666
--------- -----------
Total capitalization....................................................................... $ 2,312 $ 2,357
--------- -----------
--------- -----------
</TABLE>
- ------------------------
(1) Includes the Series A Capital Securities. As described herein, the assets of
the Series B Issuer will include $100 million aggregate principal amount of
8.47% Series B Debentures issued by USF&G which will be purchased with the
proceeds of the sale of the Series B Capital Securities and will constitute
approximately 97% of the total assets of the Series B Issuer. The remaining
3% of the assets of the Series B Issuer will consist of approximately $3.1
million aggregate principal amount of Series B Debentures which will be
purchased with the proceeds of the sale of the Common Securities to USF&G.
S-10
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the Series B Capital Securities will be
used by the Series B Issuer to purchase Series B Debentures. The net proceeds of
the sale of the Series B Debentures by USF&G will be used to redeem $100 million
of USF&G's $4.10 Series A Convertible Exchangeable Preferred Stock.
CERTAIN TERMS OF THE SERIES B CAPITAL SECURITIES
GENERAL
The following summary of certain terms and provisions of the Series B
Capital Securities supplements the description of the terms and provisions of
the Preferred Securities set forth in the accompanying Prospectus under the
heading "Description of the Preferred Securities," to which description
reference is hereby made. This summary of certain terms and provisions of the
Series B Capital Securities does not purport to be complete and is subject to,
and qualified in its entirety by reference to, the Series B Trust Agreement. The
form of the Trust Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus Supplement and accompanying Prospectus is a
part.
DISTRIBUTIONS
The Series B Capital Securities represent undivided beneficial interests in
the assets of the Series B Issuer. Distributions on each Series B Capital
Security will be payable at the annual rate of 8.47% of the stated liquidation
preference of $1,000, payable semi-annually in arrears on January 10 and July 10
of each year, except as otherwise described below. Distributions in arrears
after the semi-annual payment date therefor will accumulate additional
Distributions thereon (to the extent permitted by law) compounded semi-annually
at the rate per annum of 8.47%. The term "Distributions" as used herein shall
include any such additional Distributions. Distributions will accrue from
January 10, 1997, the date of original issuance. The first Distribution payment
date for the Series B Capital Securities will be July 10, 1997, and such
Distributions will be cumulative from the date of original issuance. The amount
of Distributions payable for any period will be computed on the basis of a
360-day year of twelve 30-day months. If any Distribution is payable on a day
that is not a Business Day, such Distribution may be made on the next succeeding
Business Day (except that if such Business Day is in the next succeeding
calendar year, such Distribution shall be made on the immediately preceding
Business Day) with the same force and effect as though made on the day the
Distribution was payable.
USF&G has the right at any time and from time to time to extend the interest
payment period on the Series B Debentures, for not more than 10 consecutive
semi-annual periods, provided that any such Extension Period shall not extend
beyond the maturity date or redemption date of the Series B Debentures. As a
consequence, Distributions on the Series B Capital Securities would be deferred
by the Series B Issuer during any Extension Period (but would continue to
accumulate additional Distributions thereon as set forth above). In the event
that USF&G exercises this right, USF&G will not, and will not permit any
subsidiary of USF&G to, declare or pay any dividend or distribution on, or
redeem, purchase, acquire, or make a liquidation or guarantee payment (other
than payments under a Guarantee Agreement) with respect to, any shares of
USF&G's capital stock or any security of USF&G (including other Debentures)
ranking PARI PASSU with or junior in interest to the Series B Debentures, except
in each case for (i) payments with securities junior in interest to the Series B
Debentures, (ii) payments made on any series of Debentures upon the stated
maturity of such Debentures or (iii) payments of accrued dividends (and cash in
lieu of fractional shares) upon conversion into common stock of any convertible
preferred stock of USF&G of any series now or hereinafter outstanding, in
accordance with the terms of such stock. As a result, this covenant requires
that an interest payment on one series of Debentures may be extended only if the
interest periods on all series of Debentures are likewise extended. Prior to the
termination of any such Extension Period, USF&G may further extend the interest
payment period, PROVIDED that such Extension Period together with all such
previous and further extensions thereof may not exceed 10 consecutive semi-
S-11
<PAGE>
annual periods or extend beyond the maturity or redemption date of the Series B
Debentures. Upon the termination of any Extension Period and the payment of all
amounts then due, USF&G may select a new Extension Period, subject to the above
requirements. See "Certain Federal Income Tax Consequences" and "Certain Terms
of the Series B--Debentures Option to Extend Interest Payment Period."
USF&G has no current intention of exercising its right to defer payments of
interest by extending the interest payment period on the Series B Debentures.
REDEMPTION
Upon the payment of the Series B Debentures, whether at maturity or upon
earlier redemption as provided in the Indenture, the proceeds from such payment
will be applied by the Property Trustee to redeem a Like Amount (as defined
below) of the Common Securities of the Series B Issuer and the Series B Capital
Securities, upon not less than 20 nor more than 90 days' notice, at a Redemption
Price equal to the aggregate liquidation preference plus accumulated and unpaid
Distributions to the Redemption Date. See "Certain Terms of the Series B
Debentures--Redemption."
USF&G has the right to redeem the Series B Debentures (a) on or after
January 10, 2007, in whole or in part, or (b) at any time, in whole but not in
part, on occurrence of a Tax Event or an Investment Company Event (each as
defined below, a "Special Event"), subject to the conditions described below
under "--Special Event Redemption or Distribution."
The Redemption Price, in the case of a redemption under (a) above, shall
equal the following prices expressed in percentages of the Liquidation Amount
together with accrued Distributions to but excluding the Redemption Date. If
redeemed during the 12-month period beginning January 10:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- -------------------------------------------------------------------------------- ----------------
<S> <C>
2007............................................................................ 104.235%
2008............................................................................ 103.812
2009............................................................................ 103.388
2010............................................................................ 102.965
2011............................................................................ 102.541
2012............................................................................ 102.118
2013............................................................................ 101.694
2014............................................................................ 101.271
2015............................................................................ 100.847
2016............................................................................ 100.424
</TABLE>
and at 100% on or after January 10, 2017.
The Redemption Price, in the case of a redemption following a Special Event
as described under (b) above, shall equal for each Series B Capital Security the
Make-Whole Amount for a corresponding $1,000 principal amount of Series B
Debentures together with accrued Distributions to but excluding the Redemption
Date. The "Make-Whole Amount" shall be equal to the greater of (i) 100% of the
principal amount of such Series B Debentures or (ii) as determined by a
Quotation Agent (as defined below), the sum of the present values of the
principal amount and premium payable as part of the Redemption Price with
respect to an optional redemption of such Series B Debentures on January 10,
2007, together with scheduled payments of interest from the Redemption Date to
January 10, 2007 (the "Remaining Life"), in each case discounted to the
Redemption Date on a semi-annual basis (assuming a 360-day year consisting of
30-day months) at the Adjusted Treasury Rate (as defined below).
"Adjusted Treasury Rate" means, with respect to any Redemption Date, the
Treasury Rate plus (i) 1.25% if such Redemption Date occurs on or before January
10, 1998 or (ii) 0.50% if such Redemption Date occurs after January 10, 1998.
S-12
<PAGE>
"Treasury Rate" means (i) the yield, under the heading which represents the
average for the immediately prior week, appearing in the most recently published
statistical release designated "H.15(519)" or any successor publication which is
published weekly by the Federal Reserve and which establishes yields on actively
traded United States Treasury securities adjusted to constant maturity under the
caption "Treasury Constant Maturities," for the Comparable Treasury Issue or
(ii) if such release (or any successor release) is not published during the week
preceding the calculation date or does not contain such yields, the rate per
annum equal to the semi-annual equivalent yield to maturity of the Comparable
Treasury Issue, calculated using a price for the Comparable Treasury Issue
(expressed as a percentage of its principal amount) equal to the Comparable
Treasury Price for such prepayment date. The Treasury Rate shall be calculated
on the third Business Day preceding the prepayment date.
"Comparable Treasury Issue" means with respect to any prepayment date the
United States Treasury security selected by the Quotation Agent as having a
maturity comparable to the Remaining Life that would be utilized, at the time of
selection and in accordance with customary financial practice, in pricing new
issues of corporate debt securities of comparable maturity to the Remaining
Life. If no United States Treasury security has a maturity which is within a
period from three months before to three months after January 10, 2007, the two
most closely corresponding United States Treasury securities shall be used as
the Comparable Treasury Issue, and the Treasury Rate shall be interpolated or
extrapolated on a straight-line basis, rounding to the nearest month using such
securities; provided, however, that if the Remaining Life is longer than the
longest United States Treasury security, the longest maturity United States
Treasury security shall be used as the Comparable Treasury Issue, without
extrapolation.
"Quotation Agent" means Merrill Lynch & Co. and its respective successors;
provided, however, that if the foregoing shall cease to be a primary U.S.
Government securities dealer in New York City (a "Primary Treasury Dealer"),
USF&G shall substitute therefor another Primary Treasury Dealer. "Reference
Treasury Dealer" means (i) the Quotation Agent and (ii) any other Primary
Treasury Dealer selected by the Debenture Trustee after consultation with USF&G.
"Comparable Treasury Price" means (A) the average of five Reference Treasury
Dealer Quotations for such prepayment date, after excluding the highest and
lowest such Reference Treasury Dealer Quotations; or (B) if the Debenture
Trustee obtains fewer than three such Reference Treasury Dealer Quotations, the
average of all such Quotations.
"Reference Treasury Dealer Quotations" means, with respect to each Reference
Treasury Dealer and any prepayment date, the average, as determined by the
Debenture Trustee, of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) quoted in
writing to the Debenture Trustee by such Reference Treasury Dealer at 5:00 p.m.,
New York City time, on the third Business Day preceding such prepayment date.
"Like Amount" means (i) with respect to a redemption of Series B Capital
Securities, Series B Capital Securities having a Liquidation Amount (as defined
below) equal to that portion of the principal amount of Series B Debentures to
be contemporaneously redeemed in accordance with the Indenture, allocated to the
Common Securities and to the Series B Capital Securities based upon the relative
Liquidation Amounts of such classes and the proceeds of which will be used to
pay the Redemption Price of the Series B Capital Securities and (ii) with
respect to a distribution of Series B Debentures to holders of Series B Capital
Securities in connection with a dissolution or liquidation of the Series B
Issuer, Series B Debentures having a principal amount equal to the Liquidation
Amount of the Series B Capital Securities of the holder to whom such Series B
Debentures are distributed.
"Liquidation Amount" means the stated amount of $1,000 per Capital Security.
PAYMENT OF ADDITIONAL SUMS. In the event a Tax Event has occurred and is
continuing and the Series B Issuer is the holder of all of the Series B
Debentures, USF&G will pay Additional Sums, if any (as defined below), on the
Series B Debentures.
S-13
<PAGE>
"Additional Sums" means the additional amounts as may be necessary in order
that the amount of Distributions then due and payable by the Series B Issuer on
the outstanding Series B Capital Securities and Common Securities of the Series
B Issuer shall not be reduced as a result of any additional taxes, duties and
other governmental charges to which the Series B Issuer has become subject as a
result of a Tax Event.
SPECIAL EVENT REDEMPTION OR DISTRIBUTION
If a Special Event shall occur and be continuing with respect to the Series
B Issuer or the Series B Capital Securities, USF&G has the right to (i) redeem
the Series B Debentures in whole (but not in part) and therefore cause a
mandatory redemption of the Series B Capital Securities in whole (but not in
part) at the Redemption Price within 90 days following the occurrence of such
Special Event, or (ii) terminate the Series B Issuer and cause the Series B
Debentures to be distributed to the holders of the Series B Capital Securities
in liquidation of the Series B Issuer. If at any time the Series B Issuer is not
or will not be taxed as a grantor trust for United States federal income tax
purposes but a Tax Event has not occurred (a "Grantor Trust Event"), the
Depositor has the right to terminate the Series B Issuer and cause the Series B
Debentures to be distributed to the holders of the Series B Capital Securities
in liquidation of the Series B Issuer. Under current United States federal
income tax law and interpretations and assuming the Series B Issuer is treated
as a grantor trust, such a distribution would not be a taxable event to holders
of the Series B Capital Securities. However, should there be a change in law or
a change in legal interpretation or a liquidation due to a Grantor Trust Event,
the termination and distribution could be a taxable event to holders of the
Series B Capital Securities. See "Certain Federal Income Tax Consequences." If
USF&G does not elect either option (i) or (ii) above, the Series B Capital
Securities will remain outstanding and USF&G will be obligated to pay any
applicable Additional Interest (as defined below). See "Certain Terms of the
Series B Debentures--Additional Interest."
"Tax Event" means that USF&G shall have received an opinion of counsel
(which may be counsel to USF&G or an affiliate but not an employee thereof and
which must be acceptable to the Property Trustee) experienced in such matters to
the effect that, as a result of any amendment to, or change (including any
announced prospective change) in, the laws (or any regulations thereunder) of
the United States or any political subdivision or taxing authority thereof or
therein affecting taxation, or as a result of any official administrative
pronouncement or judicial decision interpreting or applying such laws or
regulations, which amendment or change is effective or such pronouncement or
decision is announced on or after the date of original issuance of the Series B
Capital Securities, there is more than an insubstantial risk that (i) the Series
B Issuer is, or will be, subject to United States federal income tax with
respect to income accrued or received on the Series B Debentures, (ii) interest
payable by USF&G on the Series B Debentures is not, or will not be, deductible
by USF&G for United States federal income tax purposes or (iii) the Series B
Issuer is, or will be, subject to more than a DE MINIMIS amount of other taxes,
duties, assessments or other governmental charges.
"Investment Company Event" means the occurrence of a change in law or
regulation or a change in interpretation or application of law or regulation by
any legislative body, court, governmental agency or regulatory authority (a
"Change in 1940 Act Law") to the effect that the Series B Issuer is or will be
considered an "investment company" that is required to be registered under the
Investment Company Act of 1940, as amended, which Change in 1940 Act Law becomes
effective on or after the date of original issuance of the Series B Capital
Securities.
S-14
<PAGE>
RIGHT TO SHORTEN MATURITY
If, upon the occurrence of a Tax Event relating to the deductibility of
interest by USF&G on the Series B Debentures, the opinion of counsel referred to
in the definition of Tax Event states that the risk of non-deductibility would
be avoided if the maturity of the Series B Debentures were shortened, USF&G
shall have the right to shorten the maturity of the Series B Debentures by the
amount stated in such opinion to be the minimum extent required in order to
avoid such risk, but in no event may USF&G shorten the maturity to a Stated
Maturity of less than 19 1/2 years from the date of original issuance. In such
event, the Stated Maturity of the Capital Securities will be modified in the
same manner as the Stated Maturity of the Series B Debentures.
LIQUIDATION DISTRIBUTION UPON TERMINATION
The amount payable on the Series B Capital Securities in the event of any
liquidation of the Series B Issuer is $1,000 per Series B Capital Security plus
accumulated and unpaid Distributions, unless, in connection with such
liquidation, the Series B Debentures are distributed to the holders of the
Series B Capital Securities.
USF&G has the right at any time to terminate the Series B Issuer and, after
satisfaction of the liabilities and amounts owed to creditors of the Series B
Issuer as provided by applicable law, cause the Series B Debentures to be
distributed to the holders of the Series B Capital Securities and Common
Securities in liquidation of the Series B Issuer, subject to the Property
Trustee having received an opinion of counsel to the effect that such
distribution will not be a taxable event to the holders of the Series B Capital
Securities.
USF&G also has a right to terminate the Series B Issuer and distribute the
Series B Debentures under the circumstances described above under Special Event
Redemption or Distribution. See "Description of Preferred Securities --
Liquidation Distribution upon Termination" in the accompanying Prospectus.
CERTAIN TERMS OF THE SERIES B DEBENTURES
GENERAL
The following summary of certain terms and provisions of the Series B
Debentures supplements the description of the terms and provisions of the
Debentures set forth in the accompanying Prospectus under the heading
"Description of the Debentures," to which description reference is hereby made.
The summary of certain terms and provisions of the Series B Debentures set forth
below does not purport to be complete and is subject to, and qualified in its
entirety by reference to, the Indenture. The form of Indenture has been filed as
an exhibit to the Registration Statement of which this Prospectus Supplement and
accompanying Prospectus is a part.
Concurrently with the issuance of the Series B Capital Securities, the
Series B Issuer will invest the proceeds thereof and the consideration paid by
USF&G for the Common Securities in the corresponding Series B Debentures issued
by USF&G to the Series B Issuer. The Series B Debentures will bear Interest (as
defined below) at the annual rate of 8.47% of the principal amount thereof,
payable semi-annually in arrears on January 10 and July 10 of each year
commencing July 10, 1997, except as otherwise described below. Interest which is
accrued and unpaid after the semi-annual payment date therefor will bear
additional interest on the amount thereof (to the extent permitted by law) at
the rate per annum of 8.47% thereof, compounded semi-annually. The term
"Interest" as used herein shall include semi-annual interest payments, interest
on semi-annual interest payments in arrears and Additional Interest (as defined
below), as applicable. The Series B Debentures' other Interest payment
provisions correspond to the Distribution provisions of the Series B Capital
Securities.
The Series B Debentures will be issued as a series of Debentures under the
Indenture. The Series B Debentures will mature on January 10, 2027. The Series B
Debentures will be unsecured and will rank
S-15
<PAGE>
junior and be subordinate in right of payment to all Senior Indebtedness of
USF&G. The Series B Debentures will rank PARI PASSU with the Series A
Debentures. See "Description of the Debentures-- Subordination" in the
accompanying Prospectus.
OPTION TO EXTEND INTEREST PAYMENT PERIOD
USF&G has the right at any time and from time to time to extend the interest
payment period for the Series B Debentures for up to 10 consecutive semi-annual
periods; provided that USF&G may not defer any Additional Interest that may be
payable during such Extension Period; and provided further that no Extension
Period shall extend beyond the stated maturity date or date of redemption of the
Series B Debentures. At the end of the Extension Period, USF&G is obligated to
pay all interest then accrued and unpaid (together with interest thereon to the
extent permitted by applicable law). During any Extension Period, USF&G will
not, and will not permit any subsidiary of USF&G to, declare or pay any dividend
or distribution on, or redeem, purchase, acquire, or make a liquidation or
guarantee payment (other than payments under a Guarantee) with respect to, any
shares of USF&G's capital stock or any security of USF&G (including other
Debentures) ranking PARI PASSU with or junior in interest to the Debentures,
except in each case for (i) payments with securities junior in interest to the
Series B Debentures, (ii) payments made on any series of Debentures upon the
stated maturity of such Debentures or (iii) payments of accrued dividends (and
cash in lieu of fractional shares) upon conversion into common stock of any
convertible preferred stock of USF&G of any series now or hereinafter
outstanding, in accordance with the terms of such stock. As a result, this
covenant requires that an interest payment on one series of Debentures may be
extended only if the interest periods on all series of Debentures are likewise
extended. Prior to the termination of any Extension Period, USF&G may further
extend the interest payment period, provided that such Extension Period,
together with all such previous and further extensions thereof, may not exceed
10 consecutive semi-annual periods or extend beyond the maturity or redemption
date of the Series B Debentures. Upon the termination of any Extension Period
and the payment of all amounts then due, USF&G may select a new Extension Period
subject to the above requirements. So long as the Property Trustee shall be the
sole holder of the Series B Debentures, USF&G is required to give the Property
Trustee and the Debenture Trustee notice of its selection of such Extension
Period at least three Business Days prior to the date the Property Trustee or
USF&G is required to give notice to any applicable self-regulatory organization
or to holders of the Series B Capital Securities of the record date for the next
stated maturity of an installment of interest or the date distributions on the
Series B Capital Securities are redeemable, but in any event not less than three
Business Days prior to such record date. The Property Trustee will be required
to give such notice of USF&G's selection of such Extension Period to the holders
of the Series B Capital Securities affected thereby. If the Property Trustee has
ceased to be the sole holder of the Series B Debentures, USF&G is required to
give the Debenture Trustee and the holders of the Series B Debentures notice of
its selection of such Extension Period at least three Business Days prior to the
earlier of: (i) the date the Property Trustee or USF&G is required to give
notice to any applicable self-regulatory organization, or (ii) the next stated
maturity of an installment of interest.
ADDITIONAL INTEREST
If the Series B Issuer is required to pay any taxes, duties, assessments or
other governmental charges of whatever nature (other than withholding taxes)
imposed by the United States, or any other taxing authority, USF&G also will pay
as additional interest on the Series B Debentures ("Additional Interest") such
amounts as shall be required so that the net amounts received and retained by
the Series B Issuer after paying any such taxes, duties, assessments or
governmental charges will be not less than the amounts the Series B Issuer would
have received had no such taxes, duties, assessments or governmental charges
been imposed. USF&G may not defer payment of Additional Interest and must pay
Additional Interest if any such taxes, duties, assessments or governmental
charges are payable by the Series B Issuer during any Extension Period.
S-16
<PAGE>
REDEMPTION
The Series B Debentures are redeemable prior to maturity at the option of
USF&G (i) at any time on or after January 10, 2007, in whole or in part, and
(ii) prior to January 10, 2007, in whole (but not in part), if a Special Event
occurs and is continuing, within 90 days following the Special Event, in each
case at the Redemption Price described below.
The Redemption Price, in the case of a redemption under (a) above, shall
equal the following prices expressed in percentages of the Liquidation Amount
together with accrued Distributions to but excluding the Redemption Date. If
redeemed during the 12-month period beginning January 10:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- -------------------------------------------------------------------------------- ----------------
<S> <C>
2007............................................................................ 104.235%
2008............................................................................ 103.812
2009............................................................................ 103.388
2010............................................................................ 102.965
2011............................................................................ 102.541
2012............................................................................ 102.118
2013............................................................................ 101.694
2014............................................................................ 101.271
2015............................................................................ 100.847
2016............................................................................ 100.424
</TABLE>
and at 100% on or after January 10, 2017.
The Redemption Price, in the case of a redemption following a Special Event
as described under (b) above, shall equal the Make-Whole Amount (as defined
under "Certain Terms of the Series B Capital Securities--Redemption"), together
with accrued interest to but excluding the Redemption Date.
The Series B Debentures will be subject to optional redemption in whole (but
not in part) upon the termination and liquidation of the Series B Issuer
pursuant to an order for the dissolution, termination or liquidation of the
Series B Issuer entered by a court of competent jurisdiction. For so long as the
Series B Issuer is the holder of all Series B Debentures outstanding, the
proceeds of any redemption described in this section shall be used by the Series
B Issuer to redeem the Series B Capital Securities and the Common Securities in
accordance with their terms. USF&G shall not redeem the Series B Debentures in
part unless all accrued and unpaid Interest (including any Additional Interest)
has been paid in full on all Series B Debentures outstanding for all semi-annual
interest periods on or prior to the Redemption Date and no Extension Period for
the Series B Debentures is in effect.
RIGHT TO SHORTEN MATURITY
The maturity of the Series B Debentures may be shortened at the option of
USF&G under the circumstances described under "Description of Series B Capital
Securities--Right to Shorten Maturity."
DISTRIBUTIONS OF SERIES B DEBENTURES
Under certain circumstances involving the termination of the Series B Issuer
(including if a Special Event or Grantor Trust Event occurs), Series B
Debentures may be distributed to the holders of the Series B Capital Securities
in liquidation of the Series B Issuer after satisfaction of liabilities to
creditors of the Series B Issuer as provided by applicable law. If distributed
to holders of Series B Capital Securities in liquidation, the Series B
Debentures will initially be issued in the form of one or more global securities
so long as the Series B Capital Securities were represented by global
certificates immediately prior to such distribution and DTC, or any successor
depositary for the Series B Capital Securities, will act as depositary for the
Series B Debentures. It is anticipated that the depositary arrangements for the
Series B Debentures would be substantially identical to those in effect for the
Series B Capital Securities. Neither USF&G, The
S-17
<PAGE>
Bank of New York, as Debenture Trustee, any paying agent nor any other agent of
USF&G or the Debenture Trustee will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests in a global security for such Series B Debentures or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests. For a description of DTC and the terms of the depositary
arrangements relating to payments, transfers, voting rights, redemption and
other notices and other matters, see "Description of the Preferred
Securities--Book-Entry-Only Issuance--The Depository Trust Company" in the
accompanying Prospectus.
A global security shall be exchangeable for Series B Debentures registered
in the names of persons other than DTC or its nominee only if (i) DTC notifies
USF&G that it is unwilling or unable to continue as a depositary for such global
security and no successor depositary shall have been appointed, or if at any
time DTC ceases to be a clearing agency registered under the Exchange Act at a
time when DTC is required to be so registered to act as such depositary, (ii)
USF&G in its sole discretion determines that such global security shall be so
exchangeable, or (iii) there shall have occurred and be continuing a Debenture
Event of Default with respect to such global security. Any global security that
is exchangeable pursuant to the preceding sentence shall be exchangeable for
definitive certificates registered in such names as DTC shall direct. It is
expected that such instructions will be based upon directions received by DTC
from its Participants with respect to ownership of beneficial interests in such
global security. In the event that Series B Debentures are issued in definitive
form, such Series B Debentures will be in denominations of $1,000 and integral
multiples thereof and may be transferred or exchanged at the offices described
below.
Payments on Series B Debentures represented by a global security will be
made to DTC, as the depositary for the Series B Debentures. In the event Series
B Debentures are issued in definitive form, principal and interest will be
payable, the transfer of the Series B Debentures will be registrable, and Series
B Debentures will be exchangeable for Series B Debentures of other denominations
of a like aggregate principal amount, at the principal corporate trust office of
the Debenture Trustee in New York, New York, or at the offices of any paying
agent or transfer agent appointed by USF&G, PROVIDED that payment of interest
may be made at the option of USF&G by check mailed to the address of the persons
entitled thereto or by wire transfer. In addition, if the Series B Debentures
are issued in certificated form, the record dates for payment of interest will
be the 15th day preceding each Interest Payment Date. For a description of DTC
and the terms of the depositary arrangements relating to payments, transfers,
voting rights, redemptions and other notices and other matters, see "Description
of the Preferred Securities-- Book-Entry-Only Issuance--The Depository Trust
Company" in the accompanying Prospectus.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the principal United States federal income tax
consequences of the purchase, ownership and disposition of Series B Capital
Securities. This summary supplements, updates and, in certain respects,
supercedes the discussion contained in "United States Taxation" in the
accompanying Prospectus. This summary only addresses the tax consequences to a
person that acquires Series B Capital Securities on their original issue at
their original offering price and that is (i) an individual citizen or resident
of the United States, (ii) a corporation or partnership organized in or under
the laws of the United States or any state thereof or the District of Columbia
(iii) an estate the income of which is subject to United States federal income
tax regardless of source or (iv) a trust (a) over the administration of which a
court within the United States is able to exercise primary supervision and (b)
all substantial decisions of which one or more United States fiduciaries have
the authority to control (a "United States Person"). This summary does not
address all tax consequences that may be applicable to a United States Person
that is a beneficial owner of Series B Capital Securities, nor does it address
the tax consequences to (i) persons that are not United States Persons, (ii)
persons that may be subject to special treatment under United States federal
income tax law, such as banks, insurance companies, thrift institutions,
regulated investment
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<PAGE>
companies, real estate investment trusts, tax-exempt organizations and dealers
in securities or currencies, (iii) persons that will hold Series B Capital
Securities as part of a position in a "straddle" or as a part of a "hedging,"
"conversion" or other integrated investment transaction for federal income tax
purposes, (iv) persons whose functional currency is not the United States dollar
or (v) persons that do not hold Series B Capital Securities as capital assets.
The statements of law or legal conclusion set forth in this summary
constitute the opinion of Piper & Marbury L.L.P., special tax counsel to USF&G
and the Series B Issuer. This summary is based upon the Internal Revenue Code of
1986, as amended (the "Code"), Treasury Regulations, Internal Revenue Service
rulings and pronouncements and judicial decisions now in effect, all of which
are subject to change at any time. Such changes may be applied retroactively in
a manner that could cause the tax consequences to vary substantially from the
consequences described below, possibly adversely affecting a beneficial owner of
Series B Capital Securities. In particular, legislation has been proposed that
could adversely affect USF&G's ability to deduct interest on the Series B
Debentures, which may in turn permit USF&G to cause a redemption of the Series B
Capital Securities. See "--Possible Tax Law Changes". An opinion of counsel is
not binding on the Internal Revenue Service or the courts, and the authorities
on which this summary is based are subject to various interpretations. It is
therefore possible that the federal income tax law treatment of the purchase,
ownership and disposition of Series B Capital Securities may differ from the
treatment described below.
PROSPECTIVE INVESTORS ARE ADVISED TO CONSULT WITH THEIR OWN TAX ADVISORS IN
LIGHT OF THEIR OWN PARTICULAR CIRCUMSTANCES AS TO THE FEDERAL TAX CONSEQUENCES
OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF CAPITAL SECURITIES, AS WELL AS THE
EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
CLASSIFICATION OF SERIES B ISSUER
In connection with the issuance of the Series B Capital Securities, Piper &
Marbury L.L.P. will render its opinion to the effect that, under then current
law and assuming compliance with the terms of the Trust Agreement, and based on
certain facts and assumptions contained in such opinion, the Series B Issuer
will be classified as a grantor trust and not as an association taxable as a
corporation for United States federal income tax purposes. As a result, each
beneficial owner of Series B Capital Securities (a "Securityholder") will be
required to include in its gross income its PRO RATA share of the interest
income, including original issue discount, paid or accrued with respect to the
Series B Debentures whether or not cash is actually distributed to the
Securityholders. See "--Interest Income and Original Issue Discount." No amount
included in income with respect to the Series B Capital Securities will be
eligible for the dividends-received deduction.
INTEREST INCOME AND ORIGINAL ISSUE DISCOUNT
Final Treasury Regulations issued on June 11, 1996 generally provide that
stated interest on a debt instrument is not "qualified stated interest" and,
therefore, will give rise to original issue discount ("OID") unless such
interest is unconditionally payable in cash or in property (other than a debt
instruments of the issuer) at least annually at a single fixed rate. Interest is
considered to be unconditionally payable only if reasonable legal remedies exist
to compel timely payment or the debt instrument otherwise provides terms and
conditions that make the likelihood of late payment (other than payment that
occurs within a reasonable grace period) or non-payment a "remote contingency".
Under the Series B Indenture, USF&G has the right, at any time and from time
to time during the term of the Series B Debentures to defer payments of interest
by extending the interest payment period for a period not exceeding 10
consecutive semi-annual periods with respect to each Extension Period. Unless
the likelihood of exercise of such right to defer is remote, the Series B
Debentures would be issued with OID. During any Extension Period, (a) USF&G will
not be permitted to declare or pay any dividends or
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<PAGE>
distributions on, or redeem, purchase, acquire, or make a liquidation payment
with respect to, any of its capital stock, and (b) USF&G will not be permitted
to make any payment of principal, interest or premium, if any, on or repay,
repurchase or redeem any debt securities (including guarantees) issued by USF&G
that rank PARI PASSU with or junior the Series B Debentures (although these
restrictions will not apply to dividends or distributions in common stock of
USF&G and in certain other limited situations). See "Certain Terms of the Series
B Debentures--Option to Extend Interest Payment Period". USF&G currently
believes that the adverse impact that the imposition of such restrictions would
have on USF&G and value of the equity securities of USF&G makes the likelihood
of USF&G exercising its right to defer payments of interest on the Series B
Debentures remote. Accordingly, USF&G believes that the stated interest on the
Series B Debentures should be considered unconditionally payable for purposes of
the OID provisions of the Code and that the Series B Debentures should not be
considered to have been issued with OID. As a result, each Securityholder will
be required to include interest payments in taxable income at the time accrued
or received in accordance with its own method of accounting. There can be no
assurance, however, that the Internal Revenue Service will agree with such
determination.
However, if USF&G does exercise its right to defer payments of interest
thereon, the Series B Debentures will be considered to be retired and reissued
for their adjusted issue price at such time, and the Series B Debentures
thereafter will be considered to have been issued with OID. In such case, all of
the interest payments thereafter payable will be treated as OID. If the payments
were treated as OID (either because USF&G exercises the right to defer interest
payments or because the exercise of such right was not remote at the time of
issuance), the holder must include that discount in income on an economic
accrual basis before the receipt of cash attributable to the interest,
regardless of their method of tax accounting. The amount of OID that accrues in
any semi-annual period will approximately equal the amount of the interest that
accrues in that semi-annual period at the stated interest rate. In the event
that the interest payment period is extended, holders will continue to accrue
OID approximately equal to the amount of interest payment due at the end of the
extended interest payment period on an economic accrual basis over the length of
the extended interest period. A Securityholder that disposes of the Series B
Capital Securities during an Extension Period may suffer a loss because the
market value of the Series B Capital Securities likely will fall if USF&G
exercises its option to defer payments of interest on the Series B Debentures.
To the extent the selling price is less than the Securityholder's adjusted tax
basis (which will include all accrued but unpaid interest), a Securityholder
will recognize a capital loss.
DISTRIBUTION OF SERIES B DEBENTURES TO HOLDERS OF SERIES B CAPITAL SECURITIES
Under current law, a distribution of the Series B Issuer of the Series B
Debentures as described under the caption "Certain Terms of the Series B Capital
Securities--Liquidation Distribution Upon Termination" will be non-taxable and
will result in the Securityholder receiving directly its PRO RATA share of the
Series B Debentures previously held indirectly through the Series A Issuer, with
a holding period and aggregate tax basis equal to the holding period and
aggregate tax basis such Securityholder had in its Series B Capital Securities
before such distribution. If, however, the liquidation of the Series B Issuer
were to occur because the Series B Issuer is subject to United States federal
income tax with respect to income accrued or received on the Series B
Debentures, the distribution of Series B Debentures to Securityholders by the
Series B Issuer would be a taxable event to the Series B Issuer and each
Securityholder, and the Securityholder would recognize gain or loss as if the
Securityholder had exchanged its Series B Capital Securities for the Series B
Debentures it received upon the liquidation of the Series B Issuer. A
Securityholder will include interest in income in respect of Series B Debentures
received from the Series B Issuer in the manner described above under "Interest
Income and Original Issue Discount."
SALES OR REDEMPTION OF SERIES B CAPITAL SECURITIES
Gain or loss will be recognized by a Securityholder on the sale of Series B
Capital Securities (including a redemption for cash) in an amount equal to the
difference between the amount realized and the
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Securityholder's adjusted tax basis in the Series B Capital Securities sold or
redeemed. A Securityholder's adjusted tax basis in the Series B Capital
Securities generally will be increased by any OID included in gross income and
decreased by any interest payments not treated as "qualified stated interest"
(as defined above). See "--Interest Income and Original Issue Discount". Gain or
loss recognized by a Securityholder on Series B Capital Securities held for more
than one year generally will be taxable as long-term capital gain or loss.
Amounts attributable to accrued interest with respect to a Securityholder's PRO
RATA shares of the Series B Debentures not previously included in income will be
taxable as ordinary income.
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING
The amount of interest paid or accrued on the Series B Capital Securities
held of record by United States Persons (other than corporations and other
exempt Securityholders) will be reported to the IRS. "Backup" withholding at a
rate of 31% will apply to payments of interest to non-exempt United States
Persons unless the Securityholder furnishes its taxpayer identification number
in the manner prescribed in applicable Treasury Regulations, certifies that such
number is correct, certifies as to no loss of exemption from backup withholding
and meets certain other conditions.
Payment of the proceeds from the disposition of Series B Capital Securities
to or through the United States office of a broker is subject to information
reporting and backup withholding unless the holder or beneficial owner
establishes an exemption from information reporting and backup withholding.
Any amounts withheld from a Securityholder under the backup withholding
rules will be allowed as a refund or a credit against such Securityholder's
United States federal income tax liability, provided the required information is
furnished to the Internal Revenue Service.
It is anticipated that income on the Series B Capital Securities will be
reported to holders on Form 1099 and mailed to holders of the Series B Capital
Securities by January 31 following each calendar year.
POSSIBLE TAX LAW CHANGES
On March 19, 1996, the Revenue Reconciliation Bill of 1996 (the "Bill"), the
revenue portion of President Clinton's budget proposal, was released. The Bill
would, among other things, generally deny interest deductions for interest on an
instrument issued by a corporation that has a maximum weighted average maturity
of more than 40 years. The Bill would also generally deny interest deductions
for interest on an instrument issued by a corporation that has a maximum term of
more than 20 years and that is not shown as indebtedness on the separate balance
sheet of the issuer or, where the instrument is issued to a related party (other
than a corporation), and the holder or some other related party issues a related
instrument that is not shown as indebtedness on the issuer's consolidated
balance sheet. For purposes of determining the weighted average maturity or the
term of an instrument, any right to extend would be treated as exercised. The
above-described provisions of the Bill were proposed to be effective generally
for instruments issued on or after December 7, 1995. If either provision were to
apply to the Series B Debentures, USF&G would be unable to deduct interest on
the Series B Debentures. However, on March 29, 1996 the Chairmen of the Senate
Finance and House Ways and Means Committees issued a joint statement to the
effect that it was their intention that the effective date of the President's
legislative proposals, if adopted, will be no earlier than the date of
appropriate Congressional action. Under current law, USF&G will be able to
deduct interest on the Series B Debentures. There can be no assurance, however,
that current or future legislative proposals or final legislation will not
affect the ability of USF&G to deduct interest on the Series B Debentures. Such
a change could give rise to a Tax Event, which would permit USF&G to cause a
redemption of the Series B Capital Securities or shorten the maturity of the
Series B Capital Securities. See "Certain Terms of the Series B Capital
Securities--Redemption" and "Certain Terms of the Series B Capital
Securities--Right to Shorten Maturity."
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<PAGE>
CERTAIN ERISA CONSIDERATIONS
Each fiduciary of a pension, profit-sharing or other employee benefit plan
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA") (a "Plan"), should consider the fiduciary standards of ERISA in the
context of the Plan's particular circumstances before authorizing an investment
in the Series B Capital Securities. Accordingly, among other factors, the
fiduciary should consider whether the investment would satisfy the prudence and
diversification requirements of ERISA and would be consistent with the documents
and instruments governing the Plan.
Section 406 of ERISA and Section 4975 of the Code prohibit Plans, as well as
individual retirement accounts and Keogh plans subject to Section 4975 of the
Code (also "Plans"), from engaging in certain transactions involving "plan
assets" with persons who are "parties in interest" under ERISA or "disqualified
persons" under the Code ("Parties in Interest") with respect to such Plan. A
violation of these "prohibited transaction" rules may result in the imposition
of an excise tax under Section 4975 of the Code on the Parties in Interest and
may cause the Plan fiduciary to incur certain liabilities under ERISA, unless
exemptive relief is available under an applicable statutory or administrative
exemption. Employee benefit plans that are governmental plans (as defined in
Section 3(32) of ERISA), certain church plans (as defined in Section 3(33) of
ERISA) and foreign plans (as described in Section 4(b)(4) of ERISA) are not
subject to the requirements of ERISA or Section 4975 of the Code.
Under a regulation (the "Plan Assets Regulation") issued by the U.S.
Department of Labor (the "DOL"), the assets of the Series B Issuer would be
deemed to be "plan assets" of a Plan for purposes of ERISA and Section 4975 of
the Code if "plan assets" of the Plan were used to acquire an equity interest in
the Series B Issuer and no exceptions were applicable under the Plan Assets
Regulation. An "equity interest" is defined under the Plan Assets Regulation as
any interest in an entity other than an instrument which is treated as
indebtedness under applicable local law and which has no substantial equity
features. A beneficial interest in a trust is specifically defined under the
Plan Assets Regulation as an "equity interest."
Pursuant to an exception contained in the Plan Assets Regulation, the assets
of the Series B Issuer would not be deemed to be "plan assets" of investing
Plans if, immediately after the most recent acquisition of any equity interest
in the Series B Issuer, less than 25% of the value of the Series B Capital
Securities were held by Plans, other employee benefit plans not subject to ERISA
or Section 4975 of the Code (such as governmental, church and foreign plans),
and entities holding assets deemed to be "plan assets" of any Plan
(collectively, "Benefit Plan Investors"), or if the Series B Capital Securities
were "publicly-offered securities" for purposes of the Plan Assets Regulation.
No assurance can be given that the value of the Series B Capital Securities held
by Benefit Plan Investors will be less than 25% of the total value of such
Series B Capital Securities at the completion of the initial offering or
thereafter, and no monitoring or other measures will be taken with respect to
the satisfaction of the conditions to this exception. In addition, the Series B
Capital Securities are not expected to be considered to be "publicly-offered
securities" under the Plan Asset Regulation. Consequently, if Plans or investors
using assets of Plans purchase Series B Capital Securities, the Series B
Issuer's assets could be deemed to be "plan assets" of such Plans for purposes
of the fiduciary responsibility provisions of ERISA and the Code. Under ERISA,
any person who exercises any authority or control respecting the management or
disposition of the assets of a Plan is considered to be a fiduciary of such
Plan. Therefore, the investing fiduciary of each Plan that purchases or holds
the Series B Capital Securities should consider whether there has been a proper
delegation of fiduciary authority under ERISA.
Certain transactions involving the Series B Issuer could be deemed to
constitute direct or indirect prohibited transactions under ERISA and Section
4975 of the Code with respect to a Plan if the Series B Capital Securities were
acquired with "plan assets" of such Plan and assets of the Series B Issuer were
deemed to be "plan assets" of Plans investing in the Series B Issuer. The DOL
has issued five prohibited transaction class exemptions ("PTCEs") that may
provide exemptive relief for certain direct or indirect prohibited transactions
that may arise from the purchase or holding of the Series B Capital Securities
if
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assets of the Series B Issuer were deemed to be "plan assets" of Plans investing
in the Series B Issuer as described above. Those class exemptions are PTCE 96-23
(for certain transactions determined by in-house asset managers), PTCE 95-60
(for certain transactions involving insurance company general accounts), PTCE
91-38 (for certain transactions involving bank collective investment funds),
PTCE 90-1 (for certain transactions involving insurance company pooled separate
accounts), and PTCE 84-14 (for certain transactions determined by independent
qualified professional asset managers).
Because the assets of the Series B Issuer may be deemed to be "planned
assets" of Plans investing in the Series B Issuer for purposes of applying ERISA
and Section 4975 of the Code, the Series B Capital Securities may not be
purchased or held by any Plan or any entity whose underlying assets include
"plan assets" by reason of any Plan's investment in the entity (a "Plan Asset
Entity") or any person investing "plan assets" of any Plan, unless such
purchaser or holder is eligible for the exemptive relief available under PTCE
96-23, 95-60, 91-38, 90-1 or 84-14, or another applicable exemption. Any
purchaser or holder of the Series B Capital Securities or any interest therein
will be deemed to have represented by its purchase and holding thereof that it
either (a) is not a Plan or a Plan Asset Entity and is not purchasing such
securities on behalf of or with "plan assets" of any Plan or (b) is eligible for
the exemptive relief available under PTCE 96-23, 95-60, 91-38, 90-1 or 84-14 or
another applicable exemption with respect to such purchase or holding.
Due to the complexity of these rules and the penalties that may be imposed
upon persons involved in non-exempt prohibited transactions, it is particularly
important that fiduciaries or other persons considering purchasing the Series B
Capital Securities on behalf of or with "plan assets" of any Plan consult with
their counsel.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, USF&G and
the Series B Issuer have agreed that the Series B Issuer will sell to Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Goldman, Sachs & Co., Bear, Stearns
& Co. Inc., Lehman Brothers Inc. and Smith Barney Inc. (collectively, the
"Underwriters"), and each of the Underwriters has severally agreed to purchase
from the Series B Issuer the respective number of Series B Capital Securities
set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF SERIES B
UNDERWRITER CAPITAL SECURITIES
- -------------------------------------------------------------------------- ------------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................................... 20,000
Goldman, Sachs & Co. ..................................................... 20,000
Bear, Stearns & Co. Inc. ................................................. 20,000
Lehman Brothers Inc. ..................................................... 20,000
Smith Barney Inc. ........................................................ 20,000
-------
Total........................................................... 100,000
-------
-------
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all such Series B Capital
Securities offered hereby, if any are taken.
The Underwriters propose to offer the Series B Capital Securities in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus Supplement, and in part to certain securities
dealers at such price less a concession of $6.00 per Series B Capital Security.
The Underwriters may allow, and such dealers may reallow, a concession not in
excess of $3.00 per Series B Capital Security to certain brokers and dealers.
After the Series B Capital Securities are released for sale to the public, the
offering price and other selling terms may from time to time be varied by the
Underwriters.
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<PAGE>
In view of the fact that the proceeds from the sale of the Series B Capital
Securities will be used to purchase the Series B Debentures issued by USF&G, the
Underwriting Agreement provides that USF&G will pay as Underwriters'
Compensation for the Underwriters arranging the investment therein of such
proceeds an amount of $10.00 per Series B Capital Security for the accounts of
the several Underwriters.
The Series B Capital Securities are a new issue of securities with no
established trading market. USF&G and the Series B Issuer have been advised by
the Underwriters that they intend to make a market in the Series B Capital
Securities. However, the Underwriters are not obligated to do so and such market
making may be interrupted or discontinued without notice.
USF&G and the Series B Issuer have agreed, during the period beginning from
the date of the Underwriting Agreement and continuing to and including the
earlier of (i) the date on which the distribution of the Series B Capital
Securities ceases, as determined by the Underwriters, or (ii) 30 days after the
closing date, not to offer, sell, contract to sell or otherwise dispose of any
Series B Capital Securities, any other beneficial interest in the Series B
Issuer, any Series B Debentures or any Series B Capital Securities or any other
securities of the Series B Issuer, USF&G or any similar trust which are
substantially similar to the Series B Capital Securities, including any
guarantee of the Series B Capital Securities, or the Series B Debentures, or any
securities convertible into or exchangeable for, or that represent the right to
receive, Series B Capital Securities, preferred stock or such substantially
similar securities of either an Issuer or USF&G or any similar trust, without
the prior written consent of the Underwriters.
USF&G and the Series B Issuer have agreed to indemnify the Underwriters
against certain liabilities including liabilities under the Securities Act.
Certain of the Underwriters or their affiliates have provided from time to
time, and expect to continue to provide in the future, investment banking
services to USF&G and its affiliates, for which such Underwriters or their
affiliates have received or will receive customary fees and commissions. Robert
J. Hurst, a Director of USF&G, is a limited partner of The Goldman Sachs Group,
L.P. and a managing director of Goldman, Sachs & Co.
S-24
<PAGE>
USF&G CAPITAL I
USF&G CAPITAL II
PREFERRED SECURITIES
GUARANTEED TO THE EXTENT SUCH ISSUER HAS FUNDS AS SET FORTH HEREIN BY
USF&G CORPORATION
----------------
USF&G Capital I and USF&G Capital II, each a statutory business trust
created under the laws of the State of Delaware (each, the "Issuer," and
collectively, the "Issuers") may severally offer, from time to time, their
respective cumulative quarterly income preferred securities (the "Preferred
Securities") representing preferred undivided beneficial interests in the assets
of each Issuer. USF&G Corporation, a Maryland corporation ("USF&G"), will be the
owner of beneficial interests represented by common securities (the "Common
Securities") of each Issuer. The Bank of New York is the Property Trustee of
each Issuer. The payment of periodic cash distributions ("Distributions") with
respect to the Preferred Securities of each Issuer and payments on liquidation
or redemption with respect to such Preferred Securities, in each case out of
funds held by such Issuer, are each guaranteed by USF&G to the extent described
herein (each, a "Guarantee"). The obligations of USF&G under each Guarantee will
be subordinate and junior in right of payment to all liabilities of USF&G except
any liabilities that may be made PARI PASSU or subordinate to the Guarantee
expressly by their terms. Concurrently with the issuance by each Issuer of its
Preferred Securities, such Issuer will invest the proceeds thereof in a
corresponding series of USF&G's deferrable interest subordinated debentures (the
"Debentures") with terms corresponding to that Issuer's Preferred Securities.
The Debentures will be unsecured and subordinate and junior in right of payment
to Senior Indebtedness (as defined herein) of USF&G. The Debentures will be the
sole assets of each Issuer and the interest on the Debentures will be the only
revenue of each Issuer. Upon the occurrence of certain events as will be
described in the accompanying Prospectus Supplement, USF&G may redeem the
Debentures or may terminate each Issuer and cause the Debentures to be
distributed to the holders of the Preferred Securities in liquidation of their
interest in such Issuer. See "Description of the Preferred
Securities--Liquidation Distribution Upon Termination."
The Preferred Securities may be offered in amounts, at prices and on terms
to be determined at the time of offering, provided, however, that the aggregate
initial public offering price of all Preferred Securities issued pursuant to the
Registration Statement of which this Prospectus forms a part shall not exceed
$210,000,000. Certain specific terms of a particular Issuer's Preferred
Securities in respect of which this Prospectus is being delivered will be set
forth in an accompanying Prospectus Supplement (the "Prospectus Supplement"),
including where applicable and to the extent not set forth herein, the identity
of that Issuer, the specific title, the aggregate amount, the Distribution rate,
the maturity, the stated liquidation preference, redemption provisions, other
rights, the initial public offering price, and any other special terms, as well
as any planned listing on a securities exchange, of such Preferred Securities.
The Preferred Securities may be sold in a public offering to or through
underwriters or dealers designated from time to time. See "Plan of
Distribution." The names of any such underwriters or dealers involved in the
sale of the Preferred Securities of any particular Issuer in respect of which
this Prospectus is being delivered, the number of Preferred Securities to be
purchased by any such underwriters or dealers and any applicable commissions or
discounts will be set forth in the Prospectus Supplement. The net proceeds to
each Issuer will also be set forth in the Prospectus Supplement.
SEE "RISK FACTORS" AT PAGE 5 HEREOF FOR CERTAIN INFORMATION RELEVANT TO AN
INVESTMENT IN THE PREFERRED SECURITIES, INCLUDING THE PERIOD AND CIRCUMSTANCES
DURING WHICH PAYMENT OF DISTRIBUTIONS ON THE PREFERRED SECURITIES AND RELATED
DEBENTURES MAY BE DEFERRED AND THE RELATED FEDERAL INCOME TAX CONSEQUENCES.
---------------------
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 PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is February 21, 1996.
<PAGE>
AVAILABLE INFORMATION
USF&G Corporation, a Maryland corporation ("USF&G"), is subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and, in accordance therewith, files reports, proxy
statements and other information with the Securities and Exchange Commission
(the "Commission"). Such reports, proxy statements and other information can be
inspected and copied at the public reference room of the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C., and the public reference
facilities in the Commission's Regional Offices located at Seven World Trade
Center, 7th Floor, New York, New York and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois. Copies of such material can be obtained
at prescribed rates by writing to the Securities and Exchange Commission, Public
Reference Section, Washington, D.C. 20549. Such material can also be inspected
at the New York Stock Exchange.
USF&G and each of USF&G Capital I and USF&G Capital II, each a statutory
business trust formed under the laws of the State of Delaware, have filed with
the Commission a Registration Statement on Form S-3 (herein, together with all
amendments and exhibits, referred to as the "Registration Statement") under the
Securities Act of 1933, as amended (the "Act"). This Prospectus does not contain
all of the information set forth in the Registration Statement as certain parts
are omitted in accordance with the rules and regulations of the Commission. For
further information, reference is hereby made to the Registration Statement.
No separate financial statements of any Issuer have been included herein.
USF&G and the Issuers do not consider that such financial statements would be
material to holders of Preferred Securities offered hereby because each Issuer
is a newly formed special purpose entity, has no operating history or
independent operations and is not engaged in, and does not propose to engage in,
any activity other than as set forth below. See "The Issuers."
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by USF&G with the Commission are incorporated
by reference in this Prospectus:
1. USF&G's annual report on Form 10-K/A for the year ended December 31,
1994.
2. USF&G's quarterly report on Form 10-Q/A for the quarter ended March 31,
1995, and quarterly reports on Form 10-Q for the quarters ended June 30, 1995
and September 30, 1995.
3. USF&G's current reports on Form 8-K dated January 12, 1995, January 20,
1995, January 25, 1995 and October 12, 1995.
All other documents filed by USF&G pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and the accompanying
Prospectus Supplement and prior to the termination of the offering of the
Preferred Securities shall be deemed to be incorporated by reference in this
Prospectus and the accompanying Prospectus Supplement, and to be a part hereof
from the respective dates of the filing of such documents.
Any statement contained herein or in a document all or a portion of which is
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus and the accompanying
Prospectus Supplement to the extent that a statement contained herein or in any
other subsequently filed document 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 Prospectus or the accompanying Prospectus
Supplement.
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USF&G hereby undertakes to provide without charge to each person, including
any beneficial owner, to whom a copy of this Prospectus has been delivered, on
the written or oral request of any such person, a copy of any or all the
documents referred to above which have been or may be incorporated in this
Prospectus by reference, other than exhibits to such documents which are not
specifically incorporated by reference in the information that this Prospectus
incorporates. Requests should be directed to USF&G Corporation, 100 Light
Street, Baltimore, Maryland 21202, Attention: John F. Hoffen, Jr., Secretary
(telephone: 410-547-3310).
THE ISSUERS
Each of USF&G Capital I and USF&G Capital II is a statutory business trust
created under Delaware law pursuant to (i) a trust agreement executed by USF&G,
as sponsor for the Issuer, and the trustees of such Issuer and (ii) the filing
of a certificate of trust with the Delaware Secretary of State. Each trust
agreement will be amended and restated in its entirety (each, as so amended and
restated, the "Trust Agreement") substantially in the form filed as an exhibit
to the Registration Statement of which this Prospectus forms a part. Each Trust
Agreement will be qualified as an indenture under the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act"). Each Issuer exists for the
exclusive purposes of (i) issuing and selling its Preferred Securities and
Common Securities, (ii) using the proceeds from the sale of such Preferred
Securities and Common Securities to acquire a corresponding series of Debentures
issued by USF&G, (iii) maintaining its status as a grantor trust for United
States federal income tax purposes and (iv) engaging in those activities
necessary or incidental thereto. All of the Common Securities will be owned by
USF&G. The Common Securities will rank PARI PASSU, and payments will be made
thereon PRO RATA, with the Preferred Securities, except that upon the occurrence
and continuance of a Debenture Event of Default (as defined herein) under the
Trust Agreement, the rights of the holders of the Common Securities to payment
in respect of Distributions and payments upon liquidation, redemption or other
acquisition of Common Securities will be subordinated to the rights of the
holders of the Preferred Securities. USF&G will acquire Common Securities in an
aggregate liquidation amount equal to 3% of the total capital of each Issuer.
Each Issuer has a term of approximately 50 years, but may terminate earlier as
provided in the applicable Trust Agreement. Each Issuer's business and affairs
are conducted by the following trustees, each appointed by USF&G as holder of
the Common Securities: The Bank of New York (the "Property Trustee"), The Bank
of New York (Delaware) (the "Delaware Trustee") and three individual trustees
(the "Administrative Trustees") who are employees or officers of or affiliated
with USF&G. The Property Trustee, the Delaware Trustee and the Administrative
Trustees are collectively referred to herein as the "Issuer Trustees." The
holder of the Common Securities, or the holders of a majority in liquidation
preference of the Preferred Securities if a Debenture Event of Default has
occurred and is continuing, will be entitled to appoint, remove or replace the
Property Trustee and the Delaware Trustee. In no event will the holders of the
Preferred Securities have the right to vote to appoint, remove or replace the
Administrative Trustees, which voting rights are vested exclusively in the
holder of the Common Securities. The duties and obligations of each of the
Issuer Trustees are governed by the applicable Trust Agreement. USF&G will pay
all fees and expenses related to the Issuers and the offering of the Preferred
Securities and will pay, directly or indirectly, all ongoing costs, expenses and
liabilities of the Issuers. The principal place of business of each Issuer is
c/o USF&G Corporation, 100 Light Street, Baltimore, Maryland 21202, and its
telephone number is (410) 547-3000. The office of the Delaware Trustee in the
State of Delaware is White Clay Center, Route 273, Newark, Delaware 19711.
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USF&G CORPORATION
USF&G is a holding company whose principal subsidiaries are engaged in
writing property/casualty insurance and life insurance/annuities.
Property/casualty insurance is written primarily by United States Fidelity and
Guaranty Company, founded in 1896, and is sold through independent agents
supported by the Company's 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,
founded in 1959, and are sold throughout the United States through independent
agents, managing general agents and regional and national securities brokerage
firms. USF&G is incorporated in Maryland, and its principal executive office is
located at 100 Light Street, Baltimore, Maryland 21202, and its telephone number
is (410) 547-3000.
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RISK FACTORS
PROSPECTIVE PURCHASERS OF THE PREFERRED SECURITIES SHOULD CONSIDER THE
FOLLOWING MATTERS IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS
PROSPECTUS AND IN THE PROSPECTUS SUPPLEMENT.
SUBORDINATED OBLIGATIONS UNDER THE DEBENTURES AND THE GUARANTEE
USF&G's obligations under the Debentures are subordinate and junior in right
of payment to all Senior Indebtedness of USF&G. At December 31, 1995, the Senior
Indebtedness of USF&G aggregated approximately $825 million, including $234
million of Intercompany Indebtedness (as defined herein). In addition, as of
such date, USF&G's subsidiaries had total liabilities of approximately $11.5
billion (including estimated liabilities for insurance claims) to which the
Debentures will be effectively subordinated. The obligations of USF&G under each
Guarantee issued by USF&G for the benefit of the holders of the Preferred
Securities are subordinate and junior in right of payment to all liabilities of
USF&G, except those made PARI PASSU or subordinate to the Guarantee expressly by
their terms. There are no terms in the Preferred Securities, the Debentures or
the Guarantee that limit USF&G's ability to incur additional indebtedness,
including indebtedness that ranks senior to the Debentures and the Guarantee.
See "Description of the Guarantee-Status of the Guarantee" and "Description of
the Debentures-- Subordination."
The ability of the Issuers to pay amounts due on the Preferred Securities is
entirely dependent upon USF&G making payments on the Debentures as and when
required.
OPTION TO EXTEND INTEREST PAYMENT PERIOD; TAX CONSEQUENCES
To the extent and as further provided in the Prospectus Supplement, so long
as an Event of Default under the Indenture has not occurred and is continuing,
USF&G will have the right at any time and from time to time to extend interest
payment periods on a series of Debentures for up to 60 months (an "Extension
Period"), and, as a consequence, quarterly Distributions on the Preferred
Securities will be deferred by an Issuer during any Extension Period.
Distributions in arrears after the quarterly payment date therefor will
accumulate additional distributions thereon at the rate specified in the
Prospectus Supplement (to the extent permitted by law). In the event USF&G
exercises its right to extend the interest payment periods on the Debentures,
USF&G will not, and will not permit any subsidiary of USF&G to, declare or pay
any dividend or distribution on, or redeem, purchase, acquire, or make a
liquidation or guarantee payment (other than payments under a Guarantee) with
respect to, any shares of USF&G's capital stock or any other security of USF&G
(including other Debentures) ranking PARI PASSU with or junior in interest to
the Debentures, except in each case for (i) payments with securities junior in
interest to the Debentures, (ii) payments made on any series of Debentures upon
the stated maturity of such Debentures, or (iii) payments of accrued dividends
(and cash in lieu of fractional shares) upon conversion into common stock of any
convertible preferred stock of USF&G of any series now or hereinafter
outstanding, in accordance with the terms of such stock. As a result, this
covenant requires that an interest payment on one series of Debentures may be
extended only if the interest periods on all series of Debentures are likewise
extended. Prior to the termination of any Extension Period, USF&G may further
extend the interest payment period, provided that such Extension Period,
together with all such previous and further extensions thereof, may not exceed
60 months or extend beyond the maturity or redemption date of the Debentures.
Upon the termination of any Extension Period and the payment of all amounts then
due, USF&G may elect a new Extension Period subject to the above requirements.
See "Description of the Preferred Securities--Distributions."
Should an Extension Period occur, an Issuer will continue to accrue income
for United States federal income tax purposes which will be allocated, but not
distributed, to holders of the Preferred Securities. As a result, a holder of
Preferred Securities will include such interest in gross income for United
States federal income tax purposes in advance of the receipt of cash, and will
not receive from the corresponding Issuer
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the cash related to such income if the holder disposes of the Preferred
Securities prior to the record date for the payment of Distributions. See
"United States Taxation--Potential Extension of Interest Payment Period and
Original Issue Discount."
Should USF&G determine to exercise its right to defer payments of interest
by extending the interest payment period on the Debentures, the market price of
the Preferred Securities is likely to be affected. A holder that disposes of its
Preferred Securities during an Extension Period, therefore, might not receive
the same return on its investment as a holder that continues to hold its
Preferred Securities. In addition, as a result of the existence of USF&G's right
to defer interest payments, the market price of the Preferred Securities (which
represent an undivided beneficial interest in the Debentures) may be more
volatile than other securities on which original issue discount accrues that do
not have such rights.
PROPOSED TAX LEGISLATION
On December 7, 1995, the U.S. Department of Treasury announced a Balanced
Budget Proposal which contained a proposed amendment to the Internal Revenue
Code of 1986, as amended, (the "Code") which would classify a debt instrument
issued on or after December 7, 1995 as equity if the instrument had a term
exceeding 20 years and was not classified as indebtedness on the issuer's
balance sheet. A text of proposed statutory language published on January 23,
1996 provides that the Code amendment would not apply to issues filed with the
Commission before December 7, 1995. . Because the Registration Statement for the
Preferred Securities was filed with the Commission on December29, 1995, the
provisions of the proposed amendment would be applicable to the Preferred
Securities if such provisions are enacted with the currently proposed effective
date. Accordingly, if Debentures having a term in excess of 20 years are issued
and the proposal is subsequently enacted in its current form, the Debentures
would be subject to redemption, or the related Issuer could be liquidated by
distributing the Debentures to the holders of Preferred Securities, at the
option of USF&G as described under "Description of the Preferred
Securities--Redemption and "Description of Preferred Securities--Liquidation
Distribution Upon Termination." USF&G cannot predict whether this proposed
amendment may be modified or other legislation may be enacted which might affect
the character of the Debentures or otherwise affect the Preferred Securities
offered hereby.
SPECIAL EVENT REDEMPTION OR DISTRIBUTION
Upon the occurrence and continuation of a Special Event as further described
in "Description of the Preferred Securities--Redemption"and the Prospectus
Supplement, USF&G will have the right to redeem the Debentures affected by such
Special Event and therefore cause a mandatory redemption of the corresponding
Preferred Securities. In addition, upon the occurrence of such a Special Event
or in the event the Issuer is not or will not be taxed as a grantor trust for
United States federal income tax purposes, but a Tax Event has not occurred (a
"Grantor Trust Event") as further described in the Prospectus Supplement, USF&G
will have the right to terminate the corresponding Issuer and cause the
Debentures to be distributed to the holders of the Preferred Securities in
liquidation of such holders' interests in the Issuer. See "Description of the
Preferred Securities--Redemption," "Description of Preferred Securities--
Liquidation Distribution Upon Termination." Certain proposed tax legislation, if
enacted subsequent to the issuance of the Preferred Securities, could give rise
to USF&G's redemption or termination rights. See "Proposed Tax Legislation,"
"United States Taxation--Receipt of Debentures Upon Liquidation of an Issuer"
and "United States Taxation--Sale or Other Disposition of the Preferred
Securities."
RIGHTS UNDER THE GUARANTEE
Each Guarantee will be qualified as an indenture under the Trust Indenture
Act. The Bank of New York will act as the Guarantee Trustee under each Guarantee
for the purposes of compliance with the Trust Indenture Act. The Guarantee
Trustee will hold each Guarantee for the benefit of the holders of the
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related Preferred Securities and The Bank of New York will also be the trustee
for the Debentures and the Property Trustee.
Each Guarantee guarantees on a subordinated basis to the holders of the
related Preferred Securities the payment (but not the collection) of (i) any
accrued and unpaid Distributions required to be paid on such Preferred
Securities, to the extent the Issuer has funds on hand available therefor, (ii)
the Redemption Price, including all accrued and unpaid Distributions to the date
of redemption, with respect to such Preferred Securities called for redemption
by the Issuer, to the extent the Issuer has funds on hand available therefor,
and (iii) upon a voluntary or involuntary termination, winding-up or liquidation
of the Issuer (unless the Debentures are distributed to holders of such
Preferred Securities), (a) the aggregate liquidation preference of the Preferred
Security plus all accrued and unpaid Distributions on the Preferred Securities
to the date of payment, to the extent the Issuer has funds on hand available to
make such payment or, if different, (b) the amount of assets of the Issuer
remaining available for distribution to holders of the Preferred Securities in
liquidation of the Issuer. The holders of not less than a majority in aggregate
liquidation preference of the Preferred Securities have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Guarantee Trustee or to direct the exercise of any trust or power conferred
upon the Guarantee Trustee under a Guarantee. Any holder of the related
Preferred Securities may institute a legal proceeding directly against USF&G to
enforce its rights under the Guarantee without first instituting a legal
proceeding against the Guarantee Trustee, the Issuer or any other person or
entity. If USF&G were to default on its obligations under the Debentures, the
Issuer would lack available funds for the payment of Distributions or amounts
payable on redemption of the Preferred Securities or otherwise, and in such
event holders of the Preferred Securities would not be able to rely upon a
Guarantee for payment of such amounts. Instead, holders of the Preferred
Securities would be required either (i) to rely on the enforcement of their
rights against USF&G pursuant to the terms of the Debentures or (ii) to enforce,
to the fullest extent permitted by law, the Property Trustee's rights against
USF&G. See "Description of the Guarantee--Status of the Guarantee" and
"Description of the Debentures--Subordination." The Trust Agreement for each
series of Preferred Securities provides that each holder of Preferred Securities
by acceptance thereof agrees to the provisions of the Guarantee and the
Indenture.
LIMITED VOTING RIGHTS
Holders of Preferred Securities will have limited voting rights and, except
upon the occurrence of an Event of Default under the Trust Agreement as a result
of an event of default under the Indenture (a "Debenture Event of Default"),
will not be entitled to vote to appoint, remove or replace the Property Trustee
or the Delaware Trustee, which voting rights are vested exclusively in the
holder of Common Securities unless and until a Debenture Event of Default has
occurred and is continuing. In no event will the holders of the Preferred
Securities have the right to vote to appoint, remove or replace the
Administrative Trustees, which voting rights are vested exclusively in the
holder of the Common Securities. See "Description of the Preferred
Securities--Events of Default; Notice."
TRADING CHARACTERISTICS OF PREFERRED SECURITIES
Application has been made to list the Preferred Securities on the New York
Stock Exchange. The Preferred Securities are expected to trade at a price that
takes into account the value, if any, of accrued and unpaid Distributions; thus,
purchasers will not pay and sellers will not receive any accrued and unpaid
interest with respect to their undivided beneficial interests in Debentures
owned through the Preferred Securities that is not included in the trading price
of the Preferred Securities. However, interest on the Debentures will be
included in the gross income of U.S. holders of Preferred Securities as it
accrues, rather than when it is paid. See "United States Taxation--Income from
Preferred Securities" and "United States Taxation--Potential Extension of
Interest Payment Period and Original Issue Discount." The trading price of the
Preferred Securities is likely to be sensitive to the level of interest rates
generally. If interest rates
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<PAGE>
rise in general, the trading price of the Preferred Securities may decline to
reflect the additional yield requirements of the purchasers. Conversely, a
decline in interest rates may increase the trading price of the Preferred
Securities, although any increase may be moderated by other factors, including
by USF&G's ability to redeem the Debentures on the dates set forth in the
Prospectus Supplement. In addition, because payment of Distributions on the
Preferred Securities is dependent upon USF&G's ability to pay interest on the
Debentures, negative developments affecting USF&G may adversely affect the
trading price of the Preferred Securities.
USE OF PROCEEDS
Each of USF&G Capital I and USF&G Capital II will use all proceeds received
from the sale of its Preferred Securities to purchase Debentures of USF&G.
Unless otherwise set forth in the applicable Prospectus Supplement, the net
proceeds from the sale of the Debentures are expected to be used by USF&G for
general corporate purposes, including redemption, in whole or in part, of
outstanding shares of USF&G's $4.10 Series A Convertible Exchangeable Preferred
Stock.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
On a consolidated basis, the ratios of earnings to fixed charges and
earnings to combined fixed charges and preferred stock dividends include the
earnings and fixed charges of USF&G and its subsidiaries for the periods
indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
NINE MONTHS ENDED -----------------------------------
SEPTEMBER 30, 1995 1994 1993 1992
--------------------- --------- ----- -----
<S> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges................................. 3.9 .8 (A) 2.5 1.4
Ratio of Earnings to Combined Fixed Charges and Preferred Stock
Dividends........................................................ 2.7 .6 (A) 1.5 .8
<CAPTION>
1991 1990
----- -----
<S> <C> <C>
Ratio of Earnings to Fixed Charges................................. (B) (C)
Ratio of Earnings to Combined Fixed Charges and Preferred Stock
Dividends........................................................ (B) (C)
</TABLE>
- ------------------------
(A) USF&G's earnings were inadequate to cover fixed charges and combined fixed
charges and preferred stock dividends by $43 million and $89 million,
respectively, for the year ended December 31, 1994. In 1994, USF&G recorded
facilities exit costs of $183,000,000 relating to its plan to consolidate
its Baltimore headquarters facilities by relocating all USF&G personnel
currently located at its office building in downtown Baltimore to other
facilities owned by USF&G. The ratio of consolidated earnings before
facilities exit costs to fixed charges was 3.1 in 1994, and the ratio of
consolidated earnings before facilities exit costs to combined fixed charges
and preferred stock dividends was 1.8 in 1994.
(B) USF&G had a net loss for the year ended December 31, 1991 and earnings were
inadequate to cover fixed charges and combined fixed charges and preferred
stock dividends by $150 million and $187 million, respectively, for the year
ended December 31, 1991.
(C) USF&G had a net loss for the year ended December 31, 1990 and earnings were
inadequate to cover fixed charges and combined fixed charges and preferred
stock dividends by $436 million and $453 million, respectively, for the year
ended December 31, 1990.
The ratios were determined by dividing consolidated earnings by total fixed
charges and total fixed charges and preferred stock dividends, respectively.
Earnings consist of income from continuing operations before considering income
taxes, the cumulative effect of accounting changes, and fixed charges. Fixed
charges consist of interest and that portion of rentals which is deemed to be an
appropriate interest factor. All amounts have been restated to reflect the
mergers with Discover Re Managers, Inc. and Victoria Financial Corporation, both
of which were consummated in the second quarter of 1995 and were accounted for
as pooling-of-interests.
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DESCRIPTION OF THE PREFERRED SECURITIES
Pursuant to the terms of each Trust Agreement, the Issuers will issue the
Preferred Securities and the Common Securities (together, the "Trust
Securities"). The Preferred Securities of a particular issue will represent
undivided beneficial interests in the assets of the related Issuer and the
holders thereof will be entitled to a preference in certain circumstances with
respect to Distributions and amounts payable on redemption or liquidation over
the Common Securities of such Issuer, as well as other benefits as described in
the corresponding Trust Agreement. This summary of certain provisions of each
Trust Agreement does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all the provisions of each Trust
Agreement, including the definitions therein of certain terms, and the Trust
Indenture Act. The form of the Trust Agreement has been filed as an exhibit to
the Registration Statement of which this Prospectus forms a part and each Trust
Agreement has been qualified as an indenture under the Trust Indenture Act. Each
of the Issuers is a legally separate entity and the assets of one are not
available to satisfy the obligations of the other. See "United Stated Taxation"
for a description of certain tax matters relating to the Preferred Securities,
including a discussion of certain proposed legislation.
GENERAL
The Preferred Securities of an Issuer will rank PARI PASSU, and payments
will be made thereon PRO RATA, with the Common Securities of that Issuer except
as described under "--Subordination of Common Securities." The Debentures will
be held in trust by the Property Trustee for the benefit of the holders of the
related Trust Securities. Each Guarantee Agreement executed by USF&G for the
benefit of the holders of each Issuer's Preferred Securities is a guarantee on a
subordinated basis with respect to the related Preferred Securities but only
guarantees payment of Distributions or amounts payable on redemption or
liquidation of such Preferred Securities when the related Issuer has funds on
hand available to make such payments, and does not otherwise guarantee such
payments. See "Description of the Guarantee." USF&G has, through the Guarantee,
the Trust Agreement, the Debentures, the Indenture and the Expense Agreement (as
defined herein), taken together, fully and unconditionally guaranteed all of the
Issuer's obligations under the Preferred Securities. No single document standing
alone or operating in conjunction with fewer than all of the other documents
constitutes such guarantee. It is only the combined operation of these documents
that has the effect of providing a full, irrevocable and unconditional guarantee
of the Issuer's obligations under the Preferred Securities. See "Relationship
Among the Preferred Securities, the Debentures and the Guarantee."
DISTRIBUTIONS
Each Issuer's Preferred Securities represent undivided beneficial interests
in the assets of such Issuer. The Distributions on each Preferred Security will
be payable at a rate specified in the Prospectus Supplement for such Preferred
Securities. The amount of Distributions payable for any period will be computed
on the basis of a 360-day year of twelve 30-day months.
Distributions on the Preferred Securities will be cumulative, will accrue
from the date of original issuance and will be payable quarterly in arrears on
the dates in each year specified in the Prospectus Supplement (each date on
which Distributions are payable in accordance with the foregoing, a
"Distribution Date") (except as otherwise described below). In the event that
any date on which Distributions are otherwise payable on the Preferred
Securities is not a Business Day, payment of the Distribution payable on such
date will be made on the next succeeding day that is a Business Day (and without
any interest or other payment in respect to any such delay) except that, if such
Business Day is in the next succeeding calendar year, payment of such
Distribution shall be made on the immediately preceding Business Day, in each
case with the same force and effect as if made on the Distribution Date. A
"Business Day" shall mean any day other than a Saturday or a Sunday or a day on
which banking institutions in The City of New York
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<PAGE>
are authorized or required by law or executive order to remain closed or a day
on which the principal corporate trust office of the Property Trustee or the
Debenture Trustee is closed for business.
It is anticipated that the income of each Issuer available for distribution
to its holders of Preferred Securities will be limited to payments under the
corresponding series of Debentures in which the Issuer will invest the proceeds
from the issuance and sale of its Preferred Securities and its Common
Securities. See "Description of the Debentures." If USF&G does not make interest
payments on such Debentures, the Property Trustee will not have funds available
to pay Distributions on the corresponding Preferred Securities.
The Prospectus Supplement will include a description of the terms and
circumstances under which USF&G will have the right under the Indenture to
extend, from time to time, the interest payment period on each series of the
Debentures for up to 60 months, provided that such Extension Period may not
extend beyond the maturity or redemption date of the Debentures. Quarterly
Distributions on the corresponding Preferred Securities also will be deferred
(but will continue to accumulate) during any such Extension Period.
Distributions on the Preferred Securities will be payable to the holders
thereof as they appear on the securities register of such Issuer on the relevant
record dates, which, as long as the Preferred Securities remain in
book-entry-only form, will be one Business Day prior to the relevant
Distribution Date. Subject to any applicable laws and regulations and the
provisions of the applicable Trust Agreement, each such payment will be made as
described under "--Book-Entry-Only Issuance--The Depository Trust Company." In
the event any Preferred Securities are not in book-entry-only form, the relevant
record date for such Preferred Securities shall be the date 15 days prior to the
relevant Distribution Date.
REDEMPTION
Upon the repayment of any series of Debentures, whether at maturity or upon
earlier redemption as provided in the Indenture, the proceeds from such
repayment will be applied by the Property Trustee to redeem the corresponding
Preferred Securities, upon not less than 20 nor more than 90 days' notice, at a
redemption price (the "Redemption Price") equal to the liquidation preference of
such Preferred Securities plus all accrued and unpaid Distributions to the
redemption date (the "Redemption Date"), plus the amount of premium, if any,
paid by USF&G upon the concurrent redemption of a Like Amount (as defined in the
Trust Agreement) of Debentures. The redemption terms of a particular series of
Debentures and the related Preferred Securities will be set forth in the
accompanying Prospectus Supplement, and will include a right to redeem the
Preferred Securities upon the occurrence of certain Tax Events and Investment
Company Events (in either case, "Special Events") and exchange Debentures for
the Preferred Securities upon the occurrence of Special Events or Grantor Trust
Events, each as defined in the Trust Agreement and further described in the
Prospectus Supplement.
REDEMPTION PROCEDURES
Preferred Securities redeemed on each Redemption Date shall be redeemed at
the Redemption Price with the proceeds from the contemporaneous redemption of
the corresponding series of Debentures. Redemptions of the Preferred Securities
shall be made and the Redemption Price shall be payable on each Redemption Date
only to the extent that the Issuer has funds on hand available for the payment
of such Redemption Price. See also "--Subordination of Common Securities."
If an Issuer gives a notice of redemption in respect of its Preferred
Securities, then, by 11:00 a.m., New York City time, on the Redemption Date, to
the extent funds are available and so long as the Preferred Securities are in
book-entry-only form, the Property Trustee will irrevocably deposit with The
Depository Trust Company ("DTC") funds sufficient to pay the applicable
Redemption Price for the Preferred Securities being redeemed and will give DTC
irrevocable instructions and authority to pay the Redemption Price to the
beneficial owners of such Preferred Securities. See "--Book Entry-Only
Issuance--The
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<PAGE>
Depository Trust Company." If such Preferred Securities are no longer in
book-entry-only form, the Issuer, to the extent funds are available, will
irrevocably deposit with the paying agent for such Preferred Securities funds
sufficient to pay the applicable Redemption Price for the Preferred Securities
being redeemed and will give such paying agent irrevocable instructions and
authority to pay the Redemption Price to the holders thereof upon surrender of
their certificates evidencing such Preferred Securities. Notwithstanding the
foregoing, Distributions payable on or prior to the Redemption Date for any
Preferred Securities called for redemption shall be payable to the holders of
such Preferred Securities on the relevant record dates for the related
Distribution Dates. If notice of redemption shall have been given and funds
deposited as required, then upon the date of such deposit, all rights of the
holders of such Preferred Securities so called for redemption will cease, except
the right of the holders of such Preferred Securities to receive the Redemption
Price, but without interest on such Redemption Price, and such Preferred
Securities will cease to be outstanding. In the event that any date fixed for
redemption of Preferred Securities is not a Business Day, then payment of the
Redemption Price payable on such date will be made on the next succeeding day
which is a Business Day (and without any interest or other payment in respect of
any such delay), except that, if such Business Day falls in the next calendar
year, such payment will be made on the immediately preceding Business Day. In
the event that payment of the Redemption Price in respect of Preferred
Securities called for redemption is improperly withheld or refused and not paid
either by the Issuer or by USF&G pursuant to the Guarantee as described under
"Description of the Guarantee," Distributions on such Preferred Securities will
continue to accrue at the then applicable rate, from the original Redemption
Date to the date of payment, in which case the actual payment date will be
considered the date fixed for redemption for purposes of calculating the
Redemption Price.
Subject to applicable law, USF&G or its subsidiaries may at any time and
from time to time purchase outstanding Preferred Securities by tender, in the
open market or by private agreement.
Payment of the Redemption Price on the Preferred Securities and any
distribution of Debentures to holders of Preferred Securities shall be made to
the applicable recordholders thereof as they appear on the register for such
Preferred Securities on the relevant record date, which shall be one Business
Day prior to the relevant Redemption Date or liquidation date, as applicable;
provided, however, that in the event that any Preferred Securities are not in
book entry only form, the relevant record date for such Preferred Securities
shall be the date 15 days prior to the Redemption Date or liquidation date, as
applicable.
If less than all the securities issued by an Issuer are to be redeemed on a
Redemption Date, then the aggregate amount of such securities to be redeemed
shall be allocated 3% to the Common Securities of such Issuer and 97% to its
Preferred Securities. The particular Preferred Securities to be redeemed shall
be selected not more than 90 days prior to the Redemption Date by the Property
Trustee from the outstanding Preferred Securities not previously called for
redemption, by such method as the Property Trustee shall deem fair and
appropriate and which may provide for the selection for redemption of portions
(equal to $25 or integral multiples thereof) of the liquidation preference of
Preferred Securities of a denomination larger than $25. The Property Trustee
shall promptly notify the securities registrar in writing of the Preferred
Securities selected for redemption and, in the case of any Preferred Securities
selected for partial redemption, the liquidation preference thereof to be
redeemed. For all purposes of each Trust Agreement, unless the context otherwise
requires, all provisions relating to the redemption of Preferred Securities
shall relate, in the case of any Preferred Securities redeemed or to be redeemed
only in part, to the portion of the aggregate liquidation preference of
Preferred Securities which has been or is to be redeemed.
SUBORDINATION OF COMMON SECURITIES
Payment of Distributions on, and the Redemption Price of, each Issuer's
Trust Securities, as applicable, shall be made PRO RATA based on the liquidation
preference of such Trust Securities; PROVIDED, HOWEVER, that if on any
Distribution Date or Redemption Date a Debenture Event of Default (as defined
above)
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shall have occurred and be continuing, no payment of any Distribution on, or
Redemption Price of, any of the Issuer's Common Securities, and no other payment
on account of the redemption, liquidation or other acquisition of such Common
Securities, shall be made unless payment in full in cash of all accumulated and
unpaid Distributions on all of the Issuer's outstanding Preferred Securities for
all Distribution periods terminating on or prior thereto, or in the case of
payment of the Redemption Price the full amount of such Redemption Price on all
of the Issuer's outstanding Preferred Securities shall have been made or
provided for, and all funds available to the Property Trustee shall first be
applied to the payment in full in cash of all Distributions on, or Redemption
Price of, the Issuer's Preferred Securities then due and payable.
In the case of any Event of Default under any Trust Agreement resulting from
a "Debenture Event of Default", the holder of such Issuer's Common Securities
will be deemed to have waived any right to act with respect to such Event of
Default under such Trust Agreement until the effect of such Event of Default
with respect to such Preferred Securities has been cured, waived or otherwise
eliminated. Until any such Event of Default under the applicable Trust Agreement
with respect to the Preferred Securities has been so cured, waived or otherwise
eliminated, the Property Trustee shall act solely on behalf of the holders of
such Preferred Securities and not on behalf of the holder of the Issuer's Common
Securities, and only the holders of such Preferred Securities will have the
right to direct the Property Trustee to act on their behalf.
LIQUIDATION DISTRIBUTION UPON TERMINATION
Pursuant to each Trust Agreement, each Issuer shall be terminated by USF&G
on the first to occur of: (i) December 31, 2045, the expiration of the term of
such Issuer; (ii) the bankruptcy, dissolution or liquidation of USF&G; (iii) the
distribution of a Like Amount (as defined in the Trust Agreement) of the
corresponding series of Debentures to the holders of its Preferred Securities
and Common Securities following the occurrence of a Special Event or a Grantor
Trust Event; (iv) the redemption of all of the Issuer's Preferred Securities;
(v) an order for the dissolution of the Issuer shall have been entered by a
court of competent jurisdiction; and (vi) as otherwise described in the
Prospectus Supplement.
If an early termination occurs as described in clause (ii), (iii), (v) or
(vi) above, the Issuer shall be liquidated by the Issuer Trustees as
expeditiously as the Issuer Trustees determine to be possible by distributing,
after satisfaction of liabilities to creditors of such Issuer as provided by
applicable law, to the holders of such Preferred Securities and Common
Securities a Like Amount of the corresponding series of Debentures, unless such
distribution is determined by the Property Trustee not to be practical, in which
event such holders will be entitled to receive out of the assets of the Issuer
available for distribution to holders, after satisfaction of liabilities to
creditors of such Issuer as provided by applicable law, an amount equal to, in
the case of holders of Preferred Securities, the aggregate of the stated
liquidation preference of the Preferred Security plus accrued and unpaid
Distributions thereon to the date of payment (such amount being the "Liquidation
Distribution"). If such Liquidation Distribution can be paid only in part
because such Issuer has insufficient assets available to pay in full the
aggregate Liquidation Distribution, then the amounts payable by such Issuer on
its Preferred Securities shall be paid on a PRO RATA basis. The holder(s) of
such Issuer's Common Securities will be entitled to receive distributions upon
any such liquidation PRO RATA with the holders of its Preferred Securities,
except that if a Debenture Event of Default has occurred and is continuing, the
Preferred Securities shall have a priority over the Common Securities.
EVENTS OF DEFAULT; NOTICE
Any one of the following events constitutes an "Event of Default" under each
Trust Agreement with respect to the Preferred Securities issued thereunder
(whatever the reason for such Event of Default and whether it shall be voluntary
or involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(i) the occurrence of a Debenture Event of Default; or
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(ii) default by the Property Trustee in the payment of any Distribution when
it becomes due and payable, and continuation of such default for a period of 30
days (subject to the deferral of any due date in the case of an Extension
Period); or
(iii) default by the Property Trustee in the payment of any Redemption Price
of any Preferred Security or Common Security when it becomes due and payable; or
(iv) default in the performance, or breach, in any material respect, of any
covenant or warranty of the Issuer Trustees in such Trust Agreement (other than
a covenant or warranty a default in the performance of which or the breach of
which is dealt with in clause (ii) or (iii) above), and continuation of such
default or breach for a period of 90 days after there has been given, by
registered or certified mail, to the defaulting Issuer Trustee or Trustees by
the holders of at least 25% in aggregate liquidation preference of the
outstanding Preferred Securities of the applicable Issuer, a written notice
specifying such default or breach and requiring it to be remedied and stating
that such notice is a "Notice of Default" under such Trust Agreement; or
(v) the occurrence of certain events of bankruptcy or insolvency with
respect to the Property Trustee and the failure by USF&G to appoint a successor
Property Trustee within 60 days thereof.
Within five Business Days after the occurrence of any Event of Default
actually known to the Property Trustee, the Property Trustee shall transmit
notice of such Event of Default to the holders of such Issuer's Preferred
Securities, the Administrative Trustees and USF&G, as Depositor, unless such
default shall have been cured or waived. USF&G, as Depositor, and the
Administrative Trustees are required to file annually with the Property Trustee
a certificate as to whether or not they are in compliance with all the
conditions and covenants applicable to them under the Trust Agreement.
In the event payment of any Distribution is not made when otherwise due and
payable because of the exercise of any right the Issuer may have to defer
payment of such Distribution as provided in the Trust Agreement or otherwise,
then such failure to make payment shall not be deemed an Event of Default as
long as such payment is deferred in accordance with the Trust Agreement or
otherwise.
Under each Trust Agreement, if the Property Trustee fails to enforce its
rights under the Trust Agreement or the Indenture, any holder of Preferred
Securities issued thereunder may, to the fullest extent permitted by law and
subject to the terms of the Trust Agreement and the Indenture, after such
holder's written request to the Property Trustee to enforce such rights,
institute a legal proceeding directly against any person to enforce the Property
Trustee's rights under the Trust Agreement and the Indenture without first
instituting a legal proceeding against the Property Trustee or any other person.
In addition, to the fullest extent permitted by law, to the extent that any
action under the Indenture is entitled to be taken by the holders of a series of
Debentures and such holders fail to take such action, holders of the related
Preferred Securities may take such action. The foregoing is in addition to and
not in limitation of any direct rights provided to the holders of any series of
related Preferred Securities under the terms of the Indenture, including the
right, without any notice or other demand on the Property Trustee, to institute
suit for the enforcement of any payment of the principal of and any premium and
interest on Debentures relating to such Preferred Securities having a principal
amount equal to the aggregate liquidation preference of such Preferred
Securities, all as provided in the Indenture.
If a Debenture Event of Default has occurred and is continuing, the
Preferred Securities shall have a preference over the Common Securities with
respect to Distributions as described above. See
"--Liquidation Distribution Upon Termination" and "--Subordination of Common
Securities."
REMOVAL OF ISSUER TRUSTEES
Unless a Debenture Event of Default shall have occurred and be continuing,
any Issuer Trustee may be removed at any time by the holder of the Common
Securities. If a Debenture Event of Default has occurred and is continuing, the
Property Trustee and the Delaware Trustee may be removed at such time
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by the holders of a majority in liquidation preference of the outstanding
Preferred Securities. In no event will the holders of the Preferred Securities
have the right to vote to appoint, remove or replace the Administrative
Trustees, which voting rights are vested exclusively in the holder of the Common
Securities. No resignation or removal of an Issuer Trustee and no appointment of
a successor trustee shall be effective until the acceptance of appointment by
the successor trustee in accordance with the provisions of the Trust Agreement.
CO-TRUSTEES AND SEPARATE PROPERTY TRUSTEE
Unless a Debenture Event of Default under a Trust Agreement shall have
occurred and be continuing, at any time or times, for the purpose of meeting the
legal requirements of the Trust Indenture Act or of any jurisdiction in which
any part of the Trust Property (as defined in each Trust Agreement) may at the
time be located, the holder of the applicable Common Securities and the
Administrative Trustees shall have the power to appoint one or more persons
either to act as co-trustee, jointly with the Property Trustee, of all or any
part of such Trust Property, or to act as separate trustee of any such property,
in either case with such powers as may be provided in the instrument of
appointment, and to vest in such person or persons in such capacity any
property, title, right or power deemed necessary or desirable, subject to the
provisions of the Trust Agreement. In case a Debenture Event of Default under
the Indenture has occurred and is continuing, the Property Trustee alone shall
have power to make such appointment.
MERGER OR CONSOLIDATION OF ISSUER TRUSTEES
Any corporation or other entity into which the Property Trustee or the
Delaware Trustee may be merged or converted or with which it may be
consolidated, or any corporation or other entity resulting from any merger,
conversion or consolidation to which such Trustee shall be a party, or any
corporation or other entity succeeding to all or substantially all the corporate
trust business of such Trustee, shall be the successor of such Trustee under the
Trust Agreements, PROVIDED such corporation or other entity shall be otherwise
qualified and eligible.
VOTING RIGHTS; AMENDMENT OF TRUST AGREEMENT
Except as provided below and under "Description of the Guarantee--Amendments
and Assignment" and as otherwise required by law and each Trust Agreement, the
holders of the Preferred Securities will have no voting rights.
A Trust Agreement may be amended from time to time by the Depositor and the
Issuer Trustees, without the consent of the holders of the Preferred Securities,
(i) to cure any ambiguities, defects or inconsistencies or (ii) to make any
other change that does not adversely affect in any material respect the
interests of any holder of Preferred Securities. A Trust Agreement may be
amended by the Depositor and the Issuer Trustees in any other respect, with the
consent of the holders of a majority in liquidation preference of Preferred
Securities, except to change the amount, timing, currency or method of payment
of any Distribution or Liquidation Distribution, restrict the right of a holder
of a Preferred Security to institute suit for enforcement of any Distribution or
Liquidation Distribution, change the purpose of the Issuer, authorize the
issuance of any additional interests in the Issuer, change the Redemption Price
or affect the limited liability of any holder of Preferred Securities.
Notwithstanding the foregoing, no amendment may be made without receipt by the
Issuer of an opinion of counsel experienced in such matters to the effect that
such amendment will not affect the Issuer's status as a grantor trust for United
States federal income tax purposes or its exemption from regulation as an
investment company under the Investment Company Act of 1940, as amended.
So long as any Debentures are held by the Property Trustee, the Issuer
Trustees shall not (i) direct the time, method and place of conducting any
proceeding for any remedy available to the Debenture Trustee
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(as hereinafter defined), or executing any trust or power conferred on the
Property Trustee with respect to such Debentures, (ii) waive any past default
that is waiveable under Section 513 of the Indenture, (iii) exercise any right
to rescind or annul a declaration that the principal of all the Debentures shall
be due and payable or (iv) consent to any amendment, modification or termination
of the Indenture or the Debentures, where such consent shall be required,
without, in each case, obtaining the prior approval of the holders of a majority
in aggregate liquidation preference of all outstanding Preferred Securities;
PROVIDED, HOWEVER, that where a consent or approval under the Indenture would
require the consent or approval of each holder of Debentures affected thereby,
no such consent or approval shall be given without the prior consent of each
holder of the corresponding Preferred Securities. The Issuer Trustees shall not
revoke any action previously authorized or approved by a vote of the holders of
Preferred Securities except by subsequent vote of the holders of the Preferred
Securities. The Property Trustee shall notify all holders of the Preferred
Securities of any notice of default with respect to the Debentures. In addition
to obtaining the foregoing approvals of the holders of the Preferred Securities,
prior to taking any of the foregoing actions, the Issuer Trustees shall obtain
an opinion of counsel experienced in such matters to the effect that the Issuer
will not be classified as a corporation or partnership for United States federal
income tax purposes on account of such action and will continue to be classified
as a grantor trust for United States federal income tax purposes.
Any required approval of holders of Preferred Securities may be given at a
meeting of holders of Preferred Securities convened for such purpose or pursuant
to written consent. The Property Trustee will cause a notice of any meeting at
which holders of Preferred Securities are entitled to vote, or of any matter
upon which action by written consent of such holders is to be taken, to be given
to each holder of record of Preferred Securities in the manner set forth in each
Trust Agreement.
No vote or consent of the holders of Preferred Securities will be required
for each Issuer to redeem and cancel its Preferred Securities in accordance with
the applicable Trust Agreement.
Notwithstanding that holders of Preferred Securities are entitled to vote or
consent under any of the circumstances described above, any of the Preferred
Securities that are owned by USF&G, the Issuer Trustees or any affiliate of
USF&G or any Issuer Trustee, shall, for purposes of such vote or consent, be
treated as if they were not outstanding.
PAYMENT AND PAYING AGENCY
Payments in respect of the Preferred Securities shall be made to DTC, which
shall credit the relevant accounts at DTC on the applicable Distribution Dates
or, if any Issuer's Preferred Securities are not held by DTC, such payments
shall be made by check mailed to the address of the holder entitled thereto as
such address shall appear on the Securities Register. The paying agent (the
"Paying Agent") shall initially be The Bank of New York and any co-paying agent
chosen by The Bank of New York, and acceptable to the Administrative Trustees
and USF&G. The Bank of New York shall be permitted to resign as Paying Agent
upon 30 days' written notice to the Administrative Trustees, the Property
Trustee and USF&G, as Depositor. In the event that The Bank of New York shall no
longer be the Paying Agent, the Administrative Trustees shall appoint a
successor to act as Paying Agent (which shall be a bank or trust company and
have a combined capital and surplus of U.S.$50,000,000).
BOOK-ENTRY-ONLY ISSUANCE--THE DEPOSITORY TRUST COMPANY
DTC will act as securities depositary for all of the Preferred Securities.
The Preferred Securities will be issued only as fully-registered securities
registered in the name of Cede & Co. (DTC's nominee). One or more
fully-registered global certificates will be issued for the Preferred Securities
of each Issuer, representing in the aggregate the total number of such Issuer's
Preferred Securities, and will be deposited with DTC.
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DTC is a limited purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants ("Participants") deposit with DTC. DTC
also facilitates the settlement among Participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct Participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations ("Direct Participants"). DTC is
owned by a number of its Direct Participants and by the New York Stock Exchange,
Inc. (the "New York Stock Exchange"), the American Stock Exchange, Inc. and the
National Association of Securities Dealers, Inc. Access to the DTC system is
also available to others such as securities brokers and dealers, banks and trust
companies that clear through or maintain custodial relationships with Direct
Participants, either directly or indirectly ("Indirect Participants"). The rules
applicable to DTC and its Participants are on file with the Commission.
Purchases of Preferred Securities within the DTC system must be made by or
through Direct Participants, which will receive a credit for the Preferred
Securities on DTC's records. The ownership interest of each actual purchaser of
each Preferred Security ("Beneficial Owner") is in turn to be recorded on the
Direct and Indirect Participants' records. Beneficial Owners will not receive
written confirmation from DTC of their purchases, but Beneficial Owners are
expected to receive written confirmations providing details of the transactions,
as well as periodic statements of their holdings, from the Direct or Indirect
Participants through which the Beneficial Owners purchased Preferred Securities.
Transfers of ownership interests in the Preferred Securities are to be
accomplished by entries made on the books of Participants acting on behalf of
Beneficial Owners. Beneficial Owners will not receive certificates representing
their ownership interests in Preferred Securities, except in the event that use
of the book-entry system for the Preferred Securities of such Issuer is
discontinued.
DTC has no knowledge of the actual Beneficial Owners of the Preferred
Securities; DTC's records reflect only the identity of the Direct Participants
to whose accounts such Preferred Securities are credited, which may or may not
be the Beneficial Owners. The Participants will remain responsible for keeping
account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Redemption notices shall be sent to Cede & Co. as the registered holder of
the Preferred Securities. If less than all of an Issuer's Preferred Securities
are being redeemed, DTC's practice is to determine by lot the amount of the
interest of each Direct Participant to be redeemed.
Although voting with respect to the Preferred Securities is limited to the
holders of record of the Preferred Securities, in those instances in which a
vote is required, neither DTC nor Cede & Co. will itself consent or vote with
respect to Preferred Securities. Under its usual procedures, DTC would mail an
omnibus proxy (the "Omnibus Proxy") to the Property Trustee as soon as possible
after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or
voting rights to those Direct Participants to whose accounts such Preferred
Securities are credited on the record date (identified in a listing attached to
the Omnibus Proxy).
Distribution payments on the Preferred Securities will be made by the
Property Trustee to DTC. DTC's practice is to credit Direct Participants'
accounts on the relevant payment date in accordance with their respective
holdings shown on DTC's records unless DTC has reason to believe that it will
not receive payments on such payment date. Payments by Participants to
Beneficial Owners will be governed by
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standing instructions and customary practices and will be the responsibility of
such Participant and not of DTC, the Property Trustee, the Issuer of the
relevant Preferred Securities or USF&G, subject to any statutory or regulatory
requirements as may be in effect from time to time. Payment of Distributions to
DTC is the responsibility of the Property Trustee, disbursement of such payments
to Direct Participants is the responsibility of DTC, and disbursements of such
payments to the Beneficial Owners is the responsibility of Direct and Indirect
Participants.
DTC may discontinue providing its services as securities depositary with
respect to any of the Preferred Securities at any time by giving reasonable
notice to the Property Trustee and USF&G. In the event that a successor
securities depositary is not obtained, definitive Preferred Security
certificates representing such Preferred Securities are required to be printed
and delivered. The Depositor, at its option, may decide to discontinue use of
the system of book-entry transfers through DTC (or a successor depositary).
After a Debenture Event of Default, the holders of a majority in liquidation
preference of Preferred Securities may determine to discontinue the system of
book-entry transfers through DTC. In any such event, definitive certificates for
such Issuer's Preferred Securities will be printed and delivered.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the Issuers and USF&G believe to be
accurate, but the Issuers and USF&G assume no responsibility for the accuracy
thereof. Neither the Issuers nor USF&G has any responsibility for the
performance by DTC or its Participants of their respective obligations as
described herein or under the rules and procedures governing their respective
operations.
REGISTRAR AND TRANSFER AGENT
The Bank of New York will initially act as registrar and transfer agent for
the Preferred Securities.
Registration of transfers of Preferred Securities will be effected without
charge by or on behalf of each Issuer, but upon payment of any tax or other
governmental charges that may be imposed in connection with any transfer or
exchange.
The Issuers will not be required to register or cause to be registered the
transfer of their Preferred Securities after such Preferred Securities have been
called for redemption.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The Property Trustee is the sole Trustee under the Trust Agreements for
purposes of the Trust Indenture Act and shall have and be subject to all of the
duties and responsibilities specified with respect to an indenture trustee under
that Act. The Property Trustee, other than during the occurrence and continuance
of an Event of Default, undertakes to perform only such duties as are
specifically set forth in the Trust Agreements and, after an Event of Default,
must exercise the same degree of care and skill as a prudent person would
exercise or use in the conduct of his or her own affairs. Subject to this
provision, the Property Trustee is under no obligation to exercise any of the
powers vested in it by the Trust Agreement at the request of any holder of
Preferred Securities unless it is offered reasonable indemnity against the
costs, expenses and liabilities that might be incurred thereby. If no Event of
Default has occurred and is continuing and the Property Trustee is required to
decide between alternative courses of action, construe ambiguous provisions in a
Trust Agreement or is unsure of the application of any provision of a Trust
Agreement, and the matter is not one on which holders of Preferred Securities
are entitled under the Trust Agreement to vote, then the Property Trustee shall
take such action as is directed by USF&G as Depositor and, if not so directed,
may take such action as it deems advisable and in the best interests of the
holders of the Preferred Securities and the Common Securities and will have no
liability except for its own bad faith, negligence or willful misconduct.
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MISCELLANEOUS
The Administrative Trustees are authorized and directed to conduct the
affairs of and to operate the Issuers in such a way that no Issuer will be
deemed to be an "investment company" required to be registered under the
Investment Company Act of 1940, as amended, as a corporation or a partnership
for United States federal income tax purposes and so that the Issuers will
qualify as grantor trusts for United States federal income tax purposes and the
Debentures will be treated as indebtedness of USF&G for United States federal
income tax purposes. In this connection, USF&G and the Administrative Trustees
are authorized to take any action, not inconsistent with applicable law, the
applicable certificate of trust of the Issuer or the applicable Trust Agreement,
that USF&G and the Administrative Trustees determine in their discretion to be
necessary or desirable for such purposes, as long as such action does not
materially adversely affect the interests of the holders of the related
Preferred Securities.
Holders of the Preferred Securities have no preemptive or similar rights.
Neither Issuer may borrow money or issue debt or mortgages or pledge any of
its assets.
Except as otherwise provided in the Trust Agreements, any action requiring
the consent or vote of the Trustees shall be approved by not less than a
majority of the Administrative Trustees.
GOVERNING LAW
The Trust Agreements will be governed by and construed in accordance with
the laws of the State of Delaware.
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DESCRIPTION OF THE GUARANTEE
Each Guarantee will be executed and delivered by USF&G concurrently with the
issuance by each Issuer of its Preferred Securities for the benefit of the
holders from time to time of such Preferred Securities. The Bank of New York
will act as indenture trustee ("Guarantee Trustee") under each Guarantee for the
purposes of compliance with the Trust Indenture Act. This summary of certain
provisions of the Guarantees does not purport to be complete and is subject to,
and qualified in its entirety by reference to, all of the provisions of each
Guarantee Agreement, including the definitions therein of certain terms, and the
Trust Indenture Act. The form of the Guarantee has been filed as an exhibit to
the Registration Statement of which this Prospectus forms a part. Reference in
this summary to Preferred Securities means that Issuer's Preferred Securities to
which a Guarantee relates. The Guarantee Trustee will hold each Guarantee for
the benefit of the holders of the related Issuer's Preferred Securities.
GENERAL
USF&G will irrevocably and unconditionally agree on a subordinated basis, to
the extent set forth in each Guarantee, to pay in full, to the holders of the
related Issuer's Preferred Securities, the Guarantee Payments (as defined below)
(except to the extent paid by or on behalf of such Issuer), as and when due,
regardless of any defense, right of set-off or counterclaim which such Issuer
may have or assert. The following payments, to the extent not paid by an Issuer
(the "Guarantee Payments"), will be subject to the applicable Guarantee (without
duplication): (i) any accrued and unpaid Distributions required to be paid on
such Preferred Securities, to the extent that such Issuer has funds on hand
available therefor, (ii) the Redemption Price, with respect to any Preferred
Securities called for redemption, including all accrued and unpaid Distributions
to the date of Redemption, and any applicable premium in connection therewith,
to the extent that such Issuer has funds on hand available therefor, or (iii)
upon a voluntary or involuntary termination, winding up or liquidation of such
Issuer (unless the corresponding series of Debentures are distributed to holders
of such Preferred Securities), (a) the aggregate liquidation preference of the
Preferred Security plus all accrued and unpaid distributions on the Preferred
Securities to the date of payment, to the extent the Issuer has funds on hand
available to make such a payment or, if different, (b) the amount of assets of
such Issuer remaining available for distribution to holders of Preferred
Securities in liquidation of the Issuer. USF&G's obligation to make a Guarantee
Payment may be satisfied by direct payment of the required amounts by USF&G to
the holders of the applicable Preferred Securities or by causing the Issuer to
pay such amounts to such holders. While the assets of USF&G will not be
available for making Distributions on any Preferred Securities if the Issuer
does not have funds on hand available therefor as described above, USF&G has
agreed to pay the expenses of the related Issuer. Accordingly, each Guarantee,
together with the backup undertakings, consisting of USF&G's obligations under
such agreement to pay expenses and related covenants contained in each Trust
Agreement and USF&G's obligations under the Indenture and the Debentures,
provide for USF&G's full and unconditional guarantee of the Preferred
Securities.
No single document standing alone or operating in conjunction with fewer
than all of the other documents constitutes such guarantee. It is only the
combined operation of the Debentures, Indenture, the Trust Agreement, the
Guarantee Agreement and the Expense Agreement that has the effect of providing a
full, irrevocable and unconditional guarantee of the Issuer's obligations under
the Preferred Securities. See "Relationship Among the Preferred Securities, the
Debentures and the Guarantee."
STATUS OF THE GUARANTEE
Each Guarantee will constitute an unsecured obligation of USF&G and will
rank subordinate and junior in right of payment to all liabilities of USF&G
except those made PARI PASSU or subordinate to such Guarantee expressly by their
terms. The Trust Agreements provide that each holder of Preferred Securities by
acceptance thereof agrees to the subordination provisions and other terms of the
related Guarantee.
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Each Guarantee will rank PARI PASSU with all other such Guarantees issued by
USF&G. Each Guarantee will constitute a guarantee of payment and not of
collection (i.e., the guaranteed party may institute a legal proceeding directly
against USF&G to enforce its rights under the Guarantee without first
instituting a legal proceeding against any other person or entity). Each
Guarantee will be held for the benefit of the holders of the related Preferred
Securities. Each Guarantee will not be discharged except by payment of the
Guarantee Payments in full to the extent not paid by the Issuer or upon
distribution to the holders of the Preferred Securities of the corresponding
series of Debentures.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes which do not materially adversely affect
the rights of holders of the related Preferred Securities (in which case no
consent will be required), no Guarantee may be amended without the prior
approval of the holders of not less than a majority of the aggregate liquidation
preference of such outstanding Preferred Securities not held by USF&G or an
affiliate thereof. The manner of obtaining any such approval will be as set
forth under "Description of the Preferred Securities--Voting Rights; Amendment
of Trust Agreement." All guarantees and agreements contained in each Guarantee
shall bind the successors, assigns, receivers, trustees and representatives of
USF&G and shall inure to the benefit of the holders of the related Preferred
Securities then outstanding.
EVENTS OF DEFAULT
An event of default under each Guarantee will occur upon the failure of
USF&G to perform any of its payment or other obligations thereunder; provided,
however, that except with respect to a default in payment of any Guarantee
Payments, USF&G shall have received notice of such default and shall not have
cured such default within 60 days after receipt of such notice. The holders of
not less than a majority in aggregate liquidation preference of the related
Preferred Securities not held by USF&G or an affiliate thereof have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Guarantee Trustee in respect of such Guarantee or to direct the
exercise of any trust or power conferred upon the Guarantee Trustee under such
Guarantee.
Any holder of the related Preferred Securities may institute a legal
proceeding directly against USF&G to enforce its rights under such Guarantee
without first instituting a legal proceeding against the Issuer, the Guarantee
Trustee or any other person or entity.
USF&G, as guarantor, is required to file annually with the Guarantee Trustee
a certificate as to whether or not USF&G is in compliance with all the
conditions and covenants applicable to it under the Guarantee.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, other than during the occurrence and continuance of a
default by USF&G in performance of any Guarantee, undertakes to perform only
such duties as are specifically set forth in each Guarantee and, after an event
of default with respect to any Guarantee, must exercise the same degree of care
and skill as a prudent person would exercise or use in the conduct of his or her
own affairs. Subject to this provision, the Guarantee Trustee is under no
obligation to exercise any of the powers vested in it by any Guarantee at the
request of any holder of any Preferred Securities unless it is offered
reasonable indemnity against the costs, expenses and liabilities that might be
incurred thereby.
TERMINATION OF THE GUARANTEE
Each Guarantee will terminate and be of no further force and effect upon
full payment of the Redemption Price of the related Preferred Securities, upon
full payment of the amounts payable upon liquidation of the related Issuer or
upon distribution of Debentures to the holders of the related Preferred
Securities. Each Guarantee will continue to be effective or will be reinstated,
as the case may be, if at any
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time any holder of the related Preferred Securities must restore payment of any
sums paid under such Preferred Securities or such Guarantee.
GOVERNING LAW
Each Guarantee will be governed by and construed in accordance with the laws
of the State of New York.
THE EXPENSE AGREEMENT
Pursuant to the Expense Agreement entered into by USF&G under the Trust
Agreement (the "Expense Agreement"), USF&G will irrevocably and unconditionally
guarantee to each person or entity to whom the Issuer becomes indebted or
liable, the full payment of any indebtedness, expenses or liabilities of the
Issuer, other than obligations of the Issuer to pay to the holders of any Common
Securities being held by USF&G or Preferred Securities being issued pursuant to
the Prospectus Supplement the amounts due such holders pursuant to the terms of
such Trust Securities.
DESCRIPTION OF THE DEBENTURES
This summary of certain terms and provisions of the Debentures and the
Indenture does not purport to be complete and is subject to, and is qualified in
its entirety by reference to the Debentures and the Indenture, the forms of
which are filed as exhibits to the Registration Statement of which this
Prospectus forms a part.
GENERAL
Concurrently with the issuance of each Issuer's Preferred Securities, the
Issuer will invest the proceeds thereof and the consideration paid by USF&G for
the Common Securities in a corresponding series of Debentures issued by USF&G to
the Issuer. The Debentures will be unsecured subordinated obligations of USF&G
issued under the Indenture. Each series of Debentures will be in the principal
amount equal to the aggregate stated liquidation preference of the related
Preferred Securities plus USF&G's concurrent investment in the Common Securities
and will rank PARI PASSU with all other series of Debentures. USF&G may also
decide to sell the Debentures directly to the public. In such event, the terms
of such offering will be described in a Prospectus Supplement related to such
offering. The Indenture does not limit the aggregate principal amount of
Debentures which may be issued thereunder. The Bank of New York will act as
trustee (the "Debenture Trustee") under the Indenture.
INTEREST
The Debentures will bear interest at the rate per annum specified in the
Prospectus Supplement. Such interest will be payable quarterly in arrears on the
dates in each year specified in the Prospectus Supplement (each, an "Interest
Payment Date") to the person in whose name each Debenture is registered, subject
to certain exceptions, at the close of business on the Business Day next
preceding such Interest Payment Date. It is anticipated that the Debentures will
be held in the name of the Property Trustee in trust for the benefit of the
holders of the Preferred Securities and the Common Securities.
The amount of interest payable for any period will be computed on the basis
of a 360-day year of twelve 30-day months. In the event that any date on which
interest is payable on the Debentures is not a Business Day, then payment of the
interest payable on such date will be made on the next succeeding day which is a
Business Day (and without any interest or other payment in respect of any such
delay), except that, if such Business Day is in the next succeeding calendar
year, such payment shall be made on the immediately preceding Business Day, in
each case with the same force and effect as if made on the date such payment was
originally payable.
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The Prospectus Supplement will include a description of the terms and
circumstances under which USF&G will have the right under the Indenture to
extend, from time to time, the interest payment period on each series of the
Debentures for up to 60 months, provided that the Extension Period may not
extend beyond the maturity or redemption date of the Debentures. Quarterly
Distributions on the corresponding Preferred Securities also will be deferred
(but will continue to accumulate) during any such Extension Period.
SUBORDINATION
The Indenture provides that all payments by USF&G in respect of the
Debentures shall be subordinate to the prior payment in full of all amounts due
and payable in respect of all Senior Indebtedness. The term "Senior
Indebtedness" means the principal of, and premium, if any, and interest, if any
(including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to USF&G to the extent that such claim
for post-petition interest is allowed in such proceeding) payable on, and fees,
expenses, reimbursement obligations, indemnity obligations and other amounts due
on or in connection with, any Indebtedness incurred, assumed or guaranteed by
USF&G, whether on or prior to the date of the Indenture or thereafter incurred,
assumed or guaranteed, unless, in the instrument creating or evidencing the same
or pursuant to which the same is outstanding, it is provided that such
obligations are not superior in right of payment to the Debentures or to other
Indebtedness which is PARI PASSU with the Debentures. Without limiting the
generality of the foregoing, Senior Indebtedness shall include (i) USF&G's Zero
Coupon Convertible Subordinated Notes due 2009 and (ii) Intercompany
Indebtedness.
"Indebtedness" means (without duplication and without regard to any portion
of principal amount that has not accrued and to any interest component thereof
(whether accrued or imputed) that is not due and payable) with respect to any
Person, whether recourse is to all or a portion of the assets of such Person and
whether or not contingent, (i) every obligation of such Person for money
borrowed, (ii) every obligation of such Person evidenced by bonds, debentures,
notes or other similar instruments, including obligations incurred in connection
with the acquisition of property, assets or businesses, (iii) every
reimbursement obligation of such Person with respect to letters of credit,
bankers' acceptances or similar facilities issued for the account of such
Person, (iv) every obligation of such Person issued or assumed as the deferred
purchase price of property or services (but excluding trade accounts payable or
accrued liabilities arising in the ordinary course of business), (v) every
capital lease obligation of such Person, (vi) every Hedging Obligation (as
defined in the Indenture), (vii) every obligation of others secured by a lien on
any asset of such Person, whether or not such obligation is assumed by such
Person, (viii) every obligation of the type referred to in clauses (i) through
(vii) of another Person and all dividends of another Person the payment of
which, in either case, such Person has guaranteed or is responsible or liable,
directly or indirectly, as obligor or otherwise, and (ix) any and all deferrals,
renewals, extensions and refundings of, or amendments, modifications or
supplements to any liability of the kind described in any of the preceding
clauses (i) through (viii).
"Intercompany Indebtedness" means indebtedness of USF&G to any of its
directly or indirectly owned subsidiaries.
Upon any payment or distribution of assets to creditors upon any
liquidation, dissolution, winding up, reorganization, any assignment for the
benefit of creditors, marshaling of assets or any bankruptcy, insolvency, debt
restructuring or other similar proceedings in connection with any insolvency or
bankruptcy proceeding of USF&G, the holders of Senior Indebtedness will be first
entitled to receive payment in full of principal of, and premium, if any, and
interest, if any, on such Senior Indebtedness before the holders of the
Debentures or the Property Trustee on behalf of the holders will be entitled to
receive or retain any payment in respect of principal of, premium, if any, or
interest on the Debentures or distributions of any assets or securities.
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By reason of such subordination, in the event of liquidation or insolvency,
creditors of USF&G who are not holders of Senior Indebtedness or Debentures may
recover less, ratably, than holders of Senior Indebtedness and may recover more,
ratably, than the holders of the Debentures.
In the event of the acceleration of the maturity of any Debenture, the
holders of all Senior Indebtedness outstanding at the time of such acceleration
will first be entitled to receive payment in full of all amounts due thereon
(including any amounts due upon acceleration) before the holders of the
Debentures will be entitled to receive any payment upon the principal of,
premium, if any, or interest, if any, on the Debentures.
No payments on account of principal of, premium, if any, or interest in
respect of the Debentures may be made if there shall have occurred and be
continuing a payment default with respect to any Senior Indebtedness or other
payment resulting in the acceleration of the maturity thereof, or if any
judicial proceeding shall be pending with respect to any such default.
If the Debenture Trustee or the Property Trustee, as holder of the
Debentures, shall have received any payment on account of the principal of,
premium, if any, or interest on the Debentures when such payment is prohibited
and before all amounts due and payable on Senior Indebtedness are paid in full
or payment thereof is provided for and such fact shall have been made known to
the Debenture Trustee or the Property Trustee, then such payment shall be paid
over and delivered forthwith to USF&G.
Nothing in the Indenture shall limit the right of the Debenture Trustee, the
Property Trustee or the holders of the Debentures to pursue any rights or
remedies under applicable law against USF&G; provided that, to the extent and as
described above and in the Indenture, all Senior Indebtedness shall be paid
before holders of the Debentures are entitled to receive any payment from USF&G
of principal of or interest on the Debentures.
Upon the payment in full of all Senior Indebtedness, the holders of the
Debentures shall be subrogated to any rights of the holders of such Senior
Indebtedness to receive payments or distributions of assets of USF&G in respect
of such Senior Indebtedness until the Debentures shall be paid in full.
The Indenture does not limit the aggregate amount of Senior Indebtedness
which USF&G may incur.
CERTAIN COVENANTS OF USF&G
USF&G will covenant, as to each series of Debentures, that it will not, and
will not permit any subsidiary of USF&G to, declare or pay any dividend or
distribution on, or redeem, purchase, acquire, or make a liquidation or
guarantee payment (other than payments under a Guarantee) with respect to, any
shares of USF&G's capital stock or any other security of USF&G (including other
Debentures) ranking PARI PASSU with or junior in interest to the Debentures
(except (x) for payments with securities junior in interest to the Debentures,
(y) for payments made on any series of Debentures upon the stated maturity of
such Debentures or (z) for payments of accrued dividends (and cash in lieu of
fractional shares) upon the conversion into common stock of any convertible
preferred stock of USF&G of any series now or hereafter outstanding, in
accordance with the terms of such stock), if at such time (i) there shall have
occurred any event of which USF&G has actual knowledge that (a) with the giving
of notice or the lapse of time, or both, would constitute an Event of Default
with respect to Debentures of such series and (b) in respect of which USF&G
shall not have taken reasonable steps to cure, (ii) USF&G shall be in default
with respect to its payment of any obligations under the Guarantee relating to
the Preferred Securities of the Issuer to which Debentures of such series have
been issued or (iii) USF&G shall have given notice of its selection of an
Extension Period as provided in the Indenture with respect to Debentures of such
series and such Extension Period, or any extension thereof shall have commenced
and be continuing. USF&G will also covenant, as to each series of Debentures,
(i) to maintain directly or indirectly 100% ownership of the Common Securities
of each Issuer to which Debentures have been issued, provided that certain
successors which are permitted pursuant to the Indenture may succeed to USF&G's
ownership of the Common
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Securities, (ii) not to voluntarily terminate, wind-up or liquidate any Issuer,
except (A) in connection with the distribution of Debentures to the holders of
the Preferred Securities in liquidation of such Issuer, (B) as permitted by the
terms of the Debentures, or (C) in connection with certain mergers,
consolidations or amalgamations permitted by the related Trust Agreement and
(iii) to use its reasonable efforts, consistent with the terms and provisions of
the related Trust Agreement, to cause such Issuer to remain a business trust and
otherwise not to be classified as an association taxable as a corporation for
United States federal income tax purposes.
MODIFICATION OF THE INDENTURE
From time to time, USF&G and the Debenture Trustee may, without the consent
of the holders of any series of Debentures, amend, waive or supplement the
Indenture for specified purposes, including, among other things, curing
ambiguities, defects or inconsistencies, qualifying, or maintaining the
qualification of, the Indenture under the Trust Indenture Act, or making any
other change that does not adversely affect the rights of any holder of
Debentures in any material respect. The Indenture contains provisions permitting
USF&G and the Debenture Trustee, with the consent of the holders of not less
than a majority in principal amount of each outstanding series of Debentures
affected, to modify the Indenture in a manner affecting the rights of the
holders of such series of the Debentures; provided that no such modification
may, without the consent of the holder of each outstanding Debenture so
affected, (i) change the stated maturity of, or any installment of principal of
or interest on, any series of Debentures, or reduce the principal amount
thereof, or reduce the rate or extend the time of payment of interest thereon,
reduce any premium payable upon redemption of the Debentures, or change any
place of payment where, or the coin or currency in which, any Debenture or any
premium or interest is payable, or impair the right to institute suit for the
enforcement of any such payment on or after the stated maturity or redemption
date, or modify the provisions of the Indenture with respect to the
subordination of the Debentures in a manner adverse to the holders of the
Debentures, (ii) reduce the percentage of principal amount of Debentures of any
series, the holders of which are required to consent to any such modification of
the Indenture or (iii) modify certain provisions of the Indenture relating to
the waiver of past defaults or compliance by USF&G with the covenants therein;
and PROVIDED, that no such modification may adversely affect the rights of any
holder of the Preferred Securities and any waiver of any Debenture Event of
Default or of compliance with any covenant under the Indenture shall require the
consent of the holders of at least a majority of the aggregate liquidation
preference amount of the related series of Preferred Securities then
outstanding.
In addition, USF&G and the Debenture Trustee may execute, without the
consent of any holder of Debentures, any supplemental Indenture for the purpose
of creating any new series of Debentures.
EVENTS OF DEFAULT
The Indenture provides that any one or more of the following described
events with respect to a series of Debentures that has occurred and is
continuing constitutes an "Event of Default" with respect to such series of
Debentures:
(a) failure for 30 days to pay any interest on such series of the
Debentures, including any Additional Interest (as defined in the Indenture) in
respect thereof, when due (subject to the deferral of any due date in the case
of an Extension Period); or
(b) failure to pay any principal on such series of Debentures when due
whether at maturity, upon redemption, by declaration or otherwise; or
(c) failure to pay any sinking fund payment when and as due by the terms of
such series of Debentures; or
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(d) failure to observe or perform in any material respect certain other
covenants contained in the Indenture for 90 days after written notice to USF&G
from the Debenture Trustee or the holders of at least 25% in principal amount of
such series of outstanding Debentures or the holders of at least 25% in
liquidation preference of the related Preferred Securities then outstanding; or
(e) certain events in bankruptcy, insolvency or reorganization of USF&G.
The Debenture Trustee or the holders of not less than 25% in aggregate
outstanding principal amount of such series of Debentures may declare the
principal due and payable immediately upon an Event of Default, and should the
Debenture Trustee or such holders of such Debentures fail to make such
declaration the holders of not less than 25% in aggregate liquidation preference
of the related Preferred Securities shall have such right. The holders of a
majority in aggregate outstanding principal amount of such series of Debentures
(or if such declaration has been made by the holders of the Preferred
Securities, the holders of a majority in aggregate liquidation preference of the
related Preferred Securities) may annul such declaration and waive the default
if the default has been cured (or, in certain circumstances, even if the default
has not been cured) and a sum sufficient to pay all matured installments of
interest and principal due otherwise than by acceleration and any Additional
Interest has been deposited with the Debenture Trustee. The holders of a
majority in outstanding principal amount of such series of Debentures (or in the
case of a proceeding instituted by a holder or holders of Preferred Securities,
the holders of a majority in liquidation preference of the related Preferred
Securities then outstanding) have the right to direct the time, method and place
of conducting any proceeding for any remedy available to the Debenture Trustee.
The holders of a majority in outstanding principal amount of the Debentures
affected thereby may, on behalf of the holders of all the Debentures, waive any
past default, except a default in the payment of principal or interest (unless
such default has been cured and a sum sufficient to pay all matured installments
of interest and principal due otherwise than by acceleration has been deposited
with the Debenture Trustee) or a default in respect of a covenant or provision
which under the Indenture cannot be modified or amended without the consent of
the holder of each outstanding Debenture; provided that if any related Preferred
Security remains outstanding, no waiver of a default that adversely affects the
holders of such Preferred Securities shall be effective without the consent of a
majority of the aggregate liquidation preference of the related Preferred
Securities then outstanding. USF&G is required to file annually with the
Debenture Trustee a certificate as to whether or not USF&G is in compliance with
all the conditions and covenants applicable to it under the Indenture.
Notwithstanding any other provision in the Indenture, holders of Debentures
have an absolute and unconditional right to receive payment of the principal of
and any premium and interest on the Debentures on the respective stated
maturities expressed in such Debentures (or, in the case of redemption, on the
redemption date) and to institute suit for the enforcement of any such payment,
and such rights shall not be impaired without the consent of such holder. Any
holder of Preferred Securities shall have the right to institute suit for the
enforcement of any such payment to such holder with respect to Debentures
relating to such Preferred Securities having a principal amount equal to the
aggregate liquidation preference of such Preferred Securities held by such
holder.
Under the terms of the Trust Agreement, and for so long as the Debentures
are held by the Property Trustee, certain actions with respect to the
Debentures, including certain actions in respect of an Event of Default under
the Debentures, require the prior approval of the holders of the Preferred
Securities. See "Description of Preferred Securities--Voting Rights; Amendment
of Trust Agreement." In case an Event of Default shall occur and be continuing
as to a series of Debentures, the Property Trustee will have the right to
declare the principal of and the interest on such Debentures (including any
Additional Interest) and any other amounts payable under the Indenture to be
forthwith due and payable and to enforce its other rights as a creditor with
respect to such Debentures.
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CONSOLIDATION, MERGER, SALE OR CONVEYANCE
The Indenture provides that USF&G may not consolidate with or merge with or
into any other person or sell, convey, transfer or lease its properties and
assets as an entirety or substantially as an entirety to any person, unless (i)
the successor person is a corporation, partnership, trust or other entity
organized and validly existing under the laws of the United States or any state
thereof or the District of Columbia, and expressly assumes by a supplemental
indenture all of the obligations of USF&G under the Debentures, the Indenture
and any Guarantees, (ii) immediately after giving effect to such transaction and
treating any indebtedness which becomes an obligation of USF&G or any subsidiary
as a result of such transaction as having been incurred by it at the time of the
transaction, no Event of Default, and no event which, after notice or lapse of
time or both, would become an Event of Default, shall have occurred and be
continuing, (iii) such transaction does not give rise to any breach or violation
of any Trust Agreement or any Guarantee and (iv) certain other conditions are
met.
SATISFACTION AND DISCHARGE
Under the terms of the Indenture, USF&G will be discharged from any and all
obligations in respect of any series of Debentures (except in each case for
certain obligations to register the transfer or exchange of such Debentures,
replace stolen, lost or mutilated Debentures and hold moneys for payment in
trust) if (subject to certain conditions) USF&G deposits with the Debenture
Trustee, in trust, (i) cash and/or (ii) United States Government Obligations (as
defined in the Indenture), which through the payment of interest thereon and
principal thereof in accordance with their terms will provide cash in an amount
sufficient to pay all the principal of, and interest on, such series of
Debentures on the dates such payments are due in accordance with the terms of
such Debentures.
FORM, EXCHANGE, AND TRANSFER
The Debentures will be issuable only in registered form, without coupons and
only in denominations of $25 and integral multiples thereof.
Subject to the terms of the Indenture, Debentures may be presented for
registration of transfer or exchange (duly endorsed or accompanied by
satisfactory instruments of transfer) at the office of the Security Registrar
(as defined in the Indenture). No service charge will be made for any
registration of transfer or exchange of Debentures, but USF&G may require
payment of a sum sufficient to cover any tax or other governmental charge
payable in connection therewith. Such transfer or exchange will be effected upon
the Security Register of such transfer agent, as the case may be. USF&G has
appointed the Debenture Trustee as the initial Security Registrar. USF&G may at
any time designate additional transfer agents or rescind the designation of any
transfer agent or approve a change in the office through which any transfer
agent acts.
If the Debentures have been called for redemption, in whole or in part,
USF&G will not be required to issue, register the transfer of or exchange any
Debentures which have been called for redemption, except the unredeemed portion
of any such Debentures being redeemed in part.
PAYMENT AND PAYING AGENTS
Payment of interest on a Debenture on any Interest Payment Date will be made
to the person in whose name such Debenture (or one or more predecessor
securities) is registered at the close of business on the Regular Record Date
(as defined in the Indenture) for such interest.
Principal or any interest on the Debentures will be payable at the office of
such Paying Agent (as defined in the Indenture) or Paying Agents as USF&G may
designate for such purpose from time to time, except that at the option of
USF&G, payment of any interest may be made by check mailed to the address of the
person entitled thereto as such address appears in the Security Register or by
wire transfer. The
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principal corporate trust office of the Debenture Trustee in New York, New York
is initially designated as USF&G's sole Paying Agent for payments with respect
to the Debentures. USF&G may at any time designate additional Paying Agents or
rescind the designation of any Paying Agent or approve a change in the office
through which any Paying Agent acts.
GOVERNING LAW
The Indenture and the Debentures will be governed by and construed in
accordance with the laws of the State of New York.
INFORMATION CONCERNING THE DEBENTURE TRUSTEE
The Debenture Trustee shall have and be subject to all the duties and
responsibilities specified with respect to an indenture trustee under the Trust
Indenture Act. Subject to such provision, the Debenture Trustee is under no
obligation to exercise any of the powers vested in it by the Indenture at the
request of any holder of Debentures, unless offered reasonable indemnity by such
holder against the costs, expenses and liabilities which might be incurred
thereby. The Debenture Trustee is not required to expend or risk its own funds
or otherwise incur personal financial liability in the performance of its duties
if the Debenture Trustee reasonably believes that repayment or adequate
indemnity is not reasonably assured to it.
The Bank of New York has a course of regular dealings with USF&G in the
ordinary course of business and from time to time may also make short-term loans
and revolving credit and term loans to USF&G and its affiliates.
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RELATIONSHIP AMONG THE PREFERRED SECURITIES,
THE DEBENTURES AND THE GUARANTEES
As long as payments of interest and other payments are made when due on each
series of Debentures, such payments will be sufficient to cover Distributions
and other payments due on the corresponding Preferred Securities, primarily
because (i) the aggregate principal amount of each series of Debentures will be
equal to the sum of the aggregate stated liquidation amount of the corresponding
Preferred Securities and corresponding Common Securities; (ii) the interest rate
and interest and other payment dates on each series of Debentures will match the
Distribution rate and Distribution and other payment dates for the corresponding
Preferred Securities; (iii) each Expense Agreement entered into by USF&G
pursuant to each Trust Agreement provides that USF&G shall pay for all and any
costs, expenses and liabilities of such Issuer except the Issuer's obligations
to holders of its Preferred Securities under such Preferred Securities; and (iv)
each Trust Agreement further provides that the Issuer will not engage in any
activity that is not consistent with the limited purposes of such Issuer. The
combination of the foregoing provisions together with the Guarantee from USF&G
provide a full and unconditional guarantee of the Preferred Securities by USF&G.
Payments of Distributions and other amounts due on the Preferred Securities
(to the extent the Issuer has funds available for such payments are guaranteed
by USF&G as and to the extent set forth under "Description of the Guarantee." If
and to the extent that USF&G does not make payments on any series of Debentures,
such Issuer will not pay Distributions or other amounts due on its Preferred
Securities although such amounts will continue to accumulate.
If the Guarantee Trustee fails to enforce any Guarantee, a holder of any
related Preferred Security may institute a legal proceeding directly against
USF&G to enforce its rights under such Guarantee without first instituting a
legal proceeding against the Guarantee Trustee, the Issuer or any other person
or entity.
Each Issuer's Preferred Securities evidence the rights of the holders
thereof to the benefits of such Issuer, and each Issuer exists for the sole
purpose of issuing its Trust Securities and investing the proceeds thereof in a
corresponding series of Debentures, maintaining the status of such Issuer as a
grantor trust for United States federal income tax purposes and engaging only in
those other activities that are necessary and incidental thereto.
Upon any voluntary or involuntary termination, winding-up or liquidation of
any Issuer involving the liquidation of the corresponding series of Debentures,
the holders of Preferred Securities will be entitled to receive, out of assets
held by such Issuer, the Liquidation Distribution in cash. See "Description of
the Preferred Securities--Liquidation Distribution Upon Termination." Upon any
voluntary or involuntary liquidation or bankruptcy of USF&G, the Property
Trustee, as holder of the Debentures, would be a subordinated creditor of USF&G,
subordinated in right of payment to all Senior Indebtedness, but entitled to
receive payment in full of principal and interest, before any stockholders of
USF&G receive payments or distributions. Since USF&G is the guarantor under each
Guarantee and has agreed to pay for all costs, expenses and liabilities of each
Issuer (other than the Issuer's obligations to the holders of its Preferred
Securities), the positions of a holder of such Preferred Securities and a holder
of such Debentures relative to other creditors and to stockholders of USF&G in
the event of liquidation or bankruptcy of USF&G should be substantially the
same.
A default or event of default under any Senior Indebtedness would not
constitute a default or Event of Default under the Debentures. However, in the
event of payment defaults under, or acceleration of, Senior Indebtedness, the
subordination provisions of the Debentures provide that no payments may be made
in respect of the Debentures until such Senior Indebtedness has been paid in
full or any payment default thereunder has been cured or waived. Failure to make
required payments on any series of Debentures (subject to the right to extend
the payment date of any interest during an Extension Period) would constitute an
Event of Default under the Indenture.
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UNITED STATES TAXATION
GENERAL
This section is a summary of certain United States federal income tax
considerations that may be relevant to prospective purchasers of Preferred
Securities and represents the opinion of Piper & Marbury L.L.P., special tax
counsel to USF&G and each Issuer, insofar as it relates to matters of law and
legal conclusions. Unless otherwise stated, this summary deals only with
Preferred Securities held as capital assets by holders who purchase the
Preferred Securities upon original issuance ("Initial Holders"). It does not
deal with special classes of holders such as banks, thrifts, real estate
investment trusts, regulated investment companies, insurance companies, dealers
in securities or currencies, tax-exempt investors, or persons that will hold the
Preferred Securities as a position in a "straddle," as part of a "synthetic
security" or "hedge," as part of a "conversion transaction" or other integrated
investment, or as other than a capital asset. This summary also does not address
the tax consequences to United States Holders (as defined herein) whose
functional currency is not the United States dollar, or persons who are not
United States Holders or shareholders, partners or beneficiaries of a holder of
Preferred Securities. A "United States Holder" means a holder that is a citizen
or resident of the United States, a corporation, partnership or other entity
created or organized in or under the laws of the United States or any political
subdivision thereof, or an estate or trust the income of which is subject to
United States federal income taxation regardless of its source. Further, this
summary does not include any description of any alternative minimum tax
consequences or the tax laws of any state or local government or of any foreign
government that may be applicable to the Preferred Securities. Furthermore, the
discussion below is based upon the provisions of the Code, and regulations,
rulings and judicial decisions thereunder as of the date hereof, and such
authorities may be repealed, revoked or modified so as to result in federal
income tax consequences different from those discussed below. In this regard, it
should be noted that, in connection with current negotiations regarding the
federal budget, the Administration has made a proposal more fully described
below that may have the effect that interest payable by USF&G on the Debentures
will not be fully deductible for United States federal income tax purposes.
PROSPECTIVE PURCHASERS OF PREFERRED SECURITIES, INCLUDING PERSONS WHO ARE
NOT UNITED STATES HOLDERS AND PERSONS WHO PURCHASE PREFERRED SECURITIES IN THE
SECONDARY MARKET, ARE ADVISED TO CONSULT WITH THEIR TAX ADVISORS AS TO THE
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION
OF PREFERRED SECURITIES IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES, AS WELL AS
THE EFFECT OF ANY STATE, LOCAL OR OTHER TAX LAWS.
While it is the opinion of Piper & Marbury L.L.P. that the Debentures will
be treated as indebtedness for United States federal income tax purposes,
holders of Preferred Securities should note that the Internal Revenue Service
(the "IRS") may attempt to treat the Debentures as equity rather than
indebtedness for tax purposes. If the IRS were successful in such attempt, the
Debentures would be subject to redemption, or the related Issuer could be
liquidated by distributing the Debentures to the holders of Preferred
Securities, at the option of USF&G as described under "Description of the
Preferred Securities--Redemption" and "Description of Preferred
Securities--Liquidation Distribution Upon Termination."
On December 7, 1995, the U.S. Department of Treasury announced a Balanced
Budget Proposal which contained a proposed amendment to the Code which would
classify a debt instrument issued on or after December 7, 1995 as equity if the
instrument had a term exceeding 20 years and was not classified as indebtedness
on the issuer's balance sheet. A text of proposed statutory language published
on January 23, 1996 provides that the Code amendment would not apply to issues
filed with the Commission before the December 7, 1995. Because the Registration
Statement for the Preferred Securities was filed with the Commission on December
29, 1995, the provisions of the proposed amendment would be applicable to the
Preferred Securities if such provisions are enacted with the currently proposed
effective date. Accordingly,
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if Debentures having a term in excess of 20 years are issued and the proposal is
subsequently enacted in its current form, the Debentures would be subject to
redemption, or the related Issuer could be liquidated by distributing the
Debentures to the holders of Preferred Securities, at the option of USF&G as
described under "Description of the Preferred Securities--Redemption" and
"Description of Preferred Securities-- Liquidation Distribution Upon
Termination." USF&G and its special tax counsel cannot predict whether this
proposed amendment may be modified or other legislation may be enacted which
might affect the character of the Debentures or otherwise affect the Preferred
Securities offered hereby.
INCOME FROM PREFERRED SECURITIES
Piper & Marbury L.L.P. is of the opinion that, under then current law and
assuming full compliance with the terms of the Trust Agreement, each Issuer will
be classified as a grantor trust and not as an association taxable as a
corporation.
As a consequence, each holder of Preferred Securities will be considered the
owner of a pro rata portion of the Debentures held by the corresponding Issuer.
As a further consequence, each holder of Preferred Securities will be required
to include in gross income his or her pro rata share of the income accrued on
the Debentures held by the corresponding Issuer. Such income should not exceed
Distributions received by the holders of Preferred Securities on the Preferred
Securities except in the case where USF&G extends an interest payment period as
described in "Description of the Preferred Securities-- Distributions." No
portion of such income will be eligible for the dividends received deduction.
POTENTIAL EXTENSION OF INTEREST PAYMENT PERIOD AND ORIGINAL ISSUE DISCOUNT
To the extent and as further provided in the Prospectus Supplement, USF&G
will have the option to extend from time to time the interest payment period on
the Debentures to a period not exceeding 60 months but not beyond the maturity
or redemption date of the Debentures. As a result of USF&G's option to extend
the interest payment period, the Debentures will be treated as issued with
"original issue discount" for United States federal income tax purposes.
Accordingly, a holder of Preferred Securities will accrue interest income (i.e.,
original issue discount) in accordance with a constant yield method over the
term of the Debentures (including any Extension Period), regardless of the
receipt of cash with respect to the period to which such income is attributable.
As a result, holders of Preferred Securities during an Extension Period will
include interest in gross income in advance of the receipt of cash, and any
holders of Preferred Securities who dispose of Preferred Securities prior to the
record date for the payment of Distributions following such Extension Period
will include interest in gross income, but will not receive any cash from the
corresponding Issuer related thereto. A holder's tax basis in the pro rata share
of Debentures represented by his or her Preferred Securities will be increased
by the amount of any original issue discount that is included in income without
a receipt of cash, and will be decreased when and if such cash is subsequently
received by the holder of the Preferred Securities.
MARKET DISCOUNT OR PREMIUM
Holders of Preferred Securities other than Initial Holders may be considered
to have acquired their undivided interests in the Debentures with market
discount, acquisition premium or amortizable bond premium, as such terms are
defined for United States federal income tax purposes. Such holders are advised
to consult their tax advisors as to the income tax consequences of the
acquisition, ownership and disposition of the Preferred Securities.
RECEIPT OF DEBENTURES UPON LIQUIDATION OF AN ISSUER
Under certain circumstances described in "Description of the Preferred
Securities--Redemption," and "Description of the Preferred
Securities--Liquidation Distribution Upon Termination," USF&G may
30
<PAGE>
cause an Issuer to be terminated and cause the Debentures to be distributed to
the holders of Preferred Securities in liquidation of such holders' interests in
the Issuer. Under current United States federal income tax law and
interpretation and assuming the Issuer is treated as a grantor trust, such a
distribution would not be treated as a taxable event to holders of the Preferred
Securities. Such a tax-free transaction would result in the holder of Preferred
Securities receiving a pro rata share of the Debentures having an aggregate tax
basis equal to the aggregate tax basis that the holder had in such pro rata
share immediately prior to the distribution. A holder's holding period for such
Debentures would include the period for which the Preferred Securities were held
by such holder. If an Issuer were liquidated pursuant to the exercise by USF&G
of its right to liquidate upon the occurrence of a Grantor Trust Event, holders
of Preferred Securities could recognize gain or loss upon the exchange of their
Preferred Securities for a pro rata share of the Debentures.
SALE OR OTHER DISPOSITION OF THE PREFERRED SECURITIES
Gain or loss will be recognized on a sale, including a redemption for cash,
of Preferred Securities in an amount equal to the difference between the amount
realized and the tax basis of a holder of Preferred Securities in his or her pro
rata share of Debentures represented by such Preferred Securities. Gain or loss
recognized by a holder of Preferred Securities on the sale or exchange of
Preferred Securities held for more than one year generally will be taxable as
long-term capital gain or loss.
BACKUP WITHHOLDING AND INFORMATION REPORTING
In general, information reporting requirements will apply to amounts
received by noncorporate United States Holders as payments with respect to, or
proceeds of the sale within the United States of, the Preferred Securities and
"backup withholding" at a rate of 31% will apply to such amounts if the holder
fails to provide a correct taxpayer identification number. Any withheld amounts
generally will be allowed as a credit against the holder's federal income tax
liability, provided that the required return is timely filed with the IRS.
PLAN OF DISTRIBUTION
The Preferred Securities may be sold in a public offering to or through
underwriters or dealers designated from time to time. Each Issuer may sell its
Preferred Securities as soon as practicable after effectiveness of the
Registration Statement of which this Prospectus is a part. The names of any
underwriters or dealers involved in the sale of the Preferred Securities of any
particular Issuer in respect of which this Prospectus is delivered, the number
of Preferred Securities to be purchased by any such underwriters and any
applicable commissions or discounts will be set forth in the Prospectus
Supplement.
Underwriters may offer and sell Preferred Securities at a fixed price or
prices, which may be changed, or from time to time at market prices prevailing
at the time of sale, at prices related to such prevailing market prices or at
negotiated prices. In connection with the sale of Preferred Securities,
underwriters may be deemed to have received compensation from USF&G and/or the
applicable Issuer in the form of underwriting discounts or commissions and may
also receive commissions. Underwriters may sell Preferred Securities to or
through dealers, and such dealers may receive compensation in the form of
discounts, concessions or commissions from the underwriters.
Any underwriting compensation paid by USF&G and/or the applicable Issuer to
underwriters in connection with the offering of Preferred Securities, and any
discounts, concessions or commissions allowed by such underwriters to
participating dealers, will be set forth in an applicable Prospectus Supplement.
Underwriters and dealers participating in the distribution of Preferred
Securities may be deemed to be underwriters, and any discounts and commissions
received by them and any profit realized by them on resale of such Preferred
Securities may be deemed to be underwriting discounts and commissions, under the
Act. Underwriters and dealers may be entitled, under agreement with USF&G and
31
<PAGE>
the applicable Issuer, to indemnification against and contribution toward
certain civil liabilities, including liabilities under the Act, and to
reimbursement by USF&G for certain expenses.
In connection with the offering of the Preferred Securities of any Issuer,
such Issuer may grant to the underwriters an option to purchase additional
Preferred Securities to cover over-allotments, if any, at the initial public
offering price (with an additional underwriting commission), as may be set forth
in the accompanying Prospectus Supplement. If such Issuer grants any
over-allotment option, the terms of such over-allotment option will be set forth
in the Prospectus Supplement for such Preferred Securities.
Underwriters and dealers may engage in transactions with, or perform
services for, USF&G and/or the applicable Issuer and/or any of their affiliates
in the ordinary course of business.
Each Issuer's Preferred Securities will be a new issue of securities and
will have no established trading market. Any underwriters to whom an Issuer's
Preferred Securities are sold by such Issuer for public offering and sale may
make a market in such Preferred Securities, but such underwriters will not be
obligated to do so and may discontinue any market making at any time without
notice. Such Preferred Securities may or may not be listed on a national
securities exchange. No assurance can be given as to the liquidity of or the
existence of trading markets for any Preferred Securities.
EXPERTS
The consolidated financial statements of USF&G appearing or incorporated by
reference in USF&G's Annual Report, restated on Form 10-K/A, for the year ended
December 31, 1994 have been audited by Ernst & Young LLP, independent auditors,
as set forth in their report thereon included therein and incorporated by
reference herein. Such consolidated financial statements are incorporated herein
by reference in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
With respect to the unaudited condensed consolidated interim financial
information for the three-month periods ended March 31, 1995 and 1994, the three
and six-month periods ended June 30, 1995 and 1994, and the three and nine-month
periods ended September 30, 1995 and 1994, incorporated by reference in the
Registration Statement, the independent auditors have reported that they have
applied limited procedures in accordance with professional standards for a
review of such information. However, their separate reports included in USF&G's
quarterly report on Form 10-Q/A for the quarter ended March 31, 1995, and
quarterly reports on Form 10-Q for the quarters ended June 30, 1995 and
September 30, 1995, and incorporated herein by reference, state that they did
not audit and they do not express an opinion on that interim financial
information. Accordingly, the degree of reliance on their reports on such
information should be restricted in light of the limited nature of the review
procedures applied. The auditors are not subject to the liability provisions of
Section 11 of the Securities Act for their reports on the unaudited interim
financial information because those reports are not "reports" or a "part" of the
Registration Statement prepared or certified by the auditors within the meaning
of Sections 7 and 11 of the Securities Act.
LEGAL MATTERS
Certain legal matters will be passed upon for USF&G and the Issuers by Piper
& Marbury L.L.P., Baltimore, Maryland. Certain legal matters will be passed on
for the underwriters by Davis Polk & Wardwell, New York, New York who may rely
on the opinion of Piper & Marbury L.L.P. as to certain matters of Maryland law.
Certain matters of Delaware law relating to the validity of the Preferred
Securities will be passed upon by Richards, Layton and Finger, P.A., Wilmington,
Delaware, special Delaware counsel to USF&G and the Issuers. L. P. Scriggins, a
Director of USF&G, is a partner of Piper & Marbury L.L.P. As of December 27,
1995, lawyers in the firm of Piper & Marbury L.L.P. beneficially owned in the
aggregate approximately 20,000 shares of Common Stock or Common Stock
equivalents of USF&G.
32
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH
THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY USF&G, THE
SERIES B ISSUER OR BY THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE AN IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF USF&G OR THE SERIES B ISSUER
SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR
SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.
------------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Incorporation of Certain Documents by
Reference.................................... S-3
Prospectus Summary............................. S-4
Selected Consolidated Financial Information.... S-5
USF&G Corporation.............................. S-7
USF&G Capital II............................... S-9
Capitalization................................. S-10
Use of Proceeds................................ S-11
Certain Terms of the Series B Capital
Securities................................... S-11
Certain Terms of the Series B Debentures....... S-15
Certain Federal Income Tax Consequences........ S-18
Certain ERISA Considerations................... S-22
Underwriting................................... S-23
PROSPECTUS
Available Information.......................... 2
Incorporation of Certain Documents by
Reference.................................... 2
The Issuers.................................... 3
USF&G Corporation.............................. 4
Risk Factors................................... 5
Use of Proceeds................................ 8
Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends.................... 8
Description of Preferred Securities............ 9
Description of Guarantee....................... 19
Description of the Debentures.................. 21
Relationship Among the Preferred Securities,
the Debentures and the Guarantee............. 28
United States Taxation......................... 29
Plan of Distribution........................... 31
Experts........................................ 32
Legal Matters.................................. 32
</TABLE>
$100,000,000
USF&G CAPITAL II
8.47% CAPITAL SECURITIES, SERIES B
FULLY AND UNCONDITIONALLY GUARANTEED, TO THE
EXTENT DESCRIBED HEREIN, BY
[LOGO]
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PROSPECTUS SUPPLEMENT
------------------------
MERRILL LYNCH & CO.
GOLDMAN, SACHS & CO.
BEAR, STEARNS & CO. INC.
LEHMAN BROTHERS
SMITH BARNEY INC.
JANUARY 7, 1997
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